Court whittles down damages in Vinoskey ESOP case

BVWireIssue #203-3
August 21, 2019

ESOP valuations
discount for lack of control (DLOC), discount rate, breach of fiduciary duty, capitalization rate, fair market value (FMV), overpayment, employee stock ownership plan (ESOP), working capital, adequate consideration

The trial court recently unequivocally sided with the Department of Labor in its liability findings against the defendants in the Vinoskey ESOP case, but the court made adjustments to the DOL’s damages calculation that reduced the liability to the defendants considerably.

As reported earlier, the litigation focused on a successful Virginia company and the owner’s decision to sell his remaining 52% stock in the company to an ESOP. The price was $406 per share. A 2009 appraisal valued the stock at $285 per share. At trial, the DOL argued that the transaction price exceeded fair market value (FMV), the trustee had breached its fiduciary duties to the plan by causing it to overpay for company stock, and the owner had accepted a price he knew exceeded fair market value.

Two ‘viable methods’: Under controlling law, to determine the loss to the ESOP, “a court typically subtracts the stock’s fair market value, as determined by the court, from the inflated price paid by the ESOP,” the court explained. Here, the DOL expert’s discounted cash-flow analysis resulted in $11.5 million in overpayment. The defense expert’s DCF-based valuation yielded a per-share price above the transaction price. This expert also performed a separate damages calculation, which the court found “insufficiently thorough” and which calculated $5.5 million in overpayment.

The court said the DOL expert’s valuation and damages calculations were “more reliable touchstones for the Court’s assessment of damages.” But it declined to adopt the expert’s calculations in full. The court found there were two “viable methods of calculating damages in this case.” Under one method, the court would use the DOL expert’s “damages bridge” to calculate damages. Specifically, the expert, using a DCF analysis, identified errors in the ESOP appraisal and calculated discrete damages amounts related to each of the claimed errors. The total amount, $11.5 million, represented the overpayment, the expert claimed.

The court, in making adjustments to the DOL expert’s DCF-based calculation, reduced damages to $7.8 million. But, though the court made its preference for the DCF clear throughout the opinion, the court decided to base damages on a different method: the DOL expert’s “correction” of the contested ESOP appraisal, which was based on the capitalization of cash flow method. According to the DOL expert, the “reworked” appraisal resulted in $7.5 million in overpayment.

“Like all methods of valuing stock, this method is imperfect,” the court said. “In recognition of these imperfections,” the court made certain adjustments that increased the per-share value and reduced the amount of overpayment (damages) to $6.5 million. The court also said it would “be disposed” to reduce the damages amount by $4.6 million, the amount of debt the owner forgave after the transaction. (To finance the transaction, the ESOP received loans from the owner and the company.) The court said its reason for rejecting an offset was that “the weight of authority disfavor[s]” this reduction in damages.

A digest of Pizzella v. Vinoskey (earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and the court’s decision will be available soon at BVLaw.

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