Defendant in Vinoskey ESOP case files appeal with 4th Circuit

BVWireIssue #217-1
October 7, 2020

ESOP valuations
control premium, discount rate, expert testimony, breach of fiduciary duty, capitalization rate, fair market value (FMV), overpayment, employee stock ownership plan (ESOP), adequate consideration

In the contentious Vinoskey ESOP case, one of the defendants, the owner and selling shareholder, Adam Vinoskey, recently appealed the district court’s finding that he was liable for knowingly participating in the trustee defendant’s ERISA violations and was a co-fiduciary for the trustee’s breaches of fiduciary duties. The gist of the litigation was whether the stock sale to the ESOP was for no more than “adequate consideration.”

The court found the trustee caused the ESOP to pay more than fair market value for the company stock. Vinoskey was liable because he knew or should have known the price exceeded FMV.

Backstory: The Department of Labor litigated over a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their successful company to an ESOP. The couple had built the company from scratch. They were committed to rewarding employees for their contributions to its success and, in 1993, set up an employee stock ownership plan. By 2004, the ESOP owned 48% of company stock. Looking toward retirement, they decided to sell their remaining shares. In 2010, the company hired an experienced, independent ESOP trustee, which retained a valuation advisor to determine the range of fair market value for the company’s stock. The agreed-upon price was $406 per share. A 2009 appraisal valued the stock at $285 per share; earlier appraisals valued the stock at less than that.

Reliance on ESOP professionals: In his appeal to the 4th Circuit Court of Appeals, Vinoskey says the district court misstated the legal standard for “knowing participation.” Under the applicable case law, being liable for “knowing participation” means a nonfiduciary, selling shareholder must know more than the bare facts of the transaction. He or she must know the transaction violates ERISA. Here, the district court, relying on a single decision from another jurisdiction, applied a broader test under which it did not matter whether Vinoskey knew that the trustee violated ERISA. It was enough that he knew the price he received was above FMV. Based on this misreading of the test, the district court’s liability finding needs to be reversed.

On a more basic level, the brief argues Vinoskey did not know that the price was higher than FMV. Vinoskey is not a valuation professional, and, in fact, the company hired ESOP professionals to represent the plan’s interests and come up with a valid appraisal, the brief points out. Also, the stock was not obviously worth less than $406 per share. The brief notes that “even credentialed valuation experts disagreed markedly about the value of [the company’s] stock, making it unreasonable to expect a layperson such as Vinoskey to discern the ‘correct’ price.” Specifically, the ESOP appraiser, the DOL’s expert, and the defendants’ expert, using various valuation methods, generated a range of values from $180 per share to $493 per share. The brief shows graphically that the stock’s trajectory aligned with the market as a whole, as represented by the average returns for the S&P 500.

Control issue: Also, the brief challenges the district court’s conclusion that the high valuation was in part due to the erroneous assumption that the ESOP, owning 100% of company stock, would have complete control over the company. The district court decided for various reasons this was not the case. The brief disagrees, noting that, although Vinoskey remained chair of the board of directors after the transaction, no agreements gave him the right to appoint board members. It notes that, under the DOL’s proposed regulations, control can transfer incrementally over time. Here, even if the ESOP had not gained complete control at the closing of the transaction, it did so within a “reasonable time.” In less than two years after the transaction, the Vinoskeys had relinquished their “dominant presence” in the company, the brief notes.

The ESOP valuation did not include a control premium that could have been a red flag to Vinoskey, the brief says. Rather, the financial advisor made “a series of adjustments to [the company’s] past income statements to produce a controlling-interest valuation.” There was no evidence that Vinoskey, as a layperson, understood the significance of these adjustments.

Finally, the brief points out that, as part of the transaction financing, Vinoskey had loaned the company $10.3 million. In 2014, after an industry downturn, he voluntarily forgave $4.6 million of the ESOP’s outstanding debt. The district court declined to factor the debt forgiveness into its damages determination. The brief says this was error. If nothing else, the 4th Circuit should reduce the $6.5 million damage amount by the amount of debt forgiven.

Meanwhile, as far as we know, the defendant trustee has settled its case with the Department of Labor. To date, we have no details on the settlement.

Stay tuned for reporting on further developments in this case.

Digests of the district court’s 2019 decision in Pizzella v. Vinoskey (earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and Pizzella v. Vinoskey (II), 2020 U.S. Dist. LEXIS 15464; 2020 WL 476669 (Jan. 29, 2020), as well as the court opinions are available to subscribers of BVLaw.

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