DOL appellate brief pushes back in Vinoskey ESOP litigation

BVWireIssue #219-2
December 9, 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

Neither side is letting up in the contentious Vinoskey ESOP litigation that has now moved to the 4th Circuit U.S. Court of Appeals. After the selling shareholder, Adam Vinoskey, recently appealed the district court’s liability and damages findings, the Department of Labor has responded with a spirited defense of the court’s decision.

Backstory: The focal point of the litigation was a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their company to an ESOP. Early, in 2004, the ESOP had bought 48% of company stock. For the 2010 transaction, 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 2010 transaction price was $406 per share. Appraisals in the five years preceding this transaction ranged from $215 per share to $285 per share in 2009. Throughout the litigation, the DOL has emphasized that there was a 40% increase in the share price from 2009 to 2010 “for no business reason.”

District court’s ruling: The crux of the district court’s ruling was that Vinoskey was a knowing participant in the trustee defendant’s ERISA violations and was liable as a co-fiduciary for failing to remedy the trustee’s breaches. The trustee caused the plan to pay more than fair market value, and Vinoskey, the selling shareholder, accepted the price knowing it was inflated.

Post-judgment, the DOL and the trustee settled their case, while Vinoskey decided to appeal the rulings.

‘Reading and understanding’ appraisals: The “assemblage of evidence” supported the district court’s findings, the DOL argues. It asserts that Vinoskey, as a named fiduciary of the ESOP, was a fiduciary as to the contested transaction. For his part, Vinoskey has claimed he was not, having specifically retained the trustee to represent the interests of the ESOP for the purposes of the 2010 transaction. The DOL says that, as a co-fiduciary, Vinoskey had a duty to make reasonable efforts to remedy the trustee’s breach but did not do so.

Vinoskey knew there was overpayment because he was intimately familiar with the company’s financial situation and its value, the DOL argues. He reviewed the ESOP appraiser’s valuation underlying the 2010 transaction and, knowing all of the prior appraisals, he “knew there was no basis for the substantial price increase,” the DOL says. He “participated fully” in the activities preceding the deal. He also knew that company earnings in 2009 had been “lackluster” and agreed that the company only “started to bounce back a little bit in 2010.” He had experience “reading and understanding” appraisals of the company, and he understood “the general approach underlying the appraisals,” the DOL says in response to Vinoskey’s argument that he was not a valuation professional.

Regarding the issue of control, the DOL maintains that Vinoskey knew the ESOP did not acquire complete control but he allowed it to pay a control premium. He was reviewing the draft appraisals before the closing of the transaction. The cover page of the expert report said in all caps that the valuation was conducted on a “controlling interest basis.” Therefore, the DOL argues, he knew or should have known the ESOP was improperly paying for control.

Debt forgiveness irrelevant: Moreover, the DOL contends, the district court was correct in refusing to offset damages with the debt Vinoskey had forgiven the ESOP in 2014. The debt the ESOP took on to finance the acquisition meant it suffered “immediate harm” for paying an inflated price, the DOL brief says. The ESOP overpaid by $6.5 million. Vinoskey’s post-transaction debt forgiveness was unrelated to the original ESOP overpayment. The debt forgiveness was intended to remedy a downturn in the company’s performance rather than the loss to the ESOP, the DOL contends.

The DOL asks the 4th Circuit to affirm the district court’s decision. The response brief does not address the ASA’s amicus brief in support of Vinoskey that argues the district court’s ruling included valuation-related misstatements that required correction so they would not become precedent.

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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