In the face of several key rulings against ESOP fiduciaries, ESOP defendants, concerned about incurring substantial financial obligations, have begun to pursue claims for indemnification and/or contribution against other defendants or third parties to limit their exposure, as a recent case illustrates.
DOL claims survive: In many ways, this is a typical overpayment case. The subject is a manufacturing company in Minnesota. Before the contested transaction, the ESOP owned almost 25% of the company’s stock. The chairman of the board of directors owned the remaining 75%. In October 2011, he sold it to the ESOP in a transaction that was vetted by three nonrelated board members and overseen by an independent trustee the board had retained to represent the ESOP’s interests. The seller died in 2012, and, in this litigation, his daughter, who also used to serve on the board, represents his estate.
The DOL found it suspicious that, in late April 2011, a financial advisor stated the equity purchase value of the company shares was $28.7 million. In July 2011, after consultations with the three board members, the financial advisor valued the contested shares at $39.1 million. The ESOP trustee later hired an ESOP appraiser to produce a “written fairness report” as to the fair market value of the 75% block of shares. The ESOP appraiser also arrived at a price of $39 million. To finance the transaction, the ESOP obtained loans from the company and seller. A contemporaneous price support agreement applicable to the shares of company employees put the stock’s fair market value at $55.29 per share.
The DOL has claimed the defendant directors and the ESOP trustee breached their fiduciary duties to the plan and caused it to pay more than fair market value for the decedent’s stock. The director defendants, in a pretrial motion, asked the court to dismiss the DOL’s suit. The court found dismissal this early in the proceedings was inappropriate. It said the DOL presented “plausible” claims and any defenses the defendants might raise would turn on disputed facts that could not be resolved through a motion to dismiss or for judgment on the pleadings.
Moreover, the directors and the ESOP trustee filed third-party complaints for indemnification against the seller’s estate, prompting the seller’s daughter, as executor, to file a motion to dismiss the complaints. The ESOP defendants argued the late seller most benefitted from the contested transaction. In case the defendants were found liable under ERISA, the estate was required to cover their losses.
The court found there was no basis for a claim of indemnification against the estate. Under the applicable 8th Circuit law, ERISA does not provide for co-fiduciary contribution or indemnification. The 8th Circuit also has held that ERISA preempts state law claims. Further, the court found a contract-based indemnification claim also failed. The contractual provision on which the defendants relied was not a promise of indemnification from the seller to the defendants. If anything, it was a promise from the seller to the ESOP to reimburse the plan if a court found the plan had overpaid. Also, if the defendants were found liable under the DOL’s theory of the case, it would be for breach of fiduciary duties. By law, the estate’s executor could not indemnify them for losses related to this misconduct. The defendants’ own indemnification agreements with the company precluded this kind of liability sharing, the court pointed out.
Circuit split: There is a circuit split as to the right under ERISA for indemnification and contribution against co-fiduciaries. In a recent case, Remy v. Lubbock Nat’l Bank (profiled here), the 4th Circuit found ERISA provides for indemnification and contribution among fiduciaries but not against nonfiduciaries (e.g., the ESOP appraiser).
A digest of Acosta v. Reliance Trust Co., 2019 U.S. Dist. LEXIS 134453, 2019 WL 3766379 (Aug. 9, 2019) [Kurt], and the court’s opinion will be available soon at BVLaw.