In response to the plaintiff’s appeal in the Lee ESOP case, the defendant trustee said the district court’s dismissal of the case for lack of standing was appropriate. The trustee’s brief also accuses the plaintiff of “annexing itself to the very different facts in Brundle,” a precedential 4th Circuit decision in favor of the plaintiff.
As we recently reported, the case arose out of the 2016 sale of shares in a construction company to an ESOP. The defendant trustee oversaw the transaction, and an experienced ESOP appraisal firm prepared the valuation underlying the transaction and subsequent annual valuations. The ESOP paid $198 million for an 80% ownership stake in the company. The transaction was financed with a loan from the company and the selling shareholders received warrants that would enable them to acquire additional voting stock. A 2016 year-end annual appraisal, which came 18 days later, valued the shares at $64.8 million.
The plaintiff’s complaint suggested that the two figures showed the trustee overpaid for company stock. Last fall, the district court dismissed the case, finding the plaintiff had not shown an “injury in fact” and had no standing “to pursue her claims in this Court.” The court also said the plaintiff “fundamentally misunderstands” the transaction and the subsequent valuation and that the ESOP “realized an immediate equitable benefit.”
On appeal, the plaintiff essentially argued the court dismissed the case prematurely. The complaint stated facts sufficient to show an injury. The plaintiff’s appeal claimed this case was similar to the Brundle case and asked the 4th Circuit to allow the case to proceed to discovery.
Nothing like Brundle: The trustee’s response says there was no harm to the plaintiff; therefore, the plaintiff lacked standing to sue. The plaintiff’s “skeletal” complaint merely alleged the ESOP “was not created in the best interests of the employees.” However, the complaint was devoid of any allegations “regarding the decision-making processes or other diligence conducted by [the trustee] or any of the other fiduciaries of the ESOP.” Further, there was no allegation that the plaintiff lost money invested in the ESOP or would be harmed in the future because of the transaction, the response brief says.
The trustee notes the ESOP purchased 80% of company stock through a leveraged transaction and came to own 100% of the stock when the company bought the remaining 20% from the selling stockholders. “Employees put none of their own money into the transaction. Instead, the transaction forming the ESOP was financed entirely by the selling shareholders and the company,” the brief states. Further, the plaintiff “wrongly equates the enterprise value of the Company … with the company’s equity value, i.e., the enterprise value less the impact of the debt used to finance the transaction.”
The trustee’s brief contends the plaintiff “sings the siren song of Brundle in an attempt to escape dismissal.” But, says the trustee, the allegations pled in Brundle were “far different—and more significant—than the barebones allegations in the Complaint here.” By way of example, in Brundle, the plaintiff alleged the ESOP purchased company stock for $201.5 million in December 2013 and the company sold itself six months later for $119.7 million. The sales price comparison enabled the Brundle plaintiff to support an allegation that the value of the company dropped significantly in a relatively short time, the trustee notes. No such comparison exists here, the trustee says. It also says that the Brundle plaintiff “plausibly argued” that the valuation underlying the ESOP transaction was “too high relative to prior recent-in-time valuations that had been performed.” The plaintiff’s complaint alleged no such facts, the trustee notes. “Federal courts are called to sort viable ERISA claims from those that are merely would-be clones of Brundle,” the trustee argues in support of the district court’s dismissal of the case.
Stay tuned for further developments in this case.
A digest of the district court’s ruling in favor of the defendants in Lee v. Argent Trust Co., 2019 U.S. Dist. LEXIS 132066 (Aug. 7, 2019), and the court’s opinion, are available to subscribers of BVLaw. Digests for Brundle v. Wilmington Trust N.A., 241 F. Supp. 3d 610 (E.D. Va. 2017); Brundle v. Wilmington Trust N.A., 258 F. Supp. 3d 647 (E.D. Va. 2017); and Brundle v. Wilmington Trust N.A., 919 F.3d 763 (4th Cir. 2019), and the courts’ opinions also are available at BVLaw.