Pension Rights Center files amicus brief in support of ESOP plaintiff

BVWireIssue #212-1
May 6, 2020

ESOP valuations
appraisal, breach of fiduciary duty, fair market value (FMV), overpayment, employee stock ownership plan (ESOP)

A nonprofit consumer organization whose mission is “to protect and promote the retirement security of American workers, retirees, and their families” recently filed an amicus curiae brief in support of the appeal the plaintiff in Lee filed with the 4th Circuit (see above).

The Pension Rights Center expressed concern over the ability of participants in and beneficiaries of ESOPs to bring a lawsuit aimed at enforcing ERISA’s fiduciary rules. ERISA rules are “even more crucial in the case of private company ESOPs than for other retirement plans because of the unique structure of these plans,” the brief says. “ESOPs pose special risks for participants,” the brief claims. It also notes that “ESOPs are not a gift to employees” but represent a form of deferred compensation.

The plaintiff in the Lee case “plausibly alleged” that the trustee breached its fiduciary duties, caused the plan to enter into a prohibited transaction, and caused financial injury, the brief says. In dismissing the plaintiff’s claims at the pleading stage, the district court erred.

The brief notes that Brundle “and numerous other cases” show the plaintiff’s allegations are plausible.

Workers’ retirement savings are lost when an ESOP pays an inflated price for employer stock. If the ESOP pays too much, some of the participants’ potential retirement savings are transferred to the selling shareholders. This happens if the ESOP trustee did not conduct adequate due diligence before approving the purchase price or failed to engage in hard bargaining to get the best deal possible for the ESOP.

The brief explains the prohibited-transaction allegation. “A corporate insider’s sale of stock to an ESOP is per se prohibited because such transactions are ‘likely to injure the [ ] plan.’” The transactions are only permitted if the trustee can demonstrate that the ESOP did not pay more than “adequate consideration,” i.e., fair market value. “In fact, the trustee’s duty of undivided loyalty to the ESOP participants requires it to act like a real-world buyer who would negotiate with the sellers to try to get the best possible price for the ESOP,” the brief says.

It notes that cases such as Brundle, Perez v. Bruister, and Pizzella v. Vinoskey illustrate that ESOP trustees don’t always conduct “real world’” due diligence or try to obtain the best price possible for the ESOP.

The brief says the plaintiff “sufficiently alleged an injury in fact” and asks that the 4th Circuit reverse the district court’s dismissal and allow the plaintiff to conduct discovery. According to the amicus brief, “[i]f the instant case comes back to the 4th Circuit, it may very well be in the same posture as Brundle—an appeal following a trial in which the trial court ordered a substantial judgment based on a finding that the ESOP trustee violated its fiduciary obligations.”

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