In the latest of a series of ESOP stock purchase cases, a court recently held that an in-house attorney who oversaw a private company sale to an ESOP could be personally liable to plan participants. This case follows a nationwide trend, and in this alert we discuss what plan administrators need to know.
On May 2, the District Court for the Western District of Virginia held that an in-house attorney who oversaw a private company sale to an Employee Stock Ownership Plan (ESOP) could be personally liable to plan participants for approving the transaction. The court specifically found that defendant Michael New, an employee of the independent trustee appointed to oversee the transaction, was a fiduciary under ERISA, and denied New’s motion to dismiss.
The case, Hugler v. Vinoskey et al., Case No. 6:16-cv-00213, involved the sale of all outstanding shares of Sentry Equipment Erectors, Inc. to the Sentry ESOP. Adam Vinoskey, the selling shareholder, sold 48% of Sentry shares to the ESOP in 2004, and the remaining 52% in a second transaction in December 2010. Evolve Trust and Bank was hired to act as trustee for the second transaction, which New oversaw.
In October 2016, the Department of Labor (DOL) brought suit against Vinoskey, Evolve and New, alleging that the ESOP overpaid for company stock, and that the defendants had breached their fiduciary duties under ERISA by approving the sale. New moved to dismiss the claims as they applied to him, arguing that, because his actions were taken in his capacity as an employee of Evolve, the only way he could be held liable is if the DOL pierced the corporate veil. The district court disagreed and denied New’s motion, holding that the complaint adequately alleged that New personally took actions and exercised authority over the transaction that extended beyond his duties as an Evolve employee.
While it is not common for an employee of a corporate trustee to be individually named as a defendant in an ERISA breach of fiduciary duty lawsuit, that could change after this decision. Vinoskey is the latest in a series of recent ESOP cases in which plaintiffs have scored meaningful victories. In Brundle v. Wilmington Trust, Case No. 1:15-cv-01494, the plaintiffs prevailed at trial and secured a $30 million judgment, although the defendants currently are contesting that award in the district court and can be expected to appeal any final adverse ruling. In Perez v. First Bankers Trust Services, Inc., Case No. 3:12-cv-04450, the District Court for the District of New Jersey ruled for the DOL and ESOP participants with a $9.5 million award. First Bankers Trust has appealed that decision.
Until the pleading standards for ESOP breach of fiduciary duty cases are resolved by the appellate courts, plan fiduciaries can expect a continuing flow of new lawsuits in this area. The single most important step they can take to help avoid post-transaction legal challenges is to involve outside ESOP counsel at the very beginning to make sure that each step in the transaction is taken and can be documented in a way that demonstrates compliance with ERISA.