The case of Perez v. Bruister, Nos. 14-60811 and 14-60816 (5th Cir. 2016), raises numerous issues involving the sales of closely-held stock from a corporation’s owner to its tax-preferred Employee Stock Ownership Plan. The dispute is whether individual defendants breached fiduciary duties under ERISA when allegedly acting as trustees for an Employee Stock Ownership Trust (“ESOT”) that purchased company stock from the owner for an Employee Stock Ownership Plan (“ESOP”). The plaintiffs claim that the defendants-when acting as trustees- paid too much for the stock. There are also numerous valuation and remedies issues, over which the parties have fought bitterly.
Upon reviewing the case, the Fifth Circuit Court of Appeals (the “Court”) said that it largely affirmed the district court’s thorough and conscientious opinion under a clearly erroneous standard of review, but also clarified some of the legal issues surrounding leveraged ESOP sales presented by this case. Here is a summary of what the Court held:
–The owner, Bruister, who sold stock to the ESOP, was a fiduciary of the ESOP. Even though he abstained from voting on the sales, he undertook enough activity with respect to the ESOP, e.g., hiring and firing the appraiser and participating in related meetings, so that he exercised authority and control respecting management or disposition of ESOP assets for purposes of the ERISA definition of a fiduciary in section 3(21)(A)(i) of ERISA.
— The defendants breached the duties of loyalty and prudence to the ESOP in their conduct with respect to the stock sales and engaged in prohibited transactions.
–The district court did not abuse its discretion by denying rescission of the stock sales but granting equitable restitution in the amount the ESOP overpaid.
–The district court’s award and calculation of prejudgment interest were not an abuse of discretion.
–The district court did not abuse its discretion in prohibiting defendants from acting in the future as fiduciaries or service providers to plans covered by ERISA.