Appvion, Inc. v. Buth

99 F.4th 928

APPVION, INC. RETIREMENT SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLAN,BY AND THROUGH Grant LYON in his capacityas the ESOP Administrative Committee of Appvion, Inc., Plaintiff-Appellant, v. Douglas P. BUTH, et al., Defendants-Appellees.

No. 23-1073

United States Court of Appeals, Seventh Circuit

Argued December 1, 2023

Decided April 23, 2024

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 1:18-cv-01861 — William C. Griesbach, Judge.

Jennifer B. Anderson, Attorney, Abigail Terhune, Attorney, Lori Lea Voepel, Attorney, BEUS GILBERT MCGRODER PLLC, Phoenix, AZ, Jill M. Hartley, Attorney, PREVIANT LAW FIRM, S.C., Milwaukee, WI, Lowell Richard Williams, Attorney, Williams Blackhurst Terhune, PLLC, Phoenix, AZ, for Plaintiff-Appellant.

Craig C. Martin, Attorney, Amanda S. Amert, Attorney, Michael T. Graham, Attorney, Willkie Farr & Gallagher LLP, Chicago, IL, for Defendant-Appellee Douglas P. Buth.

Theodore M. Becker, Attorney, John Christian Nemeth, Attorney, McDermott, Will & Emery LLP, Chicago, IL, Michael B. Kimberly, Attorney, Charles H. Seidell, Attorney, McDermott, Will & Emery, Washington, DC, for Defendant-Appellee Houlihan Lokey Capital, Inc.

James Fleckner, Attorney, Jesse Lempel, Attorney, Goodwin Procter LLP, Boston, MA, Matthew L. Riffee, Attorney, Jaime Santos, Goodwin Procter LLP, Washington, DC, for Defendant-Appellee State Street Bank and Trust Company.

Jeffrey Scott Russell, Attorney, Barbara A. Smith, Attorney, Bryan Cave Leighton Paisner LLP, St. Louis, MO, Matthew James Stanford, Attorney, Bryan Cave Leighton Paisner LLP, Phoenix, AZ, for Defendant-Appellee Reliance Trust Company.

Lars Golumbic, Attorney, Larry M. Blocho, Jr., Attorney, Kara P. Wheatley, Attorney, Groom Law Group, Washington, DC, for Defendant-Appellee Stout Risius Ross, Inc.

Before Wood, St. Eve, and Lee, Circuit Judges.

Wood, Circuit Judge.

Appvion, Inc., is a Wisconsin-based paper company. In the 1990s, Appvion was owned by French conglomerate Arjo Wiggins Appleton. For many years, Appvion struggled to stabilize its financial footing, but this proved to be difficult. Unable to find a suitable buyer as of late 2000, Arjo decided to explore a sale to Appvion's employees. That sale would take the form of an "employee stock ownership plan," or ESOP, and would be financed by the employees' retirement savings. That is the path Appvion took, but ultimately it was not enough to save the company, which declared bankruptcy in 2017. The bankruptcy court authorized Grant Lyon to act on behalf of the Plan. After conducting an internal investigation, Lyon raised an avalanche of claims against dozens of individuals and corporations. His central theory is that the defendants fraudulently inflated the price of Appvion in 2001 and that the price remained inflated until Appvion's bankruptcy.

All the defendants filed motions to dismiss, and the district court granted almost all the relief they sought. We commend the court for its careful review of this complex matter. We find no error in many of its rulings, but we conclude that reversal is necessary for a subset of the counts based on the Employee Retirement Income Security Act (ERISA). We therefore remand for further proceedings.

I. Background

Because this case comes to us at the motion-to-dismiss stage, we accept all well-pleaded facts in Lyon's complaint as true and draw all reasonable inferences in his favor. Hernandez v. Illinois Institute of Tech., 63 F.4th 661, 666 (7th Cir. 2023).

A. The Plan

Appvion (formerly known as Appleton Papers) is a company specializing in two types of paper, both rather dated in today's digital age: carbonless paper, which transfers information written on a top sheet to sheets beneath it, and thermal paper, now used mostly for receipts and lottery tickets. Arjo began trying to sell Appvion in 1998, but it struggled to find a buyer on the open market. It then offered a contingent fee of up to $10 million to Appvion's officers, including its then-CEO Douglas Buth, if they managed to sell Appvion for over $700 million. Buth thought that he could meet that goal through a sale of Appvion to its employees, and Arjo gave him a green light to move forward.

Buth hired investment banking firm Houlihan Lokey to organize the sale, agreeing to pay Houlihan 1% of the final sale price if the deal closed. Houlihan in turn engaged State Street Bank and Trust Company to be the trustee of the employees' ownership interest in Appvion. Houlihan also hired Willamette Management Associates to appraise Appvion for purposes of the sale; Willamette determined that Appvion was worth $810 million. Houlihan then issued an opinion finding that to be a fair price for Appvion, despite the fact that its fee was contingent on closing and even though an Appvion newsletter had warned that no firm with a contingent fee was qualified to issue a fairness opinion.

State Street and Appvion's officers began trying to convince Appvion's employees to accept the deal at that price, relying in part on Houlihan's fairness opinion. In a series of road shows and letters to the employees, they repeatedly described Houlihan as an independent advisor, never mentioning Houlihan's contingent fee. Appvion's officers also presented the employees with a prospectus outlining the deal. The prospectus disclosed the officers' contingent fees, but again failed to disclose Houlihan's fee even as it touted Houlihan's fairness opinion.

In November 2001, the employees voted in favor of buying Appvion, and the deal closed. It was structured as a sale to a newly formed corporation, Paperweight Development Company. The employees contributed $107 million from their retirement accounts to buy 100% of Paperweight's stock; Paperweight used that money, plus over $700 million in loans, to buy 100% of Appvion's stock for its appraised value of $810 million. Thus, Paperweight became the sole owner of Appvion and was in turn fully owned by Appvion's employees. (There was little practical difference between Paperweight and Appvion: their finances were consolidated and they had identical Boards. For simplicity, we refer to Appvion except where the distinction is relevant.) Houlihan received its $8.1 million fee, while Buth, general counsel Paul Karch, and two other Appvion officers also received fees totaling around $4 million for helping the sale go through.

After the sale was finalized, Appvion formed the Employee Stock Ownership Plan Administrative Committee ("the ESOP Committee"). The ESOP Committee, whose members were Board-appointed officers of Appvion, was the named fiduciary of the Plan. It was responsible for the Plan participants' purchases of Appvion stock going forward. It also was in charge of selecting a trustee to hold the Plan participants' shares of Appvion. Over the next 16 years, the ESOP Committee retained three trustees: State Street, from 2001 to 2013; Reliance Trust Company, from 2013 to 2014; and Argent Trust Company, from 2014 to 2017.

To facilitate sales and purchases of Appvion shares by the employees, the trustees recalculated the fair market value of Appvion twice a year. The Plan's documents required the trustees to hire an independent appraiser to help with that task. State Street initially retained Willamette as Appvion's appraiser. In 2004, however, the Willamette employees who had worked on the Appvion account left to become managing directors at the investment-banking firm Stout Risius Ross. The trustees moved their business over to Stout, which continued Willamette's valuation practices.

Each valuation proceeded as follows: The appraiser calculated the fair market value of Appvion, based in part on financial projections provided by Appvion's directors and officers and in part on Appvion's assets and liabilities. The appraiser gave that valuation to the trustee, which used it to set the new price of a share of Appvion. The ESOP Committee then reviewed and approved the price set by the trustee, reported it to the Plan participants, and used it to approve purchases and sales of Appvion's shares. The price varied over time, starting at $10 per share in the 2001 sale, reaching a high of $33.62 by the end of 2006, and gradually falling to a low of $6.85 in 2016.

Four relevant events took place between the 2001 sale and Appvion's bankruptcy in 2017. First, shortly after the sale, State Street ceded to Appvion's CEO most of the trustee's power over nominating and removing directors of Appvion. Second, Appvion's Board adopted various incentive plans that awarded bonuses to the directors and officers. These bonuses initially rewarded increases in Appvion's price from one valuation to the next. But after the stock price began declining, the Board switched to incentive programs that were calculated solely on the basis of Appvion's share price, meaning that the directors and officers reaped bonuses even if Appvion's value had fallen since the last valuation. Third, in 2003, Appvion bought BemroseBooth, an English ticketing company, for $63.5 million. The transaction was a flop: by 2007 Appvion's financial statements disclosed that, after offsetting BemroseBooth's assets by its unfunded pension debt, BemroseBooth was worth $0. And fourth, the directors and officers repeatedly tried and failed to sell Appvion. The closest they came was in early 2012, but the deal soon fell through.

As noted, Appvion declared bankruptcy in 2017. In connection with that bankruptcy, Lyon became the sole member of the ESOP Committee, replacing Appvion's officers. The bankruptcy court authorized Lyon to bring claims on behalf of the Plan. Upon reviewing Appvion's internal documents, Lyon discovered that in the 2001 sale and for every valuation thereafter, Willamette (and then Stout) had adopted appraisal methods that, in Lyon's view, fraudulently inflated the price of Appvion's shares. Three of these methods are particularly important. First, the appraisers did not question the insiders' financial...