Brundle v. Wilmington Trust, N.A.

919 F.3d 763

Tim P. BRUNDLE, ON BEHALF OF the CONSTELLIS EMPLOYEE STOCK OWNERSHIP PLAN, Plaintiff - Appellee,

and

Andrew Halldorson, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,

v.WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellant.

American Society of Appraisers, Amicus Supporting Appellant,

Secretary of the United States Department of Labor, Amicus Supporting Appellee.

Tim P. Brundle, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellant,

and

Andrew Halldorson, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,

v.Wilmington Trust, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellee.

Secretary of the United States Department of Labor, Amicus Supporting Appellant,

American Society of Appraisers, Amicus Supporting Appellee.

Tim P. Brundle, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee,

and

Andrew Halldorson, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,

Constellis Group, Inc., Party-in-Interest,

v.Wilmington Trust, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellant.

American Society of Appraisers, Amicus Supporting Appellant,

Secretary of the United States Department of Labor, Amicus Supporting Appellee.

Tim P. Brundle, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee,

and

Andrew Halldorson, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a Class of all other persons similarly situated, Plaintiff,

v.Constellis Group, Inc., Party-in-Interest - Appellant,andWilmington Trust, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant.

Tim P. Brundle, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellant,

and

Andrew Halldorson, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,

v.Wilmington Trust, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellee,

Constellis Group, Inc., Party-in-Interest.

No. 17-1873

No. 17-2224

No. 17-2323

No. 17-2324

No. 18-1029

United States Court of Appeals, Fourth Circuit.

Argued: December 11, 2018

Decided: March 21, 2019

Amended: March 22, 2019

ARGUED: Carter Glasgow Phillips, SIDLEY AUSTIN LLP, Washington, D.C., for Appellant/Cross-Appellee Wilmington Trust, N.A. Gregory Y. Porter, BAILEY & GLASSER LLP, Washington, D.C., for Appellee/Cross-Appellant. Robin Springberg Parry, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Secretary of Labor. ON BRIEF: James P. McElligott, Jr., Summer L. Speight, Richmond, Virginia, Stephen W. Robinson, MCGUIRE WOODS LLP, Tysons, Virginia; Jacqueline G. Cooper, Kurt A. Johnson, SIDLEY AUSTIN LLP, Washington, D.C., for Appellant/Cross-Appellee Wilmington Trust, N.A. Edward Lee Isler, Micah E. Ticatch, ISLER DARE, P.C., Vienna, Virginia, for Appellant Constellis Group, Inc. Tillman J. Breckenridge, Ryan T. Jenny, BAILEY & GLASSER LLP, Washington, D.C., for Appellee/Cross-Appellant. J. Christian Nemeth, Chicago, Illinois, Sophia A. Luby, Washington, D.C.; Eliot T. Burriss, Erin Turley, Calli Turner, MCDERMOTT WILL & EMERY LLP, Dallas, Texas, for Amicus American Society of Appraisers. Kate S. O’Scannlain, Solicitor of Labor, G. William Scott, Associate Solicitor for Plan Benefits Security, Thomas Tso, Counsel for Appellate and Special Litigation, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Secretary of Labor.

Before GREGORY, Chief Judge, and MOTZ and FLOYD, Circuit Judges.

Affirmed by published opinion. Judge Motz wrote the opinion, in which Chief Judge Gregory and Judge Floyd joined.

DIANA GRIBBON MOTZ, Circuit Judge:

After owners of a closely held corporation sold the company to its Employee Stock Ownership Plan ("ESOP"), a participant in the ESOP brought this action. The participant contended that the trustee chosen for the ESOP by the corporation breached its fiduciary duties to the ESOP and overpaid for the stock — improperly enriching the corporation's owners at the expense of its employees.

Following a multi-day bench trial, the district court issued detailed findings of fact concluding that the trustee had indeed breached its fiduciary duties, causing the ESOP to overpay for the corporation's stock by $ 29,773,250. The court entered judgment for the ESOP in that amount and awarded attorneys' fees to the participant's counsel. These appeals and cross-appeals followed. As explained within, we affirm the careful findings of the district court.

I.

To facilitate understanding of the issues here, we begin with the governing legal principles and background facts that gave rise to this suit. The parties do not challenge these principles or facts. All are more fully set forth in the comprehensive district court opinions, upon which we rely throughout. See Brundle v. Wilmington Tr. N.A. , 241 F.Supp.3d 610 (E.D. Va. 2017) (" Brundle I "); Brundle v. Wilmington Tr. N.A. , 258 F.Supp.3d 647 (E.D. Va. 2017) (" Brundle II ").

A.

The Employee Retirement Income Security Act of 1974 (ERISA) allows an employer to create an ESOP, an employee pension plan that invests primarily in the employer's stock. The employer makes contributions to the plan that are used to purchase stock in the employer's company. Because — and only because — an ESOP contribution qualifies as employee compensation, an employer can deduct the total value of its ESOP contribution from its income tax liability as an ordinary business expense. 26 U.S.C. § 404 ; 26 C.F.R. § 1.404(a)–1(b).¹ In this way, an ESOP benefits both employees and employers by providing deferred compensation to the former and a valuable tax deduction to the latter.

ERISA imposes duties and obligations on all pension plan fiduciaries, including those of ESOPs. These duties "ensure that employees will not be left empty-handed once employers have guaranteed them certain benefits." Lockheed Corp. v. Spink , 517 U.S. 882, 887, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). One such provision prohibits the fiduciary of any ERISA plan from causing a "sale or exchange ... of any property between the plan and a party in interest." 29 U.S.C. § 1106(a)(1)(A). Absent a statutory exception, this provision would ban ESOPs because their creation necessarily requires the ESOP to purchase stock from its sponsoring employer, which is a party in interest. Congress, however, has carved out an exception to this prohibition to permit the creation of an ESOP if the stock purchase meets certain conditions. See 29 U.S.C. § 1108(e).

To protect employees from losing the value of their earned retirement savings, the exception to the ERISA ban on party-in-interest transactions requires that an ESOP pay no more than "adequate consideration" for the employer's stock. Id. § 1108(e)(1). If an employer's "stock was not worth what the ESOP paid for it," then the ESOP paid more than adequate consideration and "the ESOP and its participants suffered a loss under ERISA." See Reich , 990 F.Supp. at 961.

ERISA does not define what constitutes "adequate consideration" under the § 1108(e) exception; the Department of Labor (DOL) has proposed, but never enacted, regulations doing so.² Although courts look to these regulations for guidance, the focus of the adequate-consideration inquiry rests on the conduct of a fiduciary, as judged by ERISA's "prudent man" standard of care. See Perez v. Bruister , 823 F.3d 250, 263 (5th Cir. 2016) ; Henry III , 445 F.3d at 619 ; Chao , 285 F.3d at 437 ; Howard v. Shay , 100 F.3d 1484, 1489 (9th Cir. 1996).

Under this standard, "ESOP fiduciaries are subject to the duty of prudence just as other ERISA fiduciaries are." Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. 409, 134 S.Ct. 2459, 2467, 189 L.Ed.2d 457 (2014). Thus an ESOP fiduciary, like any other ERISA fiduciary, must "discharge his duties ... with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B).

Although these fiduciary duties "draw much of their content from the common law of trusts ... ERISA's standards and procedural protections partly reflect a congressional determination that the common law of trusts did not offer completely satisfactory protection." Tatum v. RJR Pension Inv. Comm. , 761 F.3d 346, 357 (4th Cir. 2014) (internal quotation marks omitted). Courts apply the "prudent man rule ... bearing in mind the special nature and purpose of employee benefit plans." Id. (internal quotation marks and alterations omitted). For this reason, "[t]he fiduciary obligations of the trustees to the participants and beneficiaries [of an ERISA] plan are ... the highest known to the law." Id . at 356 (alterations in original) (quoting Donovan v. Bierwirth , 680 F.2d 263, 272 n.8 (2d Cir. 1982) ).

Because an ESOP fiduciary that raises an affirmative defense under the § 1108(e) exception seeks to avoid ERISA liability for an otherwise prohibited transaction, the fiduciary bears the burden of proving by a preponderance of the evidence that the sale was for adequate consideration. See Elmore v. Cone Mills Corp. , 23 F.3d 855, 864 (4th Cir. 1994) (en banc). "This burden is a heavy one." Shay , 100 F.3d at 1488.

B.

With these principles in mind, we turn to the facts of this case.

Since its inception, Constellis Group, Inc., the closely held parent company of a group of private security subsidiaries, has offered some form of...