Walsh v. Vinoskey

19 F.4th 672

Marty WALSH, Secretary of Labor, United States Department of Labor, Plaintiff - Appellee,

v.Adam VINOSKEY; The Adam Vinoskey Trust, Defendants - Appellants,andEvolve Bank & Trust; Michael New ; Sentry Equipment Erectors, Inc.; The Sentry Equipment Erectors, Inc. Employee Stock Ownership and Savings Plan, Defendants.

Kim Blaugher, Executive Director of the Beyster Institute at the University of California San Diego's Rady School of Management; American Society of Appraisers, Amici Supporting Appellant.

No. 20-1252

United States Court of Appeals, Fourth Circuit.

Argued: September 22, 2021

Decided: December 6, 2021

ARGUED: Lars Calvin Golumbic, GROOM LAW GROUP, CHARTERED, Washington, D.C., for Appellants. Stephen Silverman, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Appellee. ON BRIEF: Kate S. O'Scannlain, Solicitor of Labor, G. William Scott, Associate Solicitor for Plan Benefits Security, Jeffrey Hahn, Litigation Counsel, Stephanie Bitto, B.A. Schaaf, Plan Benefits Security Division, Office of the Solicitor, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Appellee. Bennett L. Cohen, Denver, Colorado, Robert D. Grossman, Kansas City, Missouri, Gregory K. Brown, Christopher K. Buch, POLSINELLI PC, Chicago, Illinois; Mitchell G. Miller, Solana Beach, California, for Amicus Kim Blaugher. Lynn E. Calkins, Washington, D.C., Louis L. Joseph, Chelsea A. McCarthy, William F. Farley, HOLLAND & KNIGHT LLP, Chicago, Illinois, for Amicus American Society of Appraisers.

Before NIEMEYER, DIAZ, and QUATTLEBAUM, Circuit Judges.

Affirmed in part and reversed in part by published opinion. Judge Quattlebaum wrote the opinion, in which Judge Niemeyer and Judge Diaz joined.

QUATTLEBAUM, Circuit Judge

The Employee Retirement Income Security Act of 1974 (ERISA) prohibits any fiduciary of an employee benefit plan from causing the plan to engage in transactions with a "party in interest" when the party in interest receives more than fair market value. A fiduciary who violates this prohibition is liable for the resulting losses to the plan. Further, a non-fiduciary who "knowingly participates" in the fiduciary's breach is also liable for such losses. The question for us in this appeal is whether the district court, after conducting a bench trial, erred in imposing liability and calculating damages against an alleged knowing participant in a fiduciary's ERISA breach. For the reasons discussed below, the district court did not clearly err in its liability findings. However, we reject the district court's legal conclusion concerning the damages award. Thus, we affirm in part and reverse in part.

I.

A.

With only a high school diploma and some practical experience from the military and later working in the beverage industry, Adam Vinoskey in 1980 founded Sentry Equipment Erectors, Inc. Sentry primarily supplies equipment to soft drink manufacturers. He and his wife, Carole Vinoskey, originally owned 90% of the company.

Since "day one" of Sentry, Vinoskey hoped and planned for Sentry's employees to eventually own the company. See J.A. 353. To accomplish that, in 1993, Sentry formed an employee stock ownership plan (ESOP).¹ Sentry then periodically contributed to the ESOP. Those contributions were in turn used to purchase shares of Sentry stock. By 2004, the ESOP owned 48% of Sentry, with the Vinoskeys owning the remaining 52% through the Adam Vinoskey Trust they had since formed. Along with his role as president and chief executive officer of Sentry and chair of its board, Vinoskey served as one of the trustees to the ESOP.

Around 2010, Vinoskey expressed his interest to sell the Vinoskeys' remaining shares to the ESOP. But in such a sale Vinoskey would be on both sides of the transaction—as a seller of the Vinoskeys' remaining shares and as a buyer since he was one of the ESOP's trustees. To avoid a conflict of interest, Sentry entered into an agreement with Evolve Bank and Trust, in which Evolve would serve as the ESOP's independent fiduciary to review the transaction. To put it differently, Evolve would represent the ESOP during Vinoskey's sale of shares to the ESOP.

Ultimately, the ESOP purchased the rest of the Vinoskeys' stock for $20,706,000. That purchase price represented a price of $406 per share of Sentry stock. Of the $20,706,000 payment, the ESOP paid the Vinoskeys $10,400,096 in cash and executed an interest-bearing promissory note to him in the amount of $10,305,904. Four years later, Vinoskey, presumably as trustee for the Adam Vinoskey Trust, forgave $4,639,467 of the ESOP's outstanding debt.

B.

The Secretary of the United States Department of Labor sued Evolve and Vinoskey, ² claiming the ESOP's purchase of Vinoskey's remaining Sentry stock was a prohibited transaction under ERISA as Vinoskey was a party in interest and the purchase price exceeded the fair market value. It sought to recover the ESOP's losses—the difference between the actual fair market value of the shares and the amount paid by the ESOP. After discovery, the district court conducted a bench trial. The district court concluded that Evolve's due diligence for the transaction, despite its status as a fiduciary, was "rushed and cursory" and involved numerous failings. See Pizzella v. Vinoskey , 409 F. Supp. 3d 473, 505, 511–25 (W.D. Va. 2019). It found that the fair market value of Sentry's stock was $278.50 per share, not $406 per share. Therefore, according to the district court, Evolve was liable for making the ESOP purchase Vinoskey's stock at a price above fair market value. See id. at 511, 525, 540. The district court found Evolve liable under ERISA Section 406(a)(1)(A) and (D), 29 U.S.C. § 1106(a)(1)(A), (D), for causing a prohibited sale of property to a party in interest. It also found Evolve liable under ERISA Section 404(a)(1)(A) and (B), id. § 1104(a)(1)(A), (B), for violating its own fiduciary duties of prudence and loyalty to the ESOP. See Vinoskey , 409 F. Supp. 3d at 541–42.

In addition, the district court found Vinoskey liable for the ESOP's losses under ERISA Section 405(a)(1) and (3), 29 U.S.C. § 1105(a)(1), (3), as a "co-fiduciary" for Evolve's fiduciary breaches. See Vinoskey , 409 F. Supp. 3d at 529–30. It also found Vinoskey liable under ERISA Section 502(a)(5), 29 U.S.C. § 1132(a)(5), as a "knowing participant" in a prohibited transaction. See Vinoskey , 409 F. Supp. 3d at 526–29.

As such, the district court found Vinoskey jointly and severally liable with Evolve for $6,502,500 in damages. This amount is the difference between the per-share stock price of $406 (the price Vinoskey received) and $278.50 (the stock's fair market value as determined by the district court) times the 51,000 shares sold. See id. at 540.

Evolve and Vinoskey moved for a reduction in the damages award by $4.6 million, which was approximately the amount of debt that Vinoskey forgave in 2014—$4,639,467. The district court did not reduce the damages, but only because it considered itself to be "constrained by the weight of authority disfavoring any reduction of damages by the amount of subsequent debt forgiveness." Id. at 541 n.31. In fact, the district court "note[d] that it would otherwise be disposed to do so." Id.

Evolve and Vinoskey separately appealed, and we consolidated the two cases. Evolve eventually settled with the Secretary and moved to dismiss its appeal, which we granted pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure. Vinoskey's appeal continues, and we have jurisdiction to hear it under 28 U.S.C. § 1291.

II.

Before turning to Vinoskey's arguments on appeal, we address our standard of review. "Following a bench trial, we review a district court's factual findings for clear error and its legal conclusions de novo." Brundle ex rel. Constellis v. Wilmington Tr., N.A. , 919 F.3d 763, 773 (4th Cir. 2019) (citing Nat'l Fed'n of the Blind v. Lamone , 813 F.3d 494, 502 (4th Cir. 2016) ). Our review of an award of damages depends on the nature of the findings and conclusions. We review the conclusions of law regarding the availability and calculation of damages de novo, but the factual findings relating to the calculation of damages for clear error. Simms v. United States , 839 F.3d 364, 368 (4th Cir. 2016).

"Clear error" is a "very deferential standard of review." United States v. Horton , 693 F.3d 463, 474 (4th Cir. 2012). A factual finding is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." HSBC Bank USA v. F & M Bank N. Virginia , 246 F.3d 335, 338 (4th Cir. 2001) (quoting Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). For clear error review, our inquiry is not whether we would have reached the same result if we were sitting in the district court's shoes. Rather, we review "[i]f the district court's account of the evidence is plausible in light of the record viewed in its entirety." United States v. Thorson , 633 F.3d 312, 317 (4th Cir. 2011) (quoting Anderson , 470 U.S. at 573–74, 105 S.Ct. 1504 ). If so, we may not reverse the district court's conclusion—even if we may have weighed the evidence differently. This is the case "even when the district court's findings do not rest on credibility determinations but are based instead on physical or documentary evidence or inferences from other facts." Id. (quoting Anderson , 470 U.S. at 574, 105 S.Ct. 1504 ).

III.

With our standard of review in mind, we turn to Vinoskey's arguments on appeal. Vinoskey contends both theories under which he was held liable (either as a co-fiduciary or knowing participant) required that he knew or should have known the $406 per-share sales price was greater than the fair market value of the stock. While he raises other arguments pertinent to each theory of liability, Vinoskey argues the district court's holding that he knew or should have known the...