5th Circuit backs district court's fair market value determination in ESOP dispute


In a knotty ESOP case, the 5th Circuit Court of Appeals recently largely upheld the district court’s findings that the plan’s trustees violated their fiduciary duties and engaged in a prohibited transaction. An appraiser’s dodgy doing enabled the improper conduct, which resulted in the ESOP’s overpaying for the company stock, the district court found.

The transactions were the brainchild of the owner of a closely held corporation that installed and serviced satellite TV equipment for Direct TV and his lawyer. The owner decided to divest himself of the company by selling 100% of the company's shares to its employees by way of an employee stock ownership plan and by using a family limited liability company that held the company stock. The undertaking, rife with conflicts of interest, prompted separate suits from the Department of Labor and two individual plaintiffs alleging essentially the same thing: that the plan's three trustees (the owner was one of them) caused the ESOP to buy the shares above its fair market value. The district court consolidated the actions.

In deciding the case, the district court said "this is not a normal case" considering the "enormous" record and many factual and legal disputes. The key questions were whether the appraiser and the trustees were truly independent and looking out for the interests of the ESOP and whether it was reasonable for the trustees to rely on the appraiser’s valuations. The court’s answer was no. The court also noted that the remedy questions were harder to resolve than the liability questions, and it suggested its valuation-related findings might be “vulnerable” on appeal.

The district court's determination of overpayment was a function of the contract price and the stock’s fair market value on each of three transaction dates. For its FMV determination, the court considered the testimony of three noted valuation experts retained by the plaintiffs, the DOL, and the defendants, respectively. It found all equally credible. Different experts used different methods, different assumptions, different estimates, and they reached different conclusions. But they all used multiple approaches to produce several FMV estimates on the transaction dates. To arrive at a final value determination, or range of values, they all averaged or weighted the results.

The district approved of the averaging method and adopted it. It weighted the results the defendants’ expert achieved at 50% and the much lower valuations the DOL’s expert and the individual plaintiffs’ expert proposed at 25% each. It entirely disregarded the appraiser’s valuations made at the time of the transactions. Based on its overpayment calculation, the district court awarded $4.5 million in equitable restitution.

The defendants appealed the liability and remedy findings of the district court, and the DOL cross-appealed on the remedy.

The 5th Circuit Court of Appeals performed an extensive review. To find out more about its findings, click here.


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