Former ESOP Trustees File Appeal of Judgment in ERISA Litigation

June 26, 2015
United States Court of Appeals for the Fifth Circuit

HPTY’s David R. Johanson, Rachel J. Markun, and Douglas A. Rubel represent Herbert C. Bruister, a former trustee of the Bruister & Associates Employee Stock Ownership Plan and Trust (the “ESOT"), who filed an opening brief in the United States Court of Appeals for the Fifth Circuit on Friday June 26, 2015, in support of their appeal of a November 2014 judgment entered against them in the U.S. District Court for the Southern District of Mississippi – Northern Division. The $4.5 million dollar judgment, plus an additional $1.9 million in prejudgment interest against Herbert C. Bruister has been widely publicized as a “victory” by the Secretary of the United States Department of Labor, who initially demanded $24 million, and two private plaintiffs, Joel D. Rader and Vincent Sealy. The opening brief raises and highlights numerous errors with respect to the District Court’s decision, including the improper substitution of 20/20 hindsight for the good faith determinations and reasoned views of the trustees at the time of the 2003-2005 transactions and the court’s improper averaging of all experts’ valuation conclusions after determining that the defense expert’s opinion was reasonable. Furthermore, the Secretary of Labor’s long-time valuation consultant based its valuations of the ESOP plan sponsor on hypothetical balance sheets and income statements and incorrect debt amounts, which the Secretary of Labor had access to and failed to provide to him. In all, the opening brief raises ten separate errors with the District Court’s November 2014 decision.

The opening brief questions the court’s conclusion that Herbert C. Bruister did not abstain from the transactions at issue in the case, despite uncontroverted testimony from the remaining trustees that they made independent decisions with advice of their own counsel (William H. Campbell) and conducted their own investigation into the reasonableness of the three stock sale transactions at issue.

The appellants also raise in their opening brief the issue of the trial court’s use of 20/20 hindsight to question the trustees’ evaluation of the potential impact of Hurricane Katrina on the company’s future business prospects in valuing the company for purposes of two transactions in late 2005. At the time, the trustees believed that the hurricane and its aftermath would create a temporary disruption, however, that it also would provide business opportunities for the company, which installed satellite dishes for DirecTV. The trustees contend that the court erred by using hindsight to evaluate Katrina’s actual effect, which was more devastating than anticipated, in violation of controlling case authority.

A key focus of the Appellants’ argument deals with the competing expert valuations of the company for each of the three challenged transactions.  After finding that the trustees’ expert (Gregory P. Range of Stout Risius Ross, Inc.) presented a reasonable valuation for the three transactions, the court went on to consider the valuations of two experts presented by the Secretary of Labor and the private plaintiffs, and then inextricably averaged the three experts’ valuations to come up with a wholly new (de novo) valuation. The appellants cite to several District Court cases which expressly disapprove of using an average of the difference in the parties’ valuations, and pointed out that once the court accepted the defense expert’s valuation as reasonable, the inquiry should have ended there. 

Among the other issues presented to the Fifth Circuit, which were substantial and significant, the appellants question the trial court’s inclusion of unpaid, now worthless promissory notes in its calculation of amounts “paid” for the stock sold in each of the three transactions. For example, the selling shareholder received $762K of principal and interest on the December 2005 promissory note in the amount of $10.5 million yet that trial court ruled that the ESOT paid $3.4 million in excess of fair market value with respect to that transaction. Furthermore, with respect to the December 2004 transaction, the trial court concluded that the ESOT paid the selling shareholder $900K in excess of fair market value after it incorrectly determined that the selling shareholder received $3.8 million that it actually never received.  Several other errors underlying the valuations of both the Secretary of Labor’s and private plaintiffs’ experts are highlighted in the trustees’ opening brief, including the use of hypothetical company expenses by the Secretary of Labor’s long-time consultant Dana Messina and incorrect debt amounts (e.g., Mr. Messina overstated the amount of the company’s debt by almost $4.0 million for purposes of the September 2005 transaction and by almost $4.2 million for purposes of the December 2005 transaction); the issuance of two judgments in the consolidated cases and the improper issuance of a fiduciary bar against the trustees. In short, despite the entry of judgment seven months ago, the case appears far from over.

ADDITIONAL DOCUMENTS:

Opening Brief - Thomas E. Perez, Secretary of the United States Department of Labor

Opening Brief - Joel D. Rader and Vincent Sealy, Plaintiff-Appellee

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