ERISA Lawsuit Suggests ESOP Fiduciary Failure

Tori Dumas worked for Lift, Inc., a forklift and aerial lift company. She participated in the Lift, Inc. Employee Stock Ownership Plan (the “ESOP”). On October 3, 2019, Lift sold 1,000,000 shares of the company’s preferred stock to the ESOP for $97,655,943.

Dumas’s lawsuit alleges that the plan fiduciaries breached their legal duty to the participants by causing the ESOP to pay more than the fair market value of the stock. Simply put, it was a bad investment. The fiduciaries’ mismanagement wasted the participants’ retirement funds.

 
First, a word about why class action status matters

Class action status matters because it consolidates many similar claims into a single lawsuit. It is far more cost-effective for individuals with small claims to get the compensation they are entitled to but cannot afford to pursue. Without the tool of class action, many people could simply never get the justice they deserve.

Beyond the monetary payouts, class action lawsuits may also lead to systemic changes in corporate behavior and policies. Corporate defendants hate them and are often behind the calls for “tort reform,” which often just means limiting the availability of the class action tool.

Ordinarily, plaintiffs who want to proceed as a class must demonstrate to the court that:

• the class of potential plaintiffs is so large that it is impractical for each individual to join the lawsuit;
• that there are questions of law or fact that are common to all class members;
• the claims of the representative plaintiffs are typical of the claims of the class as a whole; and
• the representative plaintiffs and their attorneys will fairly and adequately protect the interests of the entire class.

These are the issues with which Dumas deals at this stage of the litigation.

Dereliction of ERISA duty

The lawsuit sets out several ways in which the fiduciaries violated their duties of prudent management and exclusive loyalty to the participants in the ESOP. First, however, it is important to understand who the defendants are and what role each played in the transaction.

• Aegis Fiduciary Services, LLC is the corporate Trustee retained by the plan. It has a business interest in maintaining that relationship, which may depend on the goodwill of the company’s directors and senior officers;
• Robert E. Lesser is the Managing Member of Aegis;
• Donald G. Herman, Kirk W. Sears, and Mark C. Johnson were directors and senior officers of Lift. They sold their preferred stock to the ESOP, either directly or indirectly.

Their relationships with the company are important. These relationships make the allegations of conflicts of interest (known in the language of ERISA as “prohibited transactions”) plausible.

The Complaint alleges that:

• Aegis and Lesser caused the ESOP to buy shares of Lift for more than fair market value. They misused the ESOP’s money to benefit Herman, Sears and Johnson, rather than the participants;
• Herman, Sears and Johnson knowingly participated in a situation where they had real or apparent conflicts of interest; and
• Herman, Sears and Johnson failed in their ERISA fiduciary duty to appropriately monitor Aegis and Lesser and failed to make reasonable efforts to remedy Aegis and Lesser’s misuse of the ESOP’s assets.

At trial, if the lawsuit goes to trial, the participants will have the opportunity to show evidence of these failures. Getting to trial depends on certification of class action status.

Problems to which ESOPs seem particularly susceptible

ESOPs are designed to invest exclusively in employer stock. From the workers’ point of view, this has powerful appeal. Who wouldn’t like to own the company for which they work?

On the other hand, though, some argue that ESOPs present an “all your eggs in one basket” problem. If the business of the employer fails, the participants’ retirement investments may be worthless.

In addition, because plan fiduciaries are often corporate insiders, they may possess information about the financial health of the plan sponsor that participants do not. The potential for self-dealing is enormous, and it has often been an issue with ESOP breach of ERISA fiduciary duty lawsuits.

If insiders know, for example, that the company’s next fiscal quarter is likely to be disastrous, the temptation to “unload” company stock into an ESOP may prove to be irresistible. For all these reasons, close oversight of fiduciary action is especially critical.
In Dumas, it certainly looks like one hand washed the other. The fiduciary guardrails may have failed.