Reproduced with permission from BNA Pension & Benefits Reporter, 41 BPR 433 (Feb. 25, 2014). Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
The U.S. District Court for the Western District of Wisconsin granted preliminary approval to a group of class action settlements totaling more than $11.4 million for participants in an employee stock ownership program whose accounts were wiped out by prohibited transactions by the program's fiduciaries (Chesemore v. Alliance Holdings, Inc., W.D. Wis., No. 3:09-cv-00413-WMC, 2/19/14).
In a Feb. 18 order, Judge William M. Conley found that the proposed settlements were “facially reasonable” and granted the class until June 3 to file a motion for final approval of the settlement, pending notice to the class members.
The settlements resolved most claims in litigation that was spawned from the 2007 spinoff of a company's ESOP that resulted in a massive loss of value to the ESOP participants. According to the motion for approval, the class retained some claims against David B. Fenkell, the trustee of one of the ESOPs.
The class action arose following a series of complex business transactions between Trachte Building Systems Inc. and Alliance Holdings Inc. Alliance purchased Trachte in 2002 for $24 million at a time when Trachte was 80 percent owned by the Trachte ESOP. Alliance merged the Trachte ESOP with its own ESOP after the acquisition, and the Trachte ESOP participants became participants in the Alliance ESOP.
Alliance specialized in purchasing companies with ESOPs, folding the ESOPs into the Alliance ESOP, holding and expanding the companies, and then selling them for a profit, which allowed Alliance to benefit by redeeming “phantom stock.” Alliance sought a buyer for Trachte in 2006 and expected to sell the company for about $50 million.
Alliance failed after several attempts to sell Trachte to a third-party buyer. Alliance then orchestrated a sale of Trachte to a newly formed Trachte ESOP. The Alliance ESOP accounts of Trachte employees were then spun off to the new Trachte ESOP. Within four months of the August 2007 transaction, the account balances of plan participants declined by about 50 percent. Eventually, Trachte stock became worthless due to enormous debt the company had taken on as part of the spinoff.
The participants filed a lawsuit in 2009 against Alliance, two Alliance subsidiaries, the Alliance ESOP and its fiduciaries, and the Trachte ESOP and its trustees. The participants' complaint alleged that the ESOP spinoff was a prohibited transfer under ERISA Section 208.
The court denied the defendants' motion to dismiss the ERISA Section 208 claims in February 2011 (36 PBD, 2/23/11; 38 BPR 430, 3/1/11; 50 EBC 2781).
The court then certified nearly 300 Trachte employees as a class (186 PBD, 9/26/11; 38 BPR 1764, 9/27/11; 52 EBC 1703).
Over the next year, the court determined that certain fiduciaries breached their duties to the Trachte ESOP by engaging in prohibited transactions and failing to follow plan terms. The court also determined that Alliance was liable, along with Fenkell, who was the company's president and a plan trustee, for prohibited transactions (144 PBD, 7/27/12; 39 BPR 1455, 7/31/12; 53 EBC 2954).
The court also permitted the class members to add the president's spouse as a defendant, given that she was a “gratuitous transferee” of the proceeds of the transactions (145 PBD, 7/30/12; 39 BPR 1456, 7/31/12; 53 EBC 2938).
In June 2013, the court ordered Trachte, Alliance and Fenkell to restore more than $14 million in plan assets to both ESOPs (110 PBD, 6/7/13; 40 BPR 1419, 6/11/13; 57 EBC 1231). The court ruled that Fenkell's personal ESOP account could be used to satisfy this judgment (21 PBD, 1/31/14; 41 BPR 277, 2/4/14)
Class members were represented by Hurley, Burish & Stanton S.C., Madison, Wis., and Cohen Milstein Sellers & Toll PLLC, Washington.
The defendants were represented by Morgan, Lewis & Bockius LLP, Chicago and Washington; Jackson Lewis LLP, Los Angeles, Cary, N.C., and Brookfield, Wis.; Vedder Price P.C., Chicago; Bassford Remele P.A., Minneapolis; Reinhart Boerner Van Deuren S.C., Madison, Wis.; Groom Law Group Chartered, Washington; Laner Muchin, Chicago; and Davis & Kuelthau S.C., Milwaukee.