Court Prohibits ESOP Participants From Selling Company Stock

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By Carmen Castro-Pagan

July 8 — Conco Inc. employees won't be able to sell their interest in the employee stock ownership plan sponsored by the bankrupt company for at least three years, the U.S. District Court for the Western District of Kentucky ruled ( Harper v. Conco ESOP Trs. , 2016 BL 218175, W.D. Ky., No. 3:16-CV-00125-JHM, 7/7/16 ).

Chief Judge Joseph H. McKinley affirmed July 7 a bankruptcy court's decision to prohibit the ESOP sale. McKinley said that the bankruptcy court exercised its equitable powers to breathe life into the provisions of Conco's reorganization plan by holding that a purchase of the equity interest by a third party before completion of the repayment terms would cause the company to stop operations and creditors wouldn't get paid. As such, under the reorganization plan the participants can't sell their interest in Conco's stock until 2019.

Conco, a manufacturer of ammunition containers for the U.S. Armed Forces, filed a petition to reorganize under Chapter 11 of the bankruptcy code. At the time, Conco's stock was held by the ESOP. During the reorganization proceedings, Delfasco Inc., a competitor, made several unsuccessful attempts to acquire Conco.

In its reorganization plan, Conco agreed with its unsecured creditors to make distribution payments for more than $4 million and not make contributions to the ESOP, or repurchase any employee-owned interest until 2019.

Delfasco kept at its efforts to acquire Conco, but the offers weren't accepted.

Fiduciary Breach Lawsuit

The participants sued Conco and its trustees under the Employee Retirement Income Security Act for alleged breach of fiduciary duties. In that lawsuit, the participants alleged that the fiduciaries failed to even consider Delfasco's offer to acquire Conco for $2 million at a moment when Conco's shares were valued at zero dollars.

During that litigation, the parties sought to reopen the bankruptcy case. The ESOP trustees alleged that a sale of the ESOP-owned stock would violate the terms of the reorganization plan while the participants argued that the plan didn't restrict the sale.

After reopening the case, the bankruptcy court held that the plan prohibited the sale. The participants appealed to the district court.

The plan's language is consistent with the bankruptcy court's interpretation precluding the sale, the district court said.

While the plan made clear that Conco may not repurchase or contribute money to the ESOP for the equity interests before 2019, it made no reference to whether the equity interests were permitted to be sold or otherwise transferred to a party other than Conco before 2019. Thus, the bankruptcy court didn't abuse its discretion by ruling that the sale to a third party was also prohibited under the reorganization plan terms, the district court said.

Kaplan & Partners LLP and Keller Rohrback LLP represented the participants. Bingham Greenebaum Doll LLP represented the oversight committee. Stoll Keenon Ogden PLLC represented the ESOP trustees. Seiller Waterman LLC represented Conco.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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