Employee stock ownership plans, which are retirement plans that invest primarily in employer stock, have had to contend with fewer lawsuits in the past year. 

Every year the National Center for Employee Ownership updates its employer stock litigation review (ESOP and 401(k) Plan Employer Stock Litigation Review 1990–2016). According to the report, over the last 12 months, only 21 new cases involving ESOPs reached the courts, by far the fewest in recent years. Of the 21 cases, 17 have dealt specifically with ESOPs, but only a few provided significant new guidance. Most dealt with legally non-controversial issues, such as distributions errors, attempts to set up ESOPs in companies with just one or two participants and other administrative matters. (See related story, Employer Stock Plan Litigation Slows; Decisions Favoring Defendants). 

Corey Rosen, cofounder and senior staff member of the organization, said the decline in litigation comes in part from the last several years of a strong stock market, giving participants less reason to litigate. In addition, the Supreme Court decision Fifth Third v. Dudenhoeffer (U.S., June 25, 2014) replaced the long-standing presumption of prudence rule with a new set of pleading standards requiring plaintiffs to allege that there were “special circumstances” requiring fiduciaries to recognize on the basis of public information that the market was over- or undervaluing the stock or, based on nonpublic information, the fiduciaries should have taken an alternative action that would not violate securities laws and would not do more harm than good. “These standards are proving very difficult for plaintiffs to meet because, in effect, they have to show that fiduciaries should have been able to outguess the market,” Rosen said. 

Seventh Circuit ESOP Friendly

However, in August the U.S. Court of Appeals for the Seventh Circuit in Allen v. GreatBanc Trust Co., No. 15-3569 (7th Cir. Aug. 25, 2016) expressly rejected applying the more stringent standard adopted in Dudenhoeffer. The ESOP participants accused GreatBanc of failing to conduct an independent assessment of the value of the stock and relying instead on an interested party's number. That was sufficient to support an inference that GreatBanc breached its fiduciary duties under ERISA, the court said in allowing the proposed class action to go forward. 

In another recent Seventh Circuit case, the appeals court found that the CEO of Alliance Holdings Inc. must indemnify the ESOP trustees for millions in compensatory damages (Chesemore v. Fenkell, No. 14-3181, 14-3215, 15-3740 (7th Cir. July 21, 2016)). The court affirmed the district court's decision that awarded more than $17 million to participants in the Trachte Building Systems Inc. ESOP whose accounts were wiped out following a failed ESOP spinoff. The appeals court said that ERISA allows a court to order indemnification among co-fiduciaries as an equitable remedy. 

Malpractice Suit Involving ESOPs

A recent malpractice lawsuit involving ESOPs was finally resolved when the U.S. District Court for the Southern District of Ohio ruled for McDermott Will & Emery LLP, finding no reliable evidence with which to calculate damages (Antioch Co. Litig. Tr. v. McDermott Will & Emery LLP, No. 3:09-cv-00218-TSB (S.D. Ohio Aug. 25, 2016)). (See related story, McDermott Cleared of Malpractice in Employer Stock Saga). 

According to the seven-year dispute, spearheaded by a litigation trust established to pursue the company's claims, the ESOP transaction caused a now-defunct scrapbooking company to take on nearly $200 million in additional debt, which led concerned employees to leave the company and take with them promissory notes for their interests in the ESOP—promissory notes that ultimately went unpaid. The lawsuit claimed that McDermott should have known that the ESOP transaction could give rise to liability under federal tax and benefits laws and should have provided better legal advice. 

Bloomberg BNA is offering two opportunities to learn more about ESOPs: The live event "Introduction to ESOPs,"  Sept. 14, at Bloomberg LP in New York ( and the webinar “Employee Stock Ownership Plans: Succession Strategy & Market Advantage," Oct. 25,  ( 

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