CEO Must Defend Self-Dealing Accusations Over Plan Trustee Role

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

An employee stock ownership plan trustee must defend a lawsuit alleging he used his voting share in the plan to maintain his position as the CEO of a government contractor, the U.S. District Court for the Eastern District of Virginia ruled ( Neil v. Foster-Bey , 2017 BL 7734, E.D. Va., No. 1:16-cv-01227, 1/10/17 ).

Robert Neil, a board member of CSR Inc., sufficiently alleged that John Foster-Bey used his position as ESOP trustee to replace board members in order to retain his job as chief executive officer, Judge James C. Cacheris held Jan. 10. Cacheris denied Foster-Bey’s motion to dismiss, rejecting his argument that a trustee’s exercise of his authority under the corporate bylaws and the trust agreement to appoint board members can’t constitute a breach of fiduciary duty or self-dealing under the Employee Retirement Income Security Act.

The law is unsettled as to when an ESOP trustee breaches fiduciary duties by voting the plan’s shares in a self-interested way.

Cacheris, with his decision, followed the rulings of courts in Indiana and Illinois that have held that trustees who act out of self-interest when voting shares held by an ESOP to maintain their corporate office violate ERISA. However, the U.S. Court of Appeals for the Sixth Circuit has adopted a more lenient approach, ruling that trustees who vote plan shares to entrench themselves in management, without more, don’t violate ERISA.

Neil alleged in his lawsuit that Foster-Bey’s performance began to deteriorate and that after repeated warnings, the board members informed Foster-Bey that they intended to terminate him as president, CEO, board member and ESOP trustee. At the expiration of the terms of two board members, Foster-Bey appointed new ones in retaliation and to prevent his own termination, Neil alleged.

Neil’s allegation that Foster-Bey used his position as trustee to replace board members who would retain him notwithstanding his shortcomings is an action that “goes well beyond run-of-the-mill entrenchment in management,” the court said. If proven, these allegations would clearly show that Foster-Bey failed to discharge his duties solely in the interest of participants, the court said.

Bean Kinney & Korman PC represents Neil. Gammon & Grange PC represents Foster-Bey.

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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