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May 4 — The owner of a DirecTV installation company couldn't convince the U.S. Court of Appeals for the Fifth Circuit to overturn a $6.5 million judgment stemming from his mishandling of an $18.4 million stock purchase by his company's employee stock ownership plan.
Although the three-judge panel largely affirmed the judgment in favor of the Department of Labor and participants in the Bruister & Associates Inc. ESOP, the judges used this case to clarify that the Fifth Circuit has “never recognized” a theory of ERISA liability based on a plan fiduciary's alleged failure to monitor other fiduciaries. The panel also clarified the proper standard for analyzing whether an ERISA fiduciary has properly relied on an expert's opinion.
The judgment against Herbert C. Bruister and his associates stemmed from a botched ESOP transaction in which plan fiduciaries relied on flawed valuations by an appraiser whom the DOL alleged was improperly influenced into overvaluing the company's stock (202 PBD, 10/20/14).
In recent years, the Labor Department has pointed to this case as a glaring example of poor reliance on an appraiser, given the appraiser's lack of college education and felony conviction for embezzlement from a trust (233 PBD, 12/5/14).
The Fifth Circuit devoted much of its 39-page opinion to clarifying the proper standard for determining whether ESOP fiduciaries properly relied on an expert opinion.
The district judge used the three-part test established by Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 25 EBC 1120 (5th Cir. 2000), which the Fifth Circuit said “oversimplifies the analysis” and improperly narrows the inquiry.
Even so, the Fifth Circuit agreed with the district judge that the Bruister defendants didn't live up to their duties. The court explained that the fiduciaries didn't sufficiently investigate the appraiser's background, didn't give the appraiser significant information about the company's risk factors, overlooked evidence that the appraiser was colluding with the company's attorney to increase the stock valuation and failed to double-check the appraiser's conclusions.
The Fifth Circuit also upheld the district court's calculation of the amount owed to the ESOP as a result of the fiduciaries' wrongdoing. Both the fiduciary defendants and the DOL challenged this calculation, but the Fifth Circuit said that the district court's “thoughtful approach to a complex question was founded in established valuation methodology.”
Judge Edith H. Jones wrote the court's May 3 opinion, which was joined by Judges E. Grady Jolly and Fortunato P. Benavides.
Thomas Tso and Stephen A. Silverman of the DOL and Charles P. Yezbak III of Yezbak Law Offices represented the department. David R. Johanson of Hawkins Parnell Thackston & Young LLP represented Bruister.
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Text of the decision is at http://www.bloomberglaw.com/public/document/Perez_v_Bruister_No_1460811_2016_BL_140876_5th_Cir_May_03_2016_Co.
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