Wilmington Trust Must Pay $29.8M Over Flawed ESOP Transaction

By Carmen Castro-Pagan

Wilmington Trust N.A. must pay $29.8 million to a terminated employee stock ownership plan for mishandling the purchase of the stock of government security contractor Constellis Group Inc. in 2013 ( Brundle v. Wilmington Trust, N.A , 2017 BL 77870, E.D. Va., No. 1:15-cv-01494, 3/13/17 ).

Wilmington, a subsidiary of M&T Bank Corp., rushed its evaluation of the Constellis ESOP, didn’t follow its own policies and failed to adequately vest the valuation of the company stock, Judge Leonie M. Brinkema of the U.S. District Court for the Eastern District of Virginia held March 13. The ESOP, by paying $201.5 million, paid more than adequate consideration to acquire Constellis stock, the judge said.

The company is liable for engaging in a transaction prohibited by the Employee Retirement Income Security Act, Brinkema said.

The multi-million dollar judgment is the latest outcome in a series of cases brought by participants alleging Wilmington mismanaged ESOP transactions, causing them millions of dollars in damages. Last week, Wilmington was accused of making ESOP participants pay more than $185 million for the stock of Texas oil transporter Martin Resource Management Corp. Wilmington was also sued in January over its role in a $98 million stock deal involving the ESOP of piping distributor ISCO Industries Inc.

An investigation by the Labor Department over the Constellis transaction is pending, according to court documents.

The ESOP participants, in their lawsuit, alleged that the $4,235 per share paid in 2013 wasn’t the fair market value of Constellis stock, resulting in the ESOP overpaying for the stock by $103.9 million, which they sought to recover for the plan.

Wilmington failed to assess a report that valuated the company by $100 million less than a year before, Brinkema said. It also failed to investigate the riskiness and reliability of company projections prepared by Constellis’ managers, he said.

The company failed to investigate the motivations of Constellis’ management for establishing an ESOP. Had Wilmington asked “any serious questions” about Constellis’ goals, they would have found that the sellers were more interested in the “ESOP as an exit strategy than as a benefits plan,” Brinkema said.

Wilmington’s failure to assure itself of Constellis’ intent is further evidence of its tendency to “rubber stamp whatever Constellis” put in front of it, thus violating its fiduciary duties, the judge said.

Bailey Glasser LLP represents the participants. McGuireWoods LLP and Odin Feldman & Pittleman PC represent Wilmington.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

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

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