TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee,
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant-Appellant. and ANDREW HALLDORSON, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff, AMERICAN SOCIETY OF APPRAISERS, Amicus Supporting Appellant, SECRETARY OF THE UNITED STATES DEPARTMENT OF LABOR, Amicus Supporting Appellee. TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellant, and ANDREW HALLDORSON, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellee. SECRETARY OF THE UNITED STATES DEPARTMENT OF LABOR, Amicus Supporting Appellant, AMERICAN SOCIETY OF APPRAISERS, Amicus Supporting Appellee. TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee, and ANDREW HALLDORSON, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff, CONSTELLIS GROUP, INC., Party-in-Interest,
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellant. AMERICAN SOCIETY OF APPRAISERS, Amicus Supporting Appellant, SECRETARY OF THE UNITED STATES DEPARTMENT OF LABOR, Amicus Supporting Appellee. TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee, and ANDREW HALLDORSON, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,
CONSTELLIS GROUP, INC., Party-in-Interest - Appellant, and WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant. TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellant, and ANDREW HALLDORSON, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiff,
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant - Appellee, CONSTELLIS GROUP, INC., Party-in-Interest.
Argued: December 11, 2018
Appeals from the United States District Court for the Eastern
District of Virginia, at Alexandria. Leonie M. Brinkema,
District Judge. (1:15-cv-01494-LMB-IDD)
Glasgow Phillips, SIDLEY AUSTIN LLP, Washington, D.C., for
Wilmington Trust, N.A. Gregory Y. Porter, BAILEY &
GLASSER LLP, Washington, D.C., for Appellee/Cross-Appellant.
Springberg Parry, UNITED STATES DEPARTMENT OF LABOR,
Washington, D.C., for Amicus Secretary of Labor.
P. McElligott, Jr., Summer L. Speight, Richmond, Virginia,
Stephen W. Robinson, MCGUIRE WOODS LLP, Tysons, Virginia;
Jacqueline G. Cooper, Kurt A. Johnson, SIDLEY AUSTIN LLP,
Washington, D.C., for Appellant/Cross-Appellee
Wilmington Trust, N.A. Edward Lee Isler, Micah E. Ticatch,
ISLER DARE, P.C., Vienna, Virginia, for Appellant
Constellis Group, Inc. Tillman J. Breckenridge, Ryan T.
Jenny, BAILEY & GLASSER LLP, Washington, D.C., for
Christian Nemeth, Chicago, Illinois, Sophia A. Luby,
Washington, D.C.; Eliot T. Burriss, Erin Turley, Calli
Turner, MCDERMOTT WILL & EMERY LLP, Dallas, Texas, for
Amicus American Society of Appraisers.
S. O'Scannlain, Solicitor of Labor, G. William Scott,
Associate Solicitor for Plan Benefits Security, Thomas Tso,
Counsel for Appellate and Special Litigation, UNITED STATES
DEPARTMENT OF LABOR, Washington, D.C., for Amicus Secretary
GREGORY, Chief Judge, and MOTZ and FLOYD, Circuit Judges.
GRIBBON MOTZ, CIRCUIT JUDGE.
owners of a closely held corporation sold the company to its
Employee Stock Ownership Plan ("ESOP"), a
participant in the ESOP brought this action. The participant
contended that the trustee chosen for the ESOP by the
corporation breached its fiduciary duties to the ESOP and
overpaid for the stock - improperly enriching the
corporation's owners at the expense of its employees.
a multi-day bench trial, the district court issued detailed
findings of fact concluding that the trustee had indeed
breached its fiduciary duties, causing the ESOP to overpay
for the corporation's stock by $29, 773, 250. The court
entered judgment for the ESOP in that amount and awarded
attorneys' fees to the participant's counsel. These
appeals and cross-appeals followed. As explained within, we
affirm the careful findings of the district court.
facilitate understanding of the issues here, we begin with
the governing legal principles and background facts that gave
rise to this suit. The parties do not challenge these
principles or facts. All are more fully set forth in the
comprehensive district court opinions, upon which we rely
throughout. See Brundle v. Wilmington Tr. N.A., 241
F.Supp.3d 610 (E.D. Va. 2017) ("Brundle
I"); Brundle v. Wilmington Tr. N.A., 258
F.Supp.3d 647 (E.D. Va. 2017) ("Brundle
Employee Retirement Income Security Act of 1974 (ERISA)
allows an employer to create an ESOP, an employee pension
plan that invests primarily in the employer's stock. The
employer makes contributions to the plan that are used to
purchase stock in the employer's company. Because - and
only because - an ESOP contribution qualifies as employee
compensation, an employer can deduct the total value of its
ESOP contribution from its income tax liability as an
ordinary business expense. 26 U.S.C. § 404; 26 C.F.R.
§ 1.404(a)-1(b). In this way, an ESOP benefits both
employees and employers by providing deferred compensation to
the former and a valuable tax deduction to the latter.
imposes duties and obligations on all pension plan
fiduciaries, including those of ESOPs. These duties
"ensure that employees will not be left empty-handed
once employers have guaranteed them certain benefits."
Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996).
One such provision prohibits the fiduciary of any ERISA plan
from causing a "sale or exchange . . . of any property
between the plan and a party in interest." 29 U.S.C.
§ 1106(a)(1)(A). Absent a statutory exception, this
provision would ban ESOPs because their creation necessarily
requires the ESOP to purchase stock from its sponsoring
employer, which is a party in interest. Congress, however,
has carved out an exception to this prohibition to permit the
creation of an ESOP if the stock purchase meets certain
conditions. See 29 U.S.C. § 1108(e).
protect employees from losing the value of their earned
retirement savings, the exception to the ERISA ban on
party-in-interest transactions requires that an ESOP pay no
more than "adequate consideration" for the
employer's stock. Id. § 1108(e)(1). If an
employer's "stock was not worth what the ESOP paid
for it," then the ESOP paid more than adequate
consideration and "the ESOP and its participants
suffered a loss under ERISA." See Reich, 990
F.Supp. at 961.
does not define what constitutes "adequate
consideration" under the § 1108(e) exception; the
Department of Labor (DOL) has proposed, but never enacted,
regulations doing so. Although courts look to these regulations
for guidance, the focus of the adequate-consideration inquiry
rests on the conduct of a fiduciary, as judged by
ERISA's "prudent man" standard of care. See
Perez v. Bruister, 823 F.3d 250, 263 (5th Cir. 2016);
Henry III, 445 F.3d at 619; Chao, 285 F.3d
at 437; Howard v. Shay, 100 F.3d 1484, 1489 (9th
this standard, "ESOP fiduciaries are subject to the duty
of prudence just as other ERISA fiduciaries are."
Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459,
2467 (2014). Thus an ESOP fiduciary, like any other ERISA
fiduciary, must "discharge his duties . . . with the
care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity
and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims." 29
U.S.C. § 1104(a)(1)(B).
these fiduciary duties "draw much of their content from
the common law of trusts . . . ERISA's standards and
procedural protections partly reflect a congressional
determination that the common law of trusts did not offer
completely satisfactory protection." Tatum v. RJR
Pension Inv. Comm., 761 F.3d 346, 357 (4th Cir. 2014)
(internal quotation marks omitted). Courts apply the
"prudent man rule . . . bearing in mind the special
nature and purpose of employee benefit plans."
Id. (internal quotation marks and alterations
omitted). For this reason, "[t]he fiduciary obligations
of the trustees to the participants and beneficiaries [of an
ERISA] plan are . . . the highest known to the law."
Id. at 356 (alterations in original) (quoting
Donovan v. Bierwith, 680 F.2d 263, 272 n.8 (2d Cir.
an ESOP fiduciary that raises an affirmative defense under
the § 1108(e) exception seeks to avoid ERISA liability
for an otherwise prohibited transaction, the fiduciary bears
the burden of proving by a preponderance of the evidence that
the sale was for adequate consideration. See Elmore v.
Cone Mills Corp., 23 F.3d 855, 864 (4th Cir. 1994) (en
banc). "This burden is a heavy one." Shay,
100 F.3d at 1488.
these principles in mind, we turn to the facts of this case.
its inception, Constellis Group, Inc., the closely held
parent company of a group of private security subsidiaries,
has offered some form of deferred compensation to its
employees, who are primarily retired members of the U.S.
Armed Forces. Brundle I, 241 F.Supp.3d at 614. After
initially offering a stock option program, Constellis
replaced that program with a profit-sharing plan in 2010.
Id. In mid-2013, looking for an "exit
strategy" after having twice tried and failed to
effectuate a sale of the company, the owners of Constellis
(hereinafter "the Sellers") began exploring the
possibility of creating an ESOP to purchase Constellis.
Id. at 615.
end, Constellis retained CSG International, an investment
banking firm. CSG reported that sale of Constellis to an ESOP
would not only enable the Sellers to liquidate their shares
but would save them 23.8% in federal capital gains taxes.
Id. Although noting that an ESOP would also benefit
employees, CSG emphasized that selling Constellis to an ESOP
provided the best option to optimize the Sellers'
after-tax cash return. See, e.g., id. at
616 (noting that CSG reported to the Sellers that, having
"looked at every possible scenario," it had not
seen "any possible alternative that produce[d] more
after tax cash" than the proposed ESOP (internal
quotation marks omitted)).
suggested that Constellis create what several trial witnesses
characterized as a "unique" ESOP structure to
effectuate the sale. This unique structure would permit the
Sellers to retain de facto control of Constellis, even after
the ESOP purchased all of the company stock. Rather than sell
100% of their ownership interest to the ESOP, as is the usual
practice, the Sellers would sell 90% of their shares to the
ESOP and then exchange the remaining 10% for
"equity-like" warrants. These warrants would
entitle the Sellers to buy back equity in Constellis from the
ESOP at a designated price and guarantee the Sellers a
majority on the board of directors. Id. at 626.
the ESOP's purchase, Constellis would contribute 24% of
the purchase price and the ESOP would borrow the remainder
from Constellis and the Sellers themselves. Id. at
625. In late September 2013, Constellis decided to move
forward with CSG's proposal to create this unique ESOP.
Id. To maximize the Sellers' tax savings,
Constellis had to complete the sale by the end of the
calendar year. Id. at 622.
recommendation of CSG, Constellis engaged Wilmington Trust,
N.A., to serve as trustee for the ESOP. Id. at 616.
In its role as trustee, Wilmington hired Stout Risius Ross
(SRR) to be the financial advisor on the ESOP's purchase
of Constellis. Id. at 617. CSG, Wilmington, and SRR
maintained significant long-term business relationships,
having worked together on more than twenty ESOP deals.
Id. at 643 (calling "the ESOP world . . . a
very incestuous community") (internal quotation marks
omitted); id. at 617.
November 12, 2013, SRR submitted a draft valuation of
Constellis stock to Wilmington (the "SRR Report").
The SRR Report concluded that the fair market value for a
single share of Constellis stock lay between $3, 865 and $4,
600 - resulting in a rounded median price per share of $4,
235. This placed the company's worth, or its
"enterprise value," within a range of $275 to $330
million. Id. at 620-21. On November 14, Wilmington
met with analysts from SRR to discuss its report and
valuation. At the meeting's conclusion, Wilmington set
out to negotiate the ESOP's purchase of Constellis with
authorization to offer a share price of $3, 900 to $4, 235.
Id. at 622.
next day, Wilmington submitted an opening bid on behalf of
the ESOP for $3, 900 per share. Id. at 642. CSG, on
behalf of Constellis, countered with $4, 350 and suggested to
Wilmington that the ESOP and Constellis agree on a price
first and then adjust the terms of the agreement at a later
date. Wilmington agreed and raised its own bid to $4, 100.
CSG then countered with $4, 250. By the end of the day,
Wilmington and CSG had settled on a share price of $4, 235 -
the very top of Wilmington's authorized negotiation
range. The negotiations lasted little more than five hours.
ESOP issued a tender offer for the shares on November 18 with
a closing date of December 20. The parties finalized the term
sheet on November 22. Between the conclusion of negotiations
and the closing date for the transaction, SRR revised its
valuation of the draft enterprise range downward from
$275-$330 million to $275-$325 million, but the per share
purchase price remained $4, 235. On December 19, after
meeting with SRR for half an hour to discuss SRR's
valuation, Wilmington approved the purchase. Id. at
624. On December 20, the ESOP's purchase of Constellis
closed for a per share price of $4, 235. Id. at 625.
Tim P. Brundle, a former Constellis employee and ESOP
participant, brought this action contending that Wilmington
caused the ESOP to enter into a transaction prohibited under
ERISA § 1106. Brundle alleged that the $4, 235 per share
paid by the ESOP for Constellis was too high and resulted in
the ESOP overpaying the Sellers for the stock. The district
court initially held that the 2013 purchase of Constellis by
the ESOP constituted a prohibited transaction under §
1106(a)(1). Brundle v. Wilmington Tr., N.A., 2016 WL
6542718, at *12 (E.D. Va. Nov. 3, 2016). Wilmington conceded
as much before the district court but raised the
adequate-consideration affirmative defense available under
§ 1108(e)(1). Id.
a bench trial, the district court issued meticulous factual
findings and concluded on the basis of those findings that
Wilmington had not established the § 1108(e) affirmative
defense. Rather, the court found that Wilmington had violated
its fiduciary duty to the ESOP. The district court concluded
that Wilmington's fiduciary failures resulted in the ESOP
overpaying for the Constellis stock by $29, 773, 250, and so
awarded that amount to the ESOP as damages. Brundle
I, 241 F.Supp.3d at 613.
then moved for attorneys' fees. The court first ordered
Wilmington to pay attorneys' fees pursuant to ERISA's
fee-shifting provision, 29 U.S.C. § 1132(g)(1), in the
amount of $1, 819, 631.11. Brundle II, 258 F.Supp.3d
at 663-69. It subsequently awarded an additional $1.5 million
in fees from the damages award.
appeal, Wilmington challenges the court's liability and
damages determinations and its award of $1.5 million in
non-statutory attorneys' fees. Brundle cross-appeals,
challenging as inadequate the same portion of the
attorneys' fees award.
initially and principally contends that the district court
erred in concluding that it violated ERISA. Following a bench
trial, we review a district court's factual findings for
clear error and its legal conclusions de novo. Nat'l
Fed'n of the Blind v. Lamone, 813 F.3d 494, 502 (4th
outset of both its principal brief and its oral argument,
Wilmington emphasized that there is no claim in this case
that it acted in bad faith. But of course, an ESOP
participant seeking recovery from its fiduciary need not
prove that the fiduciary acted in bad faith. Rather, an ESOP
fiduciary is liable to the plan participants if it breached
its fiduciary duties, i.e., failed to act
"solely in the interest of the
participants," with the care, skill, prudence, and
diligence used by a "prudent man acting in a like
capacity." 29 U.S.C. § 1104(a) (emphasis added).
Thus our focus is not on Wilmington's motives (good or
bad) but on whether it acted "solely in the
interest" of the plan participants, id., and
"engaged in a reasoned decisionmaking process,
consistent with that of a prudent man in like capacity,"
DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 420
(4th Cir. 2007) (internal quotation marks omitted);
accord Tatum, 761 F.3d at 356. As the Fifth Circuit
has put it, "a pure heart and an empty head are not
enough." Donovan v. Cunningham, 716 F.2d 1455,
1467 (5th Cir. 1983).
district court found that because Wilmington failed to prove
by a preponderance of the evidence that the ESOP's
purchase of Constellis was for adequate consideration - and
no more than adequate consideration - the transaction failed
to qualify for the § 1108(e) affirmative
defense. In challenging this holding, Wilmington
heavily relies on the valuation of Constellis stock submitted
by its advisor, SRR.
advice, like an advisor's independent valuation, can of
course serve as evidence of prudence in the discharge of an
ESOP trustee's duties under § 1108(e). See
Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300-01 (5th
Cir. 2000). But such advice "is not a magic wand that
fiduciaries may simply wave over a transaction to ensure that
their responsibilities are fulfilled."
Cunningham, 716 F.2d at 1474. Rather, a plan trustee
must at least show that it (1) "investigate[d] the
expert's qualifications," (2) "provide[d] the
expert with complete and accurate information," and (3)
"[made] certain that reliance on the expert's advice
was reasonably justified under the circumstances."
Shay, 100 F.3d at 1489. Because ERISA demands a high
level of scrutiny from fiduciaries, a trustee must prove that
it considered these factors "and any others relevant
under the ...