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Brundle v. Wilmington Trust, N.A.

United States Court of Appeals, Fourth Circuit

March 21, 2019

TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, Plaintiff - Appellee,
v.
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,
v.
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,
v.
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,
v.
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,
v.
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)

         ARGUED:

          Carter Glasgow Phillips, SIDLEY AUSTIN LLP, Washington, D.C., for Appellant/Cross-Appellee

          Wilmington Trust, N.A. Gregory Y. Porter, BAILEY & GLASSER LLP, Washington, D.C., for Appellee/Cross-Appellant.

          Robin Springberg Parry, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Secretary of Labor.

         ON BRIEF:

          James 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 Appellee/Cross-Appellant.

          J. 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.

          Kate 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 of Labor.

          Before GREGORY, Chief Judge, and MOTZ and FLOYD, Circuit Judges.

          DIANA GRIBBON MOTZ, CIRCUIT JUDGE.

         After 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.

         Following 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.

         I.

         To 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 II").

         A.

         The 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).[1] 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.

         ERISA 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).

         To 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.

         ERISA 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.[2] 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 Cir. 1996).

         Under 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).

         Although 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. 1982)).

         Because 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.

         B.

         With these principles in mind, we turn to the facts of this case.

         Since 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")[3] began exploring the possibility of creating an ESOP to purchase Constellis. Id. at 615.

         To that 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)).

         CSG 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.

         To fund 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.

         On the 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.

         On 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.

         The 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.

         The 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.

         Subsequently, 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.[4] 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.

         Following 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.

         Brundle 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.

         On 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.

         II.

         Wilmington 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 Cir. 2016).

         At the 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).

         A.

         The 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.[5] In challenging this holding, Wilmington heavily relies on the valuation of Constellis stock submitted by its advisor, SRR.

         Expert 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 ...


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