No Sale: ESOP Trustee Withstands Class Action Suit

The trustee of an Employee Stock Ownership Plan (ESOP) accused of allowing a plan to pay $98 million for stock that was independently appraised at $39 million less than two weeks after the sale has persuaded a judge on the merits of its arguments.

The two plaintiffs in the case “are and have been participants” in the ISCO Industries, Inc. Employee Stock Ownership Plan. The firm was a family-owned and operated company when the ESOP purchased it in 2012 – 4 million shares of common stock in the company to the ESOP in exchange for a 25-year note of $98 million, accruing 2.4% annual interest.

Wilmington Trust represented the ESOP and its participants as trustee. The plaintiffs alleged that the sale allowed the seller to “unload its interests in ISCO at an inflated price and “saddle ESOP participants with millions of dollars of debt, payable to ISCO, to finance the transaction.” In fact, plaintiffs assert that, as of December 31, 2012, the ISCO shares purchased by the ESOP were revalued by an independent appraiser at $39 million – a decrease of more than 60%.

However, Chief U.S. Magistrate Judge Mary Pat Thynge of the U.S. District Court for the District of Delaware ruled (Swain v. Wilmington Tr., N.A., 2017 BL 283031, D. Del., No. 1:17-cv-00071-RGA, report and recommendation 8/14/17) that the plaintiffs here had no injury upon with to base a claim because their stock wasn’t actually sold at a loss.  She further noted that “… stock must be purchased at an inflated price and sold at a loss for an economic injury to occur,” going on to explain that “… no injury-in-fact can be identified and plaintiffs lack standing necessary for subject matter jurisdiction.” She also noted that, although plaintiffs alleged injury due to overpayment for the stock, “… plaintiffs have not alleged or shown how harm to the ESOP by overpaying for the stocks affected them individually and overpayment alone is not sufficient to prove injury-in-fact,” and that, “absent an injury-in-fact to plaintiffs, they lack standing to sue for harm to the ESOP.”

However, the decision favoring Wilmington isn’t binding and can be accepted, rejected, or modified by the district judge hearing the case, according to Bloomberg BNA.

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