Federal Court Upholds ESOP Indemnification Agreement

Schmalz v. Sovereign Bancorp Inc., No. 2:08-cv-0085 (E.D. Pa. 4/17/12)

In Schmalz v. Sovereign Bancorp Inc., No. 2:08-cv-0085 (E.D. Pa. 4/17/12), a U.S. District Court applied the Moench Presumption of Prudence For Investment in Company Stock in ESOPs and dismissed the related claims. 

ESOP Floor Price Concerns

The March 15, 2012 Employee Ownership Update is online and discusses the following:  

CIGNA Corp. v. Amara, No. 09‐804, 2011 WL 1832824


The Supreme Court found in CIGNA Corp. v. Amara, No. 09‐804, 2011 WL 1832824 that the SPD terms are not an extension of the plan document for ERISA Section 502(a)(1)(B) purposes and cannot be enforced as if it were an extension of the plan document. This is contrary to previous precedent that more favorable SPD language generally trumps the plan document when there is a conflict.

Dann v. Lincoln National Corp., No. 08-5740 (E.D. Pa., Feb. 10)

The March 1, 2011 Employee Ownership Update is online and discusses the following:

Brown v. Medtronic Inc., No. 09-2524 (8th Cir., Dec. 13, 2010)

The January 14, 2011 Employee Ownership Update is online and discusses the following:

McCabe v. Capital Mercury Apparel, 2010 WL 4507443 (S.D.N.Y. 2010)

In McCabe v. Capital Mercury Apparel, 2010 WL 4507443 (S.D.N.Y. 2010) a federal trial court ruled that a plan sponsor did not breach its Duties of an ERISA Fiduciary Responsiblities when it paid participants in June 2009 using a June 30, 2008 valuation for participants with account values less than $1,000. [See Distribution Timing: Mandatory Distributions for more information on the force out distribution rules.]

Court Upholds ESOP's Use of Year-Old Valuation to Process Distributions reviews the court's findings, including the fact that the correct valuation was used and that the cost to obtain a new Interim Valuation would run counter to The Exclusive Benefit Rule that provides that an ERISA fiduciary must act solely in the interest of the plan's participants and beneficiaries while defraying reasonable plan expenses:

The court found, however, that so long as defendants used the June 30, 2008 valuation for the distribution because it reasonably appeared to maximize returns for Plan participants under then-prevailing circumstances, they were justified in doing so. The court also concluded that there "can be no question that reliance on the June 30, 2008 valuation seemed to best serve Participant interests." A new valuation was expected to cost at least $20,000 — practically a third of the plan sponsor's total value at the time. The court asserted that incurring over $20,000 in expenses for a new valuation, only a short time before the regularly scheduled valuation was set to take place, would run counter to defendants' statutory duty to defray administrative expenses. Accordingly, the court held that the plan sponsor acted in manner consistent with its fiduciary duty of loyalty by using the June 30, 2008 valuation as the basis for the distribution.

Neil v. Zell, GreatBanc Trust, and EGI-TRB, No. 08 C 6833 (N.D. Ill., Eastern Division, Nov. 9)

The November 15, 2010 Employee Ownership Update is online and discusses the following:

Quan v. Computer Sciences Corporation, No. 09-56190, D.C. No. 2:08-cv-02398-SJO-JWJ, September 30, 2010

Earlier this year we discussed how a NCEO analysis found that Courts Almost Always Give the Moench Presumption of Prudence For Company Stock in ESOPs. The Ninth Circuit has joined the Third, Fifth, and Sixth Circuits that have affirmatively adopted the Moench presumption. [The First Circuit is the only circuit that has rejected the Moench presumption.] Ninth Circuit Adopts Moench Presumption in Favor of Fiduciaries discusses how the United States Court of Appeals for the Ninth Circuit has adopted the Moench doctrine in Quan v. Computer Sciences Corporation, No. 09-56190, D.C. No. 2:08-cv-02398-SJO-JWJ, September 30, 2010 and some key takeaways from the case:

Bankruptcy Court Reviews Tribune Company Two-Step ESOP Transaction

The July 29, 2010 Employee Ownership Update is online and discusses the following:

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