Appeals Court: Trustee Can Repay ESOP Loan

December 17, 2002 ( - An ESOP trustee who approved a loan repayment after the company was acquired by another firm didn't breach its ERISA fiduciary duties, an appeals court has ruled.

In reversing a lower court decision, the appeals judges turned aside the US Department of Labor’s (DoL) position that the ESOP trustee would make a gratuitous transfer to the acquiring firm that would breach trustee’s duty to administer the ESOP for the exclusive benefit of plan participants, Washington legal publisher BNA reported.

“[T]he goals that employees will not be left empty-handed once employers have guaranteed them certain benefits or to make as certain as possible that pension fund assets will be adequate to meet expected benefit payments are not undermined at all by permitting the ESOP to repay the loan,” wrote Circuit Judge Eugene Siler Jr.

The BNA report gave this background from court records:

In 1999, Furon Corp. established an ESOP. Ameritrust Co. National Association was designated as the plan’s trustee. Ameritrust was later succeeded by Key Trust Co. of Ohio NA.

As trustee of the ESOP, Key Trust entered into a series of loan transactions with Furon whereby Furon loaned over $6 million to the ESOP to finance the purchase of Furon stock. As the loan was repaid, money was placed in a “suspense subfund” rather than allocated to the accounts of the individual ESOP participants.

In October 1999, 95% of Furon’s stock was acquired by Saint-Gobain Corp. As part of the acquisition, Saint-Gobain purchased all of the Furon stock held by the Furon ESOP. At that time, the ESOP still owed $2.3 million on its loan.

Saint-Gobain later terminated the Furon ESOP. A benefits committee designated by Saint-Gobain to distribute the ESOP’s assets instructed Key Trust to use the cash proceeds from the sale of the Furon stock to pay off the balance of the loan.

Lawsuit Against Key

When Key Trust refused to repay the loan, Saint-Gobain brought a lawsuit arguing that Key Trust breached the terms of the ESOP as well as its fiduciary duties. Key Trust argued that if it repaid the loan, it would breach its fiduciary duties.

The US District Court for the Northern District of Ohio ruled in favor of Key Trust, finding that if Key Trust were to repay the loan with assets from the sale of Furon stock to Saint-Gobain, it would violate its fiduciary duties to the ESOP participants.

In sending the case back for more hearings, the appeals court noted that no court has directly addressed the issue of whether repayment of an ESOP loan will violate fiduciary obligations owed to ESOP participants.

The appeals court noted that the DoL, which filed an legal brief in support of Key Trust, had issued two opinion letters that explained that plan fiduciaries, in deciding to repay plan loans, should consider whether the lender has a security interest in the employer securities and, in the absence of such a determination, repayment of the loan would violate ERISA.

The case is Benefits Committee of Saint-Gobain Corp. v. Key Trust Co. of Ohio N.A., 6th Cir., No. 01-3255, 12/16/02.