ESOP Trustee Badly Handled Stock Purchase

September 14, 2004 ( - A federal judge has awarded participants in an employee stock ownership plan (ESOP) $7.75 million in damages after finding that the plan's trustee improperly approved buying convertible preferred stock from the plan sponsor.

US District Judge David Hurd of the US District Court for the Northern District of New York ruled that US Trust Co. of California was liable for participants’ resulting losses because it didn’t properly investigate the appraised value of CommutAir, a regional airline. That made the company stock purchase deal a prohibited transaction under the Employee Retirement Income Security Act (ERISA), Hurd said.

“Simply put, in connection with this multimillion dollar transaction, in purporting to execute fiduciary duties that are the highest known to the law, US Trust barely produced a shred of evidence that shows” what its representatives did in connection with reviewing the appraisal of the employer’s value, the court said.

Hurd made the award to represent the difference between what the ESOP paid for the stock and what it should have paid if the employer’s fair market value had been correctly determined. Hurd found that the company’s total equity value as of March 1994 was $145 million (it was appraised during the sale process at $174 million) and that the convertible preferred stock’s value was $52.5 million (the ESOP had paid $60 million).

Documentation of the transaction would have been effective, “especially when representing an ESOP in a multimillion dollar deal, especially when you are aware of high fiduciary duties to that ESOP, and especially when you can anticipate – given those duties and that deal – that litigation is a possible outcome, however small that possibility may be,” the court said.

ESOP participants Joseph Henry and Michael Malinky sued CommutAir, its owners, US Trust, and others alleging they breached their ERISA fiduciary duties by allowing the ESOP to purchase CommutAir stock at inflated prices.

The case is Henry v. Champlain Enterprises Inc., N.D.N.Y., No. 01-CV-1681, 9/3/04. The opinion is available at .