ESOP Trustee Secretly Takes Over Company

September 19, 2005 ( - The US District Court for the Western District of Tennessee found that an Employee Stock Ownership Plan (ESOP) trustee breached his fiduciary duties under ERISA when he purchased all of the ESOP's stock and did not disclose his purchase.

According to BNA, Lawrence Scott was president of Memphis Equipment Co. (MEC) when, as the court said, he “orchestrated” a takeover of the company by getting a $2.3 million loan to purchase all of the company’s stock, which was held in the ESOP.  

The purchase occurred in January of 1999 and was disclosed in the ESOP’s annual report to the Department of Labor in August of 1999.   The court found that the purchase was not disclosed in the summary annual reports given to ESOP participants, according to BNA.

Two other plan trustees, Max May and Billy Thompson, learned of the stock sale in late 2002, and sued Scott for improperly acting without the approval of MEC’s board of directors, breaching his fiduciary duties as a director and officer of the company, and wrongfully converting company funds.   BNA reports that, according to the court opinion, May and Thompson also alleged that Scott engaged in a prohibited transaction, breached his fiduciary duties, and failed to properly disclose information regarding the ESOP to plan participants.

In November of 2004, the district court rescinded Scott’s stock purchase.

In the recent opinion, the court also said that Scott caused losses to the plan when he used company assets for his own personal use.   BNA reports that t he court ordered Scott to repay $627,924 to MEC, and $455,721 of that amount constituted losses to the ESOP that resulted from Scott’s failure to disclose the transaction. In addition, the court agreed with May and Thompson that Scott should be required to forfeit his own personal interest in the ESOP as a way of repaying the $455,721 loss incurred by the ESOP.

The case is May v. Scott, W.D. Tenn., No. 03-2112 M1/P, 8/31/05.