According to the opinion, the ESOP participants failed to establish evidence that the company, Millry and Brown, knowingly participated in a fiduciary breach against the ESOP by plan trustees. In addition, in granting summary judgment for Millry, the court said there was no evidence that Millry and Brown possessed “any ESOP assets, proceeds from assets or ill gotten gains such that plaintiffs could sustain an equitable restitution or disgorgement claim.”
The court pointed out that the participants’ complaint did not allege that shares of DiGiPH Holding Company were an asset of the plan, but that DiGiPH was owned, in part, by their employer, Gulf Coast Services, Inc. (GCSI), and that, in turn, the ESOP owned 42.2% of Gulf Coast stock. The defendants conceded that a portion of the sale of the DiGiPH stock may have become a plan asset after Gulf Coast’s merger with another firm, but the court said that does not change the fact that, at the time of the sale to Millry, the DiGiPH stock was not an asset of the ESOP.
In May 1999, a merger agreement was entered into between GCSI and Madison River Telephone Company, LLC. After the execution of the merger agreement, GCSI entered into an agreement to sell its 50% interest in DiGiPH to Millry, the other 50% owner of DiGiPH. The shares were sold to Millry two weeks prior to the merger closing, with the sales proceeds being added to the merger consideration paid for the GCSI stock under the merger agreement.
The merger agreement required that the DiGiPH stock be disposed of prior to the consummation of the merger, either by sale or distribution to the GCSI shareholders. GCSI’s interest in DiGiPH was sold to Millry for $6.5 million, plus relief from $4.1 million in future funding obligations and Millry sold the shares six months later for $375 million, making a profit after taxes of $78 million.
ESOP participants filed suit against GCSI and Millry, claiming the sale of the DiGiPH stock at such a low value was a breach of their employer’s fiduciary duty under the Employee Retirement Income Security Act (ERISA), and that Millry was a knowing participant in the breach.
The opinion in Eslava, et. al. v. Gulf Telephone Company, Inc., et. al. is here .