Walsh v. Vinoskey

This case was an appeal from the well-publicized district court case regarding the violation of ERISA regarding the sale of stock by the company owner to a company ESOP. The appellate court affirmed that the district court did not err, finding that the owner had extensive knowledge of the company and prior valuations, inferring he knew“something was off.” The appellate court not only ruled that there was no clear error in the district court finding that the owner violated ERISA but also ruled that not offsetting damages would result in a windfall to the ESOP, which ERISA and interpretive cases do not allow. Finally, the owner’s request for a reduction in damages was not inconsistent with a prior decision nor with other out-of-circuit cases.

Opinion.

ERISA prevents any fiduciary of an employee benefit plan from causing the plan to engage in transactions with “a party of interest” when that party receives more than fair market value (FMV). Violation results in liability to the plan for its losses. Further, a nonfiduciary who “knowingly participates” in the breach was also liable for such losses. The question on appeal was whether the district court erred in applying liability and damages against a knowing participant in a fiduciary’s ERISA breach. The district court did not err in its liability findings, but the appellate court rejected the district court’s conclusion concerning the damages award.

Background.

“With only a high school diploma and some practical experience from the military and later working in the beverage industry,” Adam Vinoskey 1980 founded Sentry Equipment Erectors Inc. Sentry primarily supplied equipment to soft drink manufacturers. He and his wife, Carole Vinoskey, owned 90% of the company.

Since “day one” of Sentry, Vinoskey hoped and planned for Sentry’s employees to eventually own the company. To accomplish that, in 1993, Sentry formed an employee stock ownership plan (ESOP). Sentry then periodically contributed to the ESOP. Those contributions were, in turn, used to purchase shares of Sentry stock. By 2004, the ESOP owned 48% of Sentry, with the Vinoskeys holding the remaining 52% through the Adam Vinoskey Trust they had since formed. Along with his role as president and chief executive officer of Sentry and chair of its board, Vinoskey served as one of the trustees of the ESOP.

Around 2010, Vinoskey expressed his interest in selling the Vinoskeys’remaining shares to the ESOP. But, in such a sale, Vinoskey would be on both sides of the transaction—as a seller of the Vinoskeys’remaining shares and as a buyer since he was one of the ESOP’s trustees. To avoid a conflict of interest, Sentry agreed with EvolveBank and Trust, in which Evolve would serve as the ESOP’s independent fiduciary to review the transaction. To put it differently, Evolve would represent the ESOP during Vinoskey’s sale of shares to the ESOP. Ultimately, the ESOP purchased the remaining Vinoskeys’ stock for $20,706,000. That purchase price represented $406 per share of Sentry stock. Of the $20,706,000 payment, the ESOP paid the Vinoskeys $10,400,096 in cash and executed an interest-bearing promissory note to him for $10,305,904. Four years later, Vinoskey, presumably as trustee for the Adam Vinoskey Trust, forgave $4,639,467 of the ESOP’s outstanding debt.

The DOL sued Evolve and Vinoskey, claiming the ESOP’s purchase of Vinoskey’s remaining Sentry stock was a prohibited transaction under ERISA. The district court decided that Evolve’s due diligence for the transaction was“rushed and cursory” and involved“ numerous failures.” “It found that the fair market value of Sentry’s stock was $278.50 per share, not $406 per share.” Evolve was liable for making the ESOP purchase Vinoskey’s stock at a price above FMV. The district court found that Evolve violated several ERISA sections in causing this purchase. Additionally, the district court found Vinoskey liable for the losses under several sections of ERISA.

As such, the district court found Evolve and Vinoskey jointly and severally liable for $6,502,500 in damages ($406 per share received less than $278.50 [FMV per share per the district court] times 51,000 shares sold). The district court did not reduce the damages by the approximately $4.6 million debt Vinoskey forgave after the transaction. The district court found itself “constrained by the weight of authority disfavoring any reduction of damages by the amount of subsequent debt forgiveness.” It noted that it would“ otherwise be disposed to do so.”

The standard of review here is whether “the district court’s account of the evidence is plausible in light of the record viewed in its entirety.”(US v Thorson).

Vinoskey’sarguments on appeal.

Vinoskey argued that, on both theories where he was held liable, he was required to know or should have known that the $406 per share was higher than FMV. He also argued that the district court’s refusal to reduce his liability by the $4.6 million he forgave was incorrect as a matter of law.

Per the Supreme Court, “the Secretary may bring a civil action under§ 502(a)(5) against another person’ who‘ knowing[ly] participant[es]’ in a fiduciary’s violation.”Harris Tr. &Sav. Bank v. Salomon Smith Barney, Inc. In that case, the Supreme Court explained that the nonfiduciary must have“ actual or constructive knowledge of the circumstances that rendered the transaction unlawful.”

The circumstances of unlawfulness here were straightforward: “Evolve, as a fiduciary, caused the ESOP to purchase Sentry stock from a party in interest for more than fair market value.” Vinoskey only disputed his knowledge that the stock price was more than FMV. The district court found that Vinoskey knew that the $406 per share exceeded FMV, based on multiple pieces of circumstantial evidence indicating that Vinoskey reviewed the stock prices from 2004 to 2009, which ranged from $220 to $285 per share, significantly below the $406 per share. Witnesses also testified that Vinoskey understood the general approach of the appraisals and the importance of cash flow and earnings. Vinoskey testified in his deposition that he had reviewed the offer evaluation and Sentry’s financials before closing. The district court found this testimony more credible than the contrary trial testimony by Vinoskey.

The district court relied on four pieces of circumstances to find that Vinoskey knew that the $406-per-sharevalue was greater than FMV:(1)Vinoskey reviewed the $406-per-shareappraisal and Sentry financials before accepting the offer; (2)Vinoskey reviewed prior appraisals, understood general methodology, and knew previous values were $220 per share to $285 per share; (3)Vinoskey reviewed Sentry financials and understood the fundamentals; and(4) Vinoskey knew that selling his shares to the ESOP did not mean he would lose all control of the company.

Evidence supports Vinoskey’s position that he did not know that the $406 per share was higher than FMV. First, valuing a nonpublic company was complex, and experts disagreed on methodologies. To expect a high-school graduate with no formal training in economics or accounting to understand a valuation is unfair. Vinoskey also testified that he believed the $220-per-share-to-$285-per-share valuations were too low. He always deferred to the appraiser’s final valuations.

He also testified he thought Sentry was worth $40 million. “According to Vinoskey, he certainly thought he could sell his remaining shares for more than the $20,706,000 sales price from the 2010 transaction.” He also believed that selling his 52% of the company and giving the ESOP 100% control justified a “premium price.” The appellate court says that is debatable. The ESOP’s participants’ direct voting rights were limited, and several ESOP actions were delegated to its trustees.“ If ceding such authority warrants the buyer paying a premium, one can also question how Vinoskey could have known the offer price was more than the fair market value.”

Finally, the record shows that Vinoskey did not seek to maximize his financial well-being to the detriment of his employees. He forgave part of the ESOP debt after the transaction when he did not have to, and he refused to have his employees pay the amount of their healthcare premiums to enhance the value of his company.

“But despite this evidence supporting Vinoskey’s position, we cannot conclude that the district court’s finding to the contrary was clear error.” The appellate court noted that its review of the transcripts was at least a degree removed from the district court judge’s vantage point. Under “clear error review,” the district court’s conclusion that Vinoskey knew the value was more significant than FMV “passes muster.” This was particularly so since the company’s performance was not more excellent than under the prior valuations, nor did the projections show a significant improvement. Additionally, Sentry never received an offer for its stock, and it was questionable whether a premium for control was justified. Vinoskey argued that the district court’s factual findings must be “obvious” and not just reasonable. (SeeSulyma.) However, that case also emphasized that circumstantial evidence can be used to determine actual knowledge.

Thus, the district court did not err when it found that Vinoskey knew that the $406-per-share value of Sentry exceeded its FMV.

“Guided by our standard of review, we see no clear error in the district court’s finding that Vinoskey violated ERISA Section 502(a)(5).” This sufficiently affirmed the district court’s decision on Vinoskey’s liability, so there was no need to determine whether there was a liability as a “co-fiduciary.”

Damages.

In reaching its decision that Vinoskey was jointly and severally liable for $6,502,500, the district court declined to reduce the damages award by $4.6 million, the approximate amount of loans that Vinoskey forgave the ESOP in 2014. The district court noted that absent the weight of authority, it would have offset the damages with the loan forgiveness. The district court referred to the Brundle case and others the district court relied on. “Those cases presented different facts where damages reduction made little sense. Here, affirming the district court’s damages award would result in an inappropriate windfall for the ESOP.” In Brundle, the debt forgiveness was for facilitating a second sale by the ESOP to an outside party and thus did not impact the damages determined due to the ESOP transaction. There was no subsequent sale in this case, and the debt forgiveness was not used as a “bargaining chip.” Vinoskey forgave the debt. And it impacted the ESOP’s loss as it reduced that loss dollar for dollar. “The aim of ERISA is ‘to make the plaintiffs whole, but not to give them a windfall.’” (Henry v. Champlain Enters.)

It was clear that the actual loss to the ESOP was $1.9 million after deducting the $4.6million that was forgiven. That is all the ESOP was entitled to. Further, Brundle never adopted a sweeping ban on reducing damages by the debt forgiven. The debt forgiven reduced the actual amount the ESOP paid for the stock and thus reduced the damages by the same amount. Other out-of-circuit cases the secretary cited also did not have facts analogous to this case and were irrelevant. This case was not inconsistent with these out-of-circuit cases.

“In sum, under review, we reverse the district court’s legal conclusion to the contrary” and allow the $4.6 million in debt forgiven as a reduction of damages.

In final judgement, then, theappellate courtaffirmed Vinoskey’s liability but reversedtheamount of damages (i.e.,liability) from $6,502,500 to $1,863,033, subtracting the loanforgiven of $4,639,467.