OPINION AND ORDER
WILLIAM M. CONLEY, District Judge.
In an order entered July 24, 2012, 886 F.Supp.2d 1007 (W.D.Wis.2012), the court found that defendants Alliance Holdings, Inc., A.H.I., Inc., AH Transition Corp., David B. Fenkell, Pamela Klute, James Mastrangelo, and Jeffrey A. Seefeldt had violated various fiduciary duties owed to the Trachte Building Systems, Inc. Employee Stock Ownership Plan (“Trachte ESOP”) and to the Alliance Holdings, Inc. Employee Stock Ownership Plan (“Alliance ESOP”) in conjunction with a complex leveraged buyout. (Dkt. # 733.) More specifically, the court found that defendants leveraged plaintiff's accounts in the Alliance ESOP to purchase Trachte Building Systems, Inc. on behalf of the Trachte ESOP at a substantially-inflated price. Following the court's ruling on liability, a bench trial was held from July 25 to July 30, 2012, to determine the extent of the plaintiffs' losses and the appropriate remedies.
While plaintiffs continue to carry the burden of proof on damages, the requirement of precision—particularly with respect to uncertainties in valuation—is not as great. Once plaintiffs prove that defendants caused harm to the plan, uncertainty about the extent of that harm should be resolved in plaintiffs' favor. Here, the court concludes plaintiffs have proven that defendants' breach of their duties to the Alliance and Trachte ESOPs caused the Trachte ESOP to overpay for the purchase of Trachte and that overpayment can be reasonably estimated at $8,329,477.53.
Because defendants Alliance and Fenkell used their control over the Trachte employees' accounts in the Alliance ESOP and the Trachte ESOP trustees to obtain an inflated price and ensure payment of phantom stock, the court will order Alliance and Fenkell to reinstate plaintiffs in the Alliance ESOP and restore $7,803,543 to their accounts; order Fenkell to disgorge the $2,896,000 he received in phantom stock payments; and order the removal of Fenkell as trustee of the Alliance ESOP. Because defendants Mastrangelo's, Seefeldt's and Klute's breach of their fiduciary duties caused the Trachte ESOP to overpay for Trachte, they must restore $6,772,554.63 to the Trachte ESOP, which represents the amount it overpaid reduced by the share of the consideration paid through the share exchange with the employee accounts. However, because Alliance and Fenkell were the more culpable fiduciaries, the court will order Alliance and Fenkell to indemnify Mastrangelo, Seefeldt and Klute for any compensatory relief paid.
The court assumes familiarity with the findings of fact and conclusions of law set forth in its liability ruling. Based on the evidence presented during the remedies phase of trial, the court makes the following additional findings of fact and conclusions of law.
A. Trachte's Fair Market Value In 2007 In the 2007 Transaction, Trachte and the Trachte ESOP paid $38,329,447.53 for 100% of Trachte's common equity. That amount represents the total consideration paid by Trachte and the Trachte ESOP, minus the $2 million worth of preferred equity and the $4,905,300 paid to Alliance employees for the phantom stock plan.
While valuation of a business is decidedly an art and not a science, especially when one is required to look back without the benefit of an arms-length sale, the parties and their experts offered wildly, at times absurdly, different approaches to Trachte's fair market value. Ultimately, the court finds two methods helpful in determining a reasonable estimate of Trachte's fair market value at the time of the 2007 Transaction.1
1. Adjusting for Errors in the Barnes Wendling's Fairness Opinion The first method corrects four errors in Barnes Wendling's calculation of the range of fair market values for Trachte's common equity. One way to correct Barnes Wendling's opinion is to subtract those errors from its conclusion of Trachte's common equity value. First, the court will subtract $1,908,610 for the tax shield. The tax shield was a benefit to the Trachte ESOP by virtue of its special tax status, but the calculation of fair market value does not typically include features unique to an individual buyer. The court will also subtract $1.7 million as a reasonable estimate of Trachte's operating capital needs. During its calculation of common equity, Barnes Wendling added $6.2 million in value from Trachte's holding in cash and cash equivalents while subtracting $4.5 million for its customer deposits, mistakenly assuming that Trachte had no need for operating cash beyond customer deposits and unrealistically treating all of its cash in excess of customer deposits as an asset.2 Finally, the court will apply a 10% discount for lack of marketability. While valuators must use judgment to determine the amount of the discount, the expert testimony indicated that discounts ranged from 1 to 10%. A discount at the high end of the range was appropriate for Trachte, since a private auction had failed to produce a price acceptable to the seller only a few months before this insider transaction.
While even defendants' expert Robert Gross characterized these errors as “aggressive judgments,” defendants argue they should be offset by what Gross identified as Barnes Wendling's other, more conservative judgments. The court disagrees. For example, while Gross testified that some appraisers would have applied a premium because the Trachte ESOP obtained a controlling share, Barnes Wendling performed its discounted cash flow analysis on a controlling interest basis, so no additional premium would have been appropriate. Gross also testified that Barnes Wendling assumed conservatively that Trachte would experience long term growth of 3%, which was lower than management's projections and Trachte's actual growth between 2002 and 2006. Management's judgments on future growth were highly suspect, however, both because of their own conflicts and those of Alliance and Fenkell, whose control over the actions of new management was virtually total until all steps of the sales transaction were completed. More importantly, the court already found that during the short time it owned Trachte between 2002 and 2007, Alliance had aggressively expanded Trachte's sales (with no material increase in total net profits to show for it) in anticipation of its sale and did so in what was already a mature market with little or no prospect for further growth. For these reasons, the court finds that a reasonable arms-length buyer would have found a projected 3% growth rate appropriate at best and unreasonably rosy at worst. Finally, Gross testified that Barnes Wendling used conservative EBITDA multiples, but (1) offered no opinion or analysis to support this opinion and (2) provided no guidance to the court as to more appropriate multiples. 3
As illustrated in the following chart, when the Barnes Wendling valuation is adjusted consistent with the above discussion, it supports a range of $20,315,067 to $32,817,601 for Trachte's common equity, with a median of $26,566,334.
| Deducting Mistakes from BWVS' Calculation of Common Equity Value |
| Value of Common Equity as Calculated by BWVS |
| 10% Marketability Discount |
Defendants urge the court to use the high end of this valuation range, but it would be unfair to give defendants the benefit of the range of permissible values after they breached their fiduciary obligation to determine fair market value. The court finds use of the median value fair for purposes of determining damages.
As in Barnes Wendling's original report, this analysis still produces an unrealistically large range of values—in part because Barnes Wendling compiled its range by taking the highest value under the discounted cash flow model and the lowest value under the market approach. This odd choice allowed Barnes Wendling to find a particularly high end value, which it then relied upon to justify the ultimate high-end value assigned to the transaction for the fairness opinion. In comparison, SRR calculated its range of value by averaging the high and low ends of the discounted...
