Chesemore v. Alliance Holdings Inc.

• Decision Date: 17 February 2011
• Docket Number: No. 09–cv–413–wmc.,09–cv–413–wmc.
• Parties: Carol CHESEMORE, Daniel Donkle, Thomas Gieck, Martin Robbins and Nannette Stoflet, on behalf of themselves, individually, and on behalf of all others similarly situated, Plaintiffs,v.ALLIANCE HOLDINGS, INC., A.H.I., Inc., David B. Fenkell, Pamela Klute, James Mastrangelo, Stephen W. Pagelow, Jeffrey A. Seefeldt, Alpha Investment Consulting Group, LLC and John Michael Maier, Defendants,andTrachte Building Systems, Inc., Employee Stock Ownership Plan and Alliance Holdings, Inc., Employee Stock Ownership Plan, Nominal Defendants.
• Court: U.S. District Court — Western District of Wisconsin

770 F.Supp.2d 950

50 Employee Benefits Cas. 2781

Carol CHESEMORE, Daniel Donkle, Thomas Gieck, Martin Robbins and Nannette Stoflet, on behalf of themselves, individually, and on behalf of all others similarly situated, Plaintiffs,

v.ALLIANCE HOLDINGS, INC., A.H.I., Inc., David B. Fenkell, Pamela Klute, James Mastrangelo, Stephen W. Pagelow, Jeffrey A. Seefeldt, Alpha Investment Consulting Group, LLC and John Michael Maier, Defendants,andTrachte Building Systems, Inc., Employee Stock Ownership Plan and Alliance Holdings, Inc., Employee Stock Ownership Plan, Nominal Defendants.

No. 09–cv–413–wmc.

United States District Court, W.D. Wisconsin.

Feb. 17, 2011.

Andrew W. Erlandson, Marie A. Stanton, Hurley, Burish & Stanton, S.C., Madison, WI, Karen L. Handorf, Michelle Yau, Monya Monique Bunch, Robert Joseph Barton, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Marc I. Machiz, Cohen Milstein Sellers & Toll PLLC, Philadelphia, PA, for Plaintiffs.Angela M. Rust, Lora L. Zimmer, Patrick F. Koenen, Hinshaw & Culbertson LLP, Appleton, WI, Christopher Craig Woods, Kristen Marie Blankley, Squire, Sanders & Dempsey, LLP, Columbus, OH, Jeffrey J. Wedel, Ryan A. Sobel, Squire, Sanders & Dempsey, LLP, Cleveland, OH, Karen L. Handorf, Karen L. Handorf, Karen L. Handorf, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Charles B. Wolf, Patrick Williamson Spangler, Vedder Price P.C., James J. Convery, Laner, Muchin, Chicago, IL, Lynn Marie Stathas, Reinhart Boerner Van Deuren S.C., Madison, WI, Alan I. Silver, Jonathan Paul Norrie, Kevin Patrick Hickey, Bassford Remele, P.A., Minneapolis, MN, Tara M. Mathison, Davis & Kuelthau, S.C., Milwaukee, WI, for Defendants.

OPINION and ORDER

WILLIAM M. CONLEY, District Judge.

In this putative class action, plaintiffs Carol Chesemore, Daniel Donkle, Thomas Gieck, Martin Robbins and Nannette Stoflet were long-term employees of Trachte Building Systems, Inc. (“Trachte”) and remain participants in the company's Employee Stock Ownership Plan and Trust (“TBS ESOP” or “the Plan”). Plaintiffs allege that defendants Alliance Holdings, Inc. (“Alliance”), A.H.I., Inc., David B. Fenkell, Stephen Pagelow, Pamela Klute, James Mastrangelo, Jeffrey Seefeldt, Alpha Investment Consulting Group, LLC and John Michael Maier each played a role in setting up and executing a complex transaction which rendered plaintiffs' interests in an employee stock ownership plan essentially worthless in violation of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001–1461.¹ Specifically, plaintiffs allege that a few years after Alliance had purchased 80% of the stock in Trachte, (1) Alliance “spun off” plaintiffs' valuable interests in the Alliance Holdings, Inc. Employee Stock Ownership Plan and Trust (“AH ESOP”) into the TBS ESOP; (2) Trachte was resold and saddled with an unreasonable debt load; (3) Alliance sold its Trachte stocks to the TBS ESOP at an inflated price in exchange for the employees' valuable Alliance and AH ESOP shares; and (4) Trachte made “phantom stock” payments to certain defendants as a reward for facilitating their sale.

Now before the court are motions to dismiss brought by all defendants, except Alpha Investment Consulting Group, LLC and John Michael Maier.² The movants contend that, even taking plaintiffs' claims against them on their face, each component of the challenged transaction met the technical requirements of ERISA and, therefore, are insufficiently pled to permit relief to be granted. Because an alternative reading of the allegations of the amended complaint is permissible—one suggesting that the transaction as a whole was a sophisticated scheme to wring most of the value out of Trachte at an inevitable loss to the employees' ESOP accounts, orchestrated in breach of fiduciary duties owed by Alliance and the other defendants—the court will deny the motions and allow discovery to proceed on the claims as pled, except as specifically noted below.

ALLEGATIONS OF FACT ³

A. Alliance's Acquisition of Trachte

Alliance is a holding company that buys, holds and sells other companies. Alliance markets itself to majority shareholders of small and medium-sized, privately-held operating companies seeking to be bought out while deferring taxation on the proceeds of the sale. When selling a company, Alliance offers potential buyers a phantom stock plan for the acquired company providing “substantial reward for each of our management team.”

Alliance sponsors the nominal defendant AH ESOP. When Alliance purchases an operating company, the employees participating in that operating company's ESOP become participants in the AH ESOP. If Alliance sells the operating company, those employees' accounts are “spun off” from the AH ESOP.

At all times relevant to the complaint, the AH ESOP owned almost all the common stock of Alliance directly or indirectly.⁴ Alliance was the named fiduciary for the AH ESOP and had the authority to appoint the plan administrator and trustee and to monitor their performance. Defendant David B. Fenkell has been the trustee of the AH ESOP since 1995, and is a member of the Alliance Board of Directors, with responsibility for appointing the Plan administrator and trustee.

In September 2002, Alliance purchased Trachte for $24 million through a complex transaction. Essentially, Trachte's employee stock ownership plan (the “old TBS ESOP”) purchased sufficient stock to obtain an 80 percent ownership interest in Trachte. Alliance then purchased the 80 percent owned by old TBS ESOP and merged old TBS ESOP into the AH ESOP. The remaining 20 percent of shares stayed with defendant Stephen W. Pagelow, who had purchased Trachte in 1984 and was its president and chief operating officer. Effective October 1, 2002, Trachte established two phantom stock plans to reward key employees of Trachte and Alliance, respectively. The phantom stock plans entitled these eligible employees to receive cash based in part on the value of the Trachte stock.

Sometime in 2006, Alliance began looking for a buyer for Trachte. In early 2007, Alliance started negotiating a sale of Trachte with HIG Capital, a private investment firm. HIG Capital made an offer to purchase Trachte from Alliance, however it refused to purchase Trachte at the price Alliance was asking because it believed that “market data indicated [that] the self storage [industry in which Trachte operated] ha[d] matured” and orders had “softened in 2007.” (Am. Compl. (dkt. # 79) at 25.) At about the same time, Alliance marketed Trachte to other potential buyers, including Tricor Pacific Capital, Inc. After failing to find an outside buyer, Alliance decided to sell Trachte to Trachte's own employees through a newly-created, Trachte-sponsored Employee Stock Ownership Plan, also a nominal defendant here.

B. Alliance's Preparations For Resale of Trachte

1. Letter of Intent

In early 2007, defendants James Mastrangelo and Jeffrey A. Seefeldt began discussions with Fenkell about the acquisition of Trachte by a new Trachte employee stock ownership plan. Mastrangelo and Seefeldt acted as “representatives” of this yet-to-be-formed TBS ESOP.

Fenkell drafted a “Letter of Intent” dated April 19, 2007, setting forth the proposed terms of an equally complex buyback of Trachte by the new TBS ESOP. Mastrangelo and Seefeldt signed the letter as “Representatives” of the yet-to-be formed TBS ESOP, Pagelow signed as one of the “Selling Shareholders” and Seefeldt signed again as the president of Trachte. The steps set out in the letter of intent included:

1. Seefeldt and Mastrangelo would cause Trachte to establish the TBS ESOP;

2. Alliance would sell $7.5 million of Trachte stock to the TBS ESOP in exchange for promissory notes;

3. the Trachte employee's accounts (now made up of stock in Alliance and its subsidiary AH Transition) would be “spun off” from the AH ESOP into the TBS ESOP;

4. the TBS ESOP would repay the promissory notes with the Alliance and AH Transition stock allocated to Trachte employees' accounts, leaving it only Trachte stock;

5. Trachte would borrow $27.5 million and a subsidiary of Trachte would repay $2.9 million to Trachte on terms negotiated by Seefeldt and Mastrangelo with the assistance of Kenneth Wanko from Alliance;

6. Trachte would make a loan to the TBS ESOP to purchase the remaining Trachte shares held by Alliance and Pagelow;

7. Trachte would terminate the Trachte Building Systems, Inc. Phantom Stock Plan (for certain Alliance employees) and make approximately $4.9 million in cash payments to its participants while leaving intact a Trachte Phantom Stock Plan (for certain Trachte employees); and

8. Trachte would redeem its preferred stock held by Alliance, as well as redeem or purchase its remaining common shares held by Alliance and Pagelow.

The closing was to be a “simultaneous sign and close,” leaving the TBS ESOP as the sole shareholder of Trachte at the end of the “buyback.”

2. Valuations

As trustee of the AH ESOP, Fenkell obtained valuations of the fair market value of Alliance, AH Transition and Trachte from Stout Risius Ross, Inc. Trachte was valued at about $44 million with a per share value of about $13,725.50, but Stout did not apply a discount for lack of marketability.

On July 2, 2007, Trachte trustees Mastrangelo, Seefeldt and Klute obtained a draft valuation and fairness opinion of the proposed transaction from Barnes Wendling Valuation Services, Inc. Barnes found that Trachte's common equity value ranged from $26.2 million to $40.1 million and compared this range to the Stout valuation. Barnes subtracted “phantom equity” payments of about $7.9 million from the Stout valuation and added a $1.9 million “tax shield” to its valuation. Comparing the “adjusted” Stout valuation of $37.6 to its upper range of $40.1 million, Barnes concluded that the proposed transaction was “within the range of reasonableness, albeit near the upper end of the range.”

The Trachte trustees obtained a second opinion...