Hood v. Smith's Transfer Corp., No. C 87-0527-L(B).

CourtUnited States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
Writing for the CourtHal Bogard, Louisville, Ky., and Alan Croll, Los Angeles, Cal., for defendants
Citation762 F. Supp. 1274
Docket NumberNo. C 87-0527-L(B).
Decision Date25 April 1991
PartiesDonald HOOD, et al., Plaintiffs, v. SMITH'S TRANSFER CORPORATION, et al., Defendants.

762 F. Supp. 1274

Donald HOOD, et al., Plaintiffs,
v.
SMITH'S TRANSFER CORPORATION, et al., Defendants.

No. C 87-0527-L(B).

United States District Court, W.D. Kentucky, at Louisville.

April 25, 1991.


762 F. Supp. 1275
COPYRIGHT MATERIAL OMITTED
762 F. Supp. 1276
COPYRIGHT MATERIAL OMITTED
762 F. Supp. 1277
Charles Zimmerman, Jr. and William S. Reisz, Louisville, Ky., for plaintiffs

Hal Bogard, Louisville, Ky., and Alan Croll, Los Angeles, Cal., for defendants.

MEMORANDUM

BALLANTINE, Chief Judge.

This matter is before the Court on the motion of defendants to dismiss plaintiffs' amended complaint in its entirety. For the reasons explained below, defendants' motion is denied in part and granted in part.

BACKGROUND

This action involves a dispute concerning an employee stock option plan created by defendant Smith's Transfer Corporation ("Smith's") for the voluntary participation of both its union and non-union employees. Plaintiffs allege numerous causes of action, including claims under the Employee Retirement Income Securities Act, 29 U.S.C. §§ 1001-1242; the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968; the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa; and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk.

The Parties

The ten named plaintiffs are employees of Smith's who chose to participate in its employee stock option plan and gave up a percentage of their wages to do so. Nine of those plaintiffs are members of the International Brotherhood of Teamsters ("Teamsters") and one of them is not a union member.1 Plaintiffs seek to represent a proposed class of all Smith's employees — union and non-union — who participated in the employee stock option plan. Plaintiffs have filed a motion for class certification which is presently pending before this Court.

Defendant Smith's Transfer Employee Ownership Plan is an employee stock ownership plan (the "ESOP") formed pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. ESOP participants contributed up to 15% of their wages in exchange for shares of Smith's common stock which would be held in trust by the ESOP.

Defendant Smith's is an interstate LTL ("less than truckload") trucking company which was organized as a Virginia corporation and has its principal place of business there. At the time relevant for the purposes of this case, Smith's had approximately 6,300 employees, 72% of whom were members of the Teamsters. Smith's has been the only administrator of the ESOP.

Defendant Sovran Bank, N.A. ("Sovran") is a national banking association and has been the only trustee for Smith's ESOP pursuant to a November 1, 1985 agreement with Smith's, the "Smith's Transfer Employee Ownership Trust Agreement."

Defendants Roger Burbage, Max McFarlin, and Edward Seibert are citizens and residents of Virginia. At the relevant times, Burbage was the Vice President, Chief Financial Officer, and Treasurer of Smith's as well as a director of that company. McFarlin was the Secretary of Smith's; Seibert was the Vice President of Human Resources for Smith's. Burbage, McFarlin, and Seibert are three of the four members of the Committee which administered Smith's ESOP.2

762 F. Supp. 1278

Defendant ARA Services, Inc. ("ARA") is a corporation which was organized in Delaware and has its principal place of business in Pennsylvania.

The Facts

In 1980, Smith's became a wholly-owned subsidiary of ARA. In 1984, a group of investors led by ARA management acquired ownership of ARA through a lever-aged buyout. Defendant Roger Burbage was one of ARA's new owners after the 1984 buyout. That buyout caused the investors to incur an approximate 1.2 billion dollar debt which ARA assumed and distributed proportionally among its subsidiaries. ARA allocated sixty-five million dollars of that debt, referred to as the "push-down debt," to Smith's which began to pay the push-down debt from its operating revenues.

On September 24, 1985, Smith's Board of Directors approved the ESOP and, thereafter, the senior management of ARA and Smith's began to implement the ESOP. By the end of September 1985, Smith's had filed a first Registration Statement with the Securities Exchange Commission ("SEC") and began a campaign to secure employee participation in the ESOP.

In November of 1985, Smith's and ARA distributed a Prospectus3 for the ESOP (dated November 12, 1985) to Smith's employees. The Prospectus states that the ESOP's purpose was to generate cash flow sufficient to meet fleet and terminal requirements over the next five years by reducing Smith's wage and salary costs from January 1, 1986 to September 30, 1991 (the "program period"). It further stated that the ESOP's principal elements were (1) for eligible employees voluntarily to elect to participate and (2) for those participants to make an agreement irrevocable for the program period to forego a certain percentage of their hourly wage.4

In exchange for the wage reduction, Smith's was to offer up to 4,803,922 shares of its common stock with a par value of $1 per share over the program period. One time per fiscal year, those shares would be distributed to individual employee accounts held by Sovran, the ESOP trustee. The number of shares distributed would depend on the level of employee participation in the ESOP. The Prospectus provided that Smith's Board of Directors5 could terminate the ESOP at any time, but that any such termination would not affect the participants' rights to the shares allocated to their accounts.

The Prospectus clearly warned prospective participants of the risks involved in choosing to participate in the ESOP. First, the Prospectus unambiguously provided that the value of the wages given up was not guaranteed to be equal to the fair market value of the shares received. On page 6, the Prospectus states that:

the 15% reduction of hourly wage rates or salaries was determined without any regard to the actual fair market value of the shares. In addition, since the fair market value of the shares of Common Stock received by participants in the Plan will be substantially less than the value of the wages and salaries foregone during the Program Period, participation in the Program and the Plan will have a direct net economic cost to participants.

On page 8, the Prospectus states that there will be a disparity in the fair market value of the shares and the wage reduction. The wage reduction would cost employees approximately $44 per share, while the preliminary independent fair market value appraisal was $10 per share.

Second, on pages 6 and 8, the Prospectus plainly states that there was no ready market

762 F. Supp. 1279
for Smith's Common Stock. The Prospectus also warned, on page 10, that a ready market might never exist for that stock because Smith's could not guarantee continued profitable operations after implementation of the ESOP

The Prospectus also clearly stated that, as a matter of union policy, the Teamsters, which represented the majority of Smith's employees, refused to recommend or approve formally to its membership any ESOP proposed by a trucking company. Although the Teamsters refused to recommend or approve Smith's ESOP, they did not condemn that ESOP. After several meetings with Smith's management, Teamsters officials decided to take a neutral stance on the ESOP and consented to the direct solicitation of individual employees, provided that all of Smith's employees, including non-union employees, could also participate in the ESOP.

After distribution of the Prospectus, Smith's held numerous meetings to inform employees about the ESOP and to encourage their participation in an effort to obtain its goal of 90% participation. Smith's thereafter attempted to secure more participation and began telling employees that their future job security depended upon their participation in the ESOP.

At some of these meetings, Smith's showed the employees a videotape that contained a further explanation of the ESOP and its significance to Smith's. Plaintiffs contend that, on the videotape, Joseph Gilbert, Chief Executive Officer of Smith's, Jack Holder, President of Smith's, and Jake Smith, Smith's former owner, stressed that (1) the ESOP's implementation was necessary to Smith's survival and, consequently, the employees' job survival and (2) the funds from the ESOP would be spent solely for new equipment and terminal improvements. Plaintiffs also claim that in those meetings, Smith's officers denied that any ESOP funds would be used to repay the push-down debt or to benefit ARA.6

Eventually, Smith's secured a little over 70% participation rate in the ESOP. Smith's Board elected to implement the ESOP on December 23, 1985 and actually implemented the ESOP on January 1, 1986, whereupon those employees who elected to participate had their wages reduced.7 On September 29, 1986, the ESOP's annual valuation date, Smith's transferred 355,000 shares of Smith's to the employees individual ESOP accounts. On April 7, 1987, plaintiffs were told that the value of their shares had increased and were worth $11.00, a one dollar increase from the $10.00 Prospectus value.

Plaintiffs allege that around March 1, 1987, Smith's and ARA began secret negotiations under the code name "Spain Project" with American Carriers, Inc. and in June 1987, it was recommended that Smith's combine with American Carriers. Smith's contends that owing to losses incurred in 1987, Smith's Board and ARA determined that Smith's needed either to liquidate or combine with a healthy carrier.8

On June 26, 1987, ARA and Smith's entered into an agreement with American Carriers under which American Carriers would acquire 100% of Smith's stock from ARA. As part of that agreement, ARA agreed to purchase all the 830,000 shares distributed to the Smith's ESOP participants for $1.12 per share, whereupon Smith's Board would terminate the ESOP. The $1.12 per share valuation allegedly was...

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14 practice notes
  • Uselton v. Commercial Lovelace Motor Freight, Inc., Nos. 88-1253
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • July 12, 1991
    ...as an "investment" or "contribution" to an employee benefit plan for purposes of the Howey test. See Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1291 (W.D.Ky.1991); Harris v. Republic Airlines, Inc., [1987-88 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 93,772 at 98,625-26, 1988 WL 56256 (......
  • Enron Corp. v. Ubs Painewebber, Inc., MDL 1446
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • February 28, 2017
    ...were given a choice of whether to participate or to continue receiving their full wages. Id. at 575. In Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1290–91 (W.D. Ky. 1991), the employees were permitted to choose whether to participate in the plan and if they did, a 15% wage reduction ......
  • Enron Corp. v. Ubs Painewebber, Inc., MDL 1446
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • February 28, 2017
    ...were given a choice of whether to participate or to continue receiving their full wages. Id. at 575. In Hood v. Smith's Transfer Corp., 762 F. Supp. 1274, 1290-91 (W.D. Ky. 1991), the employees were permitted to choose whether to participate in the plan and if they did, a 15% wage reduction......
  • In re Enron Corp. Securities, Derivative & Erisa, No. MDL 1446.
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • September 30, 2003
    ...securities statutes. See Dubin v. E.F. Hutton Group, Inc., 695 F.Supp. 138, 144-47 (S.D.N.Y.1988); Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1284 (W.D.Ky.1991). Thus any state-law claim relating to it might fall within the preemptive scope of SLUSA if the statute's other requirement......
  • Request a trial to view additional results
13 cases
  • Uselton v. Commercial Lovelace Motor Freight, Inc., Nos. 88-1253
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • July 12, 1991
    ...as an "investment" or "contribution" to an employee benefit plan for purposes of the Howey test. See Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1291 (W.D.Ky.1991); Harris v. Republic Airlines, Inc., [1987-88 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 93,772 at 98,625-26, 1988 WL 56256 (......
  • Enron Corp. v. Ubs Painewebber, Inc., MDL 1446
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • February 28, 2017
    ...were given a choice of whether to participate or to continue receiving their full wages. Id. at 575. In Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1290–91 (W.D. Ky. 1991), the employees were permitted to choose whether to participate in the plan and if they did, a 15% wage reduction ......
  • Enron Corp. v. Ubs Painewebber, Inc., MDL 1446
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • February 28, 2017
    ...were given a choice of whether to participate or to continue receiving their full wages. Id. at 575. In Hood v. Smith's Transfer Corp., 762 F. Supp. 1274, 1290-91 (W.D. Ky. 1991), the employees were permitted to choose whether to participate in the plan and if they did, a 15% wage reduction......
  • In re Enron Corp. Securities, Derivative & Erisa, No. MDL 1446.
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • September 30, 2003
    ...securities statutes. See Dubin v. E.F. Hutton Group, Inc., 695 F.Supp. 138, 144-47 (S.D.N.Y.1988); Hood v. Smith's Transfer Corp., 762 F.Supp. 1274, 1284 (W.D.Ky.1991). Thus any state-law claim relating to it might fall within the preemptive scope of SLUSA if the statute's other requirement......
  • Request a trial to view additional results
1 books & journal articles
  • SECURITIES FRAUD
    • United States
    • American Criminal Law Review Nbr. 58-3, July 2021
    • July 1, 2021
    ...were doing, regardless of whether they knew or should have known their acts were unlawful). But see Hood v. Smith’s Transfer Corp., 762 F. Supp. 1274, 1289 (W.D. Ky. 1991) (citing Landreth Timber Co. v. Landreth, 471 U.S. 681, 687 (1985)) (holding expectations of party with interest in secu......

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