Hugler v. First Bankers Trust Servs., Inc., 12 CV 8649 (VB)
| Decision Date | 29 March 2017 |
| Docket Number | 12 CV 8649 (VB) |
| Parties | EDWARD HUGLER, Acting Secretary of Labor, United States Department of Labor, Plaintiff, v. FIRST BANKERS TRUST SERVICES, INC. and REMBAR EMPLOYEE STOCK OWNERSHIP PLAN, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Edward Hugler,1 Acting Secretary of the United States Department of Labor (the "Secretary"), brings this action against defendants First Bankers Trust Services, Inc. ("First Bankers"), and the Employee Stock Ownership Plan of the Rembar Company, Inc. (the "ESOP"),2 asserting First Bankers breached fiduciary duties owed under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., and also improperly caused the ESOP to engage in a prohibited transaction under ERISA.
Before the Court are First Bankers's motion for summary judgment (Doc. #118) and the Secretary's cross-motion for partial summary judgment (Doc. #134).
For the reasons set forth below, both motions are DENIED.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1331.
The parties have submitted briefs, statements of material facts, and declarations with supporting exhibits, which reflect the following factual background.
In 2005, The Rembar Company Inc. ("Rembar") was a closely-held corporation located in Dobbs Ferry, New York. Rembar manufactured and distributed precision parts and components made from refractory metals, and distributed refractory metals in raw form to lower-volume producers.
First Bankers is a trust company based in Quincy, Illinois, that acts as trustee and custodian for employee benefit and personal trust accounts. In April 2005, Rembar retained First Bankers to serve as trustee for the Rembar ESOP in connection with a transaction in which the ESOP would purchase 100% of Rembar's stock from selling shareholders Frank Firor, Virginia Keilty, and Rosemary Brockett.
Prior to the 2005 ESOP transaction, Firor was Rembar's chief executive officer, chairman of the board of directors, president, and majority stockholder. Firor owned 81.88% of Rembar's then outstanding shares, Keilty owned 11.77%, and Brockett owned 6.35%.
In January 2005 after Firor became interested in selling his Rembar shares, Rembar engaged Corporate Solutions Group ("CSG"), an investment bank, to evaluate the feasibility ofestablishing an ESOP3 to purchase Rembar stock from its owners. CSG informally estimated that the value of 100% of Rembar's common stock was approximately $15,719,000. This figure included a 10% control premium, which "represent[ed] a premium a strategic buyer would pay to acquire a controlling stake in [Rembar]." (Sullivan Decl. Ex. G, DOL0008724, DOL0008726).
At CSG's suggestion, Rembar established an ESOP formation committee to retain a valuation company to prepare a preliminary valuation. Firor participated in the formation committee's activities.
On February 8, 2005, the formation committee retained Empire Valuation Consultants, LLC ("Empire") to prepare a preliminary valuation of the fair market value of Rembar's stock. In connection with the preliminary valuation work Empire performed, it reviewed a confidential information memorandum prepared by CSG that contained historical and financial data concerning Rembar.
Empire and CSG engaged in discussions regarding the value of Rembar's stock before Empire issued its preliminary valuation. Terence Griswold, a managing director at Empire, testified that his firm initially proposed a valuation "in the high 13 millions, and [CSG] said 20 million." (Sullivan Decl. Ex. I, at 93:2-16). CSG urged Empire to increase its preliminary valuation conclusion, and specifically sought to persuade Empire to adjust valuation factors such as the discount rate. Empire and CSG ultimately agreed to a valuation of $15.5 million after Empire communicated to CSG, "We're not going any higher." (Id. Ex. I, at 96:18-19).
Empire subsequently issued a preliminary valuation on March 4, 2005, to the Rembar formation committee c/o Walter Pastor (Pastor was a Rembar officer named to head the formation committee). The preliminary valuation was also shared with Firor. Empire's preliminary valuation concluded that as of February 15, 2005, for potential ESOP purposes, the fair market value of 100% of Rembar's common stock was $15.5 million, on a controlling interest basis. This valuation conclusion included the application of a 25% control premium and used a weighted average cost of capital discount rate that was calculated based on a capital structure of 50% debt and 50% equity.
On April 13, 2005, following the issuance of the preliminary valuation and at CSG's suggestion, Firor signed an engagement letter on behalf of Rembar appointing First Bankers to act as the ESOP's independent trustee in connection with the transaction.
Paragraph 9(a) of the FBTS engagement letter states:
As Trustee, First Bankers shall be entitled . . . to: (a) retain the Trustee's own independent financial advisor of its choosing to assist in the evaluation of the proposed transactions, and to perform the annual valuation and any other required valuations, which advisor is acceptable to the Company; provided however, that the Company shall not unreasonably withhold such acceptance.
(Sullivan Decl. Ex. B, at DOL0019924). Paragraph 11 then provides:
First Bankers's continued engagement as Trustee is contingent upon the following:
After the ESOP engaged First Bankers, CSG instructed Empire to send First Bankers an engagement letter. Empire complied and sent First Bankers an engagement letter dated April 5, 2005, which was countersigned by First Bankers and Rembar as of May 25, 2005. The letter specified that Empire was engaged to act as financial advisor to First Bankers in its capacity as trustee to the ESOP. It also stated that Empire would "express its updated opinion as to the fair market value of Rembar's common stock on, or before a date where [sic] Empire will present its conclusions to the Trustee" and "render a fairness opinion as of the Transaction Date with respect to the acquisition of the common stock by the ESOP." (Schnapp Decl. Ex. 3, at 1). The engagement letter further stated that Empire "will represent only the interests of the ESOP participants and beneficiaries." (Id.). Empire's initial engagement letter with the Rembar ESOP formation committee had stated it "will represent only the interests of the ESOP participants and beneficiaries, acting through committee and the ESOP trustee when selected." (Id. Ex. 4, at 1-2).
First Bankers also retained Brian Snarr, an attorney of the law firm Morrison Cohen LLP, as its legal counsel in connection with the 2005 ESOP transaction.
As part of its role as trustee, First Bankers formed an employee benefits committee (the "EB committee") to represent the ESOP's interests and vote on whether to approve the 2005 transaction. Such approval required the unanimous vote of the EB committee members. Among the eight First Bankers employees who served on the EB committee were certified public accountants, holders of masters of business administration degrees, and licensed attorneys. Specifically, the EB committee members included: First Bankers's president, Brian Ippensen; First Bankers's administrative trust officer, Kimberly Serbin; and First Bankers's business development officer, Merri Ash.
Prior to its appointment as trustee of the Rembar ESOP, the EB committee conducted a pre-acceptance review process to determine the feasibility of the proposed transaction. This review process involved an examination of Rembar and its business (including its performance and financial history), and a review of the proposed transaction structure.
One of the agreements entered into as part of the Rembar ESOP transaction was a limitation agreement dated as of June 17, 2005, among Rembar, First Bankers as the ESOP's trustee, and the selling shareholders. The recitals of the limitation agreement provide, inter alia:
[T]he price the Trust proposes to pay for the Common Stock is based in part on a valuation of the Common Stock that contemplates certain limitations on the base and incentive compensation paid to certain employees of the Company in the future, as well as other operational limitations, covenants and obligations of the parties hereto as set forth in this Agreement; and . . . the Trust will not, however, purchase the Common Stock unless the Company covenants to take certain steps provided herein to assure that the value of the Common Stock will not be diminished following such purchase.
(Schnapp Decl. Ex. 15, at DOL0016293).
Section 3.2(d) of the limitation agreement contains a covenant of First Bankers as trustee, which provides:
Board of Directors. For so long as the Seller Subordinated Note4 in favor of Frank Firor is outstanding, the Trustee, acting on behalf of the Trust, shall vote all of the shares of Common Stock held by the Trust to cause the Board of Directors to be at all times comprised of a majority of directors designated by Frank Firor.
Other key provisions of the limitation agreement include Section 3.1(a), which limits Firor's annual compensation from Rembar for the following five fiscal years to $75,000 per year, and Section 3.1(c), which requires Rembar to distribute the company's annual net earnings as a shareholder dividend, unless the board of directors exercises its discretion to retain up to $100,000 of its net...
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