Laidig v. GreatBanc Tr. Co.

• Decision Date: 31 January 2023
• Docket Number: 22-cv-1296
• Parties: Paul Laidig, et al. Plaintiffs, v. GreatBanc Trust Company, et al. Defendants.
• Court: U.S. District Court — Northern District of Illinois

Paul Laidig, et al. Plaintiffs,
v.
GreatBanc Trust Company, et al. Defendants.

No. 22-cv-1296

United States District Court, N.D. Illinois, Eastern Division

January 31, 2023

MEMORANDUM OPINION AND ORDER

Mary M. Rowland United States District Judge

Plaintiffs Paul Laidig, Peter Lewis, and Michael Robbins are or were employees of Vi-Jon, a manufacturer of personal care products including hand sanitizer, and are participants in Vi-Jon's employee stock ownership plan (the Plan). They bring a putative class action complaint alleging that, in 2020, Defendants GreatBanc Trust Company, Berkshire Fund VI, LP (Berkshire), John Brunner, and the John G. Brunner Revocable Trust violated the Employee Retirement Income Security Act (ERISA) by causing and/or knowingly participating in the transaction leaving Vi-Jon 100% employee-owned. Defendants have all moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). [42]; [43]; [45]. For the reasons explained below, this Court denies GreatBanc's motion to dismiss [42], denies in large part the Brunner Defendants' motion to dismiss [43], and denies Berkshire's motion to dismiss [45].

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I. Background

A. The Plan

Non-party Vi-Jon manufactures personal care products including hand sanitizer. [1] ¶ 7. Vi-Jon established the Plan with an effective date of January 1, 2020. Id. ¶ 11. According to Plaintiffs, the Plan constitutes an “employee pension benefit plan” under 29 U.S.C. § 1002(2)(A) and an “employee stock ownership plan” (ESOP)^[1]under 29 U.S.C. § 1007(d)(6). Id. ¶ 12.

In August 2020, in a series of related transactions (the ESOP Transaction), Defendant Berkshire and the Brunner Defendants sold Vi-Jon to the Plan making Vi-Jon a 100% employee-owned company as the Plan's participants are Vi-Jon's employees. Id ¶ 9.

Through the ESOP Transaction, the Plan acquired 1,203,711 shares of Vi-Jon stock, representing 100% of the issued shares, for a total of $398,512,583. Id. ¶ 14. The Plan did not possess capital prior to the ESOP Transaction and therefore borrowed 100% of the purchase price; as a result, the Plan became indebted to the company for the outstanding principal and interest, to be paid over forty-nine years. Id. The Plan releases shares of stock to participant accounts in proportion to the amount of the total debt paid each year. Id. The ESOP Transaction closed on or around August 20, 2020. Id.

As of December 31, 2020, 1,031 individuals participated in the Plan with shares allocated to their individual accounts. Id. ¶ 15. Under the Plan and ERISA,

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participants may receive a retirement benefit based on the value of the shares allocated to their accounts upon retirement. Id.

B. The Parties

Plaintiff Paul “David” Laidig resides in Tennessee and has worked for Vi-Jon or its predecessor companies for thirty-five years. Id. ¶ 16. Laidig holds company shares in his individual account in the Plan and is a vested participant in the Plan as defined under 29 U.S.C. § 1002(7). Id. Plaintiff Peter Lewis also lives in Tennessee, has worked for Vi-Jon or its predecessor companies for twenty-seven years, holds company shares in his individual account in the Plan, and is a vested participant in the ESOP as defined by 29 U.S.C. § 1002(7). Id. ¶ 17. Plaintiff Michael Robbins lives in Tennessee, worked for Vi-Jon between 2018 and 2021, holds company shares allocated to his individual account in the Plan, and is a vested participant in the Plan as defined under 29 U.S.C. § 1002(7). Id. ¶ 18.

Defendant Berkshire operates as a Massachusetts limited partnership, controlled by its general partner, Sixth Berkshire Associates LLC (Berkshire GP). Id. ¶ 19. Both Berkshire and Berkshire GP are affiliated with Berkshire Partners LLC (Berkshire Firm), a private equity investment firm. Id. ¶ 20. Through Berkshire, Berkshire GP, and other vehicles, Berkshire Firm members use their capital and capital raised from other investors to acquire privately held companies for investment. Id. In 2006, Berkshire acquired a majority stake in Vi-Jon's predecessors and merged them under the Vi-Jon name. Id. ¶ 21. Berkshire elected Vi-Jon's board of directors, including three directors employed by Berkshire Firm, at least one of

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whom was also a member of Berkshire GP. Id. In 2020, through the ESOP Transaction, Berkshire unloaded its Vi-Jon stake. Id. ¶ 22. Plaintiffs allege, on information and belief, that Berkshire received cash and/or notes for its interest in Vi-Jon. Id.

Defendant Brunner is a natural person residing in Missouri; his grandfather founded Vi-Jon. Id. ¶ 24. Prior to 2006, Brunner served as Vi-Jon's controlling shareholder and member of its board of directors. Id. In 2006, he sold a majority stake in Vi-Jon to Berkshire and retained a minority stake and his board seat. Id. ¶ 25. Brunner held his minority stake through the Brunner Trust, another named Defendant. Id. Brunner is the settlor of the Brunner Trust, and upon Plaintiffs' information and belief, a trustee and beneficiary. Id. Through the ESOP Transaction, Brunner liquidated the Brunner Trust's Vi-Jon stake, and upon Plaintiffs' information and belief, the Brunner Trust received cash and/or notes for its interest in Vi-Jon. Id. ¶ 26. Plaintiffs allege that the Brunner Trust qualified as a “party in interest” to the Plan within the meaning of 29 U.S.C. § 1002(14)(H) because it held 10% or more of the Plan employer's stock. Id. ¶ 27. Plaintiffs also assert that Brunner was a “party in interest” to the Plan within the meaning of 29 U.S.C. § 1002(14)(H) because he served as a director of the Plan's employer. Id. ¶ 28.

GreatBanc is an Illinois corporation and is the “surviving independent wing” of a banking group largely subsumed by Citizens Bank in 2007. Id. ¶ 31. GreatBanc generates most of its revenue from services to employee benefit plans. Id. Through its board, Vi-Jon appointed GreatBanc as the trustee of the Plan. Id. ¶ 34. As trustee,

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GreatBanc possessed sole and exclusive discretion to authorize and negotiate the ESOP Transaction on behalf of the Plan. Id. In August 2020, GreatBanc approved the terms of the ESOP Transaction, including the $398 million sale price and forty-nine-year loan term, on behalf of the Plan. Id. ¶ 35. According to Plaintiffs, GreatBanc acted as a fiduciary of the Plan within the meaning of ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), because it was the Plan's trustee within the meaning of ERISA § 403(a), 29 U.S.C. § 1103(a), and because it exercised discretionary authority or discretionary control respecting management of the Plan, and/or exercised authority or control respecting management or disposition of the Plan's assets, and/or had discretionary authority or discretionary responsibility in the administration of the Plan. Id. ¶ 36. GreatBanc was also a named fiduciary of the Plan under ERISA § 402(a), 29 U.S.C. § 1102(a) and under the terms of other written instruments. Id. ¶ 37.

C. Defendants' Alleged Wrongdoing

Plaintiffs allege that the ESOP Transaction was illegal. Id. ¶ 43. According to Plaintiffs, Berkshire tried to sell Vi-Jon the “usual way,” and in 2014 attempted to shop the company to the marketplace for $400 million. Id. ¶ 45. No buyer wanted to pay the asking price, likely because of the company's high debt load and lack of pricing flexibility in the industry. Id. ¶¶ 46-47. In fact, in 2012, the credit rating agency Moody's downgraded Vi-Jon's credit rating. Id. ¶ 47. By 2020, Vi-Jon was among Berkshire's top five longest-held investments with no impending deal. Id. ¶ 48.

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Plaintiffs allege that Berkshire and the Brunner Defendants turned to a new type of transaction-an ESOP transaction-after failing to find a buyer “at their desired price in the usual places.” Id. ¶ 49. This allowed Defendants to create the buyer (the Plan) on their own terms and choose the agent that would sit on the other side of the table (GreatBanc). Id. Berkshire and Brunner controlled the Plan formation and trustee hiring process through their control of the company's board. Id. ¶ 50.

In January 2020, at the beginning of the COVID-19 pandemic, Vi-Jon ramped up hand sanitizer production to meet and anticipate demand for such products. Id. ¶ 51. Vi-Jon did well as the pandemic escalated in the first half of 2020. Id. ¶ 52. The sharp increase in profits was, however, temporary; by June 2020, many new competitors entered the space and widely reported studies should have put Defendants on notice that demand would decrease by August 2020. Id. ¶¶ 53, 54. Thus, according to Plaintiffs, “there were a number of reasons to discount early pandemic profits” when Defendants valued the company in August 2020. Id. ¶ 54. Nevertheless, Plaintiffs assert, Berkshire and the Brunner Defendants pushed the deal through and determined the valuation with their advisors, latching on to pandemic-driven sales figures notwithstanding the temporary nature of the underlying market conditions. Id. ¶¶ 55-56. Plaintiffs allege that Defendants knew that ERISA's provisions prohibited the ESOP Transaction. Id. ¶ 57.

As a result of the ESOP Transaction-where the purchase price was inflated, and debt load unsustainable-employee participants in the new Plan are the “losers”

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as they suffer harm from the inflated sale price. Id. ¶ 61. That is, according to Plaintiffs, it takes more capital to pay off the financing required to obtain the shares, limiting the funds available to make the company (and the participants' shares) more valuable. Id. ¶ 62. It also takes longer to pay off debt, meaning that the Plan releases fewer shares to participants each year. Id. Under the current term, Plan participants will not fully own the company until well after its youngest employees pass retirement age. Id.

D. The Claims

Plaintiffs bring this derivative action on behalf of the Plan. Id. ¶¶ 66-67. Additionally and alternatively, they seek to represent a putative class...