Perez v. Bruister

• Decision Date: 03 May 2016
• Docket Number: Nos. 14–60811,14–60816.,s. 14–60811
• Citation: 823 F.3d 250
• Parties: Thomas E. PEREZ, Secretary, Department of Labor, Plaintiff–Appellee Cross–Appellant v. Herbert BRUISTER, Defendant–Appellant Cross–Appellee. Thomas E. Perez, Secretary, Department of Labor, Plaintiff v. Herbert Bruister, Defendant. Vincent Sealy, Plaintiff–Appellee v. Herbert C. Bruister; Bruister Family L.L.C., Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

823 F.3d 250

Thomas E. PEREZ, Secretary, Department of Labor, Plaintiff–Appellee Cross–Appellant
v.
Herbert BRUISTER, Defendant–Appellant Cross–Appellee.

Thomas E. Perez, Secretary, Department of Labor, Plaintiff
v.
Herbert Bruister, Defendant.

Vincent Sealy, Plaintiff–Appellee
v.
Herbert C. Bruister; Bruister Family L.L.C., Defendants–Appellants.

Nos. 14–60811
14–60816.

United States Court of Appeals, Fifth Circuit.

May 3, 2016.

823 F.3d 254

Thomas Tso, Esq. (argued), Stephen Aaron Silverman (argued), U.S. Department of Labor Office of the Solicitor, Washington, DC, Dane L. Steffenson, Atlanta, GA, Louis Hanner Watson, Jr., Esq., Jackson, MS, Charles Peter Yezbak, III, Esq., Yezbak Law Offices, Nashville, TN, for Plaintiff–Appellee Cross–Appellant.

David R. Johanson (argued), Hawkins, Parnell, Thackston & Young, L.L.P., Napa, CA, Cecil Maison Heidelberg, Esq., Heidelberg Harmon, P.L.L.C., Ridgeland, MS, for Defendant–Appellant Cross–Appellee.

Appeals from the United States District Court for the Southern District of Mississippi.

Before JOLLY, JONES, and BENAVIDES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This appeal raises numerous issues involving the sale of closely-held stock from a corporation's owner to its tax-preferred

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Employee Stock Ownership Plan. “The ... dispute is whether individual Defendants breached fiduciary duties under ERISA when [allegedly] acting as trustees for an Employee Stock Ownership Trust (“ESOT”) that purchased company stock for an Employee Stock Ownership Plan (“ESOP”). Plaintiffs claim Defendants paid too much for the stock.”¹ Perez v. Bruister, 54 F.Supp.3d 629, 637 (S.D.Miss.2014). There are also numerous valuation and remedies issues, over which the parties have fought bitterly. We largely affirm the district court's thorough and conscientious opinion under a clearly erroneous standard of review, but also clarify some of the legal issues surrounding leveraged ESOP sales presented by this case.

BACKGROUND

The lengthy briefs and voluminous record obscure that relatively simple facts are germane to each issue on appeal. We first provide a general background and elaborate on the facts as necessary in the following sections. This foreshortening is made easier by the comprehensive opinion of the district court, to which we make repeated reference. Perez v. Bruister, 54 F.Supp.3d 629 (S.D.Miss.2014). We have given a sketch of a typical ESOP in an earlier case:

An employer desiring to set up an ESOP will execute a written document to define the terms of the plan and the rights of beneficiaries under it. 29 U.S.C. § 1102(a) (1976). The plan document must provide for one or more named fiduciaries “to control and manage the operation and administration of the plan.” Id., § 1102(a)(1). A trust will be established to hold the assets of the ESOP. Id., § 1103(a). The employer may then make tax-deductible contributions to the plan in the form of its own stock or cash. If cash is contributed, the ESOP then purchases stock in the sponsoring company, either from the company itself or from existing shareholders. Unlike other ERISA-covered plans, an ESOP may also borrow in order to invest in the employer's stock. In that event, the employer's cash contributions to the ESOP would be used to retire the debt.

Donovan v. Cunningham, 716 F.2d 1455, 1459 (5th Cir.1983).

Bruister and Associates, Inc. (“BAI”), was a Mississippi-based Home Service Provider (“HSP”) that installed and serviced satellite-television equipment for its sole client, DirecTV. It set up an ESOP conforming to the above sketch for its employees. In a three-year period from 2002 to 2005, BAI's owner Herbert C. Bruister (“Bruister”) sold 100% of his BAI shares (also representing 100% of BAI's outstanding shares) to BAI's employees through a series of transactions with the ESOP. In all, five transactions occurred, but the first two are time-barred and no longer in dispute. Bruister personally owned the stock sold in these two transactions. The final three transactions closed on December 21, 2004, September 13, 2005, and December 13, 2005. Bruister had by this time transferred his BAI stock to the Bruister Family LLC (“BFLLC”), which he and his wife controlled each as 50% members. The ESOP bought BAI stock from BFLLC for a mix of cash and

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notes. The following table summarizes the subject transactions, see Perez, 54 F.Supp.3d at 638–39 :

Table 1

Transaction	Contract Price (Donnelly Price)	Cash Down Payment from ESOP	Amount of Note Issued by ESOP	Total Cash Eventually Paid by ESOP (Down plus Principal & Interest Payments on Notes)
12/21/2004 (100,000 shares, 20% outstanding BAI stock)	$6,700,000 ($67.00/share)	$730,000	$5,970,000	$6,815,876.95
9/13/2005 (789.47 shares, 3.16% outstanding BAI stock)	$1,199,999.72 ($76.00/share)	$1,199,999.72	N/A	$1,199,999.72
12/13/2005 (134,710.53 shares, 26.94% outstanding BAI stock)	$10,507,421.34 ($78.00/share)	N/A	$10,507,421.34	$761,823.63

Bruister, Amy O. Smith (“Smith”), and Jonda C. Henry (“Henry”) served as named trustees of the ESOP. Bruister owned BAI and ran it, Smith worked for BAI, and Henry was BAI's outside CPA. Perez, 54 F.Supp.3d at 637–38. All three were named defendants in the district court, but Henry was voluntarily dismissed during the pendency of this appeal. BFLLC is an interested party and is a named Defendant on appeal. Bruister, Smith and BFLLC are collectively described as “Defendants,” unless the context indicates otherwise.

The trustees set the sales price for each transaction based on valuations of BAI's fair market value (“FMV”) performed by Matthew Donnelly (“Donnelly”). The parties dispute whether Donnelly was truly independent and whether the trustees' reliance on his valuations was reasonably justified. The plaintiffs' basic claim is that the valuations were inflated, which caused the ESOP, and therefore BAI's employees, to pay too much for the BAI stock it bought from BFLLC. Perez, 54 F.Supp.3d at 639. BAI suffered serious business reverses and went out of business in August 2008.

The Secretary of the Department of Labor (“Secretary”) brought a civil action on April 29, 2010, raising claims for breach of fiduciary duty under ERISA § 404(a)(1)(A) ; for engaging in prohibited transactions under ERISA § 406 ; for failure to monitor (against Bruister in his capacity as a corporate director of BAI) under ERISA § 404(a)(1)(A) ; and co-fiduciary liability under ERISA § 405. Two plan participants, Joel D. Rader² and Vincent Sealy (“Sealy”), filed a civil action raising generally the same claims as the Secretary and seeking relief on behalf of the ESOP as a whole. The cases were consolidated and the district court conducted a 19–day bench trial during which it considered the testimony of 13 live witnesses,

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390 exhibits, and 42 depositions of 18 different witnesses. It ruled in favor of the Secretary and/or Sealy on all claims. Perez, 54 F.Supp.3d at 648–81. It awarded $4,504,605.30 in “equitable restitution,” or damages, which is the amount it calculated the Defendants caused the ESOP to overpay for the BAI stock, computed as follows, id. at 678–79 :

It also held Bruister alone liable for $1,988,008.67 in prejudgment interest. Id. at 679–81. Of these amounts, the district court held BFLLC jointly and severally liable for $885,065.25 in damages and $390,604.12 in prejudgment interest, or $1,275,669.37 total. Id. at 681. Defendants timely appealed each case, the Secretary cross-appealed on the remedy, and all appeals were consolidated in this Court.

DISCUSSION

I. Sealy's Standing to Sue on Behalf of the ESOP

ERISA § 409(a), 29 U.S.C. § 1109(a), provides that a fiduciary who breaches a duty “shall be personally liable to make good to such plan any losses to the plan resulting from each such breach ... and shall be subject to such other equitable or remedial relief as the court may deem appropriate.” Both the...