Perez v. Bruister, Civil Action Nos. 3:13cv1001–DPJ–FKB, 3:13cv1081–DPJ–FKB.

CourtUnited States District Courts. 5th Circuit. Southern District of Mississippi
Writing for the CourtDANIEL P. JORDAN III
Citation54 F.Supp.3d 629
PartiesThomas E. PEREZ, Secretary of the United States Department of Labor, Plaintiff v. Herbert C. BRUISTER, et al., Defendants Joel D. Rader and Vincent Sealy, Plaintiffs v. Herbert C. Bruister, et al., Defendants.
Docket NumberCivil Action Nos. 3:13cv1001–DPJ–FKB, 3:13cv1081–DPJ–FKB.
Decision Date16 October 2014

54 F.Supp.3d 629

Thomas E. PEREZ, Secretary of the United States Department of Labor, Plaintiff
Herbert C. BRUISTER, et al., Defendants
Joel D. Rader and Vincent Sealy, Plaintiffs
Herbert C. Bruister, et al., Defendants.

Civil Action Nos. 3:13cv1001–DPJ–FKB, 3:13cv1081–DPJ–FKB.

United States District Court,
S.D. Mississippi,
Northern Division.

Signed Oct. 16, 2014.

[54 F.Supp.3d 637]

Dane L. Steffenson, Angela Faye Donaldson, U.S. Department of Labor, Atlanta, GA, Gary A. Gotto, Gary D. Greenwald, Keller Rohrback, PLC, Phoenix, AZ, Michael D. Woerner, Keller Rohrback, LLP, Seattle, WA, Robert N. Norris, Louis H. Watson, Jr., Watson & Norris, PLLC, Jackson, MS, Anna O. Crowell, Leslie C. Perlman, Michael Schloss, Peter B. Dolan, Stephen Silverman, Thomas Tso, U.S. Department of Labor, Washington, DC, Charles P. Yezbak, III, Yezbak Law Offices, Nashville, TN, for Plaintiffs.

Cecil Maison Heidelberg, Heidelberg Harmon, PLLC, Ridgeland, MS, David R. Johanson, Jackson Lewis, LLP, Los Angeles, CA, Douglas A. Rubel, Jackson Lewis, PC, Cary, NC, Jason M. Stein, Jackson Lewis, LLP, New Orleans, LA, Christopher J. Rillo, Schiff Hardin, LLP, San Francisco, CA, for Defendants.


DANIEL P. JORDAN III, District Judge.

This ERISA dispute is before the Court for judgment following a 19–day bench trial. For the reasons that follow, the Court concludes that judgment should be entered for Plaintiffs. Given the breadth of the record and the dispute, the Court will provide general findings of fact and procedural history before turning to more specific issues.

I. General Findings of Fact and Procedural Overview

The primary dispute is whether individual Defendants breached fiduciary duties under ERISA when 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.

The transactions followed a somewhat familiar pattern, as described by the Fifth Circuit in Donovan v. Cunningham:

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.

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

This is essentially what happened in this case. Employer Bruister and Associates,

[54 F.Supp.3d 638]

Inc. (“BAI”), was a Mississippi-based Home Service Provider (“HSP”) that installed and serviced satellite-television equipment for its sole client DirecTV (“DTV”). In a three-year period from 2002 to 2005, BAI's owner Herbert C. Bruister sold 100% of BAI's shares to its employees through a series of transactions with the BAI ESOP and an Eligible Individual Account Plan (“EIAP”).1 In the initial transactions, Bruister owned the stock he sold, but by the time the subject transactions occurred, he had transferred ownership in the outstanding BAI stock to the Bruister Family LLC (“BFLLC”)—which he and his wife controlled.

In all, five transactions occurred, the first two of which fell outside the applicable statute of repose and are no longer in dispute. The final three transactions closed December 21, 2004, September 13, 2005, and December 13, 2005. In each instance, the Plan acquired BAI stock through an ESOT, for which Defendants Bruister, Amy O. Smith, and Jonda C. Henry served as named trustees. Bruister owned BAI and ran it, Smith worked for BAI, and Henry was BAI's outside CPA. The BFLLC was an interested party and is a named Defendant.

The Subject Transactions included a combination of cash-payment closings and closings with Transaction Loans. In basic terms, the December 2004 Transaction included cash plus a Transaction Loan from BFLLC to the ESOT for the purchase of Pledged Stock. Pledged Stock that was subject to the loan was held by BAI (not the owner BFLLC) in a suspense account. As BAI made Employer Contributions into the ESOT, those funds were used to make payments on the principal and interest, and at year's end BAI would release a proportional amount of Pledged Stock from suspension.

The December 2004 loan was refinanced the following year to reflect a “mirror” loan whereby BAI was substituted for BFLLC as creditor with a duty to repay BFLLC as BAI received payments from the ESOT. The September 2005 closing was all cash, and the December 2005 closing was another mirror loan with no cash. The following table summarizes the amounts:

Amount of
Cash Payment
at Closing
from Employer
Total Price
from ESOT
12/21/04 ESOT acquired 100,000 shares of BAI common stock (20%
$6.7 million
$5,970,000; originally owed to BFLL C but outstanding amount restructured into mirror loan on 12/12/05. BFLLC issued
of issued and outstanding stock) at $67.00 per share
note to BAI, BAI issued note to ESOT.
ESOT acquired 15,789.47 shares of BAI common stock (3.16% of issued and outstanding) at $76.00 per share
12/13/05 ESOT acquired 134,710.53 shares of BAI common stock (26.94% of issued and outstanding) at $78.00 per share
$10,507,421.34 mirror loan whereby BFLLC issued note to BAI, and BAI issued note to ESOT.

[54 F.Supp.3d 639]

The trustees based the purchase price on valuations of BAI's fair market value (“FMV”) performed by Matthew Donnelly. Donnelly was retained to serve as independent appraiser and financial advisor to the ESOT. The parties dispute whether he was truly independent and whether the trustees' reliance on Donnelly was reasonably justified. In sum, Plaintiffs claim the valuations were inflated, causing the ESOP to pay too much, and Defendants claim the price paid was adequate.

On April 29, 2010, the Secretary of the Department of Labor filed suit in Civil Action No. 4: 10cv77–DPJ–FKB, raising claims for breach of fiduciary duty under ERISA §§ 404(a)(1)(A), (B), and (D); for failure to monitor under ERISA §§ 404(a)(1)(A) and (B); and for engaging in prohibited transactions under ERISA §§ 406(a)(1)(A) and 406(b)(1) and (2). A separate suit was later filed by two plan participants, Joel D. Rader and Vincent Sealy. That suit (Civil Action No. 4:10cv95–DPJ–FKB) proceeded on a separate discovery track but was consolidated for trial on December 31, 2013.2 The Rader Plaintiffs raise generally the same claims as the Secretary and seek relief on behalf of the ESOP as a whole. The Court tried the matter without a jury from August 4 through August 28, 2014. Over fifty deposition transcripts were also submitted for the record. At the conclusion of trial, limited briefing followed, and the Court is now prepared to rule.

II. Analysis

Under Rule 52 of the Federal Rules of Civil Procedure, the Court normally provides separate findings of fact and conclusions of law. But this is not a normal case. It involves an enormous record and a large number of factual and legal disputes. Rather than provide an exhaustive list of factual findings without context followed by an equally long list of legal conclusions, the legal conclusions and factual findings will be organized by issue.

A. Procedural and Preliminary Questions

The Court entered numerous orders before trial, and those findings are incorporated herein by reference. See Orders [562, 573, 574, 601, 602]. The following issues were deferred, and the Court is now prepared to rule on them:

1. Experts

Both sides challenged the other's experts in pretrial Daubert motions. Having now heard the qualifications-based challenges, the Court finds that all testifying experts possessed sufficient knowledge, skill, experience, training, or education to give their testimony consistent with Federal Rule of Evidence 702.

[54 F.Supp.3d 640]

As for other challenges, “[a trial judge] enjoy[s] wide latitude in determining the admissibility of expert testimony.” Watkins v. Telsmith, Inc., 121 F.3d 984, 988 (5th Cir.1997). This is especially true with respect to bench trials where “the importance of the trial court's gatekeeper role is significantly diminished.” Whitehouse Hotel Ltd. P'ship v. Comm'r, 615 F.3d 321, 330 (5th Cir.2010) (citing Gibbs v. Gibbs, 210 F.3d 491, 500 (5th Cir.2000)). “It is settled law that the weight to be accorded expert opinion evidence is solely within the discretion of the judge sitting without a jury.” Pittman v. Gilmore, 556 F.2d 1259, 1261 (5th Cir.1977). Thus, “the district court is not obligated to accept or credit expert witness testimony.” Garcia v. Kerry, 557 Fed.Appx. 304, 309 (5th Cir.2014) (per curiam) (citing Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 894 (5th Cir.1991)).

In the present case, the parties utilized two categories of experts—valuation experts and experts on the individual Defendants' prudence while acting as fiduciaries. The valuation experts were subject to criticism on cross-examination related to their methods and certain alleged errors in their methodologies. This was especially true with respect to the Secretary's expert Dana Messina and Defendants' expert Gregory Range. But even in a jury trial—and especially in a bench trial— Daubert considerations should not supplant trial on the merits. “ ‘[V]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the...

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