Perez v. First Bankers Trust Servs., Inc.

• Citation: 210 F.Supp.3d 518
• Decision Date: 28 September 2016
• Docket Number: 12-cv-8648 (GBD)
• Parties: Thomas E. PEREZ, Secretary of Labor, U.S. Department of Labor, Plaintiff, v. FIRST BANKERS TRUST SERVICES, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

210 F.Supp.3d 518

Thomas E. PEREZ, Secretary of Labor, U.S. Department of Labor, Plaintiff,

v.FIRST BANKERS TRUST SERVICES, INC., Defendant.

12-cv-8648 (GBD)

United States District Court, S.D. New York.

Signed September 28, 2016

Eric Carl Lund, Thomas Tso, Jeffrey M. Hahn, Leslie Canfield Perlman, U.S. Department of Labor, Office of the Solicitor, Washington, DC, Michael Ross Hartman, U.S. Department of Labor-Office of the Solicitor, New York, NY, for Plaintiff.

Brian David Sullivan, Daniel Adam Schnapp, Elizabeth Chew Viele, Fox Rothschild, Attorneys at Law, New York, NY, for Defendant.

OPINION

GEORGE B. DANIELS, United States District Judge.

Plaintiff, the Secretary of the United States Department of Labor, brought this action alleging that Defendant First Bankers Trust Services, Inc. ("FBTS") violated the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001, et seq. , by approving the sale of 49% of Maran, Inc., a private label denim manufacturer, to the Maran Employee Stock Ownership Plan ("ESOP"), for whom it served as independent trustee.¹ The Secretary seeks, inter alia , to void the Transaction, restore all losses to the ESOP stemming therefrom, and an injunction barring FBTS from acting as a trustee, fiduciary or service provider in any future ESOP transaction. (Amended Complaint for ERISA Violations (29 U.S.C. §§ 1001, et seq. ), (ECF No. 37), at 38.) Pending before this Court are the parties' cross-motions for summary judgment. (First Bankers Trust Services, Inc. Motion for Summary Judgment, (ECF No. 161); Thomas E. Perez Motion for Summary Judgment, (ECF No. 165).) After reviewing the parties' briefs, the record, and with the benefit of oral argument, this Court has concluded that there are several material facts in dispute and that neither party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). Accordingly, both parties' motions for summary judgment are DENIED.

I. Background²

A. The Parties

Maran, Inc. is a closely held corporation that designs, manufactures, markets and imports branded and private label fashion denim.³ (Secretary of Labor's Response to First Bankers Trust Services, Inc.'s Statement of Uncontested Facts Pursuant to Fed. R. Civ. P. 56.1 and Local Rule 56.1 ("Sec'y Resp."), (ECF No. 200), ¶ 4.) In 2006, Maran's biggest customer was Walmart, which accounted for 56% of Maran's sales for the year ended August 31, 2006. (Defendants' Joint Rule 56.1 Responsive Statement of Material Facts in Opposition to the Secretary's Motion for Partial Summary Judgment ("FBTS Resp."), (ECF No. 207), at ¶ 16.)

From approximately January 2001 until November 30, 2006, David Greenberg, Maran's President and Chief Executive Officer, owned approximately 90% of Maran's outstanding stock. (Id. at ¶¶ 8, 10.) During that same time period, Richard Huang, Maran's Executive Vice President, Chief Financial Officer and Chief Operating Officer, owned the remaining 10%. (Id. at ¶¶ 9, 11.) Additionally, during that time, Greenberg and Huang were the sole members of Maran's Board of Directors.⁴ (See id. at ¶¶ 8-9.)

First Bankers Trust Services, Inc. ("FBTS") is a stand-alone trust company that serves as trustee and custodian for employee benefit and personal trust accounts, and also provides fiduciary services for ESOPs.⁵ (Id. at ¶ 1; Sec'y Resp. at ¶ 3.) In 2006, FBTS maintained an Employee Benefits Committee ("EBC") dedicated to the review and investigation of proposed ESOP transactions. (Sec'y Resp. at ¶ 17.) Ten FBTS employees served on the EBC. (Declaration of Brian Ippensen ("Ippensen Decl."), (ECF No. 210), at ¶ 4.) Two members were Certified Public Accountants, two members had Masters of Business Administration degrees, and two members were licensed attorneys. (Id. at ¶ 5.) Members of the EBC held Bachelors of Science degrees in accounting, finance, business and marketing. (Id. ) Collectively, the EBC had more than one-hundred years of experience related to employee benefits and ESOPs. (Id. at ¶ 6.) Several FBTS employees had worked on transactions in the garment or fashion industries prior to working on the Maran ESOP Transaction. (Sec'y Resp. at ¶ 9).

B. Greenberg and Huang Explore Selling Maran

In April 2005, Greenberg and Huang contemplated selling Maran and retained Citigroup Geneva Capital Strategies ("Citigroup") to value the company. (FBTS Resp. at ¶ 17.) In June 2005, as part of its work on behalf of Greenberg and Huang, Citigroup identified Starboard Capital Partners ("Starboard") as a potential purchaser of Maran. (Id. at ¶ 18.) On October 20, 2005, Starboard and its partner, Angelo Gordon & Co., sent Greenberg a letter of intent to purchase a 100% equity interest in Maran from Greenberg and Huang for $47.5 million in cash and a $17.5 million junior preferred interest in the new Maran entity, plus a 20% equity interest in the new Maran entity. (Id. at ¶ 19.) The offer was contingent upon the completion of due diligence. (Id. at ¶ 20.) Angelo Gordon then retained Clear Thinking Group ("CTG") to perform due diligence on Maran.⁶ (Id. at ¶ 21.) In March 2006, Angelo Gordon sent a revised offer for the company to Greenberg and Huang in which the purchase price was characterized as $38,135,000 in total value with $27,883,000 in cash (as compared to the initial offer which was characterized as $65 million in total value with $47.5 million in cash) (the "Angelo Gordon offer"). (Id. at ¶ 25.) Ultimately, Greenberg and Huang declined to sell the company to Starboard and Angelo Gordon. (Id. at ¶ 26.)

C. CSG and MHP Retained to Explore ESOP

Meanwhile, in January 2006, a friend referred Greenberg to CSG Capital Partners, LLC, formerly known as Corporate Solutions Group (under either name, "CSG"), an investment bank with experience structuring ESOP transactions for middle-market companies. (Id. at ¶¶ 27-28.) In a presentation that same month to Greenberg and Huang, CSG stated that a sale of Maran to an ESOP as opposed to a third party would "dramatically increase the after-tax cash flow to the selling shareholders." (Id. at ¶¶ 29-31.) Based on an initial discounted cash flow analysis, CSG estimated Maran's total enterprise value was $115 million. (Id. at ¶ 32.)

On or around July 11, 2006, Maran engaged CSG to render certain financial and/or consulting services related to the design and installation of a possible Maran ESOP. (Id. at ¶ 34.) The terms of the engagement were set forth in an agreement signed by Huang and a Managing Director at CSG. (Hahn Decl., Exhibit 18, (ECF No. 175-18), at 1.) The agreement specified that CSG would "design a plan for the acquisition of stock by the ESOP," and "[a]ct[ ] as a liaison between the Company, trustee, and the independent valuation firm in an effort to quantify and optimize the fair market value [of] the Company." (See FBTS Resp. at ¶¶ 35-36.) Additionally, the agreement specified that upon the closing of an ESOP transaction, CSG would receive an additional $250,000 fee, plus 1% of Maran's value in excess of $100,000,000 (i.e., if the ESOP transaction valued the Company at $107,140,000, CSG would receive an additional $71,400). (Id. at ¶ 37.)

Presumably at some point after engaging CSG, Maran created a Committee for the Formation of the Maran Inc./Amica Apparel Corporation ESOP ("ESOP Formation Committee") to explore the possibility of forming an ESOP.⁷ (See id. at ¶ 27.) Huang was a member of the ESOP Formation Committee.⁸ (See Hahn Decl., Exhibit 19 (ECF No. 175-19), at 1, 8 (letterhead indicating that Huang represented the ESOP Formation Committee).)

On or around August 16, 2006, the ESOP Formation Committee⁹ retained Meyers, Harrison & Pia ("MHP"), which had been recommended by CSG, to conduct an initial valuation of Maran to help the Committee decide whether to form an ESOP. (FBTS Resp. at ¶¶ 39-41.)

MHP primarily utilized two methodologies to value Maran. It referred to the first methodology as "The Discounted Debt-Free Cash Flow (Earnings Based) Method." (Hahn Decl., Exhibit 20 ("Initial Valuation"), (ECF No. 175-20), at 9-10.) This method relied on financial projections provided by Huang, including that Maran's sales for the period ended August 31, 2006 would be $107,248,000. (See FBTS Resp. at ¶ 51.) Based on this method, MHP concluded that the indicated value of the aggregate marketable, controlling equity value of Maran was $110,933,000. (Initial Valuation at 13.)

MHP referred to the second methodology used to value Maran as the "Guideline Public Company (Market-Based) Method." (Id. at 11–12.) The Guideline Method utilizes the market values of publicly traded companies to develop multiples that can be used as a proxy for the multiples the subject company should trade at. (See FBTS Resp. at ¶¶ 45-46.) Proper application of the Guideline Method generally requires selecting publicly traded companies that are similar to the company being valued. (Id. at ¶ 46.) The three publicly traded companies MHP relied upon to perform this analysis were: Guess! Inc., True Religion Apparel Corp., and Blue Holdings, Inc.¹⁰ (Id. at ¶ 47.) Based on this method, MHP concluded that the indicated value of the aggregate marketable, controlling equity value of Maran was $120,573,000. (Initial Valuation at 13.) MHP weighted the results of each method equally to arrive at its opinion that the fair market value of the aggregate marketable, controlling equity value of Maran was $115,750,000. (Id. ) MHP further opined that a 49% preferred equity interest had a fair market value of $70,961,000. (FBTS Resp. ¶¶ 52-53.) After receiving the initial valuation, the ESOP Formation Committee decided to form an ESOP. (Id. at ¶ 54.)

D. FBTS is Hired as ESOP Trustee and Subsequently Retains Epstein Becker and MHP

CSG introduced Maran to FBTS and another company, referred to as "GreatBanc," as potential candidates to serve as the ESOP's independent trustee for the Maran ESOP Transaction.¹¹ (FBTS Resp. at ¶ 55.) On October 5, 2006, FBTS initially quoted a fee of $57,000 to serve...