Pizzella v. Vinoskey
| Decision Date | 02 August 2019 |
| Docket Number | Case No. 6:16-cv-00062 |
| Citation | 409 F.Supp.3d 473 |
| Parties | Patrick PIZZELLA, Acting Secretary of Labor, U.S. Department of Labor, Plaintiff, v. Adam VINOSKEY, et al., Defendants. |
| Court | U.S. District Court — Western District of Virginia |
Andrea Christensen Luby, Ryan Matthew Kooi, United States Department of Labor Office of the Regional Solicitor, Philadelphia, PA, for Plaintiff.
Alexandra E. Brisky Cunningham, Thomas Richard Waskom, Brian Adam Wright, Hunton & Williams LLP, Richmond, VA, Alton LaRue Gwaltney, III, Kristen J. Kenley, Mark A. Nebrig, Pro Hac Vice, Mary Cabell Clay, Moore & Van Allen PLLC, Charlotte, NC, Chelsea Royce Mikula Tomko, Pro Hac Vice, Harry DeForest Cornett, Jr., Pro Hac Vice, Paul Lewis Janowicz, Pro Hac Vice, Tucker Ellis, LLP, Cleveland, OH, Scott J. Stitt, Pro Hac Vice, Tucker Ellis LLP, Columbus, OH, for Defendants.
The Employment Retirement Income Security Act of 1974 (ERISA) permits an employer to create an Employee Stock Ownership Plan ("ESOP"). An ESOP is "an employee pension plan that invests primarily in the employer's stock." Brundle v. Wilmington Trust, N.A. , 919 F.3d 763, 769 (4th Cir. 2019). ERISA imposes stringent "duties and obligations on all pension plan fiduciaries, including those of ESOPs." Id. Among these obligations are robust duties of prudence and loyalty. See 29 U.S.C. §§ 1104(a)(1)(A)-(B). Moreover, ERISA prohibits ESOP fiduciaries from causing a "sale or exchange ... of any property between the plan and a party in interest." Id. § 1106(a)(1)(A). However, ERISA provides an exception for party-in-interest transactions where the ESOP "receives no less, nor pays no more, than adequate consideration" for the employer's stock. Id. § 1108(e)(1); Brundle , 919 F.3d at 769.
In this case, the Secretary of the Department of Labor alleges that an independent transactional trustee (Evolve Bank and Trust ("Evolve")) and Adam Vinoskey, the CEO of Sentry Equipment Erectors, Inc. ("Sentry") violated ERISA by approving the Sentry ESOP's purchase of Adam Vinoskey's stock in December 2010 at an allegedly inflated price. Specifically, the Secretary alleges that the $406.00 per share paid for Adam Vinoskey's 51,000 shares was not the fair market value of the stock, resulting in the ESOP overpaying for the stock by $11,526,000.00, which the Secretary seeks to recover for the ESOP. The Secretary alleges that Evolve violated its duties of prudence and loyalty, and that Adam Vinoskey is jointly liable for the ESOP's losses as a knowing participant in a prohibited transaction and as a co-fiduciary of the Sentry ESOP.
After a week-long bench trial, and for the reasons that follow, the Court holds that Evolve violated § 1106(a)(1)(A) by approving a prohibited party-in-interest transaction for more than adequate consideration; that Evolve failed to live up to ERISA's stringent duties of prudence and loyalty; and that Adam Vinoskey is jointly liable for the losses caused by Evolve's breaches as a knowing participant in a prohibited transaction and as a co-fiduciary of the ESOP. The Court finds that the ESOP overpaid for Adam Vinoskey's stock by $6,502,500.00, an amount for which Evolve, Adam Vinoskey, and the Adam Vinoskey Trust are jointly and severally liable.
Adam and Carole Vinoskey founded Sentry Equipment Erectors, Inc. in 1980. (Dkt. 34 ¶ 10 ("Vinoskey Answer")). Sentry designs and sells equipment such as conveyors and bottling machines for soft drink manufacturers, and maintains its principal place of business in Forest, Virginia, near Lynchburg, Virginia. (Vinoskey Answer ¶ 6; Tr.2 178:24-25, 179:1-11 (Vinoskey)).2 To retain workers, Sentry offered generous benefits, such as the Sentry ESOP and paying 100 percent of employees' health care premiums. (Tr.1 179:17-25, 180:1-5 (Holcomb)). Over the decades, Sentry has attracted major corporations as customers, including Coca-Cola, Dr. Pepper, and Snapple. (Tr.4 208:24-25, 209:1-4 (Connor)).
Adam Vinoskey served as Sentry's CEO and the Chairman of Sentry's Board of Directors, and Carole Vinoskey, who passed away in July 2011, served as Sentry's Secretary/Treasurer. (JX 28 at 3479; JX 69; Tr.1 180:14-21 (Holcomb)). Although Adam Vinoskey maintains that "[p]eople came to visit [Sentry] and wanted to buy the company" on at least three occasions over the decades, Sentry has never received any formal offers to purchase the company "that included prices." (Tr.2 188:12-25, 189:1-17; see also Tr.1 79:21-24 (Lenoir); Tr.4 199:23-25; 200:1-3 (Lenoir)). Because Sentry's clients are primarily concentrated in the soft drink industry, Sentry's income generally varies depending on when bottling plants decide to make large capital improvements. (Tr.1 231:16-21 (Napier); id. 71:3-6, 72:8-9, 73:1-8 (Lenoir); id. 197:9-20 (Holcomb); Tr.4 236:6-25 (Connor); JX 23; PTX M 10:14-20 (Vinoskey Depo., stating that soft drink companies account for 80 percent of Sentry's business)).
Since "day one" of founding Sentry, Adam Vinoskey aspired for Sentry's employees to eventually own the company "because they helped build it." (Tr.2 184:7-10, 188:15-17 (Vinoskey)). In pursuit of that goal, Sentry formed an ESOP in 1993. (See JX 1-6). The purpose of the ESOP was to provide employees "with an additional means of accumulating funds for retirement as well as a meaningful stake in the Company, with future economic security and ultimately with an additional source of future income." (JX 1 at 818; see also Tr.1 169:12-25, 170:1-25, 171:1-8 (Holcomb) ( similar goals)).
Under the ESOP Plan, the shares of company stock held by ESOP participants would "generally" be voted by the ESOP Trustee(s), except in "certain limited but important corporate matters, such as a sale of all the Company's assets or merger of the Company," when ESOP participants would "have the right to instruct the Plan Trustee as to [their] wishes relative to the shares of Company Stock held in [their] ESOP Account." (JX 1 at 831 (ESOP Plan Summary Description); JX 2 at 111 (Restated ESOP Plan)). From 2006 to at least July 31, 2012, Adam Vinoskey was a named ESOP Trustee. (JX 69 at 95; PTX A-D). The Sentry ESOP had 224 participants as of December 2010. (JX 64 at 528).
After founding the ESOP, Sentry hired W. William ("Bill") Gust of the law firm Gentry Locke to provide legal services related to the ESOP. (Tr.2 182:18-25; 183:1-2 (Vinoskey)). Gust recommended that Sentry hire the appraisal company Capital Analysts, Inc. ("CAI") to conduct annual appraisals of Sentry's stock. (Id. 5:3-14 (Napier); id. 183:24-25,184:1-6 (Vinoskey); Tr.1 222:2-6 (Napier)). CAI is a valuation firm founded in 1981 by its president Brian Napier. (Tr.2 81:24-25, 82:1-5 (Napier)). Napier is certified to perform valuations by the American Society of Appraisers, and has completed "at least a thousand" ESOP valuations. (Id. 81:3-25; 82:1-14 (Napier)).
From 2005 through at least 2015, Napier has drafted and finalized appraisals of Sentry's stock. (PTX A-I; JX 84-86). Between 2005 and 2009, Napier's appraisal of Sentry's stock ranged from $215.00 per share in December 2005, (PTX A at 2502), to $285.00 per share in December 2009, (JX 84 at 267). (See PTX B-D).3 When Sentry ESOP participants retired, Sentry bought their shares at the price established by Napier's latest appraisal. (Tr.1 174:4-7 (Holcomb)). At some point before 2010, upon Gust's recommendation, Sentry developed a working relationship with Corporate Capital Resources ("CCR"), a business that helps companies establish ESOPS. (Tr.2 183:24-25, 184:1-6 (Vinoskey); 139:5-6 (Lenoir)). Michael Coffey served as Sentry's primary contact at CCR. (Id. 184:23-24 (Vinoskey)).
In 2004, the ESOP purchased 48 percent of Sentry's stock at $220.00 per share. (Vinoskey Answer ¶ 12; Tr.1 222:7-9 (Napier)). Sentry did not hire an independent fiduciary to review the prudence of this transaction. (Tr.2 185:6 (Vinoskey)). The ESOP borrowed a portion of the purchase price from Sentry, and Sentry subsequently made contributions to the ESOP that allowed the ESOP to fully repay the loan by 2010. (Vinoskey Answer ¶ 12). As the debt was paid down, the shares were allocated to individual participant accounts. (Id. ). In 2009, 48 percent of Sentry's stock had been allocated to participant accounts, and Adam Vinoskey, through the Adam V. Vinoskey Revocable Trust ("Adam Vinoskey Trust"), owned the remaining 52 percent of Sentry's shares. (JX 84 at 276; Vinoskey Answer ¶ 7). Adam Vinoskey is the trustee of the Adam Vinoskey Trust, exercises control over the Trust's assets, and owns at least 50 percent of the beneficial interest in the Trust. (Vinoskey Answer ¶ 7).
In or around 2010, as Adam Vinoskey approached his anticipated retirement, Adam Vinoskey informed Bill Gust that he was interested in selling all of his shares to the ESOP, a transaction that would give the ESOP 100 percent ownership of Sentry ("the 2010 Transaction"). (Tr.2 184:7-19 (Vinoskey)). Carole Vinoskey planned to retire around the same time, with Barbara Holcomb, Sentry's current Chief Financial Officer (CFO), joining the company in the summer of 2011. (Tr.1 164:24-25, 205:12-25, 206:1-20 (Holcomb)). Gust suggested that Evolve Bank and Trust ("Evolve") be hired as an independent fiduciary to represent the ESOP in the proposed transaction. (PTX M 47:1-10 (Vinoskey Depo.)).
Evolve is a bank with headquarters in Memphis, Tennessee that has served as a trustee for ESOPS and other trust assets since 2005. (JX 100 at 5, 33). From 2006 to 2016, Kenneth ("Kenny") Lenoir served as Executive Vice President/Manager of Evolve's trust department, a role in which Lenoir was primarily responsible for Evolve's ESOP trustee business. (Tr.1 35:8-16 (Lenoir); Tr.4 169:12-18...
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