Scalia v. Reliance Tr. Co., Case No. 17-cv-4540 (SRN/ECW)
| Decision Date | 02 March 2021 |
| Docket Number | Case No. 17-cv-4540 (SRN/ECW) |
| Parties | Eugene Scalia, Secretary of Labor (now Al Stewart, Acting Secretary of Labor), United States Department of Labor, Plaintiff, v. Reliance Trust Company; Steven R. Carlsen; Paul A. Lillyblad; Kelli Watson; and Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan, Defendants. |
| Court | U.S. District Court — District of Minnesota |
Elizabeth Arumilli, Ruben R. Chapa, Arsalan A. Nayani, and Kevin M. Wilemon, United States Department of Labor, Office of the Solicitor, 230 South Dearborn Street, Suite 844, Chicago, IL 60604, for Plaintiff.
William B. Brockman and Aiten McPherson, Bryan Cave Leighton Paisner LLP, 1201 West Peachtree Street, Fourteenth Floor, Atlanta, GA 30309, and Bradley R. Armstrong and Taylor D. Sztainer, Moss & Barnett PA, 150 South Fifth Street, Suite 1200, Minneapolis, MN 55402, for Defendant Reliance Trust Company.
Maria Brekke, Casey D. Marshall, Jonathan P. Norrie, and Alan I. Silver, Bassford Remele PA, 100 South Fifth Street, Suite 1500, Minneapolis, MN 55402, for Defendants Steven R. Carlsen, Paul A. Lillyblad, and Kelli Watson, and Defendant Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan.
This matter comes before the Court on Plaintiff's Motion for Partial Summary Judgment [Doc. No. 204], Defendants Steven R. Carlsen, Paul A. Lillyblad, and Kelli Watson's Motion for Summary Judgment [Doc. No. 215], Defendant Reliance Trust Company's Motion for Partial Summary Judgment [Doc. No. 224], Defendants' Joint Motion to Exclude Expert Testimony of Dr. Mark Johnson [Doc. No. 207], and Plaintiff's Motion to Exclude Expert Testimony of Corey Rosen [Doc. No. 228]. For the reasons set forth below, Plaintiff's Motion for Partial Summary Judgment is DENIED; Defendants Carlsen, Lillyblad, and Watson's Motion for Summary Judgment is DENIED; Defendant Reliance's Motion for Partial Summary Judgment is DENIED; Defendants' Joint Motion to Exclude Expert Testimony of Dr. Mark Johnson is DENIED; and Plaintiff's Motion to Exclude Expert Testimony of Corey Rosen is DENIED.
This case concerns the propriety of a sale of stock by William Kuban ("Kuban"), the then-majority shareholder and board chairman of Kurt Manufacturing, Inc. ("Kurt"), a closely held Minnesota company, to Kurt's employee stock ownership plan, or "ESOP," on October 5, 2011. As a result of the sale, the ESOP gained ownership of 100% of the stock of Kurt. The ESOP entered this transaction ("the Transaction") after the non-Kuban-related members of Kurt's board of directors—Defendants Carlsen, Lillyblad, and Watson ("the Directors")—vetted the transaction, and then appointed an independent trustee—Defendant Reliance Trust Company ("Reliance")—to negotiate the final price on the ESOP's behalf.
In the view of the United States Department of Labor ("DOL"), however, in orchestrating the Transaction, Defendants (both the Directors and Reliance) failed to abide by the fiduciary duties they owed the ESOP, as set forth in the Employee Retirement Income Security Act of 1974 ("ERISA"). Specifically, DOL contends that Defendantsbreached their duties of loyalty and prudence to the ESOP because they approved the Transaction despite being aware of evidence suggesting that Kuban's selling price was unreasonably high. As a result, DOL claims, the ESOP paid far more for Kuban's share of the company than it should have, and thus enriched Kuban (and Defendants) at the expense of Kurt employees. Defendants argue, to the contrary, that the ESOP did not overpay for Kuban's share of the company and that they acted with loyalty and prudence to the ESOP at all relevant times.
The Plaintiff DOL is a federal agency tasked with enforcing ERISA, among other statutes. Congress has authorized DOL to bring civil suits against persons who fail to comply with ERISA. See 29 U.S.C. §§ 1132(a)(2), (a)(5).
Defendants include certain of the participants in the Transaction. For ease of reference, however, the Court will treat the "Defendants" as three distinct entities.
The first group of Defendants are the non-Kuban-related members of Kurt's Board of Directors. At all relevant times, Steven R. Carlsen ("Carlsen") was Kurt's President. Paul A. Lillyblad ("Lillyblad") was Kurt's Vice President of Finance, and Kelli Watson ("Watson") was Kurt's Vice President of Human Resources. (Am. Compl. [Doc. No. 46] ¶¶ 16-18; Directors' Am. Answer [Doc. No. 100] ¶ 10 ().) In October 2011, these three individuals, together with Kuban and Gretchen Kuban Rode (Kuban's daughter), comprised the entirety of Kurt's five-member board of directors.
The second defendant is Reliance, an independent trust company based in Atlanta, Georgia. (Am. Compl. ¶ 2.)
The third and final defendant is Nominal Defendant Kurt Manufacturing Company, Inc. Employee Stock Ownership Plan ("ESOP"), which is a "pension plan" subject to ERISA's regulatory scheme. See also Martin v. Feilen, 965 F.2d 660, 664 (8th Cir. 1992) ().) Until October 5, 2011, the ESOP owned 24.4% of Kurt's stock, and Kuban owned the remaining 75.6% of Kurt's stock. (See Wilemon Decl. [Doc. No. 206] Ex. 2 at 49.) After the sale, the ESOP became the owner of 100% of Kurt's stock. (Id.)
From December 2009 until at least July 22, 2011, the Directors were trustees of the ESOP. (Wilemon Decl. [Doc. No. 206] Ex. 6 ("ESOP Document"); Ex. 5, Carlsen Dep. at 28, 66-67; Ex. 3, Lillyblad Dep. at 26; Ex. 4, Watson Dep. at 27.) The ESOP Document requires the trustee, or trustees, to hold and invest the trust. (ESOP Document, art. X, § 10.2.) It further provides that Kurt may "at any time ... remove a Trustee and appoint a successor thereto," subject to any relevant trust agreement. (Id.) DOL, the Directors, and Reliance all agree that the ESOP is a pension plan under ERISA, 29 U.S.C. § 1002(2). (See Am. Compl. [Doc. No. 46] ¶ 5; Reliance's Answer [Doc. No. 88] ¶ 5; Directors' Am. Answer ¶ 4.)
From at least 2006 through 2010, Willamette Management Associates, an appraisal firm ("Willamette"), provided annual valuations of Kurt stock to the trustees of the ESOP. (See Wilemon Decl. [Doc. No. 206] Exs. 8-12.) The purpose of such annual appraisals was "to provide an independent opinion of the fair market value of Kurt's common stock." (Id.) Willamette performed these valuations of Kurt stock "on a marketable, minority basis." (Id.)
Willamette's valuations of Kurt's stock price fluctuated between $13.71 and $33.44 during the five years leading up to the Transaction. Specifically, Willamette's valuations were: $13.71 as of October 31, 2006; $23.08 as of October 31, 2007; $21.79 as of October 31, 2008; $13.86 as of October 31, 2009; and $33.44 as of October 31, 2010. (Wilemon Decl. [Doc. No. 206] Ex. 8 at 3; Ex. 9 at 3; Ex. 10 at 3; Ex. 11 at 4; Ex. 12 at 3.)
In addition to valuating Kurt's stock price, Willamette calculated Kurt's "market value of invested capital"1 for those same years, which were: $26.2 million as of October 31, 2006; $39 million as of October 31, 2007; $39.3 million as of October 31, 2008; $38.7 million as of October 31, 2009; and $41.5 million as of October 31, 2010. (Id.)
On April 7, 2011, LarsonAllen LLP, Kurt's independent auditor, emailed Director Watson to ask if the increase in Kurt stock price from $13.86 as of October 31, 2009 to $33.44 as of October 31, 2010 in the Willamette valuations was "accurate" because "it justseems like a very significant increase considering the [economic] times we are in." (Wilemon Decl. [Doc. No. 213] Ex. 78 at 2.)
In November or December 2010, Mesirow Financial, Inc., an investment banking firm ("Mesirow"), contacted Kuban about the possibility of selling his stake in Kurt. (Norrie Decl. [Doc. No. 218] Ex. B, Carlsen Dep. at 39-40.) In December 2010, Mesirow gave a presentation to Kurt management regarding the merger-and-acquisition market for a company like Kurt. (Wilemon Decl. [Doc. No. 206] Ex. 5, Carlsen Dep. at 38-39; Ex. 13.) On January 18, 2011, Mesirow presented to Kurt its "Strategic Discussion Materials," which provided a more detailed analysis of the merger-and-acquisition market for Kurt as well as a "preliminary valuation analysis." (Wilemon Decl. [Doc. No. 206] Ex. 16.) Mesirow's "preliminary valuation analysis" concluded that Kurt's total enterprise value would range from $58 to $67 million if Kurt was broken up and sold in parts. (Id. at 31.) If Kurt was purchased as a whole, however, Mesirow concluded that Kurt's enterprise value would range from $50 to $60 million. (Id.)
Subsequently, to avoid a transaction that could ultimately result in breaking up Kurt, Kurt began exploring the possibility of an ESOP transaction. (Carlsen Decl. [Doc. No. 219] ¶ 2.) In April 2011, at Lillyblad's request, Mesirow sent Kurt an "Illustrative Proceeds Analysis." (See Wilemon Decl. [Doc. No. 210] Exs. 17, 18.) In this analysis, and assuming Kurt was sold as a whole, Mesirow estimated that Kurt had an enterprise value of $47.5 million and an equity value of $29.8 million. (Id.)
In March or April 2011, Kurt's board began working with Chartwell Business Valuation, LLC, a financial advisory company ("Chartwell"), on a potential sale of Kuban's stock to the ESOP. (See Am. Compl. ¶¶ 31-33; Directors' Am. Answer ¶ 13.) Kuban introduced Chartwell to Kurt as an organization that had the experience to "provide...
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