Walsh v. Bowers

• Decision Date: 17 September 2021
• Docket Number: CIVIL NO. 18-00155 SOM-WRP
• Citation: 561 F.Supp.3d 973
• Parties: Martin J. WALSH, Secretary of Labor, United States Department of Labor, Plaintiff, v. Brian BOWERS, an individual; Dexter C. Kubota, an individual; Bowers + Kubota Consulting, Inc., a corporation; Bowers + Kubota Consulting, Inc. Employee Stock Ownership Plan, Defendants.
• Court: U.S. District Court — District of Hawaii

561 F.Supp.3d 973

Martin J. WALSH, Secretary of Labor, United States Department of Labor, Plaintiff,
v.
Brian BOWERS, an individual; Dexter C. Kubota, an individual; Bowers + Kubota Consulting, Inc., a corporation; Bowers + Kubota Consulting, Inc. Employee Stock Ownership Plan, Defendants.

CIVIL NO. 18-00155 SOM-WRP

United States District Court, D. Hawai‘i.

Signed September 17, 2021

561 F.Supp.3d 976

Elisabeth Nolte, Jing Acosta, Ruben Richard Chapa, U.S. Department of Labor Office of the Solicitor, Chicago, IL, Ian H. Eliasoph, United States Department of Labor Office of the Solicitor, San Francisco, CA, Austin Case, U.S. Department of Labor Office of the Solicitor, Kansas City, MO, for Plaintiff Martin J. Walsh.

David R. Johanson, Pro Hac Vice, Rachel J. Markun, Pro Hac Vice, Hawkins Parnell & Young LLP, Napa, CA, Todd N. Wade, Pro Hac Vice, Hawkins Parnell & Young, Austin, TX, William M. Harstad, Carlsmith Ball LLP, Honolulu, HI, Douglas A. Rubel, Pro Hac Vice, Hawkins Parnell & Young, LLP, Cary, NC, for Defendants Brian J. Bowers, Dexter C. Kubota.

Scott I. Batterman, Robert E. Chapman, Clay Chapman Iwamura Pulice & Nervell, Honolulu, HI, for Defendant Bowers + Kubota Consulting, Inc.

POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER DIRECTING ENTRY OF JUDGMENT IN FAVOR OF REMAINING DEFENDANTS

Susan Oki Mollway, United States District Judge

I. INTRODUCTION.

Defendants Brian Bowers and Dexter Kubota owned all the stock in an engineering

561 F.Supp.3d 977

firm called Bowers + Kubota Consulting, Inc. (the "Company"). They created an Employee Stock Ownership Plan ("the ESOP")¹ to which they sold all their shares for $40,000,000. The Government then sued Bowers and Kubota, alleging that they had violated the Employee Retirement Income Security Act of 1974 ("ERISA") by manipulating data to induce the ESOP to pay more than the Company's fair market value. This court determines that no ERISA violation has been established.

Part of the Government's case is based on a preliminary nonbinding indication of interest by a private company to purchase the Company for what the Government says was $15,000,000. That indication of interest expressly recognized that the dollar amount needed to be adjusted to reflect the cash and debt on the Company's balance sheet. Had that adjustment occurred, the quoted dollar figure would have risen to about $29,000,000. In any event, the Company never agreed to sell for $15,000,000, meaning that that figure did not represent what a willing buyer and willing seller would mutually agree to. The indication of interest ends up having little relevance to the fair market value of the Company. The Government also cites its expert, Steven J. Sherman, who valued the Company at $26,900,000. However, because that valuation rests on errors, the court is not persuaded by it.

The Government does not establish that the Company was worth less than $40,000,000 on the day of its sale. That is, the record does not show that the ESOP paid more than the Company's fair market value. Nor does this court find that Bowers and Kubota breached any fiduciary duty or are liable for any prohibited transaction, as they demonstrate that the Company was worth at least $40 million on the day of its sale.

Accordingly, this court, following a one-week nonjury trial,² finds in favor of Bowers and Kubota and against the Government.

II. FINDINGS OF FACT.

A. Overview.

On December 14, 2012, Bowers and Kubota, through their respective trusts, sold all 1,000,000 shares of the Company to the Company's ESOP for $40,000,000. Before the sale, the Brian J. Bowers trust, dated December 22, 2010, owned 510,000 of the 1,000,000 shares of the Company, and the Dexter C. Kubota Trust, dated March 17, 2006, owned the other 490,000 shares. See Joint Ex. 36 at DOL 000312. Thus, $20,400,000 of the sales price was to be paid to Bowers's trust, and $19,600,000 to Kubota's trust. Id. at DOL 000312-13. Nicholas L. Saakvitne, the ESOP's independent fiduciary and trustee, executed the purchase agreement on behalf of the ESOP. Id. at DOL 000325.

561 F.Supp.3d 978

The ESOP, which paid for the shares with funds lent by Bowers and Kubota, agreed to pay Bowers and Kubota interest of 7 percent per annum on the amounts owed. The loan was for 25 years. See Joint Exs. 39-42.

Once they sold their shares, Bowers and Kubota ceased to be the owners of the Company, and instead employees had the option of owning stock and thereby becoming part-owners of the Company. Of course, as with any stock purchase, whether an employee benefits by being a stock owner depends on the price of the stock and also on whether the Company's performance leads to increases or decreases in the value of the stock. Clearly, if the stock is overvalued, the employee who holds stock does not enjoy the benefit that an ESOP should be designed to confer. Unlike stock purchases outside the employment context, the Company's employees had and have certain protections under ERISA.

The Government's central contention in this case is that the sale for $40,000,000 violated ERISA. See Joint Ex. # 1; see also ECF No. 1. Before trial, the Government settled its claims against Saakvitne, the original trustee of the ESOP, and against the Saakvitne Law Corporation. See ECF No. 453. What went to trial were the following claims:

a. Bowers and Kubota failed to discharge fiduciary duties with the proper care, skill, prudence, and diligence in violation of 29 U.S.C. § 1104(a)(1)(A), (B), and (D) (Complaint ¶ 37);

b. Bowers and Kubota are liable for breaches of fiduciary responsibilities by other fiduciaries under 29 U.S.C. § 1105(a)(1)-(3) (Complaint ¶¶ 40-43);

c. Bowers and Kubota engaged in prohibited transactions between a plan and a party-in-interest in violation of 29 U.S.C. § 1106(a)(1)(A) (Complaint ¶¶ 45-47);

d. Bowers and Kubota engaged in prohibited transactions with the Company's ESOP in violation of 29 U.S.C. § 1106(a)(1)(A) (Complaint ¶¶ 49-50); and

e. Bowers and Kubota knowingly participated in a transaction prohibited by ERISA under 29 U.S.C. § 1132(a)(5) (Complaint ¶¶ 52-53).

B. The Company.

The Company is a Hawaii corporation that provides architectural and engineering design, project management, and construction management services throughout Hawaii and the Pacific Rim. See Am. Trial Decl. of Brian J. Bowers ¶ 6, ECF No. 640, PageID #21376.

The Company's predecessor, KFC Airport, Inc., was formed in or about 1980. In or about 1997, Bowers bought 100 percent of the shares of KFC Airport. Bowers is the Company's president and sits on its board of directors. See Am. Trial Decl. of Dexter C. Kubota ¶ 5, ECF No. 639, PageID # 21360; Am. Bowers Decl. ¶¶ 3, 5, and 6, ECF No. 640, PageID # 21376.

Kubota joined the Company in 1988 and later purchased 49 percent of the Company's shares, leaving Bowers with the other 51 percent of the Company's shares. Kubota is the Company's vice president and sits on its board of directors. See Am. Kubota Decl. ¶¶ 3, 5, and 6, ECF No. 639, PageID # 21360; Am. Bowers Decl. ¶ 4, ECF No. 640, PageID # 21376.

Bowers and Kubota placed the ownership of their respective Company shares into their respective trusts, which they controlled for their own benefit. See Am. Bowers Decl. ¶ 8, ECF No. 640, PageID # 21376. The court therefore treats what was the trusts’ ownership of the Company as indistinguishable from ownership by

561 F.Supp.3d 979

Bowers and Kubota for purposes of the present decision.

C. The Company's Financial Statements.

Thomas Nishihara, a certified public accountant ("CPA") and the vice president of Robert H.Y. Leong & Company Certified Public Accountants A Professional Corporation, has been the Company's outside accountant since 2008. See Decl. of Thomas Nishihara ¶¶ 1, 3, 5, ECF No. 593, PageID #s 19654-55.

Nishihara has prepared the Company's tax returns and financial statements. Id. ¶¶ 6-7, PageID # 19655. From 2008 to 2011, Nishihara prepared those financial statements using the income tax basis of accounting, which is essentially a cash basis accounting method. Id. ¶ 15, PageID # 19657. The cash basis of accounting examines when revenue is received and when expenses are paid. See Bowers Test., ECF No. 640, PageID # 20439. In 2012, at the requests of Gary Kuba and Gregory Kniesel, who were hired to appraise the Company, Nishihara began using the accrual basis, which involves reporting revenues when earned and expenses when incurred. Nishihara actually converted the 2011 financial statement from a cash basis to an accrual basis. Under the accrual basis, annual expenses such as bonuses not yet earned may be reported as a contingency. See Nishihara Decl. ¶¶ 16-18, PageID # 19657.

Nishihara says that, for 2011 and 2012, he did not calculate the Company's earnings before interest, taxes, depreciation, and amortization ("EBITDA"). EBITDA is "essentially the pretax profits of the company." Test. of Steven J. Sherman, ECF No. 631, PageID # 20923. Nishihara explained that EBITDA can be calculated by taking the net income and adding interest, taxes, depreciation, and amortization. See Nishihara Test., ECF No. 629, PageID # 20527. Thus, Nishihara says, the Company's EBITDA could be calculated from the financial statements he prepared. See Nishihara Decl. ¶ 14, PageID # 19656; Nishihara Test., ECF No. 629, PageID # 20527.

Joint Exhibit 48 is an estimate of the Company's revenue for fiscal year 2012 prepared by Bowers and Kubota. See Kubota Amd. Decl. ¶ 19, ECF No. 639, PageID # 21363. It details the Company's contracts and lists historical financial data, as summarized below:

Year	Revenue
2003	$5,669,000
2004	$7,417,000
2005	$7,880,000
2006	$9,803,000
2007	$13,719,000
2008	$15,005,000
2009	$15,410,000
2010	$21,500,000
2011	$22,005,000
2012 (estimated)	$24,964,000

561 F.Supp.3d 980

Joint Exhibit 48 contains a profitability comparison that details the Company's historical net income.³

Joint Exhibit 47 is a valuation of the Company by Libra Valuation Advisors ("LVA") as of December 14, 2012, the day the Company's shares...