It's Not Just About FMV, Brundle ESOP Appeals Court Ruling Shows

Brundle v. Wilmington Trust N.A., 2019 U.S. App. LEXIS 8504, 2019 WL 1287632

“Fair market value” is not the only consideration when it comes to evaluating the performance of the ESOP trustee, the 4th Circuit made clear in its ruling on the Brundle case, which represents another milestone in ESOP case law.

At the beginning of its analysis, the 4th Circuit explained the duties imposed on an ESOP trustee and laid out the framework courts use to determine liability. ESOP trustees and valuation experts who want to survive litigation must keep these legal principles in mind.

‘Prudent man’ standard: In a nutshell, an employer may sell stock to the ESOP, but only if the price is for no more than “adequate consideration.” ERISA does not define the term “adequate consideration,” but, under the DOL’s proposed regulations (the ESOP community is still waiting for final regulations), “adequate consideration” must: (1) reflect a stock’s fair market value; and (2) be “the product of a determination made by the fiduciary in good faith.” The 4th Circuit emphasized that “the focus of the adequate-consideration inquiry rests on the conduct of a fiduciary, as judged by ERISA’s ‘prudent man’ standard of care.”

As the 4th Circuit explained, the fiduciary must act “solely in the interest of the [plan] participants,” using “the care, skill, prudence, and diligence a ‘prudent man acting in a like capacity’ would use.” In the instant case, the district court found the trustee did not do so, and the appeals court found the record, particularly as concerns the trustee’s engagement with the valuation underlying the contested transaction, supported the district court’s finding.

By way of example, the ESOP appraiser’s practice of consistently rounding up numbers may seem like a minor valuation-related issue but proved to be an issue that resonated with both courts and illustrated to them the trustee’s failure to represent the interests of the plan. Both courts noted that this rounding practice repeatedly increased the price the ESOP had to pay for the company stock. The district court noted an ESOP fiduciary should have aimed to achieve the lowest possible price for the plan. The trustee should have asked why the ESOP valuator used this rounding practice. The 4th Circuit agreed. Although not dispositive, this type of conduct illustrated the trustee’s “lackluster due diligence displayed throughout the transaction process,” the 4th Circuit found.

On a larger scale, the 4th Circuit agreed with the district court that, even if the trustee did not act in bad faith in representing the ESOP, its conduct throughout the transaction was not that of a prudent fiduciary. The trustee allowed the plan to overpay and therefore was liable for breach of fiduciary duty and damages, the 4th Circuit affirmed.