District Court Allows ESOP Participants To Amend Complaint To Add Spouse Of Trustee As Defendant

On July 25, 2012, the United States District Court for the Western District of Wisconsin issued an opinion holding that participants in the Trachte Building Systems, Inc. Employee Stock Ownership Plan could amend their complaint to add the spouse of the trustee as a defendant in a claim alleging the spouse was the gratuitous transferee of phantom stock units under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (codified in part at 29 U.S.C. § 1002). Participants alleged that the trustee deposited $2,896,100 from a phantom stock plan into an account held solely by his spouse and that the spouse gave no consideration in exchange for the deposit. The court concluded that participants demonstrated "good cause" under Federal Rule of Civil Procedure 16 for deviating from the deadline for amending the complaint. Participants sought production of information relating to the payment, which the trustee refused to produce. The trustee responded to the discovery request only after the court issued a preliminary ruling concluding that the trustee would likely be liable.

The litigation arose from a failed ESOP spinoff. An acquirer adopted an ESOP to facilitate acquisition of a target, which had adopted an ESOP which owned 80% of the target's issued and outstanding capital stock. The target's ESOP was merged with the acquirer's ESOP, with participants in the former becoming participants in the latter. After several attempts to sell the target to a third-party, the acquirer consummated the sale of the target to the ESOP of a newly-organized corporation. The acquirer spun off its ESOP to the newly created ESOP, permitting the trustee, who also served as the president of the acquirer, to benefit from the redemption of phantom stock units. Shortly thereafter, the value of participant accounts declined by approximately 50%, and eventually became worthless due to the significant amount of debt assumed by the newly-organized corporation. Participants filed a complaint alleging violations of ERISA. The court ultimately rendered a judgment in favor of participants and concluded that the trustee breached fiduciary duties of loyalty and care by dealing with plan assets in his own interest and receiving consideration from a party dealing with the plan.

Department of Labor Files Action Seeking to Recover Losses Suffered by Participants

On July 24, 2012, the United States Department of Labor filed a complaint...