Chicago partner Ted Becker and counsel Julie Govreau provided the “Legal Update” for the October issue of ESOP Report.

In Julie and Ted’s last update, they reported on the Northern District of Illinois Court’s dismissal of an ESOP lawsuit against an institutional trustee and individual members of the plan sponsor’s ESOP Committee. The court held that the plaintiffs had filed their claims long after the statute of limitations had expired. Following the dismissal, the Defendants moved the court for an award of attorney’s fees pursuant to ERISA 502(g)g(1). Following extensive briefing on the fee petition, the Court recently awarded the Defendants a total of $3.1 million in fees and expenses to be apportioned among the defendants.

As a result of the daunting backlog of Determination Letter Applications for ESOPs, the IRS has commenced a truncated ‘review’ procedure.  The process applies only to ESOPs that have been submitted to the Service but have not yet been assigned to an agent for review.  According to IRS representatives, a favorable Determination Letter for an ESOP will be issued almost immediately after confirming the name of the plan and the employer on the application. It is important to note, that all documents submitted with the application must be retained by the plan sponsor in order to rely on the Determination Letter.

In Wright, et al. v. Harrison, et al., former participants in The Scooter Store Employee Stock Ownership Plan (SSESOP) filed a suit in federal District Court for the Western District of Texas against the company’s former CEO. The lawsuit followed a dramatic decline in the value of Scooter Store stock after years of government investigations into the business practice of the company. During the investigations, the company’s CEO began selling his personal stock at a price allegedly higher than fair market value to third parties.

The Court granted in part and denied in part, the defendants’ motions.  The court dismissed the plaintiffs’ claims for failure to diversify as well as claims that defendants breached their fiduciary duties by failing to disclose information relating to the investigations and governmental activity to plan participants. The court did not dismiss the claims against the CEO. Reiterating that the most fundamental duty owed to beneficiaries of a trust is the duty of loyalty.

The Court’s opinion as to plan investments and investment disclosures is consistent with other court decisions as is the decision with respect to fiduciaries with conflicting duties. While there is no duty to diversify plan assets in an ESOP, holding those assets can be challenged. The decision also highlights the importance of clearly drafting responsibility for investments in plan and trust documents so that responsible party is clearly delineated.

To view the entire article in ESOP Report, click here.

Source: ESOP Report