A federal court granted summary judgment to all defendants in Shipp v. Central States Manufacturing, Inc., No. 5:23-cv-05215 (W.D. Ark.), Dkt. 169.
The Shipp case is part of a wave of recent lawsuits challenging decisions that mature ESOP sponsors must make around managing an ESOP sponsor’s repurchase obligation. It was the first to challenge releveraging transactions as a concept.
The Shipp plaintiffs – former participants in the Central States Manufacturing, Inc. ESOP (“ESOP”) – alleged that the company’s directors, certain members of the company’s executive management team, and the ESOP’s trustee violated ERISA when the company and ESOP entered into a releveraging transaction in 2020.
In entering judgment for the company-side defendants, the court held that “no reasonable jury could find that the two-step releveraging transaction was anything but a corporate decision” outside of ERISA‘s scope that was “made with the financial health of the company in mind.” As such, the members of the company’s board of directors and/or executive management team could not be liable as ERISA fiduciaries, except to the extent they had a duty to monitor the trustee.
The court next held that, while ERISA’s fiduciary obligations applied to the ESOP’s trustee – which was responsible for determining the price at which the ESOP would sell shares (in step one of the transaction) and purchase shares (in step two of the transaction) – the trustee acted consistent with its fiduciary duties.
First, the trustee satisfied ERISA’s duty of prudence by, among other things, closely reviewing the company’s decision-making process, engaging its own advisors, and negotiating stock prices favorable to the ESOP. Second, the trustee acted in the interests of the ESOP as a whole. As the court put it, “[t]he Trustee’s duty of loyalty is not to individual Plan Participants but to all Plan Participants or the Plan as a whole.” In contrast, plaintiffs – “all terminated or retired employees with large ESOP accounts” – were pursuing a theory that was “less about the Plan than about their individual stock portfolios.”
“Given these facts,” the court viewed “Plaintiffs’ allegation that . . . [the trustee] merely ‘rubber stamp[ed]’ the transaction” as “borderline frivolous,” and granted summary judgment in favor of the trustee.
