Bailey Glasser Defeats Motion to Compel Arbitration; Employee Stock Ownership Plan Lawsuit Moves Forward in New York

11.09.2021

Bailey Glasser attorneys representing a participant in the Strategic Financial Solutions, LLC Employee Stock Ownership Plan (ESOP) defeated a motion to compel individual arbitration made by the ESOP’s trustee, Argent Trust Company, and other defendants. The lawsuit, Cedeno v. Argent Trust Company, et al., will proceed in federal court in the Southern District of New York, seeking all losses to the plan (in contrast to being limited to individual participant losses as the arbitration clause provided) as allowed under the Employee Retirement Income Security Act (ERISA).

The plaintiff’s complaint alleges that Argent, as the ESOP’s trustee, caused the ESOP to engage in ERISA-prohibited transactions in 2017 when the ESOP bought shares of Strategic Family, Inc., the plan sponsor’s parent holding company, above fair market value for $242,228,867. Around 2019, the cost of those shares to the ESOP was increased by $104,500,000 to $346,728,682, purportedly because the company met certain targets.

The plaintiff’s lawsuit seeks to recover the ESOP’s losses in federal court, but the defendants moved to compel individual arbitration under an arbitration clause in the plan document. In a November 2, 2021, decision, District Judge John G. Koeltl held the defendants’ argument “that a participant in a defined contribution plan does not have the statutory right to seek plan-wide relief and is limited to relief for that participant’s individual account” was “contrary to the text of ERISA as well as to well-established precedent.”

Therefore, an arbitration clause that attempted to preclude participants from seeking plan-wide relief was invalid. Because that clause was not severable from the plan, Judge Koeltl held arbitration could not be compelled under the Federal Arbitration Act and denied the motion. In his ruling, Judge Koeltl distinguished between arbitration clauses that ban class actions, a procedural rule, and arbitration clauses that bar substantive statutory rights and remedies. The former are enforceable, while the latter are not.

The plaintiff is represented by Bailey Glasser partners Gregory Y. Porter, Ryan T. Jenny, and Patrick O. Muench. The decision is reported at Cedeno v. Argent Trust Company, et al., Case No. 20-cv-9987, 2021 WL 5087898 (S.D.N.Y. Nov. 2, 2021).

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