Bailey Glasser Wins Key Motion in Employee Stock Ownership Plan Dispute

04.03.2019

On April 3, 2019, Bailey Glasser LLP won a key motion in the US District Court for the Northern District of Illinois in the case McMaken v. GreatBanc Trust Company, Case No. 17-cv-04983. The lawsuit claims that GreatBanc, the trustee for the Chemonics International, Inc. Employee Stock Ownership Plan (the “ESOP”), caused the ESOP to purchase $180 million of Chemonics International, Inc. stock for more than fair market value, violating federal pension law in the ERISA statute.

The court made several important rulings of law in favor of the plaintiff and beneficiaries of ESOPs generally.

First, the court held that the plaintiff could sue to invalidate the indemnification of GreatBanc by Chemonics. In ESOP transactions, controlling shareholders of the company often force the company to indemnify the trustee who approves the deal on behalf of the ESOP and employees. In other words, the selling shareholders pick the trustee to represent the employees and force the employees to bear, via the ESOP’s ownership of the company, the trustee’s legal expenses when the employees sue the trustee for breach of duty and lack of diligence. Thus, when the employees sue the trustee for violations of the duties owed to the employees, they pay the trustee’s legal bills in advance! The Court recognized the plaintiff’s claim that this construct violates core ERISA principles prohibiting the use of plan assets to pay fiduciary liabilities.

Second, the court allowed the plaintiff’s claim that GreatBanc’s compensation structure was unlawful under ERISA. GreatBanc’s annual compensation is a percentage of the value of the Chemonics stock owned by the ESOP. GreatBanc is responsible for overseeing the valuation of Chemonics stock. The higher the valuation, the more GreatBanc gets paid.

The plaintiffs are represented by Bailey Glasser ERISA litigation partners Gregory Y. Porter and Ryan T. Jenny, and associate Patrick O. Muench. Bailey Glasser’s ERISA practice represents participants in many ESOP lawsuits.

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