Judge Allows Claims Against ESOP Trustee To Go Forward

On October 29, 2021, Judge R. David Proctor, U.S. District Court for the Northern District of Alabama, in Threadford, et al. v. Horizon Trust & Investment Management, et al. (Case No. 20-cv-00750), found that Horizon Trust and former shareholders of McKinney Communications Corporation (MCC) must face a lawsuit brought by participants in the McKinney Communications Corporation Employee Stock Ownership Plan (ESOP).

In a second decision issued the same day, deciding an issue of first impression in an Eleventh Circuit district court, Judge Proctor held the ERISA breach of fiduciary duty and prohibited transaction case would not be decided on an administrative record compiled during a plan review process, but instead discovery will be allowed. Further, his review will proceed under the prudent person standard without deference to the ESOP administrative committee’s decision.

The lawsuit claims Horizon Trust, the trustee of the ESOP, caused the ESOP to purchase MCC stock for $65,485,225, which was more than fair market value and thus violated federal pension law. In denying the motion to dismiss and rejecting every argument made by the defendants, the court held the plaintiffs’ allegations were sufficient to state claims the defendants engaged in prohibited transactions and breached their fiduciary duties in the ESOP transaction. The court rejected the defendants’ efforts to frame a breach of fiduciary duty claim as a fraud claim subject to heightened pleading standards.

Most significantly, the court rejected the defendants’ effort to severely limit its review of the claims to a deferential review of an ESOP committee decision on an administrative record compiled in a process of “exhausting administrative remedies” required in the Eleventh Circuit. Judge Proctor held that while exhaustion of administrative remedies for such claims was required in that circuit, under U.S. Supreme Court precedent the “prudent person standard” applied and “the wholesale importation of the arbitrary and capricious standard into ERISA is unwarranted.”

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