DOL, First Bankers Trust Enter into Settlement Expanding Fiduciary Process Obligations

In Acosta v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD (S.D.N.Y. Sept. 21, 2017) (consent order and judgment), the U.S. Department of Labor (DOL) and First Bankers Trust Services (FBTS) agreed to a fiduciary process for future ESOP transactions where FBTS serves as a fiduciary. The settlement provides guidance that may be useful to other fiduciaries involved with ESOPs.

The settlement stems from a lawsuit in 2016 (Perez v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD [S.D.N.Y. Sept. 28, 2016]) in which a district court dismissed cross-motions from both sides in the case of Maran Inc., a company that experienced financial difficulties after it set up its ESOP. First Bankers said it hired a qualified appraiser and relied on its report, but the court said both that that in itself was insufficient to lead to dismissal but also that the DOL needed to show that the facts of the appraisal process demonstrated a lack of good faith.

The DOL was concerned that the valuation firm had worked for the company before, that FTSB did not get information about a prior offer to sell the company, and that the appraisal agreement stipulated the appraiser could rely on the projections of a Maran officer. The DOL alleged FBTS failed to negotiate over the offer.

The ESOP purchased 49% of Maran for $70 million in 2006. By 2009, Wal-Mart, its primary customer, stopped buying from Maran, and the stock dropped to zero. Wal-Mart later renewed the contract, and the stock was valued at $8.3 million.

The settlement expands on the DOL-GreatBanc fiduciary process agreement by adding a number of requirements concerning:

• Determining the independence of the appraiser
• Assessing the reliability of earning projections
• Assessing any prior valuations and/or offers
• Making sure any cession of control by the ESOP is compensated

We will explore this issue in more depth in the next newsletter for members (the Employee Ownership Report). Holland & Knight has provided a useful side-by-side comparison (PDF) of the settlement with the GreatBanc Agreement, as well as a narrative description.