Fifth Circuit Affirms Lower Court in Perez v. Bruister

On May 3, the Fifth Circuit Court of Appeals in Perez v. Bruister, No. 14-60811 (5th Cir. 2016) upheld a district court ruling (Perez v. Bruister, 54 F. Supp. 3d 629 [S.D. Miss. 2014]) in favor of the Secretary of Labor, who was the plaintiff. The case involves three stock sales in 2004 and 2005 to an ESOP, collectively amounting to just over 50% of the shares of the company Bruister & Associates, which went out of business in 2008. Although it clarified some questions of law, the circuit court called the district court's ruling a "thorough and conscientious opinion" (p. 2) and observed that the "trustees' actions were not those of prudent men" (p.18).

The ESOP trustees consisted of Bruister (the original owner who sold to the ESOP) and two others: a Bruister employee named Smith and the company's outside CPA. The CPA was dismissed from the action during the appeal. Although Bruister abstained as a trustee from voting on the transactions, the Fifth Circuit agreed with the district court that Bruister could be held to fiduciary standards because he acted as a fiduciary by influencing the ESOP transactions.

The court affirmed the finding that the defendants breached their fiduciary duty of loyalty to plan participants and beneficiaries by being affected by Bruister's self-interest: Bruister, among other things, fired the ESOP's counsel and influenced the valuation. The other trustees were concerned with Bruister's interests, and Smith testified she made decisions for the plan by considering "what was best for everyone, including Bruister" (p. 14).

The court also agreed with the district court that the trustees had failed to meet the duty of care with regard to the appraisal, noting, for example, a failure to investigate the appraiser's qualifications, failure to provide sufficient information to the appraiser, and failure to review the appraisal report. The defendants argued that the ESOP transactions were made for adequate consideration because the valuation was lower than that of a trial expert whose opinion was partially accepted by the district court. The Fifth Circuit rejected this "all's well that ends well" argument, noting that "for liability under ERISA, the critical question is whether there was a conflict of interest, and whether it was avoided because the trustees' decisions were 'made with an eye single to the interests of the participants and beneficiaries'" (p. 14).

The circuit court also upheld the district court's determination of damages to be paid by the defendants as depending on the amount the ESOP overpaid for the stock. The amount of overpayment was determined by using three separate valuations based on information available at the time of the original transactions. The district court averaged the three, a method argued against by both the defendants and the lawyers for the Secretary of Labor.