ASA supports trustee, appraiser in ESOP litigation

Demystifying Valuation, Economic Damages + Forensic Accounting

ESOP, trustee, DOL, litigation, valuation, fair market valueI recently wrote an article about several cases being brought by the Department of Labor (DOL) against Employee Stock Ownership Plan (ESOP) trustees. The cases all related to the DOL’s claim that the ESOP trustees had breached their fiduciary duties by relying on appraisals prepared for the valuation of the ESOP owned stock. One such case (Brundle v. Wilmington Trust) has caught the eye (and ire) of the American Society of Appraisers (ASA).

In the case, the independent trustee and the valuation firm responsible for the valuation of company stock had extensive ESOP experience. The court, however, found the trustee had allowed the ESOP to purchase the Company’s stock for more than fair market value by not completing a thorough review of the appraisal performed. The trustee was found liable for a deemed overpayment of $28 million. The trustee has appealed the case.

The ASA has filed an amicus brief in support of the trustee. In its support of the trustee, the document also provided support for the ESOP fiduciaries and appraisers in general. The document alleges that the DOL’s ESOP-focused national enforcement project has resulted in legal actions in which plaintiffs are making blanket accusations of ESOP trustees breaching their fiduciary duties by relying upon appraisals which allegedly result in the ESOP overpaying for shares purchased.

The brief notes the qualifications and experience of the ESOP appraiser and accuses the court of “second guessing” the appraiser’s analysis by relying on the plaintiff’s “underqualified expert”. The ASA notes that the DOL’s expert had the benefit of hindsight and approached the valuation from a litigation perspective. The brief also states that the DOL’s expert was not an “independent qualified appraiser” as he has been the DOL’s “primary valuation consultant and expert on leveraged ESOPs”. The ASA brief also questions the appraiser’s education and training.

The brief concludes by stating that the court’s judgment is an “impermissible windfall for the ESOP participants” and it punishes the trustee who seemingly followed generally accepted procedures which include “hiring a highly-qualified and independent appraiser.”

Stay tuned.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV