THE SITUATION:
Longtime McDermott client Mather Lifeways—along with 11 other not-for-profit retirement communities—sold stock in Symbria Inc. to an Employee Stock Ownership Plan (ESOP). Nearly six years later, a single ESOP participant filed a putative class action lawsuit on behalf of the ESOP and a class of all other persons similarly situated.
The lawsuit was filed against the retirement communities, three officers of Symbria or its subsidiary who also sold stock to the ESOP, and the independent ESOP trustee. The plaintiff alleged that the ESOP paid more than fair market value for the stock, thus reducing the value of her ESOP account.
The plaintiff further alleged that because the retirement communities had the power to appoint Symbria’s directors, they were fiduciaries under the Employee Retirement Income Security Act (ERISA) and had violated ERISA in connection with the transaction.
THE CHALLENGE:
As faith-based not-for-profit organizations, the retirement communities needed to address the allegations quickly to preserve their reputations and avoid getting bogged down in a lengthy lawsuit that would draw financial resources away from patient care.
OUR OBJECTIVE:
The McDermott legal team, Ted Becker, Chris Nemeth and Rob Kline, aimed to act quickly to win an early dismissal of their clients from the lawsuit. Although ESOP transactions and the rules surrounding them are complex, the McDermott team knew they would need to present a straightforward, effective argument to the judge that would emphasize key points unburdened by unnecessary complications.
THE OUTCOME:
Less than 10 months after being engaged, the McDermott legal team won dismissal of their clients from the lawsuit.
The other defendants, represented by different law firms, also filed motions to dismiss. The judge granted the motion to dismiss of McDermott’s clients but denied the motions to dismiss of the other defendants, against whom the case proceeded.
In dismissing McDermott’s clients, the court ruled that:
- Even if the plaintiff’s allegations were true that the retirement communities had the power to appoint company directors, they were not ERISA fiduciaries. This ruling draws a clear line between fiduciary and non-fiduciary status under ERISA.
- There were no facts alleged in the complaint to support the plaintiff’s assertions that the retirement communities knew or should have known of any flaws in the stock valuation, or that they knowingly participated in an ERISA-prohibited transaction.
- The plaintiff failed to allege facts to support their assertion that the retirement communities were parties-in-interest to the ESOP transaction.
MOVE FASTER:
The result is an important victory on an accelerated timeline. McDermott’s legal team maximized efficiency and considerably limited defense costs.
The judge’s ruling is very significant because it recognizes a difference between a fiduciary and a non-fiduciary under ERISA, limiting who can be sued under ERISA in the future if they participate in the sale of a stock to an ESOP.
Learn more about our ERISA litigation capabilities.