Brundle ESOP vs. Wilmington Trust: A Trustee’s Fiduciary Responsibility

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On March 21, 2019, the U.S. Court of Appeals upheld a ruling that Wilmington Trust NA, (Wilmington Trust) a “premier provider of wealth and institutional client services for M&T Bank,” headquartered in Delaware, overvalued stock, causing the company’s employee stock ownership plan (ESOP) to overpay $29.8 million. The Virginia company, Constellis Group Inc. (Constellis) “provides risk management and advisory services to facilitate (their) clients’ business operation and support their decision-making and project-planning processes.” The decision is in reference to a prior ruling in March 2017.

Click here for full text of the original ruling (March 2017)
Click here for full text of the appeals court ruling (March 2019)

Case Synopsis

The $29.8 million dollars represents the difference between what ESOP trustee, Wilmington Trust, allowed the ESOP to pay for the private security firm, and what a Virginia federal court ruled it was actually worth. In 2013, Constellis sold the company to an ESOP and named Wilmington Trust to act as the employees’ trustee.

After being named trustee, Wilmington Trust hired an investment banking firm, Stout Risius Ross Inc., (Stout) to perform a valuation of the fair market value of the company, wherein Stout valued the company at $275 to $330 million. However, previously in 2013, another firm, the McLean Group, valued Constellis at $165 million.

Despite having knowledge of the lower valuation, Wilmington Trust did not complete proper due review of the Stout analysis, and began ESOP negotiations using the higher figure as its price. In November 2015, the members of the ESOP filed a class-action lawsuit against Wilmington Trust for breach of fiduciary duty and, ultimately, the judge ruled in favor of the employees in 2017. The ruling was upheld on appeal in 2019.

Important Considerations

This case proves to be an excellent example of the prudent-person rule, which requires those managing a client’s account to limit the types of investments to only those that a prudent person seeking reasonable income and preservation of capital might buy for his or her own portfolio. Wilmington Trust was in clear violation of this principle when acting as the trustee for the employees of Constellis.

If a prudent investor was interested in purchasing the company, they would have completed more in depth due-diligence and further analysis on the 2013 valuation performed by the McLean Group. This deeper dive would have exposed the errors in the valuation report, and would have discredited the inflated value conclusion therein. Therefore, it is important for the ESOP trustee, which has a fiduciary duty to the employees, to follow the prudent-person rule in order for the employees to get a fair deal in the purchase of their company.

Additionally, it must be recognized that professionals who have significant experience with ESOPs make mistakes and situations can and do occur where things go wrong. Such was the case in the case of Brundle ESOP vs. Wilmington Trust. Trustees, even those seasoned and confident in their knowledge of ESOPs, must conduct business in the best way possible in order to get the fairest deal for the employees when purchasing. This case highlights what can go wrong if an ESOP purchase is not handled correctly, and will likely act as precedent should similar cases arise in the future.

Additional Case Analysis

Constellis Employees Win $30M in ERISA Suit

Wilmington Trust Can’t Dodge $30M Bill To Retirement Plan

Unsatisfying Answers In 4th Circ. Retirement Plan Ruling