United States District Court, S.D. New York
EDWARD HUGLER, Acting Secretary of Labor, United States Department of Labor, Plaintiff,
FIRST BANKERS TRUST SERVICES, INC. and REMBAR EMPLOYEE STOCK OWNERSHIP PLAN, Defendants.
OPINION AND ORDER
Vincent L. Briccetti, United States District Judge.
Edward Hugler,  Acting Secretary of the United States
Department of Labor (the “Secretary”), brings
this action against defendants First Bankers Trust Services,
Inc. (“First Bankers”), and the Employee Stock
Ownership Plan of the Rembar Company, Inc. (the
“ESOP”),  asserting First Bankers breached fiduciary
duties owed under the Employee Retirement Income Security Act
of 1974 (“ERISA”), 29 U.S.C. § 1001 et
seq., and also improperly caused the ESOP to engage in a
prohibited transaction under ERISA.
the Court are First Bankers's motion for summary judgment
(Doc. #118) and the Secretary's cross-motion for partial
summary judgment (Doc. #134).
reasons set forth below, both motions are DENIED.
Court has subject matter jurisdiction pursuant to 28 U.S.C.
parties have submitted briefs, statements of material facts,
and declarations with supporting exhibits, which reflect the
following factual background.
2005, The Rembar Company Inc. (“Rembar”) was a
closely-held corporation located in Dobbs Ferry, New York.
Rembar manufactured and distributed precision parts and
components made from refractory metals, and distributed
refractory metals in raw form to lower-volume producers.
Bankers is a trust company based in Quincy, Illinois, that
acts as trustee and custodian for employee benefit and
personal trust accounts. In April 2005, Rembar retained First
Bankers to serve as trustee for the Rembar ESOP in connection
with a transaction in which the ESOP would purchase 100% of
Rembar's stock from selling shareholders Frank Firor,
Virginia Keilty, and Rosemary Brockett.
Rembar Evaluates the Feasibility of Establishing an
to the 2005 ESOP transaction, Firor was Rembar's chief
executive officer, chairman of the board of directors,
president, and majority stockholder. Firor owned 81.88% of
Rembar's then outstanding shares, Keilty owned 11.77%,
and Brockett owned 6.35%.
January 2005 after Firor became interested in selling his
Rembar shares, Rembar engaged Corporate Solutions Group
(“CSG”), an investment bank, to evaluate the
feasibility of establishing an ESOP to purchase Rembar stock
from its owners. CSG informally estimated that the value of
100% of Rembar's common stock was approximately $15, 719,
000. This figure included a 10% control premium, which
“represent[ed] a premium a strategic buyer would pay to
acquire a controlling stake in [Rembar].” (Sullivan
Decl. Ex. G, DOL0008724, DOL0008726).
CSG's suggestion, Rembar established an ESOP formation
committee to retain a valuation company to prepare a
preliminary valuation. Firor participated in the formation
February 8, 2005, the formation committee retained Empire
Valuation Consultants, LLC (“Empire”) to prepare
a preliminary valuation of the fair market value of
Rembar's stock. In connection with the preliminary
valuation work Empire performed, it reviewed a confidential
information memorandum prepared by CSG that contained
historical and financial data concerning Rembar.
and CSG engaged in discussions regarding the value of
Rembar's stock before Empire issued its preliminary
valuation. Terence Griswold, a managing director at Empire,
testified that his firm initially proposed a valuation
“in the high 13 millions, and [CSG] said 20
million.” (Sullivan Decl. Ex. I, at 93:2-16). CSG urged
Empire to increase its preliminary valuation conclusion, and
specifically sought to persuade Empire to adjust valuation
factors such as the discount rate. Empire and CSG ultimately
agreed to a valuation of $15.5 million after Empire
communicated to CSG, “We're not going any
higher.” (Id. Ex. I, at 96:18-19).
subsequently issued a preliminary valuation on March 4, 2005,
to the Rembar formation committee c/o Walter Pastor (Pastor
was a Rembar officer named to head the formation committee).
The preliminary valuation was also shared with Firor.
Empire's preliminary valuation concluded that as of
February 15, 2005, for potential ESOP purposes, the fair
market value of 100% of Rembar's common stock was $15.5
million, on a controlling interest basis. This valuation
conclusion included the application of a 25% control premium
and used a weighted average cost of capital discount rate
that was calculated based on a capital structure of 50% debt
and 50% equity.
Engagement of First Bankers as ESOP Trustee
April 13, 2005, following the issuance of the preliminary
valuation and at CSG's suggestion, Firor signed an
engagement letter on behalf of Rembar appointing First
Bankers to act as the ESOP's independent trustee in
connection with the transaction.
9(a) of the FBTS engagement letter states:
As Trustee, First Bankers shall be entitled . . . to: (a)
retain the Trustee's own independent financial advisor of
its choosing to assist in the evaluation of the proposed
transactions, and to perform the annual valuation and any
other required valuations, which advisor is acceptable to the
Company; provided however, that the Company shall not
unreasonably withhold such acceptance.
(Sullivan Decl. Ex. B, at DOL0019924). Paragraph 11 then
Bankers's continued engagement as Trustee is contingent
upon the following:
(a) First Bankers's engagement of Empire Valuation
Consultants to serve as its independent financial advisor;
(b) First Bankers's approval of valuation report(s)
and/or fairness opinion(s) furnished by such independent
financial advisor; and
(c) First Bankers's approval of the Trust Agreement and
(Id. at DOL009925).
the ESOP engaged First Bankers, CSG instructed Empire to send
First Bankers an engagement letter. Empire complied and sent
First Bankers an engagement letter dated April 5, 2005, which
was countersigned by First Bankers and Rembar as of May 25,
2005. The letter specified that Empire was engaged to act as
financial advisor to First Bankers in its capacity as trustee
to the ESOP. It also stated that Empire would “express
its updated opinion as to the fair market value of
Rembar's common stock on, or before a date where [sic]
Empire will present its conclusions to the Trustee” and
“render a fairness opinion as of the Transaction Date
with respect to the acquisition of the common stock by the
ESOP.” (Schnapp Decl. Ex. 3, at 1). The engagement
letter further stated that Empire “will represent only
the interests of the ESOP participants and
beneficiaries.” (Id.). Empire's initial
engagement letter with the Rembar ESOP formation committee
had stated it “will represent only the interests of the
ESOP participants and beneficiaries, acting through committee
and the ESOP trustee when selected.” (Id. Ex.
4, at 1-2).
Bankers also retained Brian Snarr, an attorney of the law
firm Morrison Cohen LLP, as its legal counsel in connection
with the 2005 ESOP transaction.
of its role as trustee, First Bankers formed an employee
benefits committee (the “EB committee”) to
represent the ESOP's interests and vote on whether to
approve the 2005 transaction. Such approval required the
unanimous vote of the EB committee members. Among the eight
First Bankers employees who served on the EB committee were
certified public accountants, holders of masters of business
administration degrees, and licensed attorneys. Specifically,
the EB committee members included: First Bankers's
president, Brian Ippensen; First Bankers's administrative
trust officer, Kimberly Serbin; and First Bankers's
business development officer, Merri Ash.
to its appointment as trustee of the Rembar ESOP, the EB
committee conducted a pre-acceptance review process to
determine the feasibility of the proposed transaction. This
review process involved an examination of Rembar and its
business (including its performance and financial history),
and a review of the proposed transaction structure.
The Limitation Agreement
the agreements entered into as part of the Rembar ESOP
transaction was a limitation agreement dated as of June 17,
2005, among Rembar, First Bankers as the ESOP's trustee,
and the selling shareholders. The recitals of the limitation
agreement provide, inter alia:
[T]he price the Trust proposes to pay for the Common Stock is
based in part on a valuation of the Common Stock that
contemplates certain limitations on the base and incentive
compensation paid to certain employees of the Company in the
future, as well as other operational limitations, covenants
and obligations of the parties hereto as set forth in this
Agreement; and . . . the Trust will not, however, purchase
the Common Stock unless the Company covenants to take certain
steps provided herein to assure that the value of the Common
Stock will not be diminished following such purchase.
(Schnapp Decl. Ex. 15, at DOL0016293).
3.2(d) of the limitation agreement contains a covenant of
First Bankers as trustee, which provides:
Board of Directors. For so long as the Seller
Subordinated Note in favor of Frank Firor is outstanding,
the Trustee, acting on behalf of the Trust, shall vote all of
the shares of Common Stock held by the Trust to cause the
Board of Directors to be at all times comprised of a majority
of directors designated by Frank Firor.
(Schnapp Decl. Ex. D, at 6).
key provisions of the limitation agreement include Section
3.1(a), which limits Firor's annual compensation from
Rembar for the following five fiscal years to $75, 000 per
year, and Section 3.1(c), which requires Rembar to distribute
the company's annual net earnings as a shareholder
dividend, unless the board of directors exercises its
discretion to retain up to $100, 000 of its net earnings each
First Bankers's Diligence, Negotiations, and Approval
of the Transaction
April 12, 2005, First Bankers's counsel, Snarr, sent a
request for due diligence materials to Rembar's counsel,
Stanley Bulua, asking for numerous documents related to
Rembar's corporate formation, business matters, risk
factors, financials, and tax information, among other things.
(Schnapp Decl. Ex. 6). Snarr also prepared a due diligence
memorandum, a draft of which was circulated to Bulua on May
17, 2005, identifying various issues relating to the proposed
ESOP transaction, including issues with Rembar's
financial statements, and documentation that Rembar had not
yet provided. Before it approved the transaction, First
Bankers also received an “ESOP Transaction
Memorandum” prepared by Bulua, along with a due
diligence report prepared by Snarr. First Bankers performed
its own due diligence by, inter alia, making an
on-site visit to Rembar on April 28, 2005, accompanied by
representatives from Empire and its legal counsel; reviewing
financial information provided by Rembar; and reviewing the
memoranda and analyses prepared by its counsel and Empire.
Empire also conducted a diligence interview with Rembar
representatives by telephone.
Bankers claims it reviewed Empire's final valuation in
draft form to ensure the completeness of its information,
scrutinize and understand the methodologies used, and
formulate any questions it may have based on the information
it contained. The Secretary disputes whether First Bankers
actually engaged in such a review of Empire's report,
pointing out that much of Ippensen's testimony that First
Bankers relies on discusses how First Bankers
generally reviews final valuation reports in draft
form and conducts due diligence, as opposed to what kind of
review First Bankers actually engaged in here.
(See, e.g., Schnapp Decl. Ex. 24, at
parties also dispute whether and the extent to which First
Bankers and Empire engaged in discussions regarding
Empire's valuation ahead of the June 13, 2005, EB
to the Secretary, the only steps First Bankers took
to determine the fair market value of Rembar were: (i)
participate in a meeting with Rembar management prior to the
engagement of First Bankers; (ii) conduct an on-site visit at
Rembar on April 28, 2005; (iii) receive Empire's final
valuation report; and (iv) hold an EB committee meeting on
June 13, 2005, in which Empire participated by telephone. The
Secretary disputes that First Bankers actually analyzed
Rembar's financial information, Empire's valuation
reports, or the legal due diligence memoranda.
Bankers claims it used the information it obtained from its
initial due diligence process to test the reasonableness of
Empire's final valuation. But, again, the Secretary
points out that the Ippensen testimony upon which First
Bankers relies in making this statement discusses what First
Bankers generally does, not what it actually
did with respect to the Rembar transaction.
(See Schnapp Decl. Ex. 24, at 103:20-104:20).
Serbin, on the other hand, affirmatively testified that First
Bankers went through Empire's valuation report
page-by-page to discuss each section it contained. (Schnapp
Decl., Ex. 25, at 116:21-117:16).
13, 2005, the EB committee held a meeting to consider whether
to approve the Rembar ESOP transaction. Snarr explained
the structure of the proposed transaction and Joe Eckl of
Empire discussed Empire's final valuation. Notes from the
meeting indicate the EB committee members asked questions
during Snarr and Eckl's presentations, and the issues
discussed include: Rembar's capital structure and tax
status, the structure of the ESOP, the structure of the
transaction, and the financing for the transaction.
Eckl's presentation concluded by valuing Rembar at $16
million. Following this discussion, the EB committee voted
unanimously to approve the Rembar ESOP transaction.
Empire's Final Valuation
with Eckl's presentation at the EB committee meeting,
Empire's final valuation report dated June 16, 2005,
[I]t is our opinion that the fair market value of 100% of the
common stock of the Rembar Company, Inc. is reasonably stated
at $16, 000, 000 as of June 16, 2005 for ESOP transaction
purposes. It is our further opinion that a purchase by the
ESOP is not more than adequate consideration as defined in
Section 3(18)(B) of ERISA and the proposed regulations
(Sullivan Decl. Ex. L, at 53).
reaching its valuation conclusion, Empire analyzed and relied
on Rembar's reviewed financial statements for the five
years ended May 31, 2000 through 2004, internally prepared
results for the eleven months ended April 30, 2005, and
financial projections provided by Rembar's management.
17, 2005, the ESOP purchased 100% of the 100, 000 issued and
outstanding shares of Rembar from the selling shareholders
for $15.5 million (representing $155 per share). In order to
finance the stock purchase, the ESOP borrowed $15.5 million
from Rembar, to be paid back over a 26-year term at an annual
interest rate of 4.83%. The ESOP loan was secured by the
shares purchased from the selling shareholders. Rembar, in
turn, financed the ESOP loan with $4 million cash on hand, $5
million bank term loans, and a $6 million one-day loan.
Rembar also borrowed $6.5 million from the selling
shareholders in exchange for subordinated notes, which Rembar
then used to pay back the $6 million one-day loan.
the consummation of the 2005 ESOP transaction, Rembar made
payment on its debt obligations until 2009, when it became
unable to service its debts as they became due. On July 30,
2009, as part of a restructuring, the ESOP surrendered the
unallocated Rembar shares to Rembar, and Rembar purchased the
allocated shares held by the ESOP for $15, 500 (representing
$1.0075 per share), cancelled the ESOP loan, and terminated
the ESOP. (Schnapp Decl. Ex. 16; Sullivan Opp'n Decl. Ex.
EE). The selling shareholders also cancelled the outstanding
debt Rembar owed them pursuant to the subordinated notes.
(Schnapp Decl. Ex. 18, at 5).
November 28, 2012, the Secretary filed its initial complaint
against Firor, First Bankers, and the ESOP. (Doc. #1). Firor
moved to dismiss pursuant to Rule 12(b)(6), and the Secretary
filed an amended complaint on May 3, 2013. (Doc. #15). The
amended complaint alleges that in connection with the 2005
ESOP transaction, (i) First Bankers and Firor breached their
fiduciary duties to the ESOP in violation of ERISA §
404(a)(1)(A), (B) & (D), 29 U.S.C. § 1104(a)(1)(A)
& (B); (ii) First Bankers caused the ESOP to engage in a
prohibited transaction in violation of ERISA §
406(a)(1)(A) & (D), 29 U.S.C. § 1106(a)(1)(A) &
(D); and (iii) Firor was subject to equitable relief,
17, 2013, Firor again moved to dismiss (Doc. #21); the Court
denied that motion on January 13, 2014 (Doc. #28).
a lengthy and contentious discovery period, the parties
participated in the Court-annexed Mediation Program, which
resulted in a settlement agreement between the Secretary and
Firor. On May 3, 2016, the Court entered a Consent Partial
Judgment and Order pursuant to which, inter alia,
(i) Firor neither admitted nor denied the allegations in the
amended complaint; (ii) Firor is permanently enjoined and
restrained from engaging in any further action in violation
of Title I of ERISA and from acting as a fiduciary or service
provider to any employee benefit plan subject to Title I of
ERISA; (iii) Firor agreed to pay $1, 090, 090 to the Rembar
ESOP for distribution to the individual ESOP participants and
beneficiaries; and (iv) the Secretary agreed that such
payment shall operate as a dollar-for-dollar offset of any
amount owed by First Bankers to the ESOP resulting from a
settlement or judgment in the present litigation. (Doc.
August 12, 2016, First Bankers moved for summary judgment
(Doc. #118), and on November 21, 2016, the Secretary
cross-moved for partial summary judgment (Doc. #134).
Summary Judgment Standard
Court must grant a motion for summary judgment if the
pleadings, discovery materials before the Court, and any
affidavits show there is no genuine issue as to any material
fact and it is clear the moving party is entitled to judgment
as a matter of ...