• David Martin

ESOP's Fable: The Tale of Two Hats


What does your client do when the company officers have been telling them for years that their company was doing great and that they should keep investing in the ESOP, only to see their company file bankruptcy and their stocks become worthless? Stocks go up and down and can be risky; however, if your client was induced to invest in their ESOP by assurances that were “fables,” they may have a case. Let’s be clear about what an ESOP is. An employee's stock ownership plan is called an ESOP. That is a benefit plan that allows employees to invest in their own company. The idea is that the employee has an ownership stake, and therefore, even more incentive to work hard and to drive the company forward to success. Sounds great, doesn’t it?


Unless the people who are telling the employees that the company is doing great are actually receiving compensation when employees buy the company stock through the plan. If those people are lying about the company – in order to line their pockets with each inducement to encourage employees to buy stocks – then there will be a problem. That does not pass the smell test. You might not see the case at first, but it may be worthwhile to do a little checking.

The case Halperin v. Richards, No. 20-2793, 2021 WL 3184305 (7th Cir. July 28, 2021) makes that point. Facts of the Case:

  • The company, Appvion, Inc., “was sinking” … but “… the defendants fraudulently inflated these stock valuations to line the pockets of directors and officers, whose pay was tied to the ESOP valuations. …According to the plaintiffs, Appvion, Inc. was in financial freefall from 2012 to 2016 as revenues from its paper business declined sharply. During those years, Appvion repeatedly missed its financial projections, yet the defendants continued to project unrealistic success when valuing the company's stock-which was wholly owned by employees under an ERISA-covered Employee Stock Ownership Plan (ESOP).”

  • In 2017, the company filed for bankruptcy protection. Interestingly under the company's liquidation trust, certain creditors were permitted on behalf of the company to recover losses for wrongs against the corporation.

  • The targets of the lawsuit filed were certain directors and officers of the company. They were sued under state law for breaching corporate fiduciary duties, and for unlawful dividend claims.

  • These directors and officers had dual roles or two hats. They indeed owed duties to the corporation, but they were also ERISA fiduciaries.

  • So, they contended for their defense that all of the state law claims were preempted by ERISA because the corporate duties involved related to their duties as fiduciaries for the ESOP benefit plan. And the federal district court bought that argument and dismissed all of the state law claims. This appeal followed.

  • The stench from this litigation was a bit more than the Seventh Circuit could stomach. The court looked past the typical boilerplate language lifted from Supreme Court opinions about preemption applying whenever a state law "relates to" an ERISA plan and focused more on whether the state law acted immediately and exclusively upon the ERISA plan, or where the existence of the ERISA plan is essential to the state laws operation. That was not the case here.

  • The court also noted that while some state laws that run parallel with ERISA are preempted, some are not such as those that merely increase costs or alter incentives for ERISA plans without forcing the plans to adopt any particular scheme. The writing was on the wall.

  • The court continued: “ERISA expressly allows corporate insiders to have dual corporate and ERISA obligations. Whatever complications those dual roles may entail, we are persuaded that ERISA should not be interpreted to preempt parallel state-law liability against the directors and officers in this case.”

The net result is that when corporate officers and directors are wearing two hats they have two independent duties – one as ERISA fiduciaries and the other as to their duties to the corporation. Now, assets were available to be reached through the state law claims. On the other hand, those who may only have one hat to wear – the ERISA fiduciary hat - may not be liable under state law, the court ruled.

If your client's ESOP has tanked, you may want someone to review their matter if you suspect wrongful conduct. Give us a call. Your client will not be obligated to pay anything until they have signed an agreement in writing. There may be a way to remedy a wrong. Such as if a fable teller is wearing two hats.

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