Court Finds ESOP Fiduciaries Had No Good Reason to Delay Diversification

Watkins found that Sections 5.8 and 8.3 of the ESOP plan document work together, and he looked at the plain language of the plan. In summary, an eligible participant—one who had participated in the plan for ten years and had attained the age of at least 55 years—could make a diversification election within the 90-day period following the close of each plan year in the six-plan-year qualified election period. For the first five 90-day annual election periods, the plan gave an eligible participant the option to diversify 25% of his or her account balance that was invested in employer securities, reduced by any amounts previously diversified. During the sixth and final 90-day election period in the qualified election period, an eligible participant could diversify 50% of stock shares in his or her account balance, reduced by amounts previously diversified. The value of the account balance was its value on the Annual Valuation Date.

Because Bankshares’ stock was not publicly traded on an established market, it was bound by Section 5.8(b) of the plan document, which says when a participant received a distribution of Bankshares stock pursuant to a diversification election, the participant could exercise the put option within 60 days after the distribution of the stock or during the first 60 days of the following plan year. The price of the shares for purposes of the put option was the fair market value of the shares on the Annual Valuation Date preceding the year in which the participant exercised the put option.

Watkins found that the timeliness of the Bryants’ diversification elections is not an issue, and there is no dispute that the Bryants properly exercised their rights under the plan to make a diversification election. He also found there is no plan language in Section 5.8 of the plan document that permits Bankshares to use a date other than the Annual Valuation Date when placing a value on Bankshares’ stock for purposes of buying back the shares under a put option.

The plan administrator cited Section 8.4 of the plan which said the plan administrator had a general fiduciary obligation to exercise its authority for the benefit of all plan participants when offering its reasons for not honoring the Bryants’ elections. The court rejected them all.

Watkins found the decisions conflict with the clear, specific, and mandatory terms of the plan governing stock valuation, a participant’s right to make a diversification election, and a participant’s right to exercise a put option on distributed shares and. The decisions also construe the plan in a manner that contravenes the governing federal regulations, he said. The Internal Revenue Code requires that, if an employer’s stock is “not readily tradeable on an established market” then the company that sponsors the ESOP must provide a put option right to the participant to sell the shares of stock back to the company.

Defendants’ argument that the June 30 deadline was a self-imposed, rather than a contractual, deadline surfaced for the first time in this litigation. The court did not assign much weight to that, noting that the plan administrator’s construction of the plan to permit a special valuation in times of Bankshares’ financial crisis clearly conflicts with the plan language. “Notably, the Plan could have made an exception for an alternative valuation date or other contingency plan in unexpected times of financial stress, but it did not,” Watkins wrote. In addition, he found that the plan administrator consistently interpreted June 30 as a mandatory deadline, beginning in February 2009 and continuing through the Bryants’ administrative review process.

Watkins conceded that the fact of an oral prohibition from a federal regulatory agency would seem to be a significant reason to relay to participants to explain a plan administrator’s suspension of a put option, had that fact actually motivated the decision. However, the written agreement between the Federal Reserve Bank and Bankshares, which prohibited Bankshares from purchasing or redeeming its stock shares, did not take effect until September 16, 2009, several months after the June 30, 2009 deadline had passed.

Finally, the judge said the Bryants’ November 2009 diversification elections to keep their shares in the plan could not explain or justify Bankshares’ decision not to implement the diversifications by the June 30, 2009, deadline for the obvious reason that the November 2009 diversification elections were non-existent in June. “It was not reasonable for the Plan administrator to conclude that the Bryants’ November 2009 diversification elections amounted to waivers of their previous invocation of their rights to pension benefits,” Watkins wrote. And, he found that communications to the Bryants did not effectively give then notice that they were waiving their rights to the benefits.