Court Sides With Wilmington Trust on ESOP Challenge

A federal court judge has agreed with Wilmington Trust that participants in an Employee Stock Ownership Plan (ESOP) that purchased shares at an allegedly inflated price lack standing to sue.

ISCO Industries sponsors the ESOP and Wilmington Trust is its trustee. On December 20, 2012, ISCO and/or its prior owner(s) sold four million shares of common stock in the company to the ESOP in exchange for a 25-year note of $98 million, accruing 2.4% annual interest. As of December 31, 2012, the ISCO shares purchased by the ESOP were revalued by an independent appraiser at $39 million—a decrease of more than 60%. The plaintiffs in the case sued Wilmington Trust for causing and engaging in prohibited transactions forbidden under the Employee Retirement Income Security Act (ERISA).

Chief U.S. Magistrate Judge Mary Pat Thynge of the U.S. District Court for the District of Delaware found that the plaintiffs lack standing for subject matter jurisdiction because they did not allege an economic injury. “As our sister circuits have noted, Supreme Court precedent guides: ‘an inflated purchase price will not itself constitute. . . economic loss. . . . Rather, stock must be purchased at an inflated price and sold at a loss for an economic injury to occur.’ Here, stock was purchased at an allegedly inflated price and no sale occurred thereafter. Therefore, no injury-in-fact can be identified,” Thynge wrote in her recommendation.

She also noted that to obtain injunctive or declaratory relief, plaintiffs must show “real or irreparable injury, a requirement that cannot be met where there is no showing of any real or immediate threat that the plaintiffs will be wronged again.” Thynge found the plaintiffs allege injuries incurred in the past and provide only a conclusory statement that “they continue to suffer such losses in the present.” In addition, she said, the plaintiffs “weakly counter that Wilmington Trust is the trustee and, as a result, the alleged harm could happen again.” She ruled that this does not prove an actual present harm, nor a “significant possibility of future harm,” so the plaintiffs lack standing required for injunctive or declaratory relief.

Thynge recommended that Wilmington Trust’s motions to dismiss for lack of standing be granted.

She did, however, agree with the plaintiffs on one point—they sufficiently plead enough facts to state a claim that ISCO can be identified as a party-in-interest to the prohibited transaction. She recommended Wilmington Trust’s motion to dismiss this claim be denied.

Thynge’s recommendation allowed for the parties to serve and file specific written objections within 14 days after being given a copy of her report.