Hankey Group ESOP Sued in Attempt to Capitalize on COVID-19’s Economic Effects

Fiduciaries of the Westlake Services Employee Stock Ownership Plan are accused of abusing the effects of economic shocks that emanated from the COVID-19 pandemic to enrich themselves, according to a new complaint.  

Former plan participant Mary Nguyen filed suit in the U.S. District Court for the Central District of California, accusing the Westlake Services Holding Employee Stock Ownership Plan of fiduciary breaches under the Employee Retirement Income Security Act. The suit, which is seeking class-action status, claims the defendants’ actions harmed participants’ retirement assets, the court record shows.

The complaint claims fiduciaries violated the terms of the plan by eliminating the rights of terminated employee participants to hold Westlake stock and by requiring sale terms at an improper price below market value, according to the complaint.

The complaint alleges the plaintiff and other terminated employees received less than the fair market value for their Westlake stock sold in a June 2020 sale forced by the defendants’ decisions.

The Plan

In 2013, fiduciaries for the Westlake ESOP amended and restated the plan. The fiduciaries claim the plan was changed properly and allowed for a special valuation that was ultimately performed in March 2020—as the economic effects of COVID-19 cascaded and thrust financial markets into volatility, the plaintiffs argue.   

“Defendants misled terminated employee participants by promising in plan documents and other communications that they would not divest plan participants of any entitlement to benefits, including their right to continue to hold Westlake stock until the second quarter of 2021; [and] Defendants misrepresented that the [March 2020] special valuation was authorized by the plan and that it was necessary to perform the special valuation in April 2020 and then liquidate the shares of only terminated employee participants,” the complaint shows.  

Terminated employee participants were defined as ESOP participants with a vested account balance whose employment with Westlake was terminated during the first quarter of 2020, the record shows.

The Westlake plan is a 401(k)-employee stock ownership plan covering all employees of Hankey Group—the owner of several automotive-industry related companies—except for those covered by collective bargaining. The Plan is administered by an administrative committee. The plan trustee is Don R. Hankey. Westlake is the financial services arm of the Hankey Group, which is based in Los Angeles.  

The Plaintiff

Nguyen made seven claims of ERISA fiduciary breach in the convoluted complaint.

Nguyen worked at Hankey Investment Corp., an affiliate of Westlake Services Holding Company—the parent company of Westlake Financial, a private finance in the prime and subprime automotive retail installment contracts business—and was a participant in the plan from 2011 through June 2020.

Nguyen resigned from Hankey Investment Company on February 3, 2020, the complaint shows. Upon her resignation, defendants provided a benefit information post termination document, informing Nguyen that she would not receive a rollover package for the company stock she owned in the plan until 2021, as directed by the ESOP rule for reinvestment elsewhere, according to the complaint.

“Under the terms … of the plan, the plan permitted terminated employee participants to continue to hold Westlake stock in their plan accounts until the second quarter of the year following their employment,” states the complaint. “Segregation of Westlake stock occurred in the plan year following termination of employment based on the valuation of the Westlake stock at the end of the year of termination.”

The post-termination document confirmed “Termed participants will not receive a distribution/rollover package until after the plan year when the employment termination occurs,” according to the complaint.

The document said participants who terminate employment will have an option for distribution or rollover of ESOP assets after the current plan year ends, sometime in the second quarter of the following year and informing Nguyen that the plan’s third-party administrator would prepare the distribution/rollover package to be mailed shortly after the annual statements.

“Had plaintiff known that defendants had changed the Westlake ESOP plan rule to discriminate against those participants who terminated their employment in the first quarter of 2020, plaintiff would not have resigned during the first quarter of 2020,” the complaint states.  

Nguyen was also told she should expect to receive retirement assets distributions based on the, her shares in the ESOP would be distributed in the second quarter of 2021.

The complaint claims fiduciaries committed several separate counts of fiduciary breach as the defendants “misled terminated employee participants by promising in plan documents and other communications,” upon separation from their employment that former “participants would have their benefits paid in the same manner and form as retirement benefits as described in the ESOP rule,” the complaint states.

The complaint argues that until “at least June 2020,” Nguyen and more than 100 terminated employee participants continued to hold their Westlake stock after terminating employment.  

In March 2020, as the spread of COVID-19 effected the economy, plan fiduciaries and individual defendants—including plan trustee and ESOP committee member Don Hankey and Westlake officers—“took advantage of the chaos and abrupt downturn of the stock market to call for a special valuation of the Westlake stock believing that it would result in approximately a 30% reduction in the value of the shares of the terminated employee participants and corresponding reduction in the repurchase obligations of Westlake and/or the plan,” the complaint states.

The complaint accuses the defendants, who also owned company stock, of benefitting from the plaintiff and others being paid less for their shares.

On April 22, 2020, as forecasted by Hankey on April 4, 2020, KPMG provided the company’s board with a special valuation report, reflecting approximately a 30% drop in the fair market value of the ESOP shares to $28.10 per share from $39.70, according to the complaint.

“The justification for the reduced value was based, in part, on company financial projections provided by some of the individual defendants to KPMG on March 31, 2020,” plaintiff’s attorneys wrote.   

More Allegations

Westlake ESOP fiduciaries pushed through several allegedly improper plan rule changes, that are at the center of the lawsuit— beginning in 2011—when Westlake Services Holding Company was created to acquire all the common shares of Westlake Services LLC, the complaint argues. The exchange of Westlake Services, LLC shares for holding company common shares was done on a one-for-one basis, the record shows.

In 2013, fiduciaries amended and restated the plan, according to the complaint.

The amendment in 2013 aimed to allow the defendants to perform the special valuation of the company stock or mandate the segregation of participants during the year in which they terminated employment,  the court record shows. But the plaintiffs are claiming that the 2013 amendment was not communicated to participants until May 21, 2020.

Amending the plan required the Board of Directors—under section 14(c) of the plan—to prepare a written resolution. The complaint says this was not done.

Plaintiff’s Requests

Plaintiffs are seeking injunctive relief against the plan, monetary relief and declaratory relief, the complaint shows. They have asked the court to:  

• Certify the lawsuit as a class action, certify the named plaintiff as class representative and counsel as class counsel.
• Declare all plaintiffs are entitled to have their benefits calculated and/or paid in conformity with the terms of the plan in effect at the time of their termination.
• Declare that the fiduciary defendants breached their fiduciary duties
• Order defendants make good to the ESOP and/or any successor trust(s) the losses resulting from their breaches and restoring any profits they have made through use of assets of the ESOP; and order that Defendants provide other appropriate equitable relief to the ESOP, plaintiff, and the class.  

The Court Record

The Hankey Group consists of Westlake Services Holding Company, Westlake Services, LLC and its affiliates: TNH Motors, Inc., Midway Rent-A-Car, Inc., Nowcom, LLC, Hankey Investment Company, LP, HFC Acceptance, LLC, Knight Management Services, LLC, Western Funding, Inc., Westlake Portfolio Services, Inc., CU Leasing Corp. and Conrad Staffing Services, LLC, the court record shows.  

The lawsuit is Mary Nguyen et al. v. Westlake Services Holding Company et al. The case was brought before U.S. District Court for the Central District of California. 

Westlake did not respond to requests for comment.

Attorneys from the law offices of Miller Shah LLP, based in Chester, Connecticut represent the plaintiffs. The complaint did not name counsel for the defendants.