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Compliance October 5, 2004
US Supreme Court Declines Review of ESOP Payout Lawsuit
October 5, 2004 (PLANSPONSOR.com) - A former
employee of a Marietta, Georgia polyurethane systems supplier
has won the right to pursue his corporate fiduciary breach
claims over the company's failure to tell him of a pending
merger when he cashed out his stock holdings.
Reported by Fred Schneyer
>Plaintiff Roger Ervast’s legal victory came with a US Supreme Court decision turning away requests that it review a federal appeals court ruling that the Employee Retirement Income Security Act (ERISA) did not preempt his fiduciary breach claims. The US 11 th Circuit Court of Appeals ruled in September 2003 that the duties that company owed Ervast relating to his holdings in Flexible Products’ employee stock ownership plan and its stock option plan were actually based in Georgia state law and not in ERISA.
>Reversing the lower court, the appeals court found that Ervast’s action was not “akin” to a claim for benefits or other relief available under ERISA Section 502(a) and was not blocked by the federal law. The court also noted that Ervast’s claim that he was entitled to information about the merger did not require an examination of the ESOP because Ervast did not seek entitlement to such information under the terms of the ESOP, but instead, he sought the information based on his status as a minority shareholder.
>At the heart of Ervast’s allegation was that the company should have informed him that Flexible Products was in the process of merging with Dow Chemical Company when Ervast resigned from Flexible in October 1999 and had his Flexible shares sold on October 5 and October 12 and the proceeds rolled into an individual retirement account. The company later announced that employees cashing out stock after October 26, 1999 would get the higher post-merger price because that was the date Flexible’s merger talks with Dow became “material,” according to the opinion.
>Ervast originally filed his lawsuit in January 2001 in Georgia state court, but Flexible had the case transferred to federal court after arguing that it should be governed by ERISA. The district court judge refused to send the case back to state court and Ervast appealed.
>The case is Flexible Products Co. v. Ervast, U.S., No. 03-1240, cert. denied 10/4/04.
>The 11 th Circuit ruling is at http://www.ca11.uscourts.gov/opinions/ops/200215769.pdf .