Acosta v. Saakvitne et al
Filing
657
POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER DIRECTING ENTRY OFJUDGMENT IN FAVOR OF REMAINING DEFENDANTS. Based on the above findings and conclusions, this court rules that the remaining Defendants (i.e., Defendants other than Saakv itne and his law firm) did not violate any provision of ERISA with respect to the sale of the Company to the Company's ESOP. Accordingly, the Clerk of Court is directed to enter judgment in favor of the remaining Defendants and against the Government and to close this case.Signed by JUDGE SUSAN OKI MOLLWAY on 9/17/2021. (cib)
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PageID #:
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
MARTIN J. WALSH, Secretary of )
Labor, United States
)
Department of Labor,
)
)
Plaintiff,
)
)
vs.
)
)
BRIAN BOWERS, an individual; )
DEXTER C. KUBOTA, an
)
individual; BOWERS + KUBOTA
)
CONSULTING, INC., a
)
corporation; BOWERS + KUBOTA )
CONSULTING, INC. EMPLOYEE
)
STOCK OWNERSHIP PLAN,
)
)
Defendants.
)
_____________________________ )
CIVIL NO. 18-00155 SOM-WRP
POST-TRIAL FINDINGS OF FACT
AND CONCLUSIONS OF LAW;
ORDER DIRECTING ENTRY OF
JUDGMENT IN FAVOR OF
REMAINING DEFENDANTS
POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER
DIRECTING ENTRY OF JUDGMENT IN FAVOR OF REMAINING DEFENDANTS
I.
INTRODUCTION.
Defendants Brian Bowers and Dexter Kubota owned all the
stock in an engineering firm called Bowers + Kubota Consulting,
Inc. (the “Company”).
They created an Employee Stock Ownership
Plan (“the ESOP”)1 to which they sold all their shares for
$40,000,000.
The Government then sued Bowers and Kubota,
alleging that they had violated the Employee Retirement Income
Security Act of 1974 (“ERISA”) by manipulating data to induce the
1
This order refers to “an ESOP” (rather than “the ESOP”)
when discussing the generic concept of an ESOP, reserving “the
ESOP” for the particular ESOP that purchased the Company’s
shares.
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ESOP to pay more than the Company’s fair market value.
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This
court determines that no ERISA violation has been established.
Part of the Government’s case is based on a preliminary
nonbinding indication of interest by a private company to
purchase the Company for what the Government says was
$15,000,000.
That indication of interest expressly recognized
that the dollar amount needed to be adjusted to reflect the cash
and debt on the Company’s balance sheet.
Had that adjustment
occurred, the quoted dollar figure would have risen to about
$29,000,000.
In any event, the Company never agreed to sell for
$15,000,000, meaning that that figure did not represent what a
willing buyer and willing seller would mutually agree to.
The
indication of interest ends up having little relevance to the
fair market value of the Company.
The Government also cites its
expert, Steven J. Sherman, who valued the Company at $26,900,000.
However, because that valuation rests on errors, the court is not
persuaded by it.
The Government does not establish that the Company was
worth less than $40,000,000 on the day of its sale.
That is, the
record does not show that the ESOP paid more than the Company’s
fair market value.
Nor does this court find that Bowers and
Kubota breached any fiduciary duty or are liable for any
prohibited transaction, as they demonstrate that the Company was
worth at least $40 million on the day of its sale.
2
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Accordingly, this court, following a one-week nonjury
trial,2 finds in favor of Bowers and Kubota and against the
Government.
II.
FINDINGS OF FACT.
A.
Overview.
On December 14, 2012, Bowers and Kubota, through their
respective trusts, sold all 1,000,000 shares of the Company to
the Company’s ESOP for $40,000,000.
Before the sale, the Brian
J. Bowers trust, dated December 22, 2010, owned 510,000 of the
1,000,000 shares of the Company, and the Dexter C. Kubota Trust,
dated March 17, 2006, owned the other 490,000 shares.
Ex. 36 at DOL 000312.
See Joint
Thus, $20,400,000 of the sales price was
to be paid to Bowers’s trust, and $19,600,000 to Kubota’s trust.
Id. at DOL 000312-13.
Nicholas L. Saakvitne, the ESOP’s
independent fiduciary and trustee, executed the purchase
agreement on behalf of the ESOP.
Id. at DOL 000325.
The ESOP, which paid for the shares with funds lent by
Bowers and Kubota, agreed to pay Bowers and Kubota interest of 7
2
The trial proceeded in accordance with this court’s nonjury
trial procedures, pursuant to which direct examination is
presented through written declarations, rather than through oral
testimony in open court. See Procedures for Trials Before Judge
Susan Oki Mollway ¶ 15, https://www.hid.uscourts.gov/ (click on
“Judge’s Requirements,” then on “Senior Judge Susan Oki Mollway,”
then on “Trial Procedures”). Under this procedure, the court
rules on objections to the declarations, then hears live crossexaminations and live redirect examinations. Some of the
witnesses testified by agreement via videoconference. The trial
was conducted with various COVID-related protections in effect.
3
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percent per annum on the amounts owed.
years.
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The loan was for 25
See Joint Exs. 39-42.
Once they sold their shares, Bowers and Kubota ceased
to be the owners of the Company, and instead employees had the
option of owning stock and thereby becoming part-owners of the
Company.
Of course, as with any stock purchase, whether an
employee benefits by being a stock owner depends on the price of
the stock and also on whether the Company’s performance leads to
increases or decreases in the value of the stock.
Clearly, if
the stock is overvalued, the employee who holds stock does not
enjoy the benefit that an ESOP should be designed to confer.
Unlike stock purchases outside the employment context, the
Company’s employees had and have certain protections under ERISA.
The Government’s central contention in this case is
that the sale for $40,000,000 violated ERISA.
see also ECF No. 1.
See Joint Ex. # 1;
Before trial, the Government settled its
claims against Saakvitne, the original trustee of the ESOP, and
against the Saakvitne Law Corporation.
See ECF No. 453.
What
went to trial were the following claims:
a.
Bowers and Kubota failed to discharge fiduciary
duties with the proper care, skill, prudence, and diligence in
violation of 29 U.S.C. § 1104(a)(1)(A), (B), and (D) (Complaint
¶ 37);
4
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b.
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Bowers and Kubota are liable for breaches of
fiduciary responsibilities by other fiduciaries under 29 U.S.C.
§ 1105(a)(1)-(3) (Complaint ¶¶ 40-43);
c.
Bowers and Kubota engaged in prohibited
transactions between a plan and a party-in-interest in violation
of 29 U.S.C. § 1106(a)(1)(A) (Complaint ¶¶ 45-47);
d.
Bowers and Kubota engaged in prohibited
transactions with the Company’s ESOP in violation of 29 U.S.C.
§ 1106(a)(1)(A) (Complaint ¶¶ 49-50); and
e.
Bowers and Kubota knowingly participated in a
transaction prohibited by ERISA under 29 U.S.C. § 1132(a)(5)
(Complaint ¶¶ 52-53).
B.
The Company.
The Company is a Hawaii corporation that provides
architectural and engineering design, project management, and
construction management services throughout Hawaii and the
Pacific Rim.
See Am. Trial Decl. of Brian J. Bowers ¶ 6, ECF
No. 640, PageID #21376.
The Company’s predecessor, KFC Airport, Inc., was
formed in or about 1980.
In or about 1997, Bowers bought 100
percent of the shares of KFC Airport.
Bowers is the Company’s
president and sits on its board of directors.
See Am. Trial
Decl. of Dexter C. Kubota ¶ 5, ECF No. 639, PageID # 21360; Am.
Bowers Decl. ¶¶ 3, 5, and 6, ECF No. 640, PageID # 21376.
5
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Kubota joined the Company in 1988 and later purchased
49 percent of the Company’s shares, leaving Bowers with the other
51 percent of the Company’s shares.
Kubota is the Company’s vice
president and sits on its board of directors.
See Am. Kubota
Decl. ¶¶ 3, 5, and 6, ECF No. 639, PageID # 21360; Am. Bowers
Decl. ¶ 4, ECF No. 640, PageID # 21376.
Bowers and Kubota placed the ownership of their
respective Company shares into their respective trusts, which
they controlled for their own benefit.
ECF No. 640, PageID # 21376.
See Am. Bowers Decl. ¶ 8,
The court therefore treats what was
the trusts’ ownership of the Company as indistinguishable from
ownership by Bowers and Kubota for purposes of the present
decision.
C.
The Company’s Financial Statements.
Thomas Nishihara, a certified public accountant (“CPA”)
and the vice president of Robert H.Y. Leong & Company Certified
Public Accountants A Professional Corporation, has been the
Company’s outside accountant since 2008.
See Decl. of Thomas
Nishihara ¶¶ 1, 3, 5, ECF No. 593, PageID #s 19654-55.
Nishihara has prepared the Company’s tax returns and
financial statements.
Id. ¶¶ 6-7, PageID # 19655.
From 2008 to
2011, Nishihara prepared those financial statements using the
income tax basis of accounting, which is essentially a cash basis
accounting method.
Id. ¶ 15, PageID # 19657.
6
The cash basis of
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accounting examines when revenue is received and when expenses
are paid.
See Bowers Test., ECF No. 640, PageID # 20439.
In
2012, at the requests of Gary Kuba and Gregory Kniesel, who were
hired to appraise the Company, Nishihara began using the accrual
basis, which involves reporting revenues when earned and expenses
when incurred.
Nishihara actually converted the 2011 financial
statement from a cash basis to an accrual basis.
Under the
accrual basis, annual expenses such as bonuses not yet earned may
be reported as a contingency.
See Nishihara Decl. ¶¶ 16-18,
PageID # 19657.
Nishihara says that, for 2011 and 2012, he did not
calculate the Company’s earnings before interest, taxes,
depreciation, and amortization (“EBITDA”).
EBITDA is
“essentially the pretax profits of the company.”
J. Sherman, ECF No. 631, PageID # 20923.
Test. of Steven
Nishihara explained
that EBITDA can be calculated by taking the net income and adding
interest, taxes, depreciation, and amortization.
Test., ECF No. 629, PageID # 20527.
See Nishihara
Thus, Nishihara says, the
Company’s EBITDA could be calculated from the financial
statements he prepared.
See Nishihara Decl. ¶ 14, PageID
# 19656; Nishihara Test., ECF No. 629, PageID # 20527.
Joint Exhibit 48 is an estimate of the Company’s
revenue for fiscal year 2012 prepared by Bowers and Kubota.
Kubota Amd. Decl. ¶ 19, ECF No. 639, PageID # 21363.
7
See
It details
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the Company’s contracts and lists historical financial data, as
summarized below:
Year
Revenue
2003
$5,669,000
2004
$7,417,000
2005
$7,880,000
2006
$9,803,000
2007
$13,719,000
2008
$15,005,000
2009
$15,410,000
2010
$21,500,000
2011
$22,005,000
2012 (estimated)
$24,964,000
Joint Exhibit 48 contains a profitability comparison that details
the Company’s historical net income.3
Joint Exhibit 47 is a valuation of the Company by Libra
Valuation Advisors (“LVA”) as of December 14, 2012, the day the
Company’s shares were sold to the ESOP.
There is no dispute
about the accuracy of the historical EBITDAs listed in Joint
Exhibit 47.
This court therefore accepts those figures even
though the calculation of the historical EBITDAs has not been
detailed.
Joint Exhibit 47 also lists the projected EBITDA of
the Company for 2012 as $9,240,000 (rounded up to nearest
3
The dollar amounts listed in the profitability comparison
do not appear to represent EBITDA.
8
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$10,000).
See Joint Ex. 47 at DOL 000235.
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Exhibit 5 to Joint
Exhibit 47 lists the Company’s EBITDAs for 2008 to 2012:
Year
EBITDA
2008
$1,670,000
2009
$1,585,000
2010
$3,050,000
2011
$2,614,000
2012 (estimated)
$9,235,000
See Joint Ex. 47 at DOL 000255.
Joint Exhibit 49 is LVA’s valuation of the Company as
of December 31, 2012, about two weeks after the sale.
It lists
the Company’s actual EBITDA in 2012 as $7,050,000 (rounded to the
nearest $10,000).
See Joint Ex. 49 at DOL 000120; Joint Ex. 49,
Ex 5, DOL 000138 (listing the 2012 EBITDA as $7,047,000).
The Government’s expert, Steven J. Sherman, calculated
“an adjusted EBITDA projection for 2012 of $4.9 million, more in
line with the Company’s historical financial performance.”
Sherman Decl ¶ 187, ECF No. 635, PageID # 21323.
See
Sherman opined
that a company with historical profits of $2 million to $5
million would not “turn on a dime and go to nine or $10 million.”
Sherman Test., ECF No. 631, PageID # 20923.
However, as detailed
below, Sherman’s calculation overlooks certain circumstances.4
4
Unless the court specifically notes problems with testimony
or expressly states a credibility problem, the court found
witnesses credible.
9
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In November 2012, Bowers and Kubota projected the
Company’s revenue for 2013 to 2017.
Bowers said they had a
pretty good idea what their revenue would be for 2013 and that,
for 2014 to 2017, they projected a 5 percent growth rate.
The
Company’s earnings were trending upward in 2012, and the Company
had a backlog of contracts.
See Decl. of Ian C. Rusk ¶¶22-24,
ECF No. 622, PageID #s 20159-60.
Bowers said they calculated
expenses based on historical averages.
See Bowers Test., ECF No.
628, PageID # 20402; Def. Ex. 89, Bates No. Pia 010048 or LIBRADOL INV 004759.
Bowers also testified that the Company ended up
performing very well from 2013 to 2017.
D.
Id., PageID # 20403.
Initial Discussions with URS.
Between 2008 and 2012, Bowers and Kubota had considered
and discussed selling the Company to: 1) others in the Company’s
management, 2) a private party, or 3) an employee stock ownership
plan.
See Test. of Brian J. Bowers, ECF No. 628, PageID # 20340;
Am. Kubota Decl. ¶ 21, ECF No. 639, PageID # 21363.
Bowers and
Kubota ultimately ruled out a sale to others in the Company’s
management because those managers were not interested in buying
the Company and/or lacked the financial means to do so.
See
Bowers Test., ECF No. 628, PageID # 20340.
Bowers and Kubota did communicate with private
companies, including URS Corporation, about a possible sale.
In
2011, Bowers and Kubota approached Sunnie House, the Pacific Sub
10
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Region Manager of URS, to discuss whether URS might be interested
in purchasing the Company.
House then prepared a memorandum for
the URS corporate acquisition team.
See Decl. of Sunnie House
¶¶ 3, 5, 7, ECF No. 599, PageID #s 19707-08.
Paul Vallone, URS’s
director of corporate development, was responsible for managing
its mergers and acquisitions.
ECF No. 653-1, PageID # 23329.
See Depo. Desig. of Paul Vallone,
After the Company provided URS
with various documents, including its sales numbers, award list,
resumes, and 2010 tax returns, Vallone helped URS evaluate a
possible purchase of the Company, then sent the Company a
preliminary nonbinding indication of interest on or about
December 5, 2011.
See House Decl., ¶¶ 8-9, PageID #s 19708;
Depo. Designations of Paul Vallone, ECF No. 653-1, PageID
# 23369; Joint Ex. 4 (copy of Nonbinding Letter of Interest).
That indication of interest stated that URS was interested in
purchasing the Company for $15,000,000, plus or minus “cash and
debt on the Company’s balance sheet.”
It noted that the
communication did not constitute an offer and stated, “If the
proposal contained in this letter is acceptable to you, we are
prepared to move to the next steps in the acquisition process,
enter into an agreement for exclusivity for a period of 90 days,
and begin initial due diligence.”
to those terms.
See Joint Ex. 4.
11
Bowers acknowledged and agreed
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When asked at his deposition whether URS had conducted
a due diligence review of the Company before sending its
indication of interest, Vallone responded, “Very little.
There
would have been some financial review in order to come up with
that number of 15 million, but we did not begin to do detailed
due diligence on the [C]ompany.”
Depo. Desig. of Paul A.
Vallone, ECF No. 653-1, PageID # 23388.
The Company at the time had more than $7 million in
cash and more than $7 million in working capital.
Had this been
added to the $15 million cited in URS’s indication of interest,
the dollar amount would have risen to about $29 million to $30
million.
See Bowers Test., ECF No. 628, PageID # 20373; Kubota
Test., ECF No. 628, PageID # 20495; Amd. Kubota Decl. ¶ 28, ECF
No. 639, PageID # 21364 (indicating that the Company’s cash and
work in progress “was potentially another $15 million”); Amd.
Trial Decl. of Gregory E. Kniesel ¶ 57, ECF No. 641, PageID
# 21402 (indicating that URS’s nonbinding proposed purchase price
was $29 to $30 million).
The Government ignores the actual “cash
and debt on the Company’s balance sheet” that the URS indication
of interest expressly acknowledged should be considered.
See
Government’s Proposed Findings of Fact and Conclusions of Law,
ECF No. 655, PageID # 23541 (characterizing URS’s preliminary
nonbinding indication of interest as being for $15 million).
12
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No agreement with URS was ever reached.
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This court
therefore finds that the URS preliminary nonbinding indication of
interest has little relevance to the actual value of the Company.
An individual who makes an offer of $15,000 for a used luxury car
with a Blue Book value of $40,000 does not, by virtue of making a
“lowball” offer that is never accepted, tend to establish that the
car is worth only $15,000.
Here, there is no evidence that the URS
indication of interest was the price that a willing buyer was
willing to pay and that a willing seller was willing to accept.
See IRS Revenue Ruling 59-60, § 2.02 (fair market value is “the
price at which the property would change hands between a willing
buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to
sell, both parties having reasonable knowledge of relevant
facts.”), https://www.pvfllc.com/files/IRS_Revenue_Ruling_59-60.pdf
(last visited September 15, 2021).
On January 25, 2012, while in discussion with URS, the
Company hired GMK Consulting to provide a valuation of the
Company for negotiation purposes.
GMK’s principal was Gary Kuba,
a CPA accredited as a business valuator by the American Institute
of Certified Public Accountants.
See Joint Ex. 6; Bower’s Test.,
ECF No. 628, PageID #s 20353, 20376; Decl. of Gary Kuba ¶ 6, ECF
No. 600, PageID #s 20545; Kuba Decl. ¶¶ 17 and 21, ECF No. 600,
PageID #s 19713-14.
According to the Company’s letter engaging
13
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GMK, GMK was being asked to prepare a limited report for internal
use only.
See Joint Ex. # 6.
In the course of its discussions with URS, the Company
had sent URS more than a hundred documents, including financial
information and material showing projected profits of $9,284,000
for 2012.
Ex. 48.
See Bowers Test., ECF No. 628, PageID # 20351; Joint
In a statement that would be echoed during trial by the
Government’s expert, Steven Sherman, Kuba expressed concern about
the reasonableness of this projection because it represented a
“significant jump” from the Company’s past performance.
Decl. ¶ 29, ECF No. 600, PageID # 19717.
profit for 2011 as $6,452,000.
Kuba
The Company listed its
It listed its profit for 2010 as
$6,367,000, its profit for 2009 as $4,332,000, and its profit for
2008 as $4,332,000.
See Joint Ex. 48.
On March 21, 2012, despite his earlier concerns about
the projected 2012 profits, Kuba relied on that figure because
“the scope of my assignment was an internal-use analysis for
negotiation purposes.”
# 19717.
Kuba Decl. ¶ 29, ECF No. 600, PageID
Kuba then sent Bowers his preliminary valuation of the
Company at about $38,184,000.
See Govt. Ex. 33.
Bowers
forwarded the preliminary valuation to the Company’s CPA,
Nishihara, telling him that the value “seems very high.”
Id.
Bowers later described this response as one of surprise, given
14
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the much lower figure in the URS indication of interest.
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See
Bowers Test., ECF No. 628, PageID # 20387.
Before sending Bowers its valuation at $38,184,000, GMK
had gone through several valuation drafts.
a range of $31 to $54 million.
An early draft listed
After Bowers submitted comments,
GMK reduced the upper range to be between $40 and $46 million.
Ultimately, GMK ended up providing a valuation of approximately
$39.7 million.
See Bowers Test., ECF No. 628, PageID # 20384;
Joint Ex. 17, Bates No. Bowers/Kubota 007208 (valuation of
$39,676,623).
Kuba said LVA charged very little for this quick
and limited valuation, as Kuba did not dig into the underlying
assumptions or do much due diligence.
See Decl. of Gary Kuba
¶ 25 and 29, ECF No. 600, PageID # 19716-17.
Given the limited
scope of GMK’s valuation, this court accords it little weight in
determining the value of the Company.
The Company sent GMK’s final valuation report to URS.
This had clearly not been contemplated by GMK, which had been
hired to produce a valuation for internal use only.
Shortly
thereafter, the Company and URS ended their discussion about a
possible sale of the Company.
See Bowers Test., ECF No. 628,
PageID #s 20358, 20385: Kubota Test., ECF No. 628, PageID
# 20448; Amd. Kubota Decl. ¶¶ 48-49, ECF No. 639, PageID # 21367;
Kuba Decl. ¶ 50, ECF No. 600, PageID # 19723.
15
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By June 2012, Bowers and Kubota, no longer exploring a
sale to URS, were considering whether to sell the Company to an
ESOP.
See Bowers Test., ECF No. 628, PageID #s 20358-59; Amd.
Bowers Decl. ¶ 24, ECF No. 640, PageID # 21379; Def. Ex. 50 (June
19, 2012, email from Bowers to Kuba and Kubota, stating, “Gary:
We may be moving in the ESOP direction.”).
E.
The Decision to Form the ESOP.
Kuba recommended to Bowers that the Company hire
Gregory M. Hansen, an attorney with the Honolulu law firm of Case
Lombardi & Pettit, to help with the potential sale to the ESOP.
See Amd. Bowers Decl. ¶ 25, ECF No. 640, PageID # 21379.
had significant experience with ESOPs.
Hansen
In 2012, for example,
more than 50 percent of Hansen’s legal practice involved ESOPs.
See Amd. Decl. of Gregory M. Hansen ¶ 14, ECF No. 642, PageID
# 21414.
In late August 2012, Bowers and Kubota met with Hansen.
See Amd. Bowers Decl. ¶ 26, ECF No. 640, PageID # 21379.
Hansen
recalls asking what minimum price Bowers and Kubota would sell
the Company for and remembers that they replied that they hoped
to get $40 million.
See Amd. Hansen Decl., ECF No. 642, PageID
# 21439; Hansen Test., ECF No. 629, PageID # 20593.
Hansen
explained to them that the sale price could not exceed fair
market value as determined in good faith by an independent
professional.
See Hansen Test., ECF No. 629, PageID # 20602.
16
On
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August 30, 2021, Hansen told Bowers and Kubota that they should
get a formal valuation of the Company from Kuba as soon as
possible.
See Amd. Hansen Decl. ¶ 55, ECF No. 642, PageID
# 21426.
On September 2, 2012, the Company signed a formal
retainer agreement with Hansen, who was to coordinate a team of
professionals, draft plan documents, and provide advice relating
to the structure of a possible sale of the Company to an ESOP.
See Amd. Bowers Decl. ¶ 27, ECF No. 640, PageID # 21379; Amd.
Hansen Decl. ¶ 41, ECF No. 642, PageID # 21422; Joint Ex 15 (copy
of engagement letter).
In the Fall of 2012, Bowers and Kubota concluded that
they would indeed form an ESOP.
No. 639, PageID # 21368.
See Amd. Kubota Decl. ¶ 51, ECF
There were tax advantages for Bowers,
Kubota, the Company, and ESOP participants if the ESOP was formed
by the end of 2012.
PageID # 21368.
See Amd. Kubota Decl. ¶ 55, ECF No. 639,
Marcus Piquet, a CPA, was retained to advise on
tax accounting issues related to ESOP transactions.
See Depo.
Desig. of Marcus Piquet, ECF No. 591-1, PageID #s 19519, 19528.
F.
LVA Appraisal of the Company.
In July 2012, Kuba told Bowers that GMK was willing to
prepare a formal valuation of the Company in connection with the
formation of an ESOP.
See Kuba Test., ECF No. 629, PageID
# 20573; Joint Ex. 13 (email from Bowers to Nishihara, stating
17
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PageID #:
that Kuba is interested in “assisting us with the ESOP”).
However, in October 2012, Kuba told the Company that he no longer
wished to work on the valuation because he had come to feel
“uncomfortable with the structure of the transaction.”
Decl. ¶ 57, ECF No. 600, PageID # 19725.
Kuba
Kuba’s discomfort may
have related to the nature of the transaction being proposed at
the time--a minority transaction involving preferred stock, a
structure that Kuba was unfamiliar with.
See Hansen Test., ECF
No. 629, PageID #s 20646-47; Hansen Decl. ¶ 17, ECF No. 646,
PageID # 23154.
Additionally, Kuba was conscious that he had
previously rendered a limited valuation using the Company’s
projections.
See Hansen Test., ECF No. 629, PageID # 20644; Kuba
Decl. ¶ 57, ECF No. 600, PageID # 19725.
With Kuba’s withdrawal,
Hansen recommended that the Company retain LVA, whose principal
valuation expert was Greg Kniesel.
See. Kubota Decl. ¶ 57, ECF
No. 639, PageID # 21369.
On October 20, 2012, LVA sent “The Board of Trustees of
the Proposed Bowers + Kubota Employee Stock Ownership Plan” a
proposed engagement letter.
See Govt. Ex. 48.
In the engagement
letter, LVA agreed to provide a preliminary analysis and fair
market value of the Company’s stock no later than November 21,
2012, with a final summary letter no later than December 31,
2012.
See Govt. Ex. 48, Bates No. DOL 001420.
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23642
PageID #:
Bowers sent Kniesel copies of the Company’s accrualbasis financial statements for 2011 and 2012, as well as GMK’s
final valuation report.
See Amd. Bowers Decl. ¶ 32, ECF No. 640,
PageID # 21380; Amd. Kubota Decl. ¶ 59, ECF No. 639, PageID
# 21369.
Then, two days after the date of LVA’s proposed
engagement letter, Bowers and Kubota met Kniesel in Chicago.
See
Amd. Bowers Decl. ¶ 31, ECF No. 640, PageID # 21380; Amd. Kubota
Decl. ¶ 57, ECF No. 639, PageID # 21369.
On November 21, 2012, LVA sent the Board of Trustees of
the Proposed Bowers + Kubota Employee Stock Ownership Plan and
Trust a “preliminary fair market value of the common stock” of
the Company.
See Joint Ex. 20.
LVA preliminarily determined
that the “ESOP Controlling Interest Value” fell between
$37,090,000 and $41,620,000.
Id.
The next day, Bowers sent
Nishihara (the Company’s outside CPA) LVA’s preliminary valuation
as an attachment to an email, stating, “Range is tighter and
falls within Gary’s previous range which is good.”
G.
Joint Ex. 21.
Hiring Saakvitne as the ESOP Trustee.
On November 21, 2012, Bowers and Kubota met with the
Company’s attorney, Hansen.
Hansen had prepared a written agenda
for the meeting that included a line item for “Trustee
appointment--independent highly recommended.”
Joint Ex. 21.
During the meeting, Hansen mentioned several names as possible
trustees, but he strongly recommended Saakvitne as the ESOP
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23643
trustee.
PageID #:
Hansen had worked with Saakvitne on multiple ESOP
transactions and considered Saakvitne to be a qualified and
competent trustee.5
See Hansen Decl. ¶¶ 38-39, 69, ECF No. 642,
PageID #s 21420-21, 21429; Hansen Decl. ¶ 27, ECF No. 646, PageID
# 23158; Bowers Test., ECF No. 628, PageID # 20407-08.
Bowers
and Kubota agreed to hire Saakvitne based on that advice,
Saakvitne’s resume, and a call with Saakvitne.
See Hansen Decl.
¶ 70(a), ECF No. 642, PageID # 21429; Hansen Test., ECF No. 629,
PageID #s 20604-05; Bowers Test., ECF No. 628, PageID #s 2041617; Kubota Test., ECF No. 628, PageID # 20479.
Also on November 21, 2012, Hansen sent an email to
Saakvitne with the subject “Bower+Kubota” (sic), telling
Saakvitne that “[t]hey agreed to hire you on my advice.”
Govt.
Ex. 58; Hansen Decl. ¶ 29, ECF No. 646, PageID # 23158.
The
email further stated, “This is looking like a $12 million
preferred stock transaction.
There is a slight possibility they
will change their mind and do a 100% transaction for 40 million .
. . .”
Govt. Ex. 58.
Hansen told Saakvitne that Hansen was
leaving town on December 19, 2021, and that the sale would have
to close by that date.
Id.
Saakvitne was not the only person
that Hansen told about the possible $40,000,000 price.
See Depo.
Desig. of Marcus Piquet, ECF No. 591-1, PageID #s 19579-80
5
The court takes judicial notice of Saakvitne’s death on or
about October 2, 2018. See Suggestion of Death, ECF No. 35.
Saakvitne was therefore unavailable to testify at trial.
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23644
PageID #:
(Hansen asked Piquet to look into a $40,000,000 loan); Govt. Ex.
66 (Piquet’s Preliminary Action Plan, based on conference call on
December 7, 2012, stating, “Brian and Dexter sell their stock to
the ESOP for $40MM.”).
On November 22, 2012, Hansen sent an email to Saakvitne
that attached LVA’s draft valuation of the previous day, telling
Saakvitne that his engagement letter should be with the Trustees
of the Bowers + Kubota Consulting, Inc. Employee Stock Ownership
Plan.
Govt. Ex. 59; Hansen Decl. ¶ 75, ECF No. 642, PageID
# 21430.
On November 23, 2012, Hansen sent an email to Saakvitne
that was cc’d to Kniesel of LVA.
The email asked Saakvitne to
send Kniesel a copy of Saakvitne’s draft engagement letter or to
send Kniesel Saakvitne’s exact title.
Hansen told Saakvitne that
he had asked Kniesel to revise LVA’s engagement letter to run
directly to the ESOP trustee.
See Joint Ex. 24; Hansel Decl.
¶ 77, ECF No. 642, PageID # 21431.
On or about November 26, 2012, the Company and
Saakvitne entered into an Employee Stock Ownership Plan Fiduciary
Agreement Between Bowers + Kubota Consulting, Inc. and Nicholas
L. Saakvitne.
Pursuant to this agreement, Saakvitne was to
evaluate any proposed sale of the shares of the Company,
negotiate terms on behalf of the ESOP, and continue to serve as
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23645
the ESOP’s trustee after that.
PageID #:
See Joint Ex. 27; Kubota Test.,
ECF No. 628, PageID #s 20417-18.
On December 3, 2012, Bowers and Kubota, in their
capacities as members of the Company’s board of directors, signed
a Resolution of Board of Directors by Unanimous Written Consent
Without a Meeting that adopted the ESOP and appointed Saakvitne
as the independent fiduciary and the sole ESOP trustee,
retroactively effective as of January 1, 2012.
H.
See Joint Ex. 28.
The ESOP Document.
On December 11, 2012, Bowers and Kubota, in their
capacities as the Company’s officers, adopted the Bowers + Kubota
Consulting, Inc. Employee Stock Ownership Plan (Effective As Of
January 1, 2012).
I.
See Joint Ex. 38, Pages 1 and 90 of 100.
Negotiating the Sale to the ESOP.
On December 10, 2012, Bowers and Kubota offered to sell
the “ESOP 100 percent of the Company’s common stock for $41
million.”
Joint Ex. 32 at Bowers/Kubota 0182242.
Bowers
proposed that the sale would be financed at 10 percent interest
per annum amortized over 20 years.
Id.
Saakvitne sent Bowers and Kubota a counteroffer,
offering to pay $39 million with a 25-year loan at 6 percent
interest.
Joint Ex. 32 at Bowers/Kubota 0182241-42.
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23646
PageID #:
Bowers then countered at $40 million, with a 25-year
loan at 8 percent interest.
Joint Ex. 32 at Bowers/Kubota
0182241.
Saakvitne agreed to the $40 million price, but
countered with a request for a loan at 7 percent interest, which
Bowers and Kubota accepted.
0182239-40.
Joint Ex. 32 at Bowers/Kubota
Bowers and Kubota knew that the sale could only
close at $40 million if an independent professional determined
that that price did not exceed fair market value.
See Hansen
Test., ECF No. 629, PageID # 20602 (Hansen told Bowers and Kubota
that the sale price could not exceed fair market value as
determined in good faith by an independent professional).
Saakvitne’s negotiation saved the Company’s ESOP
millions of dollars.
See Bowers Test., ECF No. 628, PageID
# 20433; Gregory K. Brown Test., ECF No. 631, PageID # 21049
(“Well, in a $40 million deal, each 1 percent would be saving
$400,000 a year, 3 percent would be $1.2 million a year.
You
know, that would drop off a little bit as the debt got paid down,
but it would be quite a while where it would be, you know, a
million dollars or more or even just slightly less of savings to
the company because this was money that was, you know, being paid
to the sellers.”).
Bowers and Kubota had told Hansen that they wanted $40
million for the Company, and Hansen had told Saakvitne and others
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23647
about that price point.
PageID #:
The Government raises concern about how
the parties ended up agreeing on the very amount that Bowers and
Kubota wanted, suggesting that Saakvitne failed to really study
the valuation and simply acquiesced in the sellers’ price.
But,
as detailed later in these findings of fact, Saakvitne had LVA’s
valuation indicating that the Company was worth at least $40
million.
Thus, Saakvitne had a good faith basis for agreeing to
purchase the Company for $40 million.
J.
Before Finalizing the Details of the Sale,
Saakvitne Conducted Due Diligence.
Saakvitne was responsible for retaining a qualified
independent appraiser to value the Company.
ECF No. 628, PageID # 20419.
See Bowers Test.,
He hired LVA, although, with his
unfettered discretion to hire any independent appraiser, nothing
required him to do so.
See Gregory Kniesel Test, ECF No. 630,
PageID # 20751; Bowers Test., ECF No. 628, PageID # 20419-20;
Kubota Test., ECF No. 628, PageID # 20487.
At most, Saakvitne
knew that there was not much time to get a valuation by Hansen’s
deadline of December 19, 2012, if an appraiser unfamiliar with
the Company were to begin its valuation analysis only after
Saakvitne formally became the ESOP trustee on November 26, 2012.
But in fact that was not a rigid deadline.
No. 628, PageID # 20494.
See Kubota Test., ECF
As Hansen testified, although he
referred to that December date in connection with his personal
schedule, he “did not intend in any manner to imply that a
24
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23648
PageID #:
transaction should be completed prior to the time that the
parties were able to address all of their legal obligations and
responsibilities relating to a transaction.
It was simply
informational regarding my vacation schedule.”
Hansen Decl.
¶ 31, ECF No. 646, PageID # 23159.
On December 7, 2012, LVA changed its engagement letter
to indicate that it was working for Nicholas L. Saakvitne,
Trustee of the Proposed Bowers + Kubota Employee Stock Ownership
Plan and Trust.
Compare Joint Ex. 20 with Joint Ex. 30; Kniesel
Test., ECF No. 630, PageID # 20749.
The engagement letter signed
by Saakvitne now stated that LVA prepare an analysis concerning
the fair market value of the Company’s stock and addressing
whether the price the ESOP was paying for the stock was greater
than its fair market value, whether the terms of a loan were at
least as favorable to the ESOP as a comparable loan from an arm’s
length negotiation, and whether any sale was fair to the ESOP
from a financial point of view.
See Joint Ex. 30.
On December 11, 2012, LVA sent Saakvitne a preliminary
valuation of the Company, indicating a value range of $37,470,000
to $41,250,000.
See Def. Ex. 136 (LIBRA-DOL INV 005537)
(indicating that the email was sent on December 11, 2012, at 3:30
p.m. EST).
Saakvitne had this preliminary valuation when he
agreed to the terms of the sale.
See Joint Ex. 136 at
Bowers/Kubota 018239 (email sent on December 11, 2012, at 4:55 pm
25
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23649
PST, which is 7:55 EST).
PageID #:
Apparently, Saakvitne also talked with
Kniesel, of LVA, that same day.
See Govt. Ex. 74 at SAK000049
(admitted into evidence on June 24, 2021, ECF No. 631, PageID
# 20994, but not mentioned in the minutes for that day).
Of
course, the agreement on the price was only preliminary, as the
closing documents were not executed until three days later and
the parties knew of the requirement that an independent appraiser
had to determine that the sale price did not exceed fair market
value.
On December 14, 2012, LVA sent Saakvitne a summary of
its valuation regarding the fair market value of the Company’s
stock.
See Joint Ex. 34.
LVA concluded that the fair market
price of the Company’s stock was $40.15 per share based on the
1,000,000 shares of the Company in existence.
at DOL 003415.
See Joint Ex. 34
Because the purchase price of $40,000,000 was
slightly less than the $40,150,000 value LVA determined the
Company was worth, LVA concluded that “the price paid by the ESOP
to acquire the Common Stock in the Transaction is not greater
than the fair market value of the Common Stock.”
Id.
Saakvitne
himself therefore viewed the proposed purchase price of
$40,000,000 as not exceeding the fair market value of the shares.
See Joint Ex. 35 at RHYL000481.
In its letter dated December 14,
2012, LVA also said that the terms of the loans to the ESOP from
Bowers and Kubota were “at least as favorable to the ESOP, from a
26
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23650
PageID #:
financial standpoint, as would be the terms of a comparable loan
resulting from arm’s-length negotiation between independent
parties.”
Joint Ex. 34 at DOL 003416.
LVA further determined
that the transaction was fair to the ESOP from a financial point
of view.
Id.
LVA’s actual evaluation of the Company as of December
14, 2012, was attached to its summary.
See Joint Exhibit 47.
Saakvitne would have had this evaluation in hand when he entered
into the stock purchase agreement dated the same day.
See
Exhibit 36.
Saakvitne apparently documented and billed for only
30.1 hours of work before the Company sold its stock to the ESOP.
See Govt. Ex. 74.
The Government’s expert, Mark Johnson, opined
that Saakvitne had clearly rushed the transaction, doing only
minimal work and improperly relying on Kniesel, who Johnson said
did not qualify as an independent appraiser, given his prior work
for Bowers and Kubota.
See Decl. of Mark Johnson ¶¶ 22(a) and
(f), ECF No. 636, PageID #s 21339-40; Test. of Mark Johnson ECF
No. 630, PageID # 20856.
Gregory K. Brown, a defense expert with
45 years of legal practice involving ERISA, differed with
Johnson’s assessment, testifying that Saakvitne’s due diligence
was sufficient and consistent with those of ERISA fiduciaries.
Brown characterized the sale of the Company as “relatively
straightforward,” noting that “[a] more complicated transaction
27
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23651
would have required more due diligence.”
PageID #:
Amd. Decl. of Gregory
K. Brown ¶¶ 7, 33, 50, ECF No. 648, PageID #s 23181, 23196-97,
23207.
Faced with these dueling opinions, this court turns to
examining who bears the burden of proving either a deficiency in
Saakvitne’s performance as the ESOP trustee, or Saakvitne’s
satisfactory performance.
It is the Government, as the
plaintiff, that must prove Saakvitne’s failings.
The
Government’s expert, Johnson, did not detail what kind of review
another trustee might have done.
Instead, he simply concluded,
“Rather than taking the time to properly supervise and evaluate
the process, [Saakvitne] seemed proud of bringing the transaction
to conclusion based [on] a tight and entirely artificial time
frame.”
See Johnson Decl. ¶ 22(f), ECF No. 636, PageID # 21340;
see also Johnson Test., ECF No. 630, PageID # 3-138 (stating that
Saakvitne only spent 28 hours working on the transaction, but not
quantifying whether 28 hours is more or less than one would
expect based on comparably complex transactions).
This is
insufficient to meet the Government’s burden.
The court is not, however, suggesting that the
Government was acting on a mere whim in questioning Saakvitne’s
reliance on a valuation provided by the very appraiser who had
previously provided a preliminary fair market value to the Board
of Trustees of the Proposed Bowers + Kubota Employee Stock
28
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23652
Ownership Plan before Saakvitne became the ESOP trustee.
PageID #:
For
that reason, this court takes the time to study with some care
what LVA did.
K.
LVA’s Valuation dated December 14, 2012.
LVA used three methods to determine the value of the
Company: 1) the guideline public company method, 2) the industry
acquisitions method, and 3) the discounted cash flow method.
See
Joint Ex. 47 at DOL 000239.
Under the guideline public company method, LVA compared
the Company to other publicly traded companies, concluding that
the value of a 100 percent controlling interest in the Company
using this method was $44,590,000.
See Joint Ex. 47 at DOL
000236-37.
Under the industry acquisition method, LVA examined the
sale prices of other comparable companies, concluding that the
value of a controlling interest in the Company using this method
was $42,250,000.
See Joint Ex. 47 at DOL 000237-38.
Under the discounted cash flow method, LVA examined the
Company’s projected cash flow, including the residual value of
the Company at the end of the forecasting horizon.
LVA then
discounted that amount by 18 percent to reflect the Company’s
present value.
See Joint Ex. 47 at DOL 000238-39; Joint Ex. 47,
Ex. 14 at DOL 000265.
LVA then added a control premium of 30
percent after examining other companies and determined that the
29
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23653
PageID #:
value of a 100 percent controlling interest in the Company under
the discounted cash flow method was $40,390,000.
47 at DOL 000239-40;
See Joint Ex.
Joint Ex. 47, Ex. 14 at DOL 000265.
While the Government says that the LVA valuation is
flawed because it used the 2012 projected EBITDA of $9.24 million
in its discounted cash flow analysis, see Government’s Proposed
Finding of Fact ¶ 92, ECF No. 655, PageID # 23561, LVA does not
appear to have done that.
See Joint Ex. 47 at DOL 000238-39
(noting that “[t]he analysis for the DCF Method is based on . . .
projected income statements after an adjustment has been made . .
. to include income taxes at a 40 percent rate”).
Id. at DOL
000238.
LVA assigned greater weight to the discounted cash flow
method “because Management projects moderately lower, but
increasing, profitability through 2017.”
000239.
See Joint Ex. 47 at DOL
LVA assigned the discounted cash flow method a weight
equal to the weight of the other two methods combined.
Balancing
the three methods, LVA concluded that a 100 percent controlling
interest in the Company was worth $41,910,000.
Id.
LVA viewed the Company as having $5,328,000 in excess
cash and marketable securities.
See Joint Ex. 47 at DOL 000231;
Joint Ex. 47, Ex. 1 at DOL 000251.
It therefore added that
amount to the $41,910,000 to reach an aggregate fair market value
30
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23654
PageID #:
of $47,240,000 for a controlling interest in the company.
See
Joint Ex. 47 at DOL 000239.
Recognizing that there was a limited market for a
controlling interest in an entity like the Company, LVA then
applied a 15 percent discount for lack of marketability.
Joint Ex. 47 at DOL 000245.
See
This meant that LVA subtracted
$7,090,000 (representing a rounded 15 percent) from $47,240,000
for a total value of the Company of $40,150,000, leaving a pershare value of $40.15 for each of the million shares.
See Joint
Ex. 47 at DOL 000246; Joint Ex. 47, Exhibit 16 at DOL 000267.
The Government’s expert, Sherman, criticizes LVA’s
analysis as relying, in part, on an allegedly inflated projected
EBITDA of $9,235,000.
Sherman notes that that figure exceeded
the Company’s historical numbers.
See Joint Ex. 47, Ex. 5 at DOL
000255; Sherman Test., ECF No. 631, PageID #s 20923, 20953.
According to Sherman, a more appropriate EBITDA would have been
$4,849,000, which would have yielded a value of only $21,821,000
under the guideline publicly traded company method (projected
2012 EBITDA of $9,240,000 x 4.5 multiple = $41,580,000 vs.
“corrected” 2012 EBITDA of $4,849,000 x 4.5 multiple =
$21,821,000).
# 21324.
See Sherman Decl. ¶ 190, ECF No. 635, PageID
Using the “corrected” EBITDA in a merged or acquired
company analysis, Sherman says that the Company would have been
31
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23655
worth $26,670,000.
PageID #:
See Sherman Decl. ¶ 197, ECF No. 635, PageID
# 21325.
Sherman also criticized LVA’s report for having relied
on projections that he did not think were supportable.
He says
profitability should have been lower given the Company’s
historical results.
# 20950.
See Sherman Test., ECF No. 631, PageID
Defense expert Ian C. Rusk, however, noted that
Sherman’s dismissal of Bowers and Kubota’s projections as not
supported by historical results was in error.
Company had actually achieved similar earnings.
Rusk says that the
Because the
Company’s earnings were trending upward in 2012 and because of a
backlog of contracts, Rusk says the projections were not
inaccurate.
See Decl. of Ian C. Rusk ¶¶ 22-24, ECF No. 622,
PageID #s 20159-60.
The court finds that Sherman’s “corrected”
EBITDA
should have taken into account those relevant circumstances
identified by Rusk, and the failure to do so renders Sherman’s
EBITDA unreliable.
Additionally, Sherman should have known that
his “corrected” EBITDA was too low because the actual EBITDA as
of December 31, 2012, was $7,047,000.
000138.
See Joint Ex. 49 at DOL
Although Sherman was supposed to base his appraisal only
on circumstances existing on or before December 14, 2012, the
actual EBITDA as of December 31, 2012, should have at least
caused him to reexamine the historical results that he claimed
32
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23656
required him to “correct” the EBITDA to only $4,849,000.
PageID #:
The
Company’s earnings in 2010 and 2011, placed against the upward
trend the Company experienced in 2012 and the Company’s backlog
of contracts, justified a higher EBITDA, further demonstrating
the unreliability of Sherman’s “corrected” EBITDA.
In November 2012, Bowers sent LVA revenue growth
projections for 2014 through 2017.
percent growth rate.
# 20402.
Those projections used a 5
See Bowers Test., ECF No. 628, PageID
After 2012, the actual growth rate of the company
ranged between 10 and 14 percent, meaning that Bowers actually
understated the growth rate in November 2012.
See id., PageID
# 20403.
L.
Post-Transaction Valuations of the Company.
Up to now, these findings of fact have focused on how
the Company was valued before being sold to the ESOP.
But the
court also has before it numerous after-the-fact valuations,
most, but not all, provided by expert witnesses for the precise
purpose of persuading this court in this case.
1. LVA’s 2013 Valuation.
On June 7, 2013, LVA issued a valuation report for the
Company as of December 31, 2012.
With an effective date of just
two weeks after the sale, this report set the value of the
Company at $6,530,000, or $6.53 per share.
DOL 000130.
See Joint Ex. 49 at
Obviously, these figures were a far cry from LVA’s
33
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PageID #:
earlier valuation of $40.15 per share as of December 14, 2012.
The reason for this marked drop is that the later valuation took
into account the Company’s obligations relating to the sale of
Company stock to the ESOP.
While it was the ESOP that entered
into a loan agreement under which the ESOP would pay Bowers
$20,400,000 and Kubota $19,600,000 for their shares in the
Company, the Company itself, on December 14, 2012, guaranteed the
ESOP’s obligations to make those loan payments.
Joint Ex. 43.
See Guaranty,
This caused LVA, after the sale, to treat the
loans as Company debt in its valuation as of December 31, 2012.
Exhibit 1 to Joint Exhibit 49 reflects LVA’s treatment
of the ESOP’s debt as a Company liability, leaving the Company
with $11,738,000 in assets but $45,306,000 in liabilities.
Joint Ex 49, Ex. 1 at DOL 000134.
See
Because of the high level of
debt, LVA did not use the discounted cash flow method that it had
used in its valuation as of December 14, 2012.
at DOL 000119.
See Joint Ex. 49
The debt also caused LVA to adjust what the
Company could be sold for and/or what comparable companies were
worth.
See Joint Ex. 49 at DOL 000122-23.
Given these
circumstances, the later LVA valuation does not assist this court
in determining the value of the Company on the date of the sale,
December 14, 2012.
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2.
PageID #:
Steven J. Sherman.
Sherman, a CPA, currently works as a managing director
at Loop Capital Financial Consulting.
than 30 years with KPMG LLP.
He previously spent more
See Decl. of Steven J. Sherman
¶¶ 1-6, ECF No. 535, PageID #s 21274-75.
The court qualified Sherman as an expert witness for
the Government with respect to the fair market value of the
Company as of December 14, 2012, as well as with respect to
analyzing LVA’s valuation of that date.
See ECF No. 631, PageID
#s 21051, 21053-54.
Sherman testified that, on December 14, 2012, the
Company was worth $26.9 million.
No. 635, PageID # 21282.
See Sherman Decl. ¶ 635, ECF
According to Sherman, the Company had a
fair market value of $32,197,000, from which he deducted 7
percent ($2,254,000) for lack of marketability.
Sherman then
deducted an additional $2,994,000 in light of the ESOP’s “limited
control.”
See Sherman Decl. ¶¶ 163, 168, 171, ECF No. 635,
PageID #s 21310 and 21311.
For reasons detailed in the
paragraphs below, this court finds that Sherman significantly and
unreasonably undervalued the Company.
Not only does this render
his ultimate valuation unreliable, it also undermines the
usefulness of his critique of LVA’s valuation.
The court begins its consideration of Sherman’s
valuation by noting that he appears to have ignored the Uniform
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Standards of Professional Appraisal Practice (“USPAP”) in
appraising the Company.
According to Kenneth J. Pia, an expert
witness for the defense, application of USPAP was mandatory.
See
Decl. of Kenneth J. Pia ¶¶ 15 n.1, 18-19, 24(C), ECF No. 650,
PageID #s 21240-42; Test. of Kenneth J. Pia, ECF No. 632, PageID
# 21117.
Pia says that Sherman’s failure to follow USPAP
“introduced substantial errors” into Sherman’s analysis.
Pia
Decl. ¶ 19, ECF No. 650, PageID # 21241.
Specifically, Pia testified that Sherman should have
interviewed Company management and that the failure to do so
violated USPAP’s scope of work and competency rules, which
require research and analysis to be sufficient to produce
credible results and to be conducted in a manner that is not
careless or negligent.
650, PageID #s 21241-42.
Pia Decl. ¶¶ 19, 24(I)(A)-(B), ECF No.
Pia noted that Sherman erred in how he
treated subconsultant fees, and that the error could have been
avoided by questioning Company management.
It turns out that,
when the Company retained subconsultants, it passed to clients
any fees charged by those subconsultants without any markup.
Pia
Decl. 24(I)(G)(3), ECF No. 650, PageID # 23249; Bowers Test., ECF
No. 628, PageID # 20413; Nishihara Test., ECF No. 629, PageID
# 20528.
Sherman, however, treated those pass-through
subconsultant fees as Company expenses, which Sherman then
deducted in calculating the Company’s value.
36
Pia pointed to this
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error as one reason that Sherman reached an erroneously low
Company value.
See Test. of Kenneth K. Pia, ECF No. 632, PageID
# 21131-32, 21134-35.
This court recognizes that, in the context of a lawsuit
over valuation, a plaintiff’s expert does not typically have a
way to interview a defendant or a defendant’s managers.
The
court is conscious that it should not rule in a way that would
make it nearly impossible for any plaintiff’s expert to render a
credible opinion on valuation.
At the same, time, plaintiff’s
attorneys typically depose defendants and their managers or
agents and may thereby obtain information needed by expert
witnesses.
Here, Sherman appears to have proceeded without the
benefit of information that would have helped him to avoid the
error concerning subconsultant fees.
Sherman conceded that he
treated $10.521 million as subconsultant expenses, which he
deducted in determining the value of the Company as of December
14, 2012.
See Sherman Test., ECF No. 631, PageID # 20926.
This
was a notable error.
Moreover, the basis for that $10.521 million figure
remains unclear.
See Sherman Decl. ¶ 212, ECF No. 635, PageID
# 21327 (referring to $2.9 million in subconsultant fees in
2012); see also Joint Ex. 49 at DOL 000135 (Dec. 12, 2012, LVA
report referring to $2.923 million in subconsultant fees).
Whatever the correct amount of subconsultant fees might have
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been, Sherman treated those fees as amounting to $10.521 million
and as being Company expenses.
His resulting valuation of the
Company was correspondingly too low.
Sherman had a separate deduction of $2,994,000 from his
valuation to reflect what he called “limited control.”
Sherman Decl., ECF No. 635, PageID # 21292.
See
This “limited
control” discount related to Sherman’s conclusion that, after the
sale, Bowers and Kubota continued to exercise meaningful control
over the Company.
According to Sherman, this was evidenced by
the significant bonuses the Company paid them without documenting
approval by Saakvitne.
See Sherman Decl. ¶¶ 169, 171, ECF No.
635, PageID # 21312.
Pia faults Sherman for basing his “limited control”
discount on matters occurring after December 14, 2012.
According
to Pia, USPAP Advisory Opinion No. 34 states:
A retrospective appraisal is complicated by
the fact that the appraiser already knows
what occurred in the market after the
effective date of the appraisal. With market
evidence that data subsequent to the
effective date was consistent with market
expectations as of the effective date, the
subsequent data should be used. In the
absence of such evidence, the effective date
should be used as the cut-off date for data
considered by the appraiser.
Pia also says the American Institute of Certified Public
Accountants Statement of Standards for Valuation Service Number
One similarly states that “the valuation analyst should consider
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only circumstances existing at the valuation date and events
occurring up to the valuation date.”
PageID # 23244.
Pia Decl., ECF No 650,
Sherman’s reliance on matters occurring after
the sale to apply the limited control discount appears to the
court to have contravened the appraisal standards limiting the
facts to be considered.
As a result, Sherman improperly
decreased the value of the Company by $2,994,000.
Moreover, as Pia testified, when principals sell a
company to an ESOP, the ESOP does not then get unfettered control
over the Company.
# 23261.
See Pia Decl. ¶ 24(VI)(C), ECF No. 650, PageID
The record does not establish that Saakvitne had an
absolute right to approve or disapprove the compensation paid to
Bowers and Kubota.
Sherman’s erroneous treatment of subconsultant fees and
his consideration of after-the-sale developments to calculate a
“limited control” discount amounted to an undervaluation of
$13,515,000 ($10,521,000 + $2,994,000).
If this amount were
added to Sherman’s value of $26,900,000, the total would be
$40,415,000.
In short, Sherman does not credibly undermine LVA’s
valuation as of December 14, 2012.
3.
Kenneth J. Pia.
The court qualified Pia, Bowers and Kubota’s retained
expert, to provide an independent valuation of the Company as of
December 14, 2012, and to review LVA’s valuation and fairness
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opinions.
PageID #:
See Test. of Kenneth J. Pia, ECF No. 632, PageID
# 21110.
Pia is a CPA with more than 30 years of experience.
works for Marcum, LLP.
He
See Decl. of Kenneth J. Pia ¶¶ 4-5, ECF
No. 650, PageID # 23228-29.
Pia opined that the fair market value of the Company on
December 14, 2012, was $43.20 million, or $43.20 per share.
See
Decl. of Kenneth J. Pia ¶ 10, ECF No. 650, PageID # 23238.
Pia opined that Kniesel’s conclusions of the fair
market value range “were within a reasonable range.”
See Decl.
of Kenneth J. Pia ¶ 16, ECF No. 650, PageID # 23240.
As already noted earlier in these findings of fact, Pia
was helpful to the court in evaluating Sherman’s opinion.
As to
Pia’s additional opinion that the Company was worth $43.20
million, this court, while understanding that that opinion is
offered by the defense as validation of LVA’s valuation, sees no
need to determine whether the Company was in fact worth $43.20
million as of December 14, 2012.
The court finds that the $40
million sale price did not exceed fair market value.
The court
is not in need of further validation of the actual sale price of
$40 million.
4.
Ian C. Rusk.
The court qualified Ian C. Rusk as a defense expert to
provide opinions with respect to the fair market value of 100
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percent of the shares of the Company as of December 14, 2012.
Test. of Ian C. Rusk, ECF No. 631, PageID # 21060; Decl. of Ian
C. Rusk ¶ 1, ECF No. 622, PageID # 20146.
Rusk is a professional business appraiser.
See Rusk
Decl. ¶ 4, ECF No. 622, PageID # 20147.
Rusk testified that the fair market value of a
nonmarketable controlling interest in the Company as of December
14, 2012, was $43,050,000 or $43.05 per share.
¶ 11, ECF No. 622, PageID # 20154.
See Rusk Decl.
Rusk reasoned that the fair
market value of the Company on a controlling interest basis was
$44,600,000, but that there was a potential for dilution of the
Company’s stock.
He therefore deducted 3.5 percent, or
$1,550,000, leading to a value of $43,050,000.
See Rusk Decl.
¶¶ 16-17, ECF No. 622, PageID #s 20155-56.
As with Pia’s valuation opinion, Rusk’s valuation
opinion would be important only if the Government had mounted a
credible challenge to the actual sale price.
The court does,
however, find Rusk’s identification of certain aspects of the
Company’s finances helpful.
In particular, the court credits
Rusk for his discussion about the Company’s EBITDA and about the
upward trend the Company was experiencing in 2012.
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M.
PageID #:
The Sale Price Did Not Exceed the Fair Market
Value of the Company as of December 14, 2012.
Having reviewed the evidence going to the value of the
Company as of December 14, 2012, the court here summarizes that
evidence and finds that the sale price of $40,000,000 did not
exceed the fair market value of the Company as of December 14,
2012.
In the first place, the URS nonbinding preliminary
indication of interest is not relevant to (and certainly does not
establish) the fair market value of the Company.
No agreement
was ever reached between the Company and URS.
GMK valued the Company at approximately $39.7 million.
This figure appears to have been based on limited data, and GMK
ultimately withdrew from its role as an appraiser for the
Company.
These circumstances make this court hesitant to rely on
the GMK valuation in determining the value of the Company as of
December 14, 2014.
LVA then stepped in to perform an analysis and, on
November 21, 2012, preliminarily determined for the Board of
Trustees of the Proposed Bowers + Kubota Employee Stock Ownership
Plan and Trust that the “ESOP Controlling Interest Value” was
between $37,090,000 and $41,620,000.
See Joint Ex. 20.
LVA was subsequently retained by Saakvitne and gave him
its determination that the Company had a value of $40,150,000 as
of December 14, 2012.
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Bowers and Kubota sold their shares in the Company to
the ESOP for $40,000,000.
The Government pointed to a number of
circumstances that the Government viewed as suspicious.
The
Government raised concerns that Saakvitne had spent very little
time working on the matter before agreeing on a price and on the
terms of the sale of the Company shares to the ESOP.
But
Saakvitne actually negotiated significant benefits for the ESOP,
and the amount of time Saakvitne billed for is by no means proof
of carelessness or negligence on his part.
The Government also voiced concern about Saakvitne’s
reliance on LVA to provide an independent valuation, when LVA had
already provided a preliminary determination of value before
Saakvitne became the ESOP trustee.
To complicate matters
further, LVA had Kuba’s limited valuation, which ended up being
in the same ballpark as LVA’s opinion.
In aid of showing that
Saakvitne’s reliance on LVA was problematic, the Government
presented the opinions of its expert, Sherman, who
Company at $26,900,000 as of December 14, 2012.
valued the
Unfortunately
for the Government, however, Sherman’s opinion contained notable
errors that may have amounted to an undervaluation of $13,515,000
($10,521,000 relating to subconsultant fees + $2,994,000 relating
to a “limited control” discount).
If $13,515,000 is added to his
value of $26,900,000, the total is $40,415,000, which is very
close to the actual sale price.
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Taking into account all of the evidence presented, this
court finds that the Company was not sold for more than fair
market value.
N.
The Limitations Defense.
Bowers and Kubota raised an affirmative defense
premised on the statute of limitations.
Given this court’s
valuation ruling and this court’s ultimate conclusion (detailed
in the conclusions of law) that they breached no fiduciary duty,
they no longer need to rely on that defense.
This court
nevertheless includes here its factual findings relating to that
defense, and, in the accompanying conclusions of law, discusses
that limitations issue.
Bowers and Kubota made two arguments
relevant to their limitations defense.
First, they argued that the Government was on notice of
their December 2012 sale to the ESOP from the time Form 5500 was
electronically filed in October 2013.
According to Bowers and
Kubota, the three-year limitations period began to run in October
2013, but this lawsuit was not filed until April 27, 2018.
Second, Bowers and Kubota argue that, because the
claims against them are grounded in what the Government has
asserted was a breach of fiduciary duty by Saakvitne, the
Government should have acted more promptly once it knew or should
have known about alleged deficiencies in Saakvitne’s actions in
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his capacity as the trustee of other ESOPs being reviewed by the
Government.
With respect to both arguments, this court makes the
following findings.
1.
It was Not Until December 2014 that Any
Government Official Read the Form 5500 That
Was Submitted Electronically in October 2013.
Form 5500 is an Annual Return/Report of Employee
Benefit Plan, required to be filed with the Internal Revenue
Service.
Form 5500 for the ESOP in issue in this case was filed
around October 15, 2013.
The supplemental attachments to that Form 5500
explained the transaction:
Closing on December 14, 2012, the Plan
purchased all of the issued and outstanding
shares (Shares) of common stock of the
Company and financed the purchase with two
loans (ESOP Loans) from the Sellers that are
evidenced by two executed Promissory Notes,
and pledged the Shares to the Sellers to
secure payment of the Notes. The Company
common stock is held in a trust (Trust)
established under the Plan. The loans are to
be repaid over a period of twenty five years
by Company contributions and/or distributed
dividends and/or earnings to the Plan. As
the Plan makes each payment of principal, an
appropriate percentage of stock will be
allocated to eligible employees’ accounts in
accordance with applicable regulations under
the Code. Shares vest fully upon allocation.
The loans are collateralized by the
unallocated shares of common stock and are
guaranteed by the Company. The lenders have
no rights against shares of common stock once
they are allocated under the ESOP.
Accordingly, the financial statements of the
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Plan as of December 31, 2012, and for the
year ended December 31, 2012, present
separately the assets and liabilities and
changes therein pertaining to:
B The accounts of employees with vested
rights in allocated common stock (Allocated)
and
B Common stock not yet allocated to employees
(Unallocated).
Joint Ex. 62 at Page 17 of 32.
Apparently, the Form 5500 was also submitted to the
Department of Labor via EFAST2.
According to Marianne Gibbs, the
ERISA Filing Acceptance Program Manager for the Office of the
Chief Information Officer in the Department of Labor, EFAST2
collects information for the Government and discloses that
information to the public and the Government.
See Test. of
Marianne Gibbs, ECF No. 632, PageID # 21216; Decl. of Marianne
Gibbs ¶ 1, ECF No. 644, PageID #s 23140-01.
Gibbs testified that
the Government electronically receives a million filings per year
via EFAST2 and does not have employees assigned to regularly read
those filings.
Id., PageID #s 21217-18, 21231.
Nothing in the record establishes that anyone in the
Government actually read the Form 5500 when it was submitted in
2013.
Instead, the record establishes that Michael Wen, Senior
Investigator for the United States Department of Labor, Employee
Benefits Security Administration, first read the relevant Form
5500 in December 2014.
Decl. of Michael Wen ¶ 1, ECF No. 637,
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PageID #:
PageID #s 21345; Depo. Desig. of Michael Wen, ECF No. 643-4,
PageID #s 21934-35; Decl. of Crisanta Johnson ¶ 53, ECF No. 623,
PageID #s 20185; See Depo. Desig. of Robert Prunty, ECF No. 6432, PageID #s 21712-13.
The legal import of this fact is
addressed in the conclusions of law.
2.
No Government Official Involved with Looking
at Saakvitne’s Performance as a Trustee for
other ESOPs Was Actually Prompted By Anything
About those other ESOPs to Examine
Saakvitne’s Performance as a Trustee for the
ESOP in Issue in This Case.
In December 2014, Michael Wen of the Department of
Labor was told by his supervisor to “find some ESOP cases in
Hawaii.”
Depo. Desig. of Michael Wen, ECF No. 643-4, PageID
# 21934.
Wen then used the Government’s ERISA data system to
identify leveraged ESOPs with an asset value over either $1
million or $5 million.
Company’s ESOP.
The ERISA data system identified the
Id.
Wen’s supervisor was Miguel Paredes.
See Depo. Desig.
of Miguel Paredes, ECF No. 643-5, PageID #s 22189, 22192-93.
Paredes testified that the Government began investigating
Saakvitne in 2014 and was concerned about his actions.
Id.,
PageID #s 22195, 22264.
Having identified the Company’s ESOP, Wen turned to
Dorian Hanzich, then a senior investigator for the Department of
Labor and now a financial analyst for it, who then reviewed the
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GMK and LVA valuation reports, as well as the Company’s financial
statements, determining while performing preliminary diagnostics
for the Department of Labor that the sale price must have been
predetermined and that the ESOP had paid significantly more than
fair market value.
See Depo. Desig. of Dorian Hanzich, ECF No.
643-1, PageID #s 21469-70, 21483, 21500-01, 21513.
Robert Prunty of the Department of Labor spoke with
Saakvitne in mid-2014 about another investigation the Department
of Labor was conducting involving the Hot Dog on a Stick ESOP,
which Saakvitne was the trustee of.
See Depo. Desig. of Robert
Prunty, ECF No. 643-2, PageID #s 21680-81, 21686.
Prunty did not
speak to Wen about the Company’s ESOP before December 2014, and
it was not until early 2017 that Prunty began investigating the
Company’s ESOP.
Id., PageID # 21686, 21694.
According to
Prunty, the EFAST2 system was not set up in a way that would have
allowed a Government investigator to use Form 5500 filings to
identify multiple ESOPs a particular person was involved with.
Id., PageID # 21715.
Prunty testified that neither Wen nor
Hanzich had worked on the Hot Dog on a Stick investigation.
Depo. Desig. of Robert Prunty, ECF No. 643-3, PageID # 21891.
other words, the mere existence of the Hot Dog on a Stick
investigation did not lead anyone to look at Saakvitne’s work
with the Company’s ESOP.
48
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The court received evidence regarding the issue of
whether an earlier investigation involving Saakvitne might have
alerted the Department of Labor to look at Saakvitne’s other
work, such as with the ESOP in issue here.
Jerome Raguero of the
Department of Labor (and its Rule 30(b)(6) representative for
deposition purposes) testified that, when the Department of Labor
investigates an ESOP, it does not generally ask about other ESOPs
a person might be involved with, but that there was no policy
prohibiting such questions.
See Depo. Desig. of Jerome Raguero,
ECF No. 643-7, PageID #s 22442, 22488, 22491.
Raguero also
testified that the Department of Labor does not have policies
with respect to flagging ESOP transactions from the Form 5500s.
Id., PageID # 22519.
Paul Zielinski of the Department of Labor
first heard of Saakvitne through the Hot Dog on a Stick
investigation.
See Depo. Desig. of Paul Zielinski, ECF No. 643-
8, PageID #s 22612, 22643.
Zielinski said investigators could
ask witnesses about their involvement with other ESOPs.
Id.,
PageID # 22647.
In fact, the Department of Labor’s Ty Fukumoto said
that an investigator “would definitely ask” about other clients
that a service provider might be working with.
See Depo. Desig.
of Ty Fukumoto, ECF No. 643-9, PageID #s 22849, 22766.
He
testified that the Department of Labor used Form 5500s to help it
decide which ESOPs it should investigate.
49
Id., PageID # 22791.
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Fukumoto became aware of Saakvitne in the mid-2000s, when
Saakvitne was working with abandoned 401(k) plans.
#s 22820-21.
Id., PageID
He said that it was “very possible that in talking
to Mr. Saakvitne or gathering information . . . additional
investigations were opened as a result.”
Id., PageID # 22849.
On or about June 15, 2016, Wen prepared a Major Case
Submission relating to the ESOP at issue in this case.
Depo. Desig., ECF No. 643-4, PageID # 22038.
See Wen
Wen explained that
the case was “opened . . . due to a more than $30 million
decrease in the company stock valuation after the ESOP purchased
100 percent of the common stock in 2012.”
Id., PageID # 22041.
Of course, as noted above, the decrease in valuation flowed from
the debt incurred when the ESOP purchased the Company’s stock and
the Company guaranteed the ESOP’s payment of the purchase price.
The court takes judicial notice of a matter that does
not appear to be in dispute, which is that, in October 2017, the
Government, the Company, and Bowers and Kubota in their
individual capacities, agreed to toll the statute of limitations
under ERISA effective October 16, 2017, to April 30, 2018.
See
ECF No. 367-2, PageID #s 7607-12 (copy of tolling agreement
marked as Defense Ex. 241 but not offered into evidence).
The legal import of the facts set forth above
concerning Department of Labor investigations is addressed in
this court’s conclusions of law.
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III.
PageID #:
CONCLUSIONS OF LAW.
A.
Jurisdiction.
The Company’s ESOP is an employee benefit plan as
defined by ERISA.
See 29 U.S.C. § 1002(3) (“The term ‘employee
benefit plan’ or ‘plan’ means an employee welfare benefit plan or
an employee pension benefit plan or a plan which is both an
employee welfare benefit plan and an employee pension benefit
plan.”).
The ESOP is governed by the applicable provisions of
subchapter I of ERISA, 29 U.S.C. §§ 1001 to 1191d.
See 29 U.S.C.
§ 1003(a)(1) (“this subchapter shall apply to any employee
benefit plan if it is established or maintained-(1) by any employer engaged in commerce or in any industry or
activity affecting commerce”).
This Court has jurisdiction over this action pursuant
to 29 U.S.C. §§ 1132(a)(2) and (5) (“A civil action may be
brought . . . (2) by the Secretary . . . for appropriate relief
under section 1109 of this title . . . ; [or] (5) . . . (A) to
enjoin any act or practice which violates any provision of this
subchapter, or (B) to obtain other appropriate equitable relief
(i) to redress such violation or (ii) to enforce any provision of
this subchapter.”).
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B.
PageID #:
The Alleged Failure of Bowers and Kubota To
Discharge Fiduciary Duties with the Proper Care,
Skill, Prudence, and Diligence in Violation of 29
U.S.C. § 1104(a)(1)(A), (B), and (D) (Complaint
¶ 37).
Paragraph 37 of the Complaint asserts violations of 29
U.S.C. § 1104(a)(1)(A), (B), and (D).
Those provisions state:
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d),
1342, and 1344 of this title, a fiduciary
shall discharge his duties with respect to a
plan solely in the interest of the
participants and beneficiaries and–
(A) for the exclusive purpose of:
(i) providing benefits to
participants and their beneficiaries; and
(ii) defraying reasonable expenses
of administering the plan;
(B) with the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent man acting in a
like capacity and familiar with such matters
would use in the conduct of an enterprise of
a like character and with like aims; [and]
. . . .
(D) in accordance with the documents and
instruments governing the plan insofar as
such documents and instruments are consistent
with the provisions of this subchapter and
subchapter III.
In relevant part, ERISA defines a fiduciary as follows:
a person is a fiduciary with respect to a
plan to the extent (i) he exercises any
discretionary authority or discretionary
control respecting management of such plan or
exercises any authority or control respecting
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management or disposition of its assets,
(ii) he renders investment advice for a fee
or other compensation, direct or indirect,
with respect to any moneys or other property
of such plan, or has any authority or
responsibility to do so, or (iii) he has any
discretionary authority or discretionary
responsibility in the administration of such
plan. . . .
29 U.S.C. § 1002(21)(A).
“ERISA ‘defines ‘fiduciary’ not in terms of formal
trusteeship, but in functional terms of control and authority
over the plan.’”
Johnson v. Couturier, 572 F.3d 1067, 1076 (9th
Cir. 2009) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 262
(1993)).
The Ninth Circuit “construe[s] ERISA fiduciary status
‘liberally, consistent with ERISA’s policies and objectives.’”
Id. (quoting Ariz. State Carpenters Pension Tr. Fund v. Citibank,
125 F.3d 715, 720 (9th Cir. 1997)); see also LeGras v. AETNA Life
Ins. Co., 786 F.3d 1233, 1236 (9th Cir. 2015) (“we have repeatedly
stated that ERISA is remedial legislation that should be
construed liberally to protect participants in employee benefits
plans.” (alteration signals, quotation marks, and citation
omitted)); Batchelor v. Oak Hill Med. Grp., 870 F.2d 1446, 1449
(9th Cir. 1989) (“ERISA is remedial legislation which should be
liberally construed in favor of protecting participants in
employee benefit plans.”).
In short, ERISA’s aim is to protect
employees in connection with plans like ESOPs.
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Members of an employer’s board of directors have ERISA
fiduciary obligations to the extent they have responsibility over
the ESOP and over the management or disposition of its assets.
See Couturier, 572 F.3d at 1076 (“We have accordingly recognized
that where members of an employer’s board of directors have
responsibility for the appointment and removal of ERISA trustees,
those directors are themselves subject to ERISA fiduciary duties,
albeit only with respect to trustee selection and retention.”).
The Department of Labor has provided guidance for fiduciaries who
sit on a board of directors:
Members of the board of directors of an
employer which maintains an employee benefit
plan will be fiduciaries only to the extent
that they have responsibility for the
functions described in section 3(21)(A) of
the [ERISA, 29 U.S.C. § 1002(21)(a)]. For
example, the board of directors may be
responsible for the selection and retention
of plan fiduciaries. In such a case, members
of the board of directors exercise
“discretionary authority or discretionary
control respecting management of such plan”
and are, therefore, fiduciaries with respect
to the plan. However, their responsibility,
and, consequently, their liability, is
limited to the selection and retention of
fiduciaries (apart from co-fiduciary
liability arising under circumstances
described in section 405(a) of the Act[, 29
U.S.C. § 1105(a)]).
29 C.F.R. § 2509.75-8(D-4).
ERISA seeks to ensure that fiduciaries who fund an ESOP
acquire employer securities for “adequate consideration.”
U.S.C. § 1108(e)(1).
29
Courts therefore recognize that “an ERISA
54
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plan and ERISA fiduciary responsibilities thereunder, can exist
even where a formal employee benefit plan ha[s] not been
adopted.”
2012).
Solis v. Webb, 931 F. Supp. 2d 936, 945 (N.D. Cal.
“A person’s actions, not the official designation of his
role, determines whether he enjoys fiduciary status, regardless
of what his agreed-upon contractual responsibilities may be.”
CSA 401(K) Plan v. Pension Pros., Inc., 195 F.3d 1135, 1138 (9th
Cir. 1999) (quotation marks and citation omitted).
In analyzing the Government’s assertions about breaches
of fiduciary duty, this court keeps firmly in mind the
Government’s burden.
A plaintiff has the burden of proving the
breach of a fiduciary duty under 29 U.S.C. § 1104 or § 1105.6
6
Because this court concludes that the Government fails to
meet its burden of establishing a breach of fiduciary duty, this
court does not go on to address whether alleged losses were or
were not caused by the breach. The subject of who bears the
burden of establishing causation has divided courts, but within
the Ninth Circuit that burden appears to rest with plaintiffs.
See Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1099
(9th Cir. 2004) (citing with approval a Sixth Circuit case for
the proposition that a “fiduciary’s failure to investigate an
investment decision alone is not sufficient to show that the
decision was not reasonable. . . . [A] plaintiff must show a
causal link between the failure to investigate and the harm
suffered by the plan.” (citation omitted)). See also Pledger v.
Reliance Tr. Co., 2019 WL 10886802, at *28 (N.D. Ga. Mar. 28,
2019). By contrast, the Eighth Circuit has stated that, “once
the ERISA plaintiff has proved a breach of fiduciary duty and a
prima facie case of loss to the plan or ill-gotten profit to the
fiduciary, the burden of persuasion shifts to the fiduciary to
prove that the loss was not caused by, or his profit was not
attributable to, the breach of duty.” Martin v. Feilen, 965 F.2d
660, 671 (8th Cir. 1992). See also Chao v. Tr. Fund Advisors,
2004 WL 444029, at *6 (D.D.C. Jan. 20, 2004).
55
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See Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir.
1994) (stating that “ERISA plaintiffs bear the burden of proving
a breach of fiduciary duty”); Ramos v. Banner Health, 461 F.
Supp. 3d 1067, 1122 (D. Colo. 2020), aff'd, 1 F.4th 769 (10th
Cir. 2021); see also Wildman v. Am. Century Servs., LLC, 362 F.
Supp. 3d 685, 700 (W.D. Mo. 2019) (“a plaintiff bears the burden
of showing the defendant breached its fiduciary duties, which
results in a prima facie case of loss to the plan”); Larson v.
Allina Health Sys., 350 F. Supp. 3d 780, 793 (D. Minn.
2018)(“ERISA plaintiffs bear the burden of proving a breach of
fiduciary duty.”).
In June 2012, after the discussions with URS fell
apart, Bowers and Kubota decided to consider a sale to an ESOP.
See Bowers Test., ECF No. 628, PageID #s 20358-59; Amd.
Bowers Decl. ¶ 24, ECF No. 640, PageID # 21379; Def. Ex. 50 (June
19, 2012, email from Bowers to Kuba and Kubota, stating, “Gary:
We may be moving in the ESOP direction.”).
June 2012 is
therefore the earliest that Bowers and Kubota could be said to
have been fiduciaries with respect to the Company’s ESOP.
Before
then, they exercised no discretionary authority, management, or
control with respect to an ESOP.
This court concludes that
Bowers and Kubota were fiduciaries as defined by ERISA from the
time they exercised discretionary authority to form the Company’s
ESOP.
56
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Bowers and Kubota generally ceased being fiduciaries
for the ESOP on December 3, 2012, when Bowers and Kubota in their
capacities as directors of the Company signed a Resolution of
Board Directors by Unanimous Written Consent Without a Meeting
that adopted the ESOP and appointed Saakvitne as the independent
fiduciary and the sole ESOP trustee, retroactively effective as
of January 1, 2012.
See Joint Ex. 28.
The Government fails to
meet its burden of proving the breach of any fiduciary duty.
This court addresses each of the fiduciary duty
allegations in Paragraph 37 of the Complaint, taking them in
order except that Paragraph 37(c) is considered last given the
nature of the fiduciary duty cited in that paragraph.
1.
Paragraph 37(a) of the Complaint.
In Paragraph 37(a) of the Complaint, the Government
asserts that Bowers and Kubota breached their fiduciary duty to
the ESOP by sending LVA inflated revenue projections for 2012.
Essential to establishing this breach is establishing
that the revenue projections were in fact inflated.
The
Government does not meet its burden of doing that.
The Government’s expert, Sherman, criticized LVA’s
analysis because it relied, in part, on an allegedly inflated
projected EBITDA of $9,235,000, which Sherman said exceeded
historical numbers.
See Joint Ex. 47, Ex. 5 at DOL 000255;
Sherman Test., ECF No. 631, PageID #s 20923, 20953.
57
He said that
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a more appropriate EBITDA would have been $4,849,000, which would
have resulted in a much lower value.
The court rejects Sherman’s
“corrected” EBITDA of $4,849,000 because, as this court found
earlier in this order, Sherman failed to take relevant
circumstances into account.
While the Government says that the LVA valuation is
also flawed because it used the 2012 projected EBITDA of $9.24
million in its discounted cash flow analysis, see Government’s
Proposed Finding of Fact ¶ 92, ECF No. 655, PageID # 23561, LVA
does not appear to have done that.
See Joint Ex. 47 at DOL
000238-39 (noting that “[t]he analysis for the DCF Method is
based on . . . projected income statements after an adjustment
has been made . . . to include income taxes at a 40 percent
rate”).
Id. at DOL 000238.
This court concludes that the Government fails to prove
by a preponderance of the evidence that Bowers or Kubota breached
a fiduciary duty relating to the revenue predictions for 2012
that they provided to LVA.
2.
Paragraph 37(b) of the Complaint.
In Paragraph 37(b) of the Complaint, the Government
asserts that Bowers and Kubota sent LVA inflated revenue
projections for 2013 to 2017.
Once again, the Government does
not establish that by a preponderance of the evidence.
As noted in this court’s findings of fact, Bowers, in
58
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November 2012, sent LVA revenue growth projections for 2014
through 2017 using a 5 percent growth rate.
See Bowers Test.,
ECF No. 628, PageID # 20402; Def. Ex. 89, Bates No. Pia 010048 or
LIBRA-DOL INV 004759.
After 2012, the actual growth rate of the
company ranged between 10 and 14 percent, meaning that Bowers
actually understated the growth rate in November 2012.
Bowers Test., ECF No. 628, PageID # 20403.
See
In short, the
Government fails to show by a preponderance of the evidence that
Bowers and Kubota breached any fiduciary duty relating to their
revenue predictions for 2013 to 2017.
3.
Paragraphs 37(d) and (e) of the Complaint.
In Paragraphs 37(d) and (e) of the Complaint, the
Government asserts that Bowers and Kubota breached their
fiduciary duty to the ESOP by relying on LVA’s preliminary and
fairness opinion.
Again, the record does not establish that
alleged breach.
To start with, Bowers and Kubota could not have
breached a duty in relying on LVA’s preliminary or fairness
opinion unless that opinion suffered from material errors or
misstatements.
The Government has not shown material errors or
misstatements.
To the contrary, this court has found that the
Company was not sold for more than fair market value, and the
sale price was nearly identical to LVA’s valuation as of December
14, 2012.
59
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In addition, as of December 7, 2012, LVA was working
for “Nicholas L. Saakvitne, Trustee of the Proposed Bowers +
Kubota Employee Stock Ownership Plan and Trust.”
30.
See Joint Ex.
Saakvitne had the exclusive right to hire an appraiser, and
it was he who relied on LVA’s fairness opinion in negotiating and
executing the sale and sale documents.
To the extent the
Government is seeking to blame Bowers and Kubota for Saakvitne’s
reliance on LVA’s opinion, such blame is not actionable unless
the opinion was materially flawed, which this court has found not
to have been the case.
Nor has the Government shown how any reliance on the
valuations damaged the Company’s ESOP.
Accordingly, this court concludes that the Government
fails to meet its burden of establishing a breach of fiduciary
duty relating to reliance on LVA’s preliminary and fairness
opinions, as alleged in Paragraphs 37(d) and (e) of the
Complaint.
4.
Paragraph 37(f) of the Complaint.
In Paragraph 37(f) of the Complaint, the Government
asserts that Bowers and Kubota breached a fiduciary duty by
causing the ESOP to purchase the Company’s stock for more than
fair market value.
This court has found that, in paying
$40,000,000 for 100 percent of the Company’s stock on December
14, 2012, the ESOP did not pay more than fair market value.
60
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finding is fatal to the claim in Paragraph 37(f) of the
Complaint.
5.
Paragraph 37(c) of the Complaint.
Paragraph 37(c) of the Complaint asserts that Bowers
and Kubota breached their limited fiduciary duty to monitor
Saakvitne after he was appointed as the ESOP’s trustee and
fiduciary.
The Government does not prove this assertion by a
preponderance of the evidence.
The Department of Labor’s published guidance discusses
the fiduciary duty to monitor a trustee, which in this case
Bowers and Kubota had even after Saakvitne’s appointment because
they exercised discretionary authority with respect to monitoring
Saakvitne:
At reasonable intervals the performance of
trustees and other fiduciaries should be
reviewed by the appointing fiduciary in such
manner as may be reasonably expected to
ensure that their performance has been in
compliance with the terms of the plan and
statutory standards, and satisfies the needs
of the plan. No single procedure will be
appropriate in all cases; the procedure
adopted may vary in accordance with the
nature of the plan and other facts and
circumstances relevant to the choice of the
procedure.
29 C.F.R. § 2509.75-8(FR-17).
This guidance is consistent with
the Plan, which states:
The Company shall have all powers necessary
to enable it to administer the Plan and the
Trust Agreement in accordance with their
provisions, including without limitation the
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following: . . . (9) reviewing the
performance of the Trustee with respect to
the Trustee’s administrative duties,
responsibilities and obligations under the
Plan and Trust Agreement.
Joint Ex. 38 § 17.03.
This court has already ruled in this case that the
power to appoint and remove a trustee gives rise to a duty to
monitor the trustee’s performance.
See ECF No. 47, PageID # 472
(citing Webb, 931 F. Supp. 2d at 953; Carr v. Int’l Game Tech.,
770 F. Supp. 2d 1080, 1090 (D. Nev. 2011)).
As noted by the
Northern District of California in In re Calpine Corporation
ERISA Litigation, 2005 WL 1431506, at *3 (N.D. Cal. Mar. 31,
2005), the duty arising from § 2509.75-8(FR-17) is “limited.”
Bowers and Kubota did not breach their limited
fiduciary duty to monitor Saakvitne to ensure that he was acting
in the best interests of the ESOP.
In its proposed Conclusions
of Law, the Government claims:
Defendants breached their fiduciary duty to
monitor Saakvitne because they knew of
Saakvitne’s misconduct, having set up the
entire transaction to facilitate it, and
failed to take remedial steps. Specifically,
Defendants set up the entire transaction
before appointing Saakvitne at the last
minute, leaving him insufficient time to do
anything but rubber stamp the prebaked
transaction set out for him by Defendants.
Defendants then watched as the pieces of
their plan fell into place, doing nothing
despite their knowledge the $40 million price
was in excess of fair market value.
ECF No. 655 ¶ 38, PageID # 23590.
62
The record does not support
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the Government’s statement.
On November 21, 2012, Hansen sent Saakvitne an email in
which Hansen told Saakvitne that Hansen was leaving town on
December 19, 2021 and that the sale would have to close by that
date.
See Govt. Ex. 58; Hansen Decl. ¶ 29, ECF No. 646, PageID
# 23158.
While that date did not give Saakvitne a lot of time to
conduct due diligence, there was actually no requirement that the
deal close in December 2012.
See Kubota Test., ECF No. 628,
PageID # 20494; Hansen Decl. ¶ 31, ECF No. 646, PageID # 23159.
At most, there were tax advantages for Bowers, Kubota, the
Company, and ESOP participants if the sale concluded by the end
of 2012.
See Amd. Kubota Decl. ¶ 55, ECF No. 639, PageID
# 21368.
That suggests that Saakvitne may have decided that the
tax benefits to the ESOP outweighed the burden of finalizing the
sale by the end of 2012.
While the Government argues that Saakvitne was forced
by the time constraint to hire LVA, the record demonstrates that
he had unfettered discretion to hire any independent appraiser,
and that he was not required to hire LVA.
See Gregory Kniesel
Test, ECF No. 630, PageID # 20751; Bowers Test., ECF No. 628,
PageID # 20419-20; Kubota Test., ECF No. 628, PageID # 20487.
Saakvitne may have decided that LVA was a well-respected
appraisal company that had already started an appraisal and that,
given the tax benefits to the ESOP and its participants, it was
63
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better to hire LVA than to delay the sale.
PageID #:
If this court is to
find any deficiency, it had to be proven by the Government.
It
was not.
Nor does the record support the Government’s suggestion
that Bowers, Kubota, and Saakvitne conspired to arrange for a $40
million sale price.
Bowers and Kubota had told Hansen that they
were hoping to sell the Company for $40,000,000.
58; Govt. Ex. 66.
See Joint Ex.
Hansen then tried to organize the process,
asking Marcus Piquet to look into a $40,000,000 loan.
Desig. of Marcus Piquet, ECF No. 591-1, PageID # 19579.
See Depo.
While
Hansen’s email to Saakvitne of November 21, 2012, mentions the
possibility of selling the Company for $40 million, see Govt. Ex.
58, that merely gave Saakvitne insight into the price Bowers and
Kubota wanted to sell their shares for.
Saakvitne’s negotiation,
see Joint Ex. 32, ended up saving the ESOP millions of dollars.
See Bowers Test., ECF No. 628, PageID # 20433; Gregory K. Brown
Test., ECF No. 631, PageID # 21049.
In the end, the ESOP did not
pay more than the fair market value for the Company, and the
Government does not identify damage to the ESOP.
As this court acknowledged earlier, the Government’s
concerns are understandable.
The Government was looking at a
high sale price that had been shared ahead of time with the ESOP
trustee.
But knowing what a seller wants does not make a buyer
complicit in wrongdoing.
The Government was also faced with an
64
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appraiser who had initially been dealing with the sellers who
were forming the ESOP, then transferred its services to the
trustee, ultimately providing an appraisal in a fairly short time
that was fairly close to the limited valuation set by GMK.
For
his part, the trustee documented only about 30 hours of work.
That the Government had suspicions and opened an investigation
appears entirely warranted.
But when the Government filed this
lawsuit, it took on the burden of proving that its suspicions
were reflected in fact.
What has happened in the trial of this
case is that the Government failed to carry that burden, not for
want of effort but for what appears to be a want of evidence.
The Government simply does not prove that Bowers or
Kubota should have better monitored Saakvitne to ensure that he
was acting in the best interests of the ESOP and to prevent the
ESOP from being damaged.
C.
Bowers and Kubota Are Not Liable for Breaches of
Fiduciary Responsibilities by Other Fiduciaries
under 29 U.S.C. § 1105(a)(1)-(3) (Complaint ¶¶ 4043).
Paragraphs 40 to 43 of the Complaint assert violations
of 29 U.S.C. §§ 1105(a)(1) to (3), which provide:
a fiduciary with respect to a plan shall be
liable for a breach of fiduciary
responsibility of another fiduciary with
respect to the same plan in the following
circumstances:
(1) if he participates knowingly in, or
knowingly undertakes to conceal, an act or
omission of such other fiduciary, knowing
65
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such act or omission is a breach;
(2) if, by his failure to comply with section
1104(a)(1) of this title in the
administration of his specific
responsibilities which give rise to his
status as a fiduciary, he has enabled such
other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such
other fiduciary, unless he makes reasonable
efforts under the circumstances to remedy the
breach.
Paragraphs 40 to 43 of the Complaint assert that Bowers
and Kubota are liable for breaches of fiduciary duties by others.
Specifically, the Government asserts that 1) Bowers and Kubota
are liable for each other’s provision of faulty financial data to
LVA; 2) Bowers and Kubota are liable for each other’s failure to
monitor Saakvitne; and 3) Bowers and Kubota are liable for
behavior by another fiduciary (such as Saakvitne) who caused the
ESOP to pay more than fair market value to purchase the Company.
See ECF No. 1, PageID #s 17-18.
1.
Bowers and Kubota Are Not Liable for
Each Other’s Provision of Allegedly
Inaccurate Financial Data to LVA in
2012.
In Joint Exhibit 48, the Company estimated its EBITDA
for 2012 as $9,284,000.
In LVA’s valuation of the Company as of
December 14, 2012, it relied on this EBITDA.
DOL 000235 and DOL 255.
See Joint Ex. 47 at
The Government’s expert, Sherman,
characterizing this estimated EBITDA for 2012 as being way off
the mark, calculated “an adjusted EBITDA projection for 2012 of
66
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$4.9 million, more in line with the Company’s historical
financial performance.”
See Sherman Decl ¶ 187, ECF No. 635,
PageID # 21323; Sherman Test., ECF No. 631, PageID # 20923.
Sherman was too quick to dismiss Bowers and Kubota’s projections
as unsupported by historical results.
Joint Exhibit 48 illustrates the projected revenue for
2012 as about only $3 million more than the projected revenue for
2011 ($22,005,000 vs. $24,964,000).
Bowers and Kubota knew the
Company had contracts due to be paid in 2012 (which Sherman
appears not to have taken into account because he did not know
about them).
Bowers and Kubota generally knew what their
expenses would be.
The Government does not establish that their
projection was unreasonably inflated.
See Decl. of Ian C. Rusk
¶¶ 22-24, ECF No. 622, PageID #s 20159-60.
Joint Exhibit 49 is LVA’s valuation of the Company as
of December 31, 2012.
It lists the actual EBITDA for the Company
in 2012 as $7,050,000 (rounded to the nearest $10,000).
See
Joint Ex. 49 at DOL 000120; Joint Ex. 49, Ex 5, DOL 000138
(listing the 2012 EBITDA as $7,047,000).
This actual amount was
not calculated until the summer of 2013; it therefore does not
prove that Bowers and Kubota are liable for having projected
inflated 2012 profits.
In November 2012, Bowers sent LVA revenue growth
projections for 2014 through 2017.
67
Those projections used a 5
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23691
percent growth rate based on historical averages.
PageID #:
See Bowers
Test., ECF No. 628, PageID # 20402; Def. Ex. 89, Bates No. Pia
010048 or LIBRA-DOL INV 004759.
After 2012, the actual growth
rate of the company ranged between 10 and 14 percent, meaning
that Bowers actually understated the growth rate in November
2012.
See Bowers Test., ECF No. 628, PageID # 20403.
The circumstances just summarized by this court
undercut the Government’s assertion that either Bowers or Kubota
bears responsibility for the other’s provision to LVA of inflated
financial projections.
2.
Bowers and Kubota Are Not Liable for Each
Other’s Failure To Monitor Saakvitne.
This court earlier ruled that the Government failed to
prove that Bowers or Kubota is liable for having failed to
monitor Saakvitne.
That ruling makes it impossible for each to
be liable for the failure of the other to monitor Saakvitne,
there having been no such failure.
3.
Bowers and Kubota Are Not Liable for Behavior
by Any Other Fiduciary That Caused or
Contributed to Payment by the ESOP of More
than Fair Market Value for the Company.
Nor does the Government prove its contention that
Bowers or Kubota is liable for another fiduciary’s actions
leading to payment by the ESOP of more than fair market value for
the Company.
This court has already found that the Government
failed to prove that the ESOP paid more than fair market value.
68
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Payment of more than fair market value being a necessary
predicate for this contention, the contention fails.
D.
Bowers and Kubota Did Not Engage in Prohibited
Transactions in Violation of 29 U.S.C. § 1106.
The Government alleges that Bowers and Kubota engaged
in transactions prohibited by ERISA in 29 U.S.C. § 1106.
Under
29 U.S.C. § 1108(e)(1), § 1106 is inapplicable when a sale to an
ESOP involves “adequate consideration.”
With respect to such
claims, the Government has the burden of establishing the
existence of a transaction that would be prohibited under § 1106.
If the Government makes that showing, the burden shifts to
Defendants to demonstrate that they satisfied the “adequate
consideration” exemption in 29 U.S.C. § 1108(e)(1). See Howard v.
Shay, 100 F.3d 1484, 1488 (9th Cir. 1996).
As set forth below, the sale to the ESOP was for
“adequate consideration.”
1.
Prohibited Transactions Between a Plan and a
Party in Interest.
Paragraphs 45 to 47 of the Complaint assert violations
of 29 U.S.C. § 1106(a)(1)(A), which provides that “[a] fiduciary
with respect to a plan shall not cause the plan to engage in a
transaction, if he knows or should know that such transaction
constitutes a direct or indirect . . . sale or exchange, or
leasing, of any property between the plan and a party in
interest.”
69
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Specifically, paragraphs 45 to 47 of the Complaint
assert that Bowers and Kubota engaged in a prohibited transaction
by causing or allowing the Company’s ESOP to purchase the stock
of the Company for more than fair market value.
Defendants meet their burden of demonstrating by a
preponderance of the evidence that the Company’s shares were
worth at least what the Company’s ESOP paid for it.
Accordingly,
there was no improper prohibited transaction for purposes of 29
U.S.C. § 1106(a)(1)(A).
2.
Prohibited Transactions with the ESOP.
Paragraphs 49 to 50 of the Complaint assert violations
of 29 U.S.C. §§ 1106(b)(1) and (2), which provide:
A fiduciary with respect to a plan shall not–
(1) deal with the assets of the plan in his
own interest or for his own account,[or]
(2) in his individual or in any other
capacity act in any transaction involving the
plan on behalf of a party (or represent a
party) whose interests are adverse to the
interests of the plan or the interests of its
participants or beneficiaries.
Specifically, paragraphs 49 and 50 of the Complaint
assert that Bowers and Kubota improperly dealt with assets of the
Company’s ESOP by acting in their own interests.
As set forth in
paragraphs 44 to 61 of the Government’s proposed conclusions of
law, these allegations are based on the alleged sale of the
Company for more than fair market value.
70
See ECF No. 655, PageID
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PageID #:
# 23595 to 23602.
This court has already determined by a preponderance of
the evidence that the Company’s ESOP did not pay more than fair
market value for the Company.
In other words, Bowers and Kubota
did not sell the Company to the ESOP in a manner detrimental to
the ESOP and favorable to them.
Accordingly, this court
concludes that Bowers and Kubota cannot be said to have violated
§ 1106, as they show that the sale was for “adequate
consideration” for purposes of § 1108(e)(1).
E.
Bowers and Kubota Are Not Individually Liable
Under 29 U.S.C. § 1132(a)(5) for Knowingly
Participating in Prohibited Transactions.
Paragraphs 52 and 53 of the Complaint assert that
Bowers and Kubota are individually liable under 29 U.S.C.
§ 1132(a)(5) for having participated in transactions prohibited
by ERISA.
Under 29 U.S.C. § 1132(a)(5), a civil action may be
brought “by the Secretary (A) to enjoin any act or practice which
violates any provision of this subchapter, or (B) to obtain other
appropriate equitable relief (i) to redress such violation or
(ii) to enforce any provision of this subchapter.”
As already set forth above, because the Government
fails to prove that Bowers and Kubota violated any provision of
ERISA with respect to the sale of the Company to the ESOP, they
have no liability under § 1132(a)(5).
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23695
F.
PageID #:
The Government’s Claims Are Not Barred by The
Statute of Limitations.
ERISA’s statute of limitations states:
No action may be commenced under this
subchapter with respect to a fiduciary’s
breach of any responsibility, duty, or
obligation under this part, or with respect
to a violation of this part, after the
earlier of–
(1) six years after (A) the date of the last
action which constituted a part of the breach
or violation, or (B) in the case of an
omission the latest date on which the
fiduciary could have cured the breach or
violation, or
(2) three years after the earliest date on
which the plaintiff had actual knowledge of
the breach or violation;
except that in the case of fraud or
concealment, such action may be commenced not
later than six years after the date of
discovery of such breach or violation.
29 U.S.C. § 1113.
Defendants have asserted as an affirmative defense the
untimeliness of the Government’s claims.
Although this
affirmative defense is no longer essential given this court’s
conclusion that the Government has not shown that the ESOP paid
more than fair market value for the Company’s shares or that
Defendants breached any fiduciary duty, this court proceeds to
discuss the limitations defense because considerable time and
effort was spent on it.
This court concludes that Defendants do
not meet their burden with respect to their limitations defense.
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23696
PageID #:
The Supreme Court last year, in Intel Corporation
Investment Policy Committee v. Sulyma, 140 S. Ct. 768, 776
(2020), discussed when a plaintiff can be said to have had
“actual knowledge” of an ERISA breach or violation such that the
three-year limitation period begins running.
“[P]otential,
possible, virtual, conceivable, theoretical, hypothetical, or
nominal” knowledge does not, without more, qualify as “actual
knowledge.”
Id.
disclosure alone.
Section 1113(2) “requires more than evidence of
That all relevant information was disclosed to
the plaintiff is no doubt relevant in judging whether he gained
knowledge of that information. . . .
To meet § 1113(2)’s ‘actual
knowledge’ requirement, however, the plaintiff must in fact have
become aware of that information.”
Id. at 777.
In Sulyma, the Court noted that actual knowledge could
be proven in the usual way, such as through testimony and
inferences from circumstantial evidence.
Id. at 779.
The Court
also noted that its decision did “not preclude defendants from
contending that evidence of ‘willful blindness’ supports a
finding of ‘actual knowledge.’”
Id. (citing Global-Tech
Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011)).
In Global-Tech, the Court saw “willful blindness” as
occurring when a person subjectively believed there was a high
probability that a fact existed but deliberately avoided learning
about that existence.
563 U.S. at 769.
73
Sulyma recognizes that
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23697
PageID #:
willful blindness can support a finding of actual knowledge.
140
S. Ct. at 779.
This court has taken judicial notice of the agreement
by the Government, the Company, and Bowers and Kubota in their
individual capacities to toll the statute of limitations under
ERISA from October 16, 2017, to April 30, 2018.
See ECF No. 367-
2, PageID #s 7607-12 (copy of tolling agreement was Defense Ex.
241 but was not introduced into evidence).
was filed on April 27, 2018.
The present Complaint
See Joint Ex. # 1; see also ECF No.
1.
1.
Actual Knowledge.
Bowers and Kubota argue that § 1113(2) bars the
Government’s claims because the Government had actual knowledge
of the facts underlying those claims more than three years before
this lawsuit was filed, even taking into account the parties’
tolling agreement.
Bowers and Kubota point to Form 5500 (the
Annual Return/Report of Employee Benefit Plan), filed with the
Internal Revenue Service and submitted to the Department of Labor
via EFAST2 on October 15, 2013.
See ECF No. 654, PageID
#s 23517-18.
For the claims in this case to be timely, the
Government cannot have had actual knowledge of the facts
underlying them more than three years before October 2017, when
the tolling agreement took effect.
74
Thus, if actual knowledge
Case 1:18-cv-00155-SOM-WRP Document 657 Filed 09/17/21 Page 75 of 78
23698
PageID #:
flowed from a filing in October 2013, then the claims in this
lawsuit are time-barred.
However, this court is not persuaded
that the mere filing of the Form 5500 in 2013 provided the
Government with actual notice.
As the Supreme Court held in
Sulyma, Ҥ 1113(2) requires more than evidence of disclosure
alone.”
140 S. Ct. at 777.
According to Marianne Gibbs, the ERISA Filing
Acceptance Program Manager for the Office of the Chief
Information Officer in the Department of Labor, the Government
electronically receives a million filings per year via EFAST2 and
does not have people reading those filings.
See Test. of
Marianne Gibbs, ECF No. 632, PageID #s 21217-18, 21231.
Moreover, the record establishes that Michael Wen, Senior
Investigator for the United States Department of Labor, Employee
Benefits Security Administration, first read the Form 5500 for
the ESOP in December 2014, which falls within the three-year
period before the tolling agreement took effect in October 2017.
Decl. of Michael Wen ¶ 1, ECF No. 637, PageID #s 21345; Depo.
Desig. of Michael Wen, ECF No. 643-4, PageID #s 21934-35; Decl.
of Crisanta Johnson ¶ 53, ECF No. 623, PageID #s 20185; See Depo.
Desig. of Robert Prunty, ECF No. 643-2, PageID #s 21712-13.
The
tolling agreement bars claims that the Government had actual
knowledge of on or before October 16, 2014.
The filing of Form
5500 in 2013 did not provide actual knowledge as that concept has
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23699
been explained in Sulyma.
PageID #:
Instead, Form 5500 was only a
disclosure that was not actually reviewed by anyone in the
Government until December 2014.
Given the nature of the
information on the form and the volume of such forms filed, it is
understandable that it was pulled up and actually reviewed more
than a year after it was filed.
2.
Willful Blindness.
Bowers and Kubota argue that the Government cannot deny
having had actual knowledge simply by ignoring facts staring the
Government in the face.
It is, of course, true that if the
Government is willfully blind, actual knowledge will be
attributed to the Government.
Bowers and Kubota base their
willful blindness argument on what they say was the Government’s
ignoring of Saakvitne’s conduct with respect to other ESOPs.
ECF No. 654, PageID #s 23518-19.
See
On this matter, the burden is
on Bowers and Kubota to prove their point.
They do not meet
their burden.
This court does have before it evidence that, in mid2014, Robert Prunty of the Department of Labor spoke with
Saakvitne concerning the investigation into the Hot Dog on a
Stick ESOP.
See Depo. Desig. of Robert Prunty, ECF No. 643-2,
PageID # 21686.
Prunty testified that a Government investigator
interested in a particular person could conceivably use the
EFAST2 system to look up Form 5500s in aid of gathering
76
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23700
information about that person’s work.
PageID #:
Id., PageID # 21715.
While other Government employees testified that, when
investigating ESOPs, they did not generally ask about other ESOPs
a person might be involved in, they also conceded that there was
no policy prohibiting such questions.
See Depo. Desig. of Jerome
Raguero, ECF No. 643-7, PageID #s 22442, 22488, 22491; Depo.
Desig. of Paul Zielinski, ECF No. 643-8, PageID # 22647.
See
also Depo. Desig. of Ty Fukumoto, ECF No. 643-9, PageID # 22649.
The problem facing this court is that the ability of Government
investigators to ask about other ESOPs Saakvitne was involved
with does not necessarily make the investigators willfully blind
when they do not do that.
Willful blindness requires more than a failure to do
everything possible.
The willfully blind person must have
believed there was a high probability or wrongdoing and must have
deliberately avoided learning about that.
at 769.
Global-Tech, 563 U.S.
At best, Bowers and Kubota have demonstrated that
Government employees did not, but could have, inquired into other
ESOPs Saakvitne was involved in when those employees spoke with
Saakvitne in 2014.
With the burden on Bowers and Kubota, this
alone does not demonstrate willful blindness.
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23701
IV.
PageID #:
CONCLUSION.
Based on the above findings and conclusions, this court
rules that the remaining Defendants (i.e., Defendants other than
Saakvitne and his law firm) did not violate any provision of
ERISA with respect to the sale of the Company to the Company’s
ESOP.
Accordingly, the Clerk of Court is directed to enter
judgment in favor of the remaining Defendants and against the
Government and to close this case.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, September 17, 2021.
/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge
Walsh v. Heritage, et al., Civ. No. 18-00155 SOM-WRP; POST-TRIAL FINDINGS OF FACT AND
CONCLUSIONS OF LAW; ORDER DIRECTING ENTRY OF JUDGMENT IN FAVOR OF REMAINING DEFENDANTS
78
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