PEREZ v. FIRST BANKERS TRUST SERVICES, INC. et al

Filing 230

OPINION. Signed by Judge Michael A. Shipp on 3/31/2017. (gxh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

THOMAS E. PEREZ, Secretary of Labor,
Plaintiff,
Civil Action No. 12-4450 (MAS) (DEA)
V.

OPINION
FIRST BANKERS TRUST SERVICES,
INC., et a!.,
Defendants.

SHIPP, District Judge
This matter arises from the SIP Group, Inc. Employee Stock Ownership Plan’s (the “SIP
ESOP” or the “Plan”) purchase of thirty-eight percent of the outstanding stock of SIP Group, Inc.
(“SIP”), a total of 380,000 shares, through trustee Defendant First Bankers Trust Services, Inc.
(“FBTS” or “Defendant”), from Vincent DiPan& (“DiPano”) for S 16 million. Plaintiff Thomas
E. Perez,2 the Secretary of Labor, United States Department of Labor (“Plaintiff’ or the
“Secretary”) asserts that FBTS breached its duties of loyalty and prudence, and engaged in a
prohibited transaction with respect to the Plan’s purchase of DiPano’s 380,000 shares. The Court
conducted a seventeen-day bench trial, beginning on May 23, 2016, and culminating on September

1

The Secretary of Labor and DiPano reached a settlement of the Secretary’s claims against DiPano
pursuant to a partial Consent Judgment and Order, which the Court approved on April 20, 2016.
(ECF No. 149.)
2

This action was originally commenced by the former Secretary of Labor, Hilda L. Solis. (ECF
No. 1.) The caption was subsequently revised to reflect the succeeding, and now former, Secretary
of Labor, Thomas E. Perez. Although Thomas E. Perez is no longer the current Secretary of Labor,
the Court maintains Thomas E. Perez as Plaintiff in the caption above for the purpose of
consistency.

23, 2016. (ECF Nos. 179-83, 186, 189-92, 199-201, 210, 213-14, 216.) The parties submitted
proposed findings of fact and conclusions of law on October 28, 2016 (ECF Nos. 224, 225), and
responses on November 15, 2016 (ECF Nos. 226, 227).
Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, and afler careful
consideration of the entire record in this case and the applicable law, the Court concludes that
FBTS breached its duties of prudence and loyalty, and engaged in a prohibited transaction under
the Employee Retirement Income Security Act of 1974.
I.

Jurisdiction
The Court has jurisdiction over this matter pursuant to

§

Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C.
action appropriately lies in the District of New Jersey pursuant to
II.

1132(e)(1) of the Employee

§
§

1001-1461. Venue of this

1132(e)(2) of ERISA.

Findings of Fact3
A.

Overview of the Litigation

1.

At all relevant times herein, the SJP ESOP was an employee stock ownership

plan sponsored by SJP. (Stipulation of facts ¶ 1, ECF No. 177; May 23, 2016 Tr. (DiPano) 31:1315.)
2.

On or about November 16, 2006, FBTS was retained as trustee of the SJP ESOP.

(Joint Ex. 6 (FBTS Engagement Agreement); May 24, 2016 Tr. (D’Esposito) 26:12-15.)
3.

The SJP ESOP was created so that SJP could sponsor a pension plan for SJP’s

employees. (May 23, 2016 Tr. (Dugan) 109:10-14.)

In evaluating the testimony of the witnesses appearing at trial, and afler the Court had
opportunity to hear their testimony and observe their demeanor, the Court undertook
individualized credibility assessment of each witness and assigned the appropriate weight to
testimony based on the Court’s conclusions with respect to credibility. Such determinations
reflected in the factual findings.
2

the
an
the
are

4.

On April 16, 2007, Defendant DiPano sold 380,000 shares of stock in SJP to the

SJP ESOP—representing 38% of SJP’s outstanding shares—for $16 million (the “Transaction” or
the “SJP ESOP Transaction”). (Stipulation of Facts ¶JJ 2-3.)
5.

In 2009, the Department of Labor (“DOL”) initiated an investigation into the

Transaction to determine compliance with ERISA. (May 24, 2016 Tr. (M. Munoz) 98:11-99:1.)
6.

On July 17, 2012, the DOL filed its Complaint in this action. (ECF No. 1.) In its

Complaint, the DOL alleged, among other things, that FBTS, as trustee, did not adequately perform
its duties and, as a result, caused the SJP ESOP to overpay for SJP common stock. (See Id.)
7.

A bench trial for this action concluded on September 23, 2016.

B.

Background of SJP and Its Management

8.

At all relevant times, SJP was a closely-held site preparation construction company

concentrating in the homebuilder market in New Jersey. (Stipulation of Facts

¶ 4;

May 23, 2016

Tr. (Dugan) 112:7-9, 163:22-164:1; June 29, 2016 Tr. (Aliferis) 14:17-23.)
9.

SJP consists of three separately incorporated companies: Dyna-Tec Drilling and

Blasting, LLC (“Dyna-Tec”), National Crushing and Recycling, LLC (“National”), and South
Jersey East Coast Paving, LLC (“South Jersey”) (collectively, “SJP” or the “Company”). (Joint
Ex. 1 (Offering Memo), at 6; May 23, 2016 Tr. (Dugan) 112:10-14.)
10.

Each of the constituent companies of SJP specialized in a distinct area of site

preparation. For example, Dyna-Tec specialized in rock drilling and blasting, National specialized
in crushing and processing rocks generated from blasting operations, and South Jersey specialized
in excavating and paving the site. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 11; May 23, 2016 Tr.
(DiPano) 18:8-20, 19:4-13, 19:24-21:8.)

3

11.

In addition, SIP provided land development and construction services for

residential homebuilders and commercial real estate developers in New Jersey, New York, and
Pennsylvania. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 8; May 23, 2016 Tr. (DiPano) 19:1-13.)
12.

From 2002 to 2007, SIP’s primary business was providing site development

services for homebuilders. At all relevant times, the vast majority of $JP’s work was for residential
sites. (May 23, 2016 Tr. (Dugan) 117:13-118:20, 120:24-121:2, 122:9-128:10 (stating that from
2002 to 2007, $JP did not work on any projects involving oil or gas refineries, oil pipelines,
theaters, railroads, airports, casinos, harbors, ports, public highways, public bridges, dams, canals,
waterlocks, correctional facilities, and schools and was unsure if SIP worked on projects involving
hospitals or power plants); June 29, 2016 Tr. (Aliferis) 14:21-23; Stipulation of Facts
13.

¶ 5.)

Between 2002 and 2006, South Jersey accounted for the majority of SJP’s revenues.

(May 23, 2016 Tr. (Dugan) 113:5-20; Joint Ex. 1 (Offering Memo), at 126-28 (revenues broken
out by customer and division).)
14.

The majority of SJP’s top customers were residential homebuilder companies.

(May 23, 2016 Tr. (Dugan) 118:9-121:2; June 29, 2016 Tr. (Aliferis) 14:17-23.)
15.

The majority of SJP’s revenues came from work on residential homebuilding

projects in New Jersey. (May 23, 2016 Tr. (Dugan) 120:24-121:2, 133:1 1-15; May 24, 2016 Tr.
(D’Esposito) 95:10-12.)
16.

Site preparation companies, such as SIP, are highly dependent on the construction

of new housing. (Joint Ex. 1 (Offering Memo), at 47.)
17.

SJP operates within the homebuilding industry because its customers were

homebuilders and its business was dependent on homebuilding construction. (May 23, 2016 Tr.
(Dugan) 118:9-121:2; July 14, 2016 Tr. (Messina) 64:2-13.)

4

18.

Carmen Yacuzzio (“Yacuzzio”) founded SJP in 1959 and was its owner until his

death in 2004. (Joint Ex. 1 (Offering Memo), at 6, 22.)
19.

DiPano joined SJP in 1984. (Joint Ex. 1 (Offering Memo), at 22.) DiPano initially

served as SJP’s Vice President and subsequently became SJP’s President in 2002 or 2003.
(Stipulation of Facts
20.

¶

11.)

DiPano became Chief Executive Officer (“CEO”) of SJP in 2004 or 2005,

following the death of Yacuzzio. (May 23, 2016 Tr. (DiPano) 23:10-17, 48:19-20; May 23, 2016
Tr. (Dugan) 107:15-20;

Stipulation of Facts

¶J

7, 10; Joint Ex. 1 (Offering Memo), at 29

“Organizational Chart”.)
21.

DiPano became the majority owner of SJP in March of 2005 when he purchased

SIP’s outstanding shares from Yacuzzio for $4.5 million. (Pl.’s Ex. 1 (Yacuzzio Stock Transfer
Agreement), at 63; May 23, 2016 Tr. (DiPano) 23:18-21, 26:11-20.)

Specifically, DiPano

purchased 90% of the outstanding shares of South Jersey, 44% of the outstanding shares of
National, and 43.48% of the outstanding shares of Dyna-Tec.

(Pl.’s Ex. 1 (Yacuzzio Stock

Transfer Agreement), at 63; May 23, 2016 Tr. (DiPano) 26:11-27:4.)
22.

Upon DiPano’s purchase of Yacuzzio’s stock, DiPano became the majority owner

of each of SIP’s constituent companies in March of 2005. (P1.’s Ex. 1 (Yacuzzio Stock Transfer
Agreement), at 63; May 23, 2016 Tr. (DiPano) 23:18-21.)
23.

Frank Dugan (“Dugan”) has worked for SJP since 1985. (Joint Ex. 1 (Offering

Memo), at 22; May 23, 2016 Tr. (Dugan) 107:2-4.)
24.

Dugan served as SJP’s Vice President from at least January 1, 2006 through the

date of the Transaction. (Stipulation of Facts

¶J 8,

5

12.)

25.

Michael D’Esposito (“D’Esposito”) has worked for SJP since at least the mid

1990s. (Stipulation of Facts
26.

¶ 9;

May 24, 2016 Tr. (D’Esposito) 6:16-18.)

D’Esposito served as SJP’s Assistant Controller and then Controller, and became

SJP’s Chief Financial Officer (“CFO”) in 2006. (Stipulation of Facts ¶J 9, 13.)
27.

At the time of the Transaction, D’Esposito held the position of Secretary/Treasurer

and CFO. (Stipulation of Facts

¶ 9;

May 24, 2016 Tr. (D’Esposito) 7:1-12; Joint Ex. 1 (Offering

Memo), at 29 “Organizational Chart.”)
28.

In contemplation of the Transaction, DiPano and Dugan exchanged their shares of

the three constituent companies of SIP for a pro-rata share of the newly unified SIP. (Joint Ex. 1
(Offering Memo), at 14 “Reorganization.”)
29.

At the time of the Transaction, DiPano owned 70% of SIP’s outstanding stock and

Dugan owned 30% of SJP’s outstanding stock. (Stipulation of Facts ¶ 7-8.)
30.

The SIP constituent companies largely had the same management, board members,

and officers at the time of the Transaction. (May 23, 2016 Tr. (Dugan) 108:7-9; Joint Ex. 1
(Offering Memo), at 29 “Organizational Chart.”)
31.

Since approximately January 2006 through the date of the Transaction, SIP’s Board

of Directors consisted of Dugan and DiPano. (Stipulation of Facts ¶ 14.)
C.

$JP Hires Advisors in Anticipation of the SJP ESOP Transaction

32.

In 2006, SIP retained Steven Etkind (“Etkind”) of Sadis & Goldberg as legal counsel

to guide SIP through the process of establishing an ESOP and to provide an opinion on whether the
ESOP had been duly established. (Stipulation of facts ¶ 18.)
33.

Sadis & Goldberg was not retained to provide an opinion regarding the fair market

value of SIP. (Stipulation of Facts ¶ 19.)

6

34.

In October 2006, SJP retained Duff & Phelps, LLC (“Duff & Phelps”) to advise

SIP on the logistics of establishing an ESOP and again in January 2007 to act as SIP’s financial
advisor in connection with the $JP ESOP Transaction. (Stipulation of F acts ¶ 24-25.)
35.

Pursuant to the Duff & Phelps Engagement Agreement, SIP agreed to pay Duff &

Phelps professional fees, including a transaction fee “equal to 1.00% of the amount of the total
anticipated committed financing ($20,000,000) or $200,000.”
Engagement Agreement), at 3
36.

(Joint Ex. $ (Duff & Phelps

¶J 5.a, 5.b.)

The Duff & Phelps Engagement Agreement (Joint Ex. 8, at 2-3) further provided,

in pertinent part, that:
The Company [(i.e. SIP)] agrees to furnish, or use its best efforts to
cause to be furnished, to Duff& Phelps all reasonably requested data
and information concerning the Company and all such other data,
material and information as Duff& Phelps shall reasonably request.
Duff & Phelps assumes no responsibility for the accuracy or
completeness of any information provided by or on behalf of the
Company.
37.

Duff& Phelps’s role in the contemplated Transaction was to represent the seller—

i.e., DiPano and SIP—while FBTS’s role was to represent the buyer—i.e., the SIP ESOP. (May
25, 2016 Tr. (Miscione) 8:3-10:14; June 29, 2016 Tr. (Aliferis) 77:13-18, 121:19-25; lune 30,
2016 Tr. (Gross) 20:14-18; July 6, 2016 Tr. (Ash) 57:3-12; May 26, 2016 Tr. (Ippensen) 4:19-23.)
D.

Background of FBTS and FBTS Employees

3$.

FBTS has been in the business of administering ESOP plans since 1989. (May 26,

2016 Tr. (Ippensen) 132:11-13.)
39.

In 2006 and 2007, FBTS had an Employee Benefits Committee (“EB Committee”)

responsible for reviewing proposed ESOP transactions.
Stipulation of Facts ¶ 36.)

7

(May 25, 2016 Tr. (Cory) 88:9-13;

40.

The EB Committee could only approve transactions with unanimous consent of its

members. (May 26, 2016 Tr. (Ippensen) 139:14-140:-3; May 27, 2016 Tr. ($erbin) 159:5-8.)
41.

As of April 16, 2007, FBT$’s EB Committee was comprised of eight or nine

members. (May 26, 2016 Tr. (Ippensen) 132:17-19, 138:21-25; May 27, 2016 Tr. (Serbin) 145:510.)
42.

At or around the time of the Transaction, Brian Ippensen (“Ippensen”), Kjersti Cory

(“Cory”), Kimberly Serbin (“Serbin”), and Merri Ash (“Ash”) sewed on the EB Committee. (May
26, 2016 Tr. (Ippensen) 132:24-133:6; May 27, 2016 Tr. (Serbin) 103:12-14; July 6, 2016 Tr. (Ash)
27:21-25.)
43.

Ash is currently employed by FBTS. (July 6, 2016 Tr. (Ash) 4:13-14.)

44.

At or around the time of the Transaction, Ash sewed as FBTS’s Vice President of

New Business Development. (July 6, 2016 Tr. (Ash) 5:1-6.)
45.

As Vice President of New Business Development, Ash’s job was in sales, and she

was responsible for bringing in new business. (July 6, 2016 Tr. (Ash) 5:7-12; May 26, 2016 Tr.
(Ippensen) 134:23-135:1.)
46.

Ash earned a commission for all new business that she generated for FBTS. (July

6,2016 Tr. (Ash) 100:23-101:1.)
47.

Ash received a 20% commission on fees generated by FBTS when it was retained

to serve as a trustee in anticipation of an ESOP transaction and an additional 20% commission on
fees generated in the first year in which FBTS was retained to serve as an ongoing trustee. (July
6, 2016 Tr. (Ash) 101:3-21.)
48.

Cory sewed as a trust officer at FBTS in 2006 and 2007. (May 25, 2016 Tr. (Cory)

86:25-87:5, 88:15-16.)

8

49.

Cory lefi employment at FBTS in 2012 and, as of the date of her testimony, worked

for an FBTS competitor. (May 25, 2016 Tr. (Cory) 87:6-8; 117:14-19.)
50.

Serbin is currently employed by FBTS and was an employee of FBTS at the time

of the Transaction. (May 27, 2016 Tr. (Serbin) 102:25-103:15.)
51.

Serbin has an educational background in business administration with an emphasis

in accounting and finance. (May 27, 2016 Tr. (Serbin) 103:16-25.)
52.

Ippensen was the President of FBTS in 2006 and 2007.

(May 26, 2016 Tr.

(Ippensen) 4:8-12; 92:2-6.)
53.

Ippensen has been a Certified Public Accountant since 1991. (May 26, 2016 Tr.

(Ippensen) 133:13-16.)
54.

As of April 13, 2007, Ippensen estimated that he had reviewed 250 to 300 valuation

reports during the course of his career. (May 26, 2016 Tr. (Ippensen) 133:17-20.)
55.

Although FBTS did not have a formal policy requiring every conversation to be

memorialized, meeting minutes were typically taken at each EB Committee meeting. (May 27,
2016 Tr. (Serbin) 137:10-16; May 26, 2016 Tr. (Ippensen) 147:14-148:5.)
E.

FBTS Considers Trustee Role for SJP ESOP Transaction (October-November
2006)

56.

FBTS first considered a trustee role with respect to the SJP ESOP Transaction in the

fourth quarter of 2006, sometime toward the end of October. (May 27, 2016 Tr. (Serbin) 104:1-9;
July 6, 2016 Tr. (Ash) 102:18-23.)
57.

A professional trustee, like FBTS, possesses various capabilities in the areas of

accounting, finance, legal, and ESOP administration.
148:25-149:16.)

9

(June 29, 2016 Tr. (Aliferis) 111:5-18;

58.

Prior to being retained, FBTS performed a two-step approval process with the EB

Committee. (July 6, 2016 Tr. (Ash) 103:6-104:17.)
59.

For the first step of the EB Committee’s two-step approval process, Ash introduced

SJP’s interest in performing an ESOP transaction to the EB Committee and recommended a
financial and legal advisor for the Transaction.

(July 6, 2016 Tr. (Ash) 5:1-6, 103:6-18.)

Specifically, Ash informed the EB Committee that SJP was a paving company that was a fullyintegrated site developer with very little competition. (July 6, 2016 Tr. (Ash) 129:7-12.)

Ash

further informed the EB Committee that SJP was projected to have its most successful year in 2006.
(July 6, 2016 Tr. (Ash) 129:7-18.)
60.

Ash recommended that FBT$ should retain Prairie Capital (“Prairie”) as the

financial advisor and Steiker, Fischer, Edwards and Greenapple (“SFE&G”) as the legal advisor.
(July 6, 2016 Tr. (Ash) 103:15-18.)
61.

FBTS adopted Ash’s recommendations for the financial and legal advisors. (May

26, 2016 Tr. (Ippensen) 143:14-144:2.)
62.

The EB Committee granted approval to proceed to the second step of the EB

Committee’s two-step approval process. (July 6, 2016 Tr. (Ash) 128: 12-16.) The second step
involved Ash providing “[m]ore information about the company.” (July 6, 2016 Tr. (Ash) 129:25130:8.)
63.

Afier FBTS has been appointed as trustee, it typically assigns a team to work directly

on a transaction and to work and consult with the EB Committee in ultimately approving or rejecting
the transaction. (May 27, 2016 Tr. (Serbin) 104: 12-25.)
64.

For the SJP ESOP Transaction, FBTS assigned Ash and Cory. (May 27, 2016 Tr.

(Cory) 105:1-14.)

10

65.

Ash was the “point person” and “team leader” for the $JP ESOP Transaction and

she attended the November 15, 2006 due diligence meeting on behalf of FBTS and participated in
follow-up meetings on the Transaction. (May 25, 2016 Tr. (Cory) 116:10-117:8; Sept. 23, 2016
Tr. (Cory) 4:24-5:11; May 26, 2016 Tr. (Ippensen) 140:15-141:5; (July 6, 2016 Tr. (Ash) 14:2224); May 27, 2016 Tr. (Serbin) 150:4-6.)
66.

None of FBTS’s employees, other than Ash, spoke to SIP’s management prior to

the Transaction. (Sept. 23, 2016 Tr. (Cory) 64:11-14; May 27, 2016 Tr. (Serbin) 128:11-13.)
67.

With respect to the SIP ESOP Transaction, Cory did not visit SIP or meet with any

of SIP’s management, did not speak with Duff& Phelps, did not participate in meetings in which
Ash may have participated, and “wasn’t necessarily there every step of the way” until afier the
Transaction. (May 25, 2016 Tr. (Cory) 94:24-95:16, 98:25-99:2, 116:15-21.)
68.

Ash and Ippensen expected that Cory would be principally responsible for

reviewing SJP’s financial documents. (July 6, 2016 Tr. (Ash) 8:8-9:24, 12:1-19; May 26, 2016
Tr. (Ippensen) 37:8-12.)
69.

Cory was not a valuation expert, however, and did not consider herself to be

principally responsible for reviewing and understanding valuation reports concerning SIP. (May
25, 2016 Tr. (Cory) 92:11-93:9.)
70.

Cory believed that all EB Committee members were equally responsible for

reviewing valuation reports concerning SIP. (May 25, 2016 Tr. (Cory) 92:20-93:2.)
71.

Ippensen assumed that if he did not hear from Ash or Cory during the six-month

period leading up to the SIP Transaction, then there were no major issues concerning the
Transaction. (May 26, 2016 Tr. (Ippensen) 141:18-23.)

11

F.

November 15, 2006 Meeting

72.

On November 15, 2006, FBTS retained SFE&G as independent legal counsel in

connection with the proposed $JP ESOP Transaction. (Joint Ex. 6 (FBTS Engagement Agreement),
at4; FBTS Ex. 7.)
73.

SFE&G was retained to conduct legal due diligence as opposed to financial or

valuation due diligence. (FBTS Ex. 7, D00036; May 26, 2016 Tr. (Ippensen) 76:6-8; 168:2-13.)
74.

Further, SFE&G did not opine on the fair market value of DiPano’s shares but

expressly relied on the opinion of Prairie, FBTS’s valuation firm, concerning the value of those
shares. (FBTS Ex. 13, D00085-86,
75.

¶ (I).)

Steven Fischer (“Fischer”), who served as one of FBTS’s expert witnesses at trial,

was a member of SFE&G at the time of the Transaction. (Stipulation of Facts ¶ 39.)
76.

On November 15, 2006, a meeting was held at $JP’s offices in New Jersey, which

included SJP’s management team (i.e., DiPano, Dugan, and D’Esposito), Duff & Phelps, Prairie,
and FBTS.

(Stipulation of Facts

¶J

44-45.)

Specifically, the following individuals were in

attendance: Ash of FBTS; DiPano, D’Esposito and Dugan of SJP; Peter Aliferis (“Aliferis”) of
Prairie; Steve Greenapple (“Greenapple”) of SFE&G; John Miscione4 (“Miscione”) of Duff &
Phelps; Etkind of Sadis & Goldberg, and Alvin Cheslow (“Cheslow”) of Drescher & Cheslow
(SJP’s corporate attorney). (May 23, 2016 Tr. (DiPano) 53:5-12; Stipulation of Facts ¶ 45.)
77.

Ash, who was the only person that attended the November 15, 2006 meeting on

behalf of FBTS, did not possess any expertise in finance or valuation. (May 26, 2016 Tr. (Ippensen)
8:6-11, 37:2-7; July 6,2016 Tr. (Ash) 8:1-7, 8:8-9:24, 12:1-19.)

At the time of the Transaction, Miscione was a managing director at Duff & Phelps. (May 25,
2016 Tr. (Miscione) 4:18-2 1.)

12

78.

Ash did not take any notes of what was discussed at the November 15, 2006

meeting. (July 6, 2016 Tr. (Ash) 100:6-8.)
79.

Neither SFE&G nor Prairie provided Ash with a copy of any notes that they may

have taken during the November 15, 2006 meeting. (July 6, 2016 Tr. (Ash) 100:13-22.)
80.

Although Ash was not a financial expert, her role at the November 15, 2006

meeting was to evaluate SIP’s management team based on her ability to assess people. (July 6,
2016 Tr. (Ash) 8:8-9:24, 12:1-19, 107:6-14; May 26, 2016 Tr. (Ippensen) 37:2-7.)
31.

The meeting was held so that FBTS could learn about SJP and determine whether it

would be interested in serving as a trustee for the proposed Transaction.

(May 26, 2016 Tr.

(Ippensen) 8:12-18.)
82.

The meeting began with introductions of the attendees and with Dugan introducing

the Company, its history, and financial outlook. (July 6, 2016 Tr. (Ash) 105:2-10.)
83.

The meeting lasted between two and three hours, (May 23, 2016 Tr. (Dugan)

176:22-177:11), during which FBTS explained the process of ESOP sponsorship and the services
that FBTS could provide to SIP’s management and advisors. (May 23, 2016 Tr. (Dugan) 139:212, 177:13-20.)
84.

The November 15, 2006 meeting included a tour of SJP’s facility, where the

attendees observed SIP’s equipment and facilities firsthand. (May 23, 2016 Tr. (Dugan) 139:8-12;
July 6, 2016Tr. (Ash) 105:11-15.)
85.

The November 15, 2006 meeting was the only time that FBTS met with SJP or Duff

& Phelps prior to the Transaction. (July 6, 2016 Tr. (Ash) 10:6-20; May 26, 2016 Tr. (Ippensen)
11:7- 19.)

13

86.

At the meeting, SIP discussed its own reputation, purported competitive advantage,

relationship with customers, plans to reduce customer concentration with major customers like K.

Hovnanian Homes (“Hovnanian”), and plans to expand into different regions. (June 29, 2016 Tr.
(Aliferis) 47:7-22; July 6, 2016 Tr. (Ash) 105:17-106:7.)
87.

With regard to customer concentration, SIP made everyone aware that it “had a

client concentration.” (July 6, 2016 Tr. (Ash) 105:21-106:3.)
88.

With regard to expansion, John Miscione stated that SIP was “interested in

diversifying, not only in diversifying in terms of what kind of work [it] did, but also in geographics,
moving into the state of New York.” (July 6, 2016 Tr. (Ash) 106:8-14.)
89.

FBTS had the opportunity at the meeting to interview and ask questions of SIP’s

management. (May 25, 2016 Tr. (Miscione) 45:19-21; June 29, 2016 Tr. (Aliferis) 114:9-il.)
90.

Between FBTS and Prairie, only Aliferis of Prairie had received SIP’s consolidated

financial statements prior to the meeting, providing him with “the ability to ask some questions
about those financials.” (July 6, 2016 Tr. (Ash) 105:7-10; FBTS Ex. 2.)
91.

FBTS did not receive historical financial information at this meeting beyond what

SIP verbally discussed.5
92.

During the November 15, 2006 meeting, Duff & Phelps conveyed an offer to FBTS

ofSl6 million to sell a minority of SIP’s outstanding shares. (July 6, 2016 Tr. (Ash) 10:2-5.)

FBT$ was unable to cite any testimony where a witness recalled receiving historical financial
information at the November 15, 2006 meeting. FBTS, rather, cites instances of custom and
practice and speculates the likelihood of receiving additional information, which the Court finds
unpersuasive absent other corroborating evidence. (May 24, 2016 Tr. (D ‘Esposito) 39:11-22; June
29, 2016 Tr. (Aliferis) 47:7-22.)

14

93.

Based on what she observed at the November 15, 2006 meeting, Ash determined

that SJP had a “good management team” because the team members had worked together for a long
time with their previous employer, and because they “looked to be a cohesive management team.”
(July 6, 2016 Tr. (Ash) 106:25-107:5.)
94.

Ash did not communicate the information obtained from the November 15, 2006

meeting to FBTS before signing the FBTS Engagement Agreement.6 (May 26, 2016 Tr. (Ippensen)
9:22-10:19.)
95.

On November 16, 2006, the day afier the November 15, 2006 meeting, Ash signed

the FBTS Engagement Agreement. (Joint Ex. 6 (FBTS Engagement Agreement), at 7; Stipulation
of Facts ¶ 34.)
G.

FBTS Engagement Agreement

96.

FBTS was retained to represent the Plan in its purchase of a minority stake of SJP

from DiPano.

(Joint Ex. 6 (FBT$ Engagement Agreement); Joint Ex. 7 (Prairie Engagement

Agreement), at 1; Joint Ex. 1 (Offering Memo), at $ “General Transaction Overview”; May 23,
2016 Tr. (DiPano) 30:7-18.)

6

Defendant cites only the purported typical practice—which does not prove what occurred with
regard to the SJP ESOP Transaction specifically—and a single cursory answer from Ippensen for
the proposition that Ash presented the findings from the November 15, 2006 meeting to FBTS.
(May 26, 2016 Tr. (Ippensen) 9:22-25; 137:10-22.) Defendant failed to provide evidence with
regard to the contents of the presentation, any record of the presentation, or any testimony
pertaining to any other details corroborating the occurrence of this purported meeting between
FBTS and Ash. In light of the presented evidence and the Court’s assessment of the witnesses’
credibility, the Court finds that Ash did not communicate the information obtained from the
November 15, 2006 meeting to FBTS prior to signing the engagement agreement.

15

97.

FBTS understood that its duty as a Plan trustee included determining the fair market

value of DiPano’s shares. (Joint Ex. 6 (FBTS Engagement Agreement), at 2

¶

5 (setting forth

FBTS’s appointment as Trustee of the Trust); May 26, 2016 Tr. (Ippensen) 4:24-5:2, 6:25-7:4.)
9$.

FBTS understood that, at all times, it was acting in a fiduciary capacity to the SJP

Plan beneficiaries. (May 26, 2016 Tr. (Ippensen) 131:22-25.)
99.

Paragraph 5 of the FBTS Engagement Agreement (Joint Ex. 6, at 2) provides:
First Bankers agrees as of the date set forth above to accept its
appointment as Trustee of the Trust. First Bankers will exercise all
duties, responsibilities, and powers of a fiduciary under ERISA in its
capacity as a discretionary Trustee of the Trust and shall control the
management and disposition of the Company Stock held by the Trust
to the extent such duties, responsibilities, and authority are consistent
with the terms of the Plan and Trust Agreement and are not delegated
to: (1) an investment manager as defined under ERISA, (ii) the Plan
Administrator (as defined in the Plan) or (iii) a named fiduciary. First
Bankers acknowledges its status as a discretionary Trustee under
ERISA, including the responsibilities and duties of a fiduciary
involving the financing, acquisition and holding of Company Stock
of a privately held Corporation.

100.

Under the FBTS Engagement Agreement, SJP agreed to pay FBTS $30,000 in

consideration for FBTS’s services. (Joint Ex. 6 (FBTS Engagement Agreement), at 3 ¶7; May 26,
2016 Tr. (Ippensen) 140:4-9.)
101.

The FBTS Engagement Agreement did not provide for a success fee or bonus for

FBTS with respect to its work as a transactional trustee for the SJP ESOP. (May 26, 2016 Tr.
(Ippensen) 140:10-14.) If FBTS approved the SJP ESOP Transaction, however, it could be retained
as an ongoing trustee.

(Joint Ex. 6 (FBTS Engagement Agreement) 12; May 26, 2016 Yr.

(Ippensen) 6:16-24.)

16

102.

FBTS understood that even though it was paid by SJP (i.e., the seller’s company),

its role was to represent the interests of the Plan (i.e., the buyer). (Joint Ex. 6 (FBTS Engagement
Agreement), at 5
103.

¶ 2; May 26, 2016 Tr.

(Ippensen) 4:19-23.)

The FBT$ Engagement Agreement also set forth the following fee schedule for any

work FBTS performed for the Plan as an ongoing trustee: an annual fee calculated as a percentage
of the Plan’s assets, and in no event less than $15,000. (Joint Ex. 6 (FBTS Engagement Agreement),
at 12; May 26, 2016 Tr. (Ippensen) 6:16-24.)
104.

FBT$ was permitted to engage an independent financial advisor and approve a

valuation report and/or fairness opinion furnished by such independent financial advisor. (Joint Ex.
6 (FBTS Engagement Agreement), at 10, 12.)
105.

The valuation firm would prepare a report determining the fair market value of the

shares to be purchased by the E$OP. (May 25, 2016 Tr. (Cory) 90:18-24.)
106.

The SJP ESOP trust agreement provided that all contributions from SJP would be

held in trust by the named trustee (i.e., FBTS), and that the trustee would hold and invest trust assets
for the exclusive benefit of the Plan participants and beneficiaries. (Joint Ex. 3 (Trust Agreement),
at 3, Article I,
107.

§

1.01-1.04.)

The SJP ESOP trust agreement authorized the trustee (i.e., FBTS) to use trust assets

to buy company stock, and required that all purchases of company stock be made at fair market
value as determined in good faith and in accordance with applicable requirements of ERISA. (Joint
Ex. 3 (Trust Agreement), at 4, Article II,
108.

§ 2.01 (a)-(b).)

As the trustee, FBTS was a “named fiduciary” within the meaning of both the SJP

ESOP plan document (the “Plan Document”) and ERISA
at 70 “Article Fifleen

—

fiduciary Responsibility”

¶

17

§ 402(a).

15.01.)

(Joint Ex. 4 (Plan Document),

109.

The Plan Document required FBTS to discharge its duties solely in the interest of

the Plan participants and beneficiaries for the exclusive purpose of providing benefits and defraying
reasonable expenses.
Responsibility”
110.

(Joint Ex. 4 (Plan Document), at 70 “Article Fifteen

—

Fiduciary

¶ 15.03.)

The Plan Document further required FBTS to discharge its “duties with the care,

skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use in the conduct of an enterprise of like
character and with like aims.” (Joint Ex. 4 (Plan Document), at 70 “Article Fifteen
Responsibility”
H.
111.

—

Fiduciary

¶ 15.03.)
FBTS’s Pre-Transactional Investigation Procedure7

FBTS does not have any written materials describing its review procedures for an

initial ESOP acquisition transaction.

(May 25, 2016 Tr. (Cory) 89:3-7; May 26, 2016 Tr.

(Ippensen) 115:6-17.)
112.

Between 2006 and 2012, FBTS’s pre-transactional review process was “always

evolving.” (May 25, 2016 Tr. (Cory) 89:8-23.)
113.

There is no uniform approach in the ESOP industry as to how a fiduciary needs to

conduct due diligence for an ESOP Transaction, and due diligence will vary depending on the facts
and circumstances of the case. (June 21, 2016 Tr. (Fischer) 95:1-14.)

‘

FBT$ also contends that once it was engaged, it participated in “numerous conversations” about
the SJP ESOP Transaction. (May 27, 2016 Tr. (Serbin) 152:15-24.) Upon reviewing Defendant’s
citation to the record and the relevant testimony, the Court finds that these conversations did not
occur. The Court makes this finding based on the lack of detail offered by Defendant in support,
the Court’s assessment of the witnesses’ credibility, and the fact that the testimony mentioned the
SJP ESOP Transaction as just one of many topics discussed in these purported discussions.

18

114.

In the ESOP industry, whether a fiduciary’s reliance on a valuation report is

reasonable depends not only on the four corners of the valuation report, but on the entirety of
everything else the fiduciary knows, everything else the valuation firm knows, and everything
discussed between the fiduciary and its attorneys, its valuation firm, and the seller’s company.
(June 21, 2016 Tr. (Fischer) 76:5-77:25.)
115.

The very same issue may be addressed in different ways from one experienced and

reasonable trustee to the next. (June 21, 2016 Tr. (Fischer) 77:21-25.)
I.

FBTS Retains Prairie (November 20, 2006)

116.

At the time of the Transaction, Prairie, among other things, was in the business of

performing valuations of closely-held companies. (June 29, 2016 Tr. (Aliferis) 4:14-19; Joint Ex.
9 (Apr. 11,2007 Draft), at 55; June 30, 2016 Tr. (Gross) 6:8-13.)
117.

Prairie provided ongoing valuation services for approximately 80% of the plans for

which it performed the initial valuation. (June 30, 2016 Tr. (Gross) 19:13-20:3.)
118.

Prairie is a highly respected valuation firm in the ESOP industry. (June 21, 2016

Tr. (Fischer) 40:6-7.)
119.

One of the “heads” of Prairie, Robert Gross (“Gross”), has been involved in

“hundreds” of ESOP transactions over the course of his career. (June 30, 2016 Tr. (Gross) 26:1519; June 21, 2016 Tr. (Fischer) 40:10-18.)
120.

At the time of the Transaction, Gross was the Managing Director at Prairie. (Joint

Ex. 9 (Apr. 11, 2007 Draft), at 55.)
121.

Gross had no personal involvement in the Transaction, including preparing the

valuation or the fairness opinion. (June 30, 2016 Tr. (Gross) 20:22-22:13.)

19

122.

At the time ofthe Transaction, Aliferis was employed at Prairie as the Vice President

of Corporate Finance. (June 29, 2016 Tr. (Aliferis) 4:9-13; Joint Ex. 9 (Apr. 11, 2007 Draft), at
5$.)
123.

Aliferis led the Prairie team working on the SIP valuation. (June 29, 2016 Tr.

(Aliferis) 5:7-13; June 30, 2016 Tr. (Gross) 20:19-21.)
124.

Aliferis had previously performed one to two valuations for FBTS prior to the SJP

ESOP Transaction. (June 29, 2016 Tr. (Aliferis) 6:1-3.)
125.

On November 20, 2006, FBTS entered into an engagement agreement with Prairie

pursuant to which Prairie would “undertake a series of ESOP-related services” including “a
Preliminary Valuation/Feasibility study.” (Joint Ex. 7 (Prairie Engagement Agreement), at 1.)
FBTS retained Prairie to provide, among other things, the following services: estimate the fair
market value of SIP’s stock; provide a valuation report; and provide a fairness opinion. (Joint Ex.
7 (Prairie Engagement Agreement), at 1-2.)
126.

FBTS selected Prairie based on its previous work experience with the valuation firm

and believed that Prairie had a great reputation in the valuation industry. (May 26, 2016 Tr.
(Ippensen) 143:14-144:2; May27, 2016 Tr. (Serbin) 157:24-158:5.)
127.

Pursuant to the FBTS Engagement Agreement, SIP agreed to pay for the valuation

services that Prairie provided. (Joint Ex. 6 (FBTS Engagement Agreement), at $
12$.

¶ 2.)

Specifically, SJP agreed to pay Prairie the following fees: $16,000 to $19,000 for a

“Preliminary Valuation/Feasibility” and $16,000 to $19,000 for a “[d]etailed valuation and required
opinions.” (Joint Ex. 7 (Prairie Engagement Agreement), at 3 “Item 3.”)

20

129.

FBTS understood that Prairie would not be ensuring the accuracy of the information

provided by SIP or its agents. (Joint Ex. 7 (Prairie Engagement Agreement), at 4; May 26, 2016
Tr. (Ippensen) 30:8-31:10.)
130.

Prairie’s Engagement Agreement with FBTS contained the following disclaimer:
In completing this engagement, we will rely on information provided
by [FBTS] and [SIP] including, but not limited to, financial
statements, projections, product information, facilities descriptions,
employee data, and other information as may be requested. We will
accept this information as being accurate without independent
verification.

(Joint Ex. 7, at 4.)
131.

Similarly, in the “Statement of Limiting Conditions” contained in Prairie’s April 11,

2007 Draft Valuation Report and April 27, 2007 Post-Transaction Valuation Report, Prairie again
advised FBTS that:
Information supplied by others that was considered in this valuation
is from sources believed to be reliable, and no further responsibility
is assumed for its accuracy. We have assumed that the information
furnished by the Company has been reasonably prepared and reflects
the best currently available estimates and judgment of the
Company’s management as the historical and expected future
performance of the Company and have not undertaken any
independent analysis to verify the reasonableness of such
information.8
(Joint Ex. 9 (Apr. 11, 2007 Draft), at 54; Joint Ex. 10 (Apr. 27, 2007 Report), at 68.)
132.

Nonetheless, FBTS expected Prairie to review the financial information provided to

it by SIP and Duff& Phelps. (May 26, 2016 Tr. (Ippensen) 34:9-17.)

8

Prairie states that the disclaimer does not mean that Prairie does not try to verify the information.
Rather, Aliferis testified that Prairie “does make efforts to verify the financial information
presented to it.” (June 29, 2016 Tr. (Aliferis) 115:22-116:4.) Aliferis, however, did not elaborate.
Accordingly, the Court finds that the “efforts” made by Prairie consist only of the actions that the
Court sets forth in its findings of fact.

21

133.

During its due diligence process, Prairie did not discuss the basis of the valuation

and the Transaction as a whole with FBTS and SJP except for the instances specifically set forth
in the Court’s findings of fact.9
134.

FBTS felt assured that Prairie received accurate information from SJP because the

information primarily came in the form of audited financial statements.

(May 26, 2016 Tr.

(Ippensen) 35:14-24.)
135.

Audits of financial statements for the period of 2002 to 2005 were complete at the

time of the Transaction. Audited financial statements for the year 2006 were in draft form as of
the date of the Transaction, given that the Churchin Group needed the ESOP valuation to adjust
SJP’s 2006 financial statements for the ESOP contribution. (July 1, 2016 Tr. (Fouratt) 22:8-12.)
136.

FBTS, however, did not obtain or review the 2006 draft audited financial statements

prior to the Transaction. (May 26, 2016 Tr. (Ippensen) 3 6:18-23 (FBTS did not receive any audited
financials for SJP prior to the Transaction other than those contained in the Offering Memo) 37:1538:8 (other than the financial information in the Offering Memo, FBT$, through Ash, may have
verbally received “limited information” prior to the Transaction).)

FBTS alleges that Prairie asked some questions of Duff & Phelps, SJP’s financial advisor, as
well as $JP’s management, (June 29, 2016 Tr. (Aliferis) 115:2-8), and that Prairie also had some
discussions with FBTS and its counsel regarding the basis of the valuation and the Transaction as
a whole. (June 29, 2016 Tr. (Aliferis) 115:8-11.) FBTS, however, failed to produce any
documentary evidence supporting these purported discussions. Based on the lack of corroborating
evidence and the Court’s assessment of the witnesses’ credibility, the Court finds that Prairie did
not engage in discussions beyond those specifically outlined in the Court’s findings of fact.

22

J.

Duff & Phelps Offering Memorandum (January 2007)

137.

SIP retained Duff & Phelps again in January 2007 to act as SJP’s financial advisor

in connection with SIP’s decision to implement the ESOP and in connection with the Transaction.
(Court’s Finding of Fact (“CFF”)
13$.

¶ 34.)10

SIP and Duff & Phelps entered into an engagement agreement dated January 18,

2007, pursuant to which Duff & Phelps agreed to perform, inter cilia, the following services:
determine the value of SIP’s equity for the ESOP Transaction; prepare a transaction memorandum
and financial models for presentation to the ESOP trustee; participate in due diligence visits,
meetings, and consultations between SJP and the ESOP trustee; coordinate distribution of all
financial information related to the ESOP Transaction to the ESOP trustee and its advisors; assist
SIP in negotiating with the ESOP trustee; assist SIP in negotiating ESOP Transaction documents;
and act as agent for SIP in identifying and developing sources of financing. (FBTS Ex. 25,
D00485-86.)
139.

Duff & Phelps prepared a Confidential Information Memorandum dated January

2007 (the “Offering Memo”) to be sent to potential third-party lenders to obtain financing and to
FBT$ representing DiPano’s opening bid for the sale of his shares to the SIP ESOP. (Stipulation
of Facts ¶ 32; May 25, 2016 Tr. (Miscione) 7:3-16,21:10-18; see also Joint Ex. 1 (Offering Memo).)
140.

The Offering Memo was marketing material, which, in the context of similar

transactions, tends to focus on the positive aspects of the company and downplay risk factors that
would typically be identified during the buyer’s due diligence investigation. (July 15, 2016 Tr.

10

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
23

(Messina) 73:11-24; see also Sept. 19, 2016 Tr. (Puntillo) 110:3-22 (buyer is expected to adjust
seller’s projections based on risk assessment).)
141.

The Offering Memo contained a general overview discussion of the site preparation

industry, including financial, regulatory, and regional issues. (Joint Ex. 1 (Offering Memo); Joint
Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis, attaching Offering Memo), at 46-54; May
26, 2016 Tr. (Ippensen), at 153:20-154:21.)
142.

The Offering Memo contained four bullet points on the issue of “seasonal demand,”

briefly discussing how changing demand for services between seasons affected cash flow, labor,
and equipment management.

(Joint Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis,

attaching Offering Memo), at 49; May 26, 2016 Tr. (Ippensen) 155:5-156:5.)
143.

Although the Offering Memo’s discussion of stock prices appeared to be current

through the fourth quarter of 2006, its discussion of North American housing jobs, machinery
costs, gas prices, construction spending, employment rates in the site prep industry, and asphalt
prices were only current through June and July of 2006. (Joint Ex. I (Offering Memo), at 47-48.)
144.

The Offering Memo further contained a discussion about one of SJP’s major

customers, Hovnanian, including an analysis of Hovnanian’s financial performance in 2005 and
2006. (Joint Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis, attaching Offering Memo), at
53; May 26, 2016 Tr. (Ippensen) 156:22-158:17.)
145.

The Offering Memo stated that “New Jersey will continue to be a primary focus for

[Hovnanian]” and that 23.7% of Hovnanian’s proposed communities were located in New Jersey.
(Joint Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis, attaching Offering Memo), at 53.)

24

146.

The Offering Memo stated that SJP had been “steadily diversifying away from

Hovnanian.”1’ (Joint Ex. 1 (Offering Memo), at 12.) By “diversifying” the Offering Memo meant
that SIP was attempting to add additional customers. (May 24, 2016 Tr. (D’Esposito) 22:4-23:2;
35:24-36:21.)
147.

SJP was never asked to identify its purported additional customers, explain why it

believed it could get more customers, or what additional costs, if any, would be needed to cultivate
those additional customers. (June 29, 2016 Tr. (Aliferis) 85:6-86:8, 86:23-87:8 (did not recall SIP
specifically explaining how SJP determined that municipalities and commercial developers had
available projects); Sept. 23, 2016 Tr. (Cory) 43:12-19 (did not recall discussions about whether
SIP was diversifying away from Hovnanian, or how it could replace Hovnanian if it lost Hovnanian
as a customer); July 6, 2016 Tr. (Ash) 56:4-24 (did not recall SIP explaining specifics of its
customer diversification strategy).)
148.

The Offering Memo suggested that one of the reasons that SJP was projected to

outperform its historical earnings was because of its plans for customer diversification. (Joint Ex.
1 (Offering Memo), at 40.)
149.

Contrary to the seller’s representation that SIP had been steadily diversifying away

from Hovnanian, the Offering Memo showed that SJP’s dependence on Hovnanian had actually
increased from 44% in 2002 to nearly 60% in 2006.

(Joint Ex. 1 (Offering Memo), at 12

(“Customer Concentration”), 126-28 (“lop Ten Customers”); Demonstrative 22.)

‘

As proof of this diversification strategy, the Offering Memo noted that as of December 2006,
only 20% of SIP’s outstanding bids were on Hovnanian jobs. (Joint Ex. 1 (Offering Memo), at
12, 27; July 6, 2016 Tr. (Ash) 66:22-67:6; May26, 2016 Tr. (Ippensen) 93:5-14.)

25

150.

The Offering Memo offered 380,000 shares of DiPano’s stock, or 38% of all

outstanding shares in SIP for $16 million. (Joint Ex. 1 (Offering Memo), at 8, General Transaction
Overview.)
151.

FBTS and its advisors did not receive a copy of the Yacuzzio Stock Transfer

Agreement prior to the Transaction and were not aware that DiPano had purchased 60% of the
outstanding shares of SIP just two years earlier in March of 2005 for $4.5 million—more than five
times less than the price DiPano proposed to sell the shares to the SIP ESOP. (Pl.’s Ex. 4; P1.’s
Ex. 4(a); Pl.’s Ex. 4(b); Pl.’s Ex. 4(c); May26, 2016 Tr. (Ippensen) 118:20-22.)
152.

FBTS did not obtain any of SJP’s financial information with the exception of what

was contained in the Offering Memo. (See generally Pl.’s Ex. 4; P1.’s Ex. 4(a); P1.’s Ex. 4(b); Pl.’s
Ex. 4(c) (Index of FBTS’s Rule 34 Responses); May 26, 2016 Tr. (Ippensen) 36:18-23 (FBTS did
not receive any audited financials for SIP prior to the Transaction other than those contained in
the Offering Memo) 37:15-38:8 (other than the financial information in the Offering Memo, FBTS,
through Ash, may have verbally received “limited information” prior to the Transaction).)
153.

Cory—the individual that FBTS identified as principally responsible for reviewing

the financial materials—did not receive the Offering Memo, or even know of Duff & Phelps’s
role, before the SIP ESOP Transaction. (May 25, 2016 Tr. (Cory) 98:25-100:25 (no recollection
if she either knew about Duff & Phelps prior to the Transaction or when she saw the Offering
Memo).)
154.

Duff & Phelps relied on historical financial information provided by SIP to draft the

Offering Memo. (May 25, 2016 Tr. (Miscione) 34:17-20.)
155.

The Offering Memo contained a financial overview of SIP, including historical

financial statements for the period 2002 through Estimated fiscal Year End December 2006, five

26

year financial projections from 2007 through 2011, a description of SJP, and a description of the
proposed ESOP Transaction—the sale by DiPano of 380,000 shares of SJP to the ESOP,
representing 38% of all outstanding shares of the Company, for $16 million. (See generally Joint
Ex. 1 (Offering Memo), at 3, Table of Contents.)
156.

After SJP’s 34.4% growth in 2006, Duff& Phelps projected the Company to make

0% growth in 2007. (Joint Ex. 1 (Offering Memo), at 9.) Duff& Phelps also projected 4% growth
in 2008, 6% growth in 2009, 8% growth in 2010, and 6% growth in 2011. (Joint Ex. 1 (Offering
Memo), at 9.)
157.

The Offering Memo attached the 2005 Audited Financial Statements (which

incorporated audited financial information from 2004); Audited Prepared Combined Statements for
2002 to 2005; and a “Draft” combined forecasted financial statement for 2006. (See Joint Ex. 1
(Offering Memo), at 56-120.)
158.

The Offering Memo included a disclaimer that expressly advised FBTS of the

following:
1.

that the Offering Memo does not purport to be all inclusive
or contain all of the information that a prospective investor
might find to be material;

2.

that any prospective investor should conduct its own due
diligence on SJP’s business, financial information and future
prospects;

3.

that Duff & Phelps did not independently verify any of the
information contained in the Offering Memo;

4.

that Duff & Phelps disclaimed any responsibility for the
accuracy of the information contained in the Offering
MemoS

5.

that Duff & Phelps disclaimed any responsibility for any
material information that may have been omitted from the
Offering Memo;

27

6.

that the information contained in the Offering Memo was
only current through the date of the Offering Memo, if not
earlier;

7.

that Duff & Phelps disclaimed any responsibility to
supplement or update any of the information contained in the
Offering Memo;

8.

that the Offering Memo did not purport to be an indication
of the current state of affairs of SJP or constitute a
representation that there has been no change to the business
or affairs of $JP.’2

(Joint Ex. 1 (Offering Memo), at 2.)
159.

As the information contained in the Offering Memo was prepared no later than

January 2007, the Offering Memo did not incorporate SJP’s actual financial performance for the
first quarter of 2007. (May 25, 2016 Tr. (Miscione) 11:15-19, 13:5-14; see generally Joint Ex. 1
(Offering Memo).)
K.

Duff & Phelps Sends Prairie and FBTS the Offering Memo

160.

On or about March 2, 2007, Duff& Phelps sent Prairie a copy of the Offering Memo.

(Joint Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis, attaching Offering Memo).)
161.

Prairie then forwarded a copy of the Offering Memo to FBTS at some point prior to

the Transaction. (May 26, 2016 Tr. (Ippensen) 37:13-20; May25, 2016 Tr. (Miscione) 7:12-20.)
162.

FBTS understood that the seller’s projections in the Offering Memo were based on

financial information that was current no later than December 2006. (May 27, 2016 Tr. (Ippensen)
49:21-50:11.)

12

The Court notes that this list constitutes a summary of, as opposed to a direct excerpt from, Joint
Exhibit 1, at 2.
28

163.

Ippensen interpreted the Offering Memo as containing an industry analysis,

reviewed it, and felt comfortable with the industry analysis. (May 26, 2016 Tr. (Ippensen) 153:20155:4; May 27, 2016 Tr. (Ippensen) 48:10-49:1.)
164.

FBTS and Prairie failed to identify the inconsistency between the Offering Memo’s

representation that SJP was increasingly diversifying away from Hovnanian and the fact that SJP
had grown increasingly reliant on Hovnanian during the past five years. (July 6, 2016 Tr. (Ash)
68:18-70:15 (not specifically aware of how SJP was diversifying away from Hovnanian, or how
long it had been diversifying away); June 29, 2016 Tr. (Aliferis) 68:3-17 (did not recall SJP saying
that it was steadily diversifying away from Hovnanian, and did not specifically recall looking to
see if customer concentration was increasing or decreasing).)
L.

March 12, 2007 Visit

165.

Aliferis of Prairie visited several work sites near SJP’s offices on March 12, 2007.13

(June 29, 2016 Tr. (Aliferis) 43:21-44:6; see also Joint Ex. 9 (Apr. 11, 2007 Draft), at 6.)
166.

Aliferis only recalls being driven around by Dugan to three or four work sites and

spending approximately five minutes at each work site. (June 29, 2016 Tr. (Aliferis) 43:24-44:6,
45:5-14.)
167.

Dugan explained to Aliferis the services that SJP was providing at each work site.

(June 29, 2016 Tr. (Aliferis) 45:5-14.)

13

Although Prairie describes the March 12, 2007 visit as a “due diligence meeting,” the Court
finds no evidence concerning what specific due diligence Prairie conducted on March 12, 2007,
besides visiting several of SJP’s work sites.

29

168.

Aliferis observed firsthand that it was raining “pretty bad” during the March 12,

2007 visit.14 (June 29, 2016 Tr. (Aliferis) 43:21-44:21, 80:21-25; ECF No. 215-1.)
169.

No representatives from FBTS participated in or attended the March 12, 2007 visit.

(June 29, 2016 Tr. (Aliferis) 42:20-43:1; May 26, 2016 Tr. (Ippensen) 11:13-19; July 6, 2016 Tr.
(Ash) 112:2-10.)
170.

Prairie did not inform FBTS of anything discussed at the March 12,2007 visit. (May

26, 2016 Tr. (Ippensen) 11:20-12:6; July 6, 2016 Tr. (Ash) 91:11-17.)
M.

March 13, 2007 Financing for Transaction

171.

By correspondence dated March 13, 2007, First American Bank approved a

financing package for SIP in the amount of $22.5 million in connection with the SIP ESOP
Transaction—in the amount of various notes totaling $18.5 million, and a $4 million line of credit,
which was collateralized by all of $JP’s assets, including its equipment, bank accounts, and
contracts. (FBTS Ex. 31, at D00526-27.)
172.

Dugan and D’Esposito provided information to First American Bank regarding SIP

in connection with First American Bank’s loan to SIP. (May 23, 2016 Tr. (DiPano) 97:2-6.)
173.

The information SIP provided to First American Bank in connection with financing

the SIP ESOP Transaction included SIP’s customers, how SIP obtained work, how SJP bid on
jobs, and how SJP tracked jobs. (May 23, 2016 Tr. (Dugan) 150:8-15.)

‘

On September 21, 2016, Plaintiff filed a Motion for Judicial Notice as to the weather conditions
near SIP’s offices on March 12, 2007. (ECF No. 215.) Defendant responded on September 27,
2016. (ECF No. 217.) Upon reviewing the parties’ submissions, the Court denies Plaintiffs
Motion.

30

174.

First American Bank representatives visited the SJP offices and job sites on more

than one occasion. (May 23, 2016 Tr. (DiPano) 98:17-24, 99:3-7; May 23, 2016 Tr. (Dugan) 153:67.)
175.

In addition to First American Bank, two other lending institutions, LaS alle Business

Credit, LLC and Citibank, issued financing proposals to SJP in connection with the ESOP
Transaction. The financing proposals were expressly subject to those institutions performing due
diligence and they expressly advised SJP that they did not constitute offers of loan commitments.
(FBTS Ex. 29, at 1 (“It should be emphasized that the following is not intended to be nor should it
be construed as a commitment

. . .

to provide the requested financing, but serves merely as a

preliminary description of the possible terms of the proposed financing.. . subject to further review,
analysis, consideration and credit approval

. . . .“);

FBTS Ex. 30, at 1 (“This letter, however, is

neither a contract nor an offer to enter into a contract nor a commitment to obligate [LaSalle
Business Credit] in any way.”), at 5 (“[T]his letter is an expression of interest and is not a binding
commitment of [LaSalle Business Credit] to provide financing.
would be conditioned upon [inter atia]

. . .

. .

[and] [t]he closing of the loan

a satisfactory due diligence review of the business and

financial affairs of [SJP].”).)
176.

The SJP ESOP executed a loan from SJP to fund the Transaction (the “Internal

ESOP Loan”). (May 27, 2016 Tr. (Ippensen) 24:1-5.)
177.

SJP later wrote down the Internal ESOP Loan by an undetermined amount.’5 (May

27, 2016 Tr. (Ippensen) 24:6-10.)

15

FBT$ alleges inconsistent facts regarding the amount of the Internal ESOP Loan write-down.
In its Proposed Findings of Fact, FBTS states that the write-down was $5.5 million, and in its
Proposed Conclusions of Law, FBTS states that the write-down was $9.6 million. (Compare
Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 552 (citing May 27, 2016 Tr.
(Ippensen) 24:6-10), with Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 705 (citing
31

N.

March 2007

178.

On March 16, 2007, Aliferis requested additional information from D’Esposito,

—

Prairie Due Diligence

including, but not limited to, information regarding SJP’s top ten customers in terms of overall
revenue for December 31, 2006; updated backlog’6 and revenue recognition, names and estimated
revenues associated with the current top five to seven job bids; an updated staffing matrix for the
fiscal year ended 2006; and the “composition of revenues for SJP Contractors, National[,] and
Dyna-Tec.” (FBTS Ex. 32.)
179.

Aliferis also spoke with SJP management about backlog to confirm that the

statements concerning backlog in the Offering Memo were correct. (June 29, 2016 Tr. (Aliferis)
64:6-12.)
180.

In addition, Aliferis spoke with SJP management about SJP’s profit margins on

“average”jobs. (June 29, 2016 Tr. (Aliferis) 70:9-14.)
181.

By e-mail message dated March 24, 2007, Aliferis sent D’Esposito and Miscione, a

representative of First American Bank, the preliminary projections that were utilized by Prairie for
the valuation of $JP’s common stock. (FBTS Ex. 9.)
182.

The March 24,2007 e-mail message requested that D’Esposito “review the enclosed

analysis and verify the comments” so that Prairie could move forward with its valuation report.
(FBT$ Ex. 9.)

July 6, 2016 Tr. (Ash) 127:3-8).) FBTS fails to cite to, and the Court is unaware of, any documents
presented at trial that contain the actual amount of the write-down. Because the specific amount
of the write-down is immaterial to the Court’s decision for reasons set forth in the Discussion
section below, the Court need not determine whether the write-down was $5.5 million or $9.6
million.
16

Backlog is work on hand (i.e., new work or a previous year’s unfinished contract work) that has
yet to be performed. (May 23, 2016 Tr. (DiPano) 41:3-14.)
32

183.

To verify the projections, Prairie reviewed SJP’s updated financial information,

which was provided by SJP. (June 29, 2016 Tr. (Aliferis) 79:20-25.)
184.

Prairie relied on the information provided by SJP and did not undertake an

independent analysis to verify the underlying rationale. (June 29, 2016 Tr. (Aliferis) 79:15-25.)
185.

On March 28, 2007, D’Esposito sent an e-mail message to Aliferis, copying

Miscione and Daniel Christoffel of Duff & Phelps, attaching the draft audited combined financial
statements for the period ending December 31, 2006 prepared by the Curchin Group. (FBTS Ex.
34; May24, 2016 Tr. (D’Esposito) 30:2-5.)
186.

In the March 28, 2007 e-mail message, D’Esposito informed Prairie that SJP

exceeded its projected earnings before interest, tax, depreciation, and amortization (“EBITDA”) for
2006 of $9.5 million with an adjusted EBITDA for 2006 of $11 million. (FBTS Ex. 34; May 24,
2016 Tr. (D’Esposito) 5 1:12-25.)
187.

Prairie asked for information regarding the operational overview of SJP and the

different services offered by SIP in the market. (June 29, 2016 Tr. (Aliferis) 119:7-15.)
188.

Prairie also wanted to see historical audited financial statements, as well as

information relating to backlog, customers, suppliers, and year-to-date financial information.
(June 29, 2016 Tr. (Aliferis) 119:7-20.)
189.

SJP provided all of the information that Prairie requested.

(June 29, 2016 Tr.

(Aliferis) 119:25-120:1.) Most of this information was already contained in the Offering Memo.
(May 29, 2016 Tr. (Aliferis) 119:11-13 (describing information requested as “[p]retty much
consistent with—more or less consistent with what was [previously] provided by the [C]ompany’s
financial advisor”).)

33

0.

March 29, 2007 Teleconference

190.

On March 29, 2007, Ash and Cory of FBTS held a conference call with two of

FBTS’s attorneys from SFE&G to discuss the Stock Appreciation Rights (“SARs”) schedule and
the terms of the indemnification agreement in the Stock Purchase Agreement (the “SPA”). (FBTS
Ex. 11 (Mar. 29, 2007 Conference Call Memo), at 1.)
191.

The conference call attendees were EB Committee members Cory and Ash, as well

as FBTS’s legal counsel, Greenapple and Margaret Steere.

(FBTS Ex. 11 (Mar. 29, 2007

Conference Call Memo), at 1.)
192.

No one from Prairie participated in the March 29, 2007 conference call. (FBTS Ex.

11 (Mar. 29, 2007 Conference Call Memo), at 1.)
193.

Cory took notes (“March 29, 2007 Conference Call Memorandum”) during the

March 29, 2007 conference call. (FBTS Ex. 11 (Mar. 29, 2007 Conference Call Memo), at 1-2;
May 25, 2016 Tr. (Cory) 126:15-127:6.)
194.

According to the March 29, 2007 Conference Call Memorandum, the only issues

discussed were the SARs and the proposed indemnification clause. (FBTS Ex. 11 (Mar. 29, 2007
Conference Call Memo), at 1.)
195.

SARs are a form of incentive compensation designed to benefit company

management whereby management receives a bonus when the stock price of the company rises.
(May 25, 2016 Tr. (Miscione) 54:23-55:5; May 25, 2016 Tr. (Cory) 107:21-25.)
196.

The participants of the March 29, 2007 conference call did not discuss what

consequence SARs had on the fair market value of SJP and did not ask Prairie to quantify the effect
of SARs on the final purchase price. (May 25, 2016 Tr. (Cory) 108:22-109:5.)

34

197.

Cory asked a single question about the SPA, specifically, how Section 8.5 would

work. (FBTS Ex. 11 (Mar. 29, 2007 Conference Call Memo), at 2; May 25, 2016 Tr. (Cory) 129:713.)
19$.

The attendees discussed the indemnification clause in the SPA and noted that the

indemnification should come from the seller, the party receiving the money, not the Company.
(FBTS Ex. 11 (Mar. 29, 2007 Conference Call Memo), at 1; May 25, 2016 Tr. (Cory) 130:6-16.)
The meeting notes indicate that Greenapple requested a revision to the indemnification clause.
(FBTS Ex. 11 (Mar. 29, 2007 Conference Call Memo), at 1.)
199.

The terms of indemnification were not negotiated by FBTS, as FBTS merely sought

to change the indemnification provision to comply with ERISA

§

410.17 (FBTS Ex. 11 (Mar. 29,

2007 Conference Call Memo), at 1; May 25, 2016 Tr. (Cory) 130:6-21.)
P.

Prairie’s April 11, 2007 Draft Valuation Report & Fairness Opinion

200.

On April 11, 2007, Prairie sent a draft valuation report (“April 11, 2007 Draft

Valuation Report”) to Cory at FBTS. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 1.)
201.

It is typical to have a draft valuation report dated as of the transaction closing and

a final report generated after the date of closing to allow for the final report to accurately reflect
the valuation on the closing date. (June 21, 2016 Tr. (Fischer) 62:4-63:12.)

17

There is no evidence that the terms of the indemnification agreement were “negotiated,” as
opposed to being revised to comply with ERISA § 410. See Johnson v. Couturier, No. 05-2046,
2008 WL 4443085, at *5 (E.D. Cal. Sept. 26, 2008), aff’d and remanded, 572 F.3d 1067 (9th Cir.
2009) (“A number of federal courts have held that under ERISA § 410, where an ESOP owns a
substantial portion of the sponsoring company’s stock, it would be inconsistent with the intentions
of ERI$A to allow a trustee who has breached his fiduciary duties to the ESOP to be indemnified
by the sponsoring company where the ESOP would indirectly bear the financial burden.”)
(citations omitted).
35

202.

Prairie typically spends two to two-and-a-half months on a valuation report, during

which Prairie works on multiple simultaneous engagements. (June 29, 2016 Tr. (Aliferis) 136:1116, 169:23-170:24.)
203.

The general time period spent on valuation periods depends on the circumstances

of each particular transaction. (June 29, 2016 Tr. (Aliferis) 169:23-170:24.)
204.

In the April 11, 2007 Draft Valuation Report, the Industry Analysis section was

missing. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 30.)
205.

It is a best practice for a valuation professional to include an industry analysis

section in a valuation report. (June 30, 2016 Tr. (Van Horn) 130:3-6; July 14, 2016 Tr. (Messina)
72:1-3; June 30, 2016 Tr. (Gross) 23:1-4.)
206.

The industry analysis section: (1) tells the reader that the valuation professional

reviewed relevant industry and economic factors that could potentially impact the subject
company; and (2) educates the reader about important trends and important factors that could
influence the value of the subject company. (June 30, 2016 Tr. (Van Horn) 131:10-19.)
207.

A prudent investor would not have gone forward with the Transaction given that

the April 11, 2007 Draft Valuation Report was missing information about SJP’s industry and
region. (Sept. 19, 2016 Tr. (Puntillo) 27:10-24.)
202.

After the Transaction, the April 27, 2007 Post-Transaction Valuation Report

contained an Industry Analysis section, which a prudent investor would have considered to be
material prior to the Transaction for determining whether the tenor of the industry analysis for SJP
reasonably reflected SJP’s projected performance. (Sept. 19, 2016 Tr. (Puntillo) 85:15-86:14.)

36

209.

The April 27, 2007 Post-Transaction Valuation Report contained no discussion

explaining or justifying the financial projections for SIP in light of the unfavorable economic
trends inthehousingindustry. (June 30, 2016 Tr. (Van Horn) 130:20-131:19; 174:2-17.)
210.

Prairie used SIP’s record 2006 financial performance as the baseline for its

projections even though it resulted in projections that deviated from SIP ‘s five-year historical
average performance, due to, inter a/ia, the recent growth of the Company. (Stipulation of Facts

¶J 51-52; see also July 5, 2016 Tr.

(Stoesser) 24:5-7 (“The valuation reports by Prairie.

.

.

and by

Duff& Phelps, use[] a baseline tofl 2006, which was a really strong year for SJP”); July 14,2016
Tr. (Messina) 96:16-22.)
211.

With the exception of the Industry Analysis section, Prairie’s April 11, 2007 Draft

Valuation Report contained many of the key components that are typical within the ESOP industry:
a review of the transaction, a discussion of Prairie’s background and experience, a discussion of
the materials it reviewed, a discussion of SIP’s historic financial data, a discussion of SJP’s
projections of future performance, and a discussion of how Prairie came up with its valuation,
including the methodologies used, as well as a narrative about the Company and the economy.
(June 21, 2016 Tr. (Fischer) 41:23-42:17.)
212.

Both the April 11, 2007 Draft Valuation Report and the April 27, 2007 Post

Transaction Valuation Report contained numerous errors and were missing some valuation
components. (See, e.g., July 14,2016 Tr. (Messina) 105:6-106:14 (Plaintiffs expert witness, Dana
Messina (“Messina”), concluded that Prairie committed a host of valuation errors); see generally
June 30, 2016 Tr. (Van Horn) 153:5-188-20 (Defendant’s expert witness, Bradley Van Horn (“Van
Horn”) identified errors among valuation components).)

37

213.

In preparation of the April 11, 2007 Draft Valuation Report, Prairie’s review

included a variety of data points, such as SIP’s revenue, profitability, working capital, and discount
rates. (June 29, 2016 Tr. (Aliferis) 122:19-123:7.)
214.

In preparation of the April 11, 2007 Draft Valuation Report, Prairie and FBTS did

not ask Duff & Phelps follow-up questions concerning: (a) the projected growth rate; (b) the
projected margins; and (c) the assumptions and justifications supporting Duff & Phelps’s
projections.’8 (May 25, 2016 Tr. (Miscione) 14:21-16:8 (no recollection of being asked by FBTS
or Prairie how Duff & Phelps arrived at the compound annual growth rate (“CAGR”)), 16:21-17:5
(no recollection of being asked how Duff & Phelps arrived at EBITDA or gross profit margins),
83:9-12 (no recollection of being asked what assumptions were used in seller’s financial model);
May 24, 2016 Tr. (D’Esposito) 13:3-6 (no recollection of being asked if 2006 earnings were
sustainable); June 29, 2016 Tr. (Aliferis) 114:12-15 (no recollection of what specific financial
information was provided); 14:3-13 (no specific recollection of how SIP’s management described
SJP); 23:5-16 (no specific recollection of discussing the peer group with SIP), 58:18-20 (did not
recall if SJP identified its competitors by name), 59:2-12 (no specific recollection of discussing
modifications to SIP’s equipment), 68:12-17 (no recollection of analyzing customer concentration
trend), 77:15-78:9 (no specific recollection of discussing projections with Duff& Phelps or SIP’s
management), 89:11-24 (did not recall comparing size of SIP’s bids after the change of
ownership).)

18

Further, there is no evidence that Aliferis spoke with or obtained information directly from SIP’s
accountant. (June 29, 2016 Tr. (Aliferis) 78:21-79:11 (did not know of the Curchin Group or
Robert Fouratt); July 1, 2016 Tr. (Fouratt) 23:22-25 (could not recall speaking with Aliferis prior
to the Transaction).)

32

215.

Prairie by and large accepted, without verification, representations made by SIP’s

management and financial advisor concerning SJP’s business (e.g., its reputation, contracts,
backlog, bidding, and bid rate), as well as its historical and projected financial performance. (June
29, 2016 Tr. (Aliferis) 50:1-52:16; June 30, 2016 Tr. (Gross) 24:6-25:2, 25:14-26:6.)
216.

Prairie copied verbatim information from the Offering Memo, including

information about SIP and projections provided SJP, and pasted that information into the April 11,
2007 Draft Valuation Report. (Compare Joint Ex. 1 (Offering Memo), at 22-32, with Joint Ex. 9
(Apr. 11, 2007 Draft), at 8-17; May 26, 2016 Tr. (Stipulation by D. Schnapp) 66:15-20
(establishing Prairie’s copying and pasting).)
217.

Prairie received financial and company information directly from SJP or its

advisors, which Prairie used in preparing the April 11, 2007 Draft Valuation Report. (Stipulation
of Facts

¶ 43.)

218.

It is typical in ESOP transactions that valuation companies get information relating

to the company from the company itself. (June 21, 2016 Tr. (Fischer) 42:18-23.)
219.

Dugan and D’Esposito provided information about SIP to Duff & Phelps and

Prairie.t9 (May 23, 2016 Tr. (DiPano) 33:17-35:4, 42:7-19-43:2.)

‘

FBTS further alleges that Dugan and D’Esposito later began to communicate directly with
FBTS. (May 23, 2016 Tr. (DiPano) 42:7-19-43:2.) Upon reviewing the evidence presented and
assessing the credibility of the witnesses, however, the Court finds that Dugan and D’Esposito had
direct communications with Prairie, but not with FBTS. (See May, 26 2016 Tr. (Ippensen) 75:1920; May 27, 2016 Tr. (Ippensen) 31:2-7; July 6, 2016 Tr. (Ash) 61:9-12; Sept. 23, 2016 Tr. (Cory)
51:24-52:4.)

39

220.

Dugan provided information to Prairie20 regarding contracts, backlog, customer

information, and field operations. (May 23, 2016 Tr. (DiPano) 78:13-79:3; May 23, 2016 Tr.
(Dugan) 149:17-150:2.)
221.

FBTS did not review any of the financial information that Prairie received to ensure

that it was accurate or complete. (May 26, 2016 Tr. (Ippensen) 34:14-35:13.)
222.

The EB Committee typically receives a draft valuation report a few days before the

transaction is tentatively set to close. (May 27, 2016 Tr. (Serbin) 133:12-16.)
223.

The April 11, 2007 Draft Valuation Report was provided to FBTS less than three

business days before the Transaction, and less than two business days before Prairie’s presentation
at the April 13, 2007 conference call. (Stipulation of Facts ¶48 (describing conference call on April
13, 2007); Joint Ex. 5 (Stock Purchase Agreement).)
224.

Prairie did not provide FBTS with any draft valuations prior to April 11, 2007.

(Pl.’s Ex. 4, P1.’s Ex. 4(a), Pl.’s Ex. 4(b), P1.’s Ex. 4(c) (Index of FBTS Rule 34 Responses); May
25, 2016 Tr. (Cory) 102:2-5 (testifying that she did not recall receiving a draft valuation report
prior to April 11, 2007); May 26, 2016 Tr. (Ippensen) 12:7-13:1 (testifying that he was not aware
of receiving any draft valuation reports prior to April 11, 2007 and that if FBTS had received a
draft valuation report prior to April 11, 2007, it would have been kept in FBTS’s files); May 27,
2016 Tr. (Serbin) 129:7-9 (testifying that the April 11, 2007 Draft Valuation Report is the only
valuation report that she could recall); July 6, 2016 Tr. (Ash) 21:17-20, 29:20-23 (testifying that

20

In his testimony, DiPano refers generally to FBTS and Prairie as “they” when describing who
requested information from SJP in connection with the SJP ESOP Transaction. (May 23, 2016 Tr.
(DiPano) 78:13-79:3.) In light of the lack of evidence that FBTS received financial documents
directly from SJP, and after assessing the credibility of the witnesses, the Court finds that the
information was provided directly to Prairie but not directly to FBTS.
40

she did not recall receiving a draft valuation prior to April 11, 2007); June 29, 2016 Tr. (Aliferis)
8:5-8, 94:22-25.)
225.

FBTS had an obligation to review and to understand the April 11, 2007 Draft

Valuation Report. (May 26, 2016 Tr. (Ippensen) 145:21-23.)
226.

Ippensen reviewed the April 11, 2007 Draft Valuation Report prior to the

Transaction. (May 26, 2016 Tr. (Ippensen) 133:17-134:5.)
227.

When reviewing the April 11, 2007 Draft Valuation Report, Ippensen performed

his own “capitalized cash flow” calculation of market valuation using historical information as a
“gut check.” (May 27, 2016 Tr. (Ippensen) 13:18-14:19.)

228.

The capitalized cash flow method is derived from the historical cash flow divided

by the discount rate adjusted for growth. (May 27, 2016 Tr. (Ippensen) 13:15-14:1.)
229.

To perform the calculation, Ippensen added together the historical EBITDA figures

for 2004, 2005, and 2006 and divided that number by three. That number was then divided by the
19.25 discount factor minus four percent, i.e., the expected growth rate in the April 11, 2007 Draft
Valuation Report. (May 27, 2016 Tr. (Ippensen) 81:5-82:25; Joint Ex. 9 (Apr. 11, 2007 Draft), at
79.)
230.

In making his “gut-check” calculation, Ippensen did not use SJP’s historical cash

flows, but rather, its historical EBITDA. Additionally, Ippensen did not look at the full historical
period set forth in the April 11, 2007 Draft Valuation Report, but rather only the three most recent
years (two of which were SIP’s highest performing years). (May 27, 2016 Tr. (Ippensen) 81:982:10; see also Joint Ex. 1 (Offering Memo), at 34, 37.)
231.

Ippensen’ s results from the capitalized cash flow method for valuation comported

with Prairie’s valuation of SIP. (May 27, 2016 Tr. (Ippensen) 14:2-10.)

41

232.

When Ippensen reviewed the April 11, 2007 Draft Valuation Report, he did so to

ensure that Prairie’s due diligence procedures, as set forth on page six, comported with IRS Ruling
59-60. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 6; May 26, 2016 Tr. (Ippensen) 184:6-20.)
233.

$erbin also read and reviewed the April 11, 2007 Draft Valuation Report prior to

the meeting on April 13, 2007, at which she voted to approve the Transaction. (May 27, 2016 Tr.
(Serbin) 106:12-107:21.)
234.

Prairie’s fairness opinion addressed “whether the consideration to be paid for the

shares by the ESOP is equal to or less than their fair market value as of the date of closing, and
whether the Transaction is fair to the ESOP Trust from a financial point of view.” (Joint Ex. 7
(Prairie Engagement Agreement), at 2.)
235.

The purpose of Prairie’s fairness opinion was to opine as to whether the Transaction

was fair from a financial point of view to the ESOP and whether the terms of financing were
reasonable, and set forth the terms under which it conducted its analysis. (June 30, 2016 Yr.
(Gross) 48:14-49:5.)
236.

Although FBTS retained Prairie to provide a valuation report, FBTS understood

that FBTS was ultimately responsible for making the determination of the fair market value of
DiPano’s shares. (May 26, 2016 Tr. (Ippensen) 7:5-1 1.)
237.

In its fairness opinion, Prairie opined that the consideration the SJP ESOP was

paying as part of the Transaction did not exceed fair market value, and that the terms and conditions
of the Transaction were fair to the SJP ESOP. (June 30, 2016 Tr. (Gross) 58:18-59:12.)
238.

Prairie’s fairness opinion stated:
In completing this engagement, we have relied on information
provided by the E$OP Trustee and the Company including, but not
limited to, financial statements, projections, product information,
facilities descriptions, employee data, and other information as may

42

have been requested. This information has been accepted as being
accurate without independent verification by us.
(Joint Ex. 11 (Apr. 16, 2007 Fairness Opinion), at 3.)
239.

Typically, one of the components of a valuation report is “[a] statement that the

data received has been relied on with/without independent verification.” (June 30, 2016 Tr. (Van
Horn) 150:12-24.) This statement puts the reader (i.e., FBTS) “on alert” that the valuation advisor
(i.e., Prairie) did not independently verify the information that it received from its sources and that
the burden for conducting any necessary due diligence was shifted to the reader (i.e., FBTS). (June
30, 2016 Tr. (Van Horn) 151:12-21.)
240.

In the normal course of performing a valuation, Prairie often received financial

statements; however, Prairie does not undertake an independent audit of that information as Prairie
is not an accounting firm. (June 30, 2016 Tr. (Gross) 23 :21-24:12; June 29, 2016 Tr. (Aliferis)
4:20-5:6.)
241.

Unless information provided by the seller is implausible on its face, Prairie will

typically accept such information as true. (June 29, 2016 Tr. (Aliferis) 80:21-81:12, 83:6-84:16;
June 30, 2016 Tr. (Gross) 25:14-19.)
242.

Prairie relied on projections of SIP’s future performance to reach its conclusions

regarding the value of DiPano’s stock. (Stipulation of Facts ¶ 47.)
243.

In the April 11, 2007 Draft Valuation Report, Prairie used the discounted cash flow

(“DCF”) method and the market multiple method in preparing its valuation. (Joint Ex. 9 (Apr. 11,
2007 Draft), at 46; June 29, 2016 Tr. (Aliferis) 18:11-23; May 26, 2016 Tr. (Ippensen) 103:16-20;
Stipulation of facts ¶ 49.)

43

244.

Prairie weighed the market multiple method and the DCF method, fifty percent

each in the April 11, 2007 Draft Valuation Report. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 46; May
26, 2016 Tr. (Ippensen) 103:16-109.)
245.

Prairie’s conclusion of SJP’s value under the DCF method was $36,105,000. (Joint

Ex. 9 (Apr. 11, 2007 Draft), at 46.)
246.

Prairie’s conclusion regarding SJP’s value under the market multiple method was

$53,607,000. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 46.)
247.

The market multiple method and the DCF method were both standard valuation

methods used in the ESOP industry and were appropriately used by Prairie. (June 30, 2016 Tr.
(Van Horn) 82:13-83:8.) It was appropriate to give each valuation method fifty percent weight.
(July 14, 2016 Tr. (Messina) 159:1-23.)
248.

Under the DCF method, the value of a company is derived by adding all of the

company’s projected future cash flows and discounting them to their present value. (July 14, 2016
Tr. (Messina) 70:13-21; June 30, 2016 Tr. (Gross) 18:1-9; May 26, 2016 Tr. (Ippensen) 186:5-17.
June 29, 2016 Tr. (Aliferis) 23:20-24; 148:4-14.)
249.

Under the market multiple method, the value of a closely held company is derived

by identifying similar publicly traded companies (the “peer group”), expressing the known market
value of the peer group (based on publicly traded share price) as a function of a financial metric,
and then applying that formula to derive the privately held company’s value. (June 30, 2016 Tr.
(Gross) 15:5-16:2; July 14, 2016 Tr. (Messina) 111:23-112:8.)
1.
250.

FBTS’s Review ofPrairie’s Reliance on 2006 Performance

FBTS understood that the financial projections used by Prairie were a leading driver

of Prairie’s value conclusion under the DCF method. (May 26, 2016 Tr. (Ippensen) 3 9:1-40:1; July

44

14, 2016 Tr. (Messina) 70:22-71:4 (explaining that the driving factors of the DCF method are the
cash flow projections and discount rate).)
251.

SJP experienced significant, positive revenue growth in the years 2005 and 2006

and reported record revenues, gross profits, and EBITDA for 2006.21 (Joint Ex. 9 (Apr. 11, 2007
Draft), at 72, 79; May 24, 2016 Tr. (D’Esposito) 11:6-12:11.)
252.

$JP’s growth in the years 2005 and 2006 coincided with DiPano’s assumption of

the CEO position at SJP. (May 24, 2016 Tr. (D’Esposito) 31:4-8.)
253.

FBTS attributed SJP’s growth in 2005 and 2006 to the change in management

structure. (May 27, 2016 Tr. (Ippensen) 64:21-65:9; May 27, 2016 Tr. (Serbin) 118:6-11.)
254.

Although FBTS may have attributed SJP’s growth to change in management,

FBTS’s belief was unsubstantiated given that FBTS failed to conduct any analysis or diligence to
determine the actual effect of management.22
255.

FBTS noted $JP’s growth in 2005 and 2006 by customer, utilizing the Top Ten

Customer Lists in the Offering Memo. (Joint Ex. 1 (Offering Memo), at 126-28; May 26, 2016
Tr. (Ippensen) 87:22-88:4.)

21

$JP’s estimated growth between 2005 and 2006 in terms of net revenues and growth was 34.4%
or $60,831,000. (Joint Ex. 1 (Offering Memo), at 122.)

22

Defendant contends that DiPano “modernized $JP by, among other things, making upgrades to
$JP’s equipment fleet and computer systems, as well as changing the management of SJP’s
maintenance facility and the heavy equipment tracking system.” (Def.’s Proposed Findings of
Fact and Conclusions of Law ¶ 23 (citing May 23, 2016 Tr. (DiPano) 48:21-49:3).) There is no
evidence, however, that Prairie or FBTS knew or considered the effect of the change in
management structure prior to the SJP ESOP Transaction. (See June 29, 2016 Tr. (Aliferis) 60:520, 62:7-63:4 (Aliferis was unaware that SJP had any proprietary software, and had no recollection
of discussing SJP’s computer system either with SJP or FBTS) (citing June 29, 2016 Tr. (Aliferis)
60:5-20, 62:7-63:4); see also June 29, 2016 Tr. (Aliferis) 59:18-60:17 (did not recall any
discussions with SIP regarding upgrading its fleet beyond the ordinary periodic maintenance, nor
did he recall discussing upgrades to its computer system).)

45

256.

FBTS did not conduct a detailed analysis of SIP’s growth in 2005 and 2006 by

customer, however, and failed to identify, for example, the inconsistency between SIP’s
representation that it was diversifying away from Hovnanian and the fact that SIP had grown
increasingly reliant on Hovnanian during the past five years. (CFF
257.

¶ 1 64.)23

FBT$ also attributed the 2006 growth to SJP’s bidding on larger projects and

moving into areas outside of New Jersey, such as New York. (May 27, 2016 Tr. (Ippensen) 65:1015.) FBTS, however, did not independently verify whether this was true. (May 26, 2016 Tr.
(Ippensen) 59:10-61:17; 80:8-15 (unable to identify any evidence except SJP’s top customers for
2006 as reflected in the Offering Memo); July 6, 2016 Tr. (Ash) 43:7-16.)
258.

The Offering Memo revealed that while some customer revenues were growing

(e.g., Hovnanian), other customer revenues were decreasing or wholly disappeared (e.g., Sharp,
Millennium, Sunrise, Kara Homes, Inc. (“Kara Homes”),24 Artisan Group, Continental, Signature,
Halpem, American Properties, Nordic, Bukiet, $GS Communities). (Joint Ex. 1 (Offering Memo)
at 126.)
259.

Ippensen reviewed the projections in the April 11, 2007 Drafi Valuation Report and

felt “extremely comfortable” with the projected 0% growth for 2007.

(May 26, 2016 Tr.

(Ippensen) 186:24-187:5.)

23

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
24

Additionally, FBTS and Prairie did not discuss the effect of Kara Homes’s bankruptcy on either
SIP’s ability to match its 2006 revenues, or on SJP’s stated strategy of diversifying away from
Hovnanian. (May 26, 2016 Tr. (Ippensen) 102:21-103:1; May 23, 2016 Tr. (Dugan) 176:9-15,
189:17-23.)

46

260.

Ippensen “remember[ed] distinctly” when reviewing the projections seeing few

other reports in his sixteen years of experience that projected 0% growth the year following 34%
growth. (May 26, 2016 Tr. (Ippensen) 186:24-187:8.)
261.

Ippensen believed that the projections, which projected 0% growth for 2007 and

increased growth in the following years, were “extremely conservative.” (May 26, 2016 Tr.
(Ippensen) 186:24-187:1 1.)
262.

Ippensen did not think that the financial projections contained in the April 11, 2007

Draft Valuation Report were unrealistic for various reasons, including growth in SJP’s revenue
over the prior five years; projected zero percent growth for 2007; $58 million backlog going into
2007; $8.5 million of awarded bids for 2007; and outstanding bids for 2007, which SJP could also
have been awarded. (May 27, 2016 Tr. (Ippensen) 16:2-19.)
263.

The financial projections in the April 11, 2007 Draft Valuation Report increased

SJP’s total operating expenses between 2006 and 2007 and continued to increase the operating
expenses from 2007 to 2011. (May 27, 2016 Tr. (Ippensen) 17:12-22; Joint Ex. 9 (Apr. 11, 2007
Draft), at 79.)
264.

SJP was projected to achieve revenue growth of $16 million during the five years

2007 through 2011, which is $1 million more than the revenue growth that SJP achieved in 2006
as compared to 2005. (May 27, 2016 Tr. (Ippensen) 21:6-20; Joint Ex. 9 (Apr. 11, 2007 Draft), at
79.)
265.

Prairie projected that SJP would generate average revenues, gross profits, gross

profit margins, EBITDA, EBITDA margins, and cost of sales margins that deviated from SIP’s
historical five-year average. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)

47

266.

Prairie projected that SJP would match its 2006 record gross profits in 2007 and

achieve record gross profits in each subsequent year. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)
267.

Prairie’s projected cost of sales, cost of sales margins, and income from operations

margins were more favorable than either SJP ‘S five-year average, three-year average, or two-year
average historical margins. (June 29, 2016 Tr. (Aliferis) 28:4-30:3, 31:1-16; Joint Ex. 9 (Apr. 11,
2007 Draft), at 72, 79.)
268.

The financial projections in the April 11, 2007 Draft Valuation Report decreased

EBITDA for 2007 by five percent as compared to 2006. (May 27, 2016 Tr. (Ippensen) 17:2318:17; Joint Ex. 9 (Apr. 11,2007 Draft), at 79. June 29, 2016 Tr. (Aliferis) 33:2-10; Joint Ex. 9
(Apr. 11, 2007 Draft), at 79.) SJP’s 2007 projected EBITDA, however, was still approximately
twice as large as $JP’s year historical average. (See Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)
269.

When calculating the projected revenues and sales for SJP, Prairie took into account

whether SJP had sufficient equipment, personnel, and finances to realize the projections, based on
the information supplied by SJP. (June 29, 2016 Tr. (Aliferis) 3 5:7-15; Joint Ex. 9 (Apr. 11, 2007
Draft), at 79.)
270.

Although Prairie projected SJP’s costs to increase because $JP was in a capital

intensive business, (June 29, 2016 Tr. (Aliferis) 3 5:7-22; Joint Ex. 9 (Apr. 11, 2007 Draft), at 79),
Prairie projected that SJP’s costs as a percentage of sales would be 5.5% less than SJP’s historical
cost as a percentage of sales (Joint Ex. 9 (Apr. 11, 2007 Draft), at 79; see also Demonstrative 3.)
271.

SJP’s 2006 unadjusted income from operations was 16.25%. (Joint Ex. 9 (Apr. 11,

2007 Draft), at 72.) SJP’s five-year, three-year, and two-year average unadjusted income from
operations were: 9.92%, 9.89%, and 12.99%, respectively. (Joint Ex. 9 (Apr. 11, 2007 Draft), at
72.)

48

272.

Further, from 2002 to 2003, SIP’s unadjusted income from operations decreased

from 13.05% to 6.90%; and from 2003 to 2004, SJP’s unadjusted income from operations
decreased from 6.90% to 3.86%. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 72.)
273.

Prairie believed that the 16.25% unadjusted income from operations in 2006

demonstrated that SIP’s profitability had been increasing, specifically since 2004. (June 29, 2016
Tr. (Aliferis) 151:11-20.)
274.

Prairie also determined that the gross profit projections for 2007 to 2011, which

mirrored the 25.4% achieved by SIP in 2006, were reasonable based on discussions with
management, historical trend analysis, growth in revenue and profitability, strong backlog
numbers, and continued solicitation of bids on new projects. (June 29, 2016 Tr. (Aliferis) 152:16153:10; Joint Ex. 9 (Apr. 11, 2007 Draft) at 72.)
275.

Aliferis concluded that the drivers for SJP’s profitability were an increase in

revenues, due to SIP’s change in management, and an increase in profit margins, due to SIP’s
ability to provide a variety of services for each job (meaning that SIP was vertically integrated and
could offer a more comprehensive array of services per job, permitting it to bid for larger projects).
(JointEx. 9 (Apr. 11,2007 Draft), at 51; June29, 2016 Tr. (Aliferis) 87:17-89:24, 151:14-25; May
23, 2016 Tr. (DiPano) 46:2-20.) For example, SIP had the ability to clear a work site, to process
refuse from the site, and then to perform work on the site, such as paving, the creation of roads,
and other necessary infrastructure for home building activity. (May 25, 2016 Tr. (Miscione) 24:310.)
276.

As a function of SIP’s ability to crush and recycle rock on site, the Offering Memo

stated that SIP was the “only vertically integrated site developer in the region.” (Joint Ex. 1
(Offering Memo) at 11.)

49

277.

Notwithstanding the Offering Memo’s description of SJP as “vertically integrated,”

SJP was only partially vertically integrated because it did not supply its own commodity products,
such as asphalt, through its value chain. (July 14, 2016 Tr. (Messina) 49:21-50:6.)
278.

Prairie believed that SJP’s vertical integration allowed SJP to achieve its record

revenues in 2006 and to bid on larger more profitable projects. (June 29, 2016 Tr. (Aliferis) 89:710, 99:15-20.)
279.

SIP had been partially vertically integrated, however, since at least 1996 when

Dyna-Tec’ s formation completed the SIP trifecta of South Jersey, National, and Dyna-Tec. (Joint
Ex. 1 (Offering Memo) at 25; May 23, 2016 Tr. (DiPano) 27:20-25 (testifying that SJP had been
using rock crushing equipment since 1996); May 25, 2016 Tr. (Miscione) 24:11-25:13.)
280.

SJP’s partial vertical integration did not provide it with any long-term sustainable

competitive advantages because smaller companies had the ability to subcontract different parts of
the value chain, thereby vertically integrating themselves. (July 14, 2016 Tr. (Messina) 53:10-18;
Joint Ex. 1 (Offering Memo), at 46 (stating that “[s]mall companies can compete effectively by
subcontracting their services to larger firms, specializing by type of work, or becoming a preferred
contractor for local builders and developers”).)
281.

Although cost advantages owing to a company’s vertical integration are typically

quantified in a valuation report (July 14, 2016 Tr. (Messina) 53:22-54:3), SJP’s purported cost
advantages due to its vertical integration were not quantified in the April 11, 2007 Draft Valuation
Report (see generally Joint Ex. 9 (Apr. 11, 2007 Draft)).
282.

The EBITDA gross profits and EBITDA margins in the April 11, 2007 Draft

Valuation Report were more favorable to a higher valuation of SIP than the same computations in
the Offering Memo. (May 26, 2016 Tr. (Ippensen) 54:9-2 1.)

50

283.

FBTS was never told by Prairie why the difference in the EBITDA gross profits

and EBITDA margins between the Offering Memo and the April 11, 2007 Draft Valuation Report
arose. (May 26, 2016 Tr. (Ippensen) 54:22-55:6.)
iL
284.

FBTS’s Review ofPrairie’s Consideration ofBacklog

Backlog is work on hand (i.e., new work or a previous year’s unfinished contract

work) that has yet to be performed. (May 23, 2016 Tr. (DiPano) 41:3-14.)
285.

SJP’s backlog at the end of 2006 was approximately $58 million.25 (Joint Ex. 1

(Offering Memo), at 27; Joint Ex. 9 (Apr. 11, 2007 Draft), at 13; June 29, 2016 Tr. (Aliferis)
153 :23-154: 1.)
286.

As stated in the Offering Memo, SJP’s backlog grew from 2005 to 2006 as a result

of SJP’s bidding on larger multi-phase projects and an increased work rate. (May 23, 2016 Tr.
(DiPano) 70:7-25; Joint Ex. 1 (Offering Memo), at 27.)
287.

In contrast to $JP’s backlog at the end of 2006 of $58 million, SJP’s backlog at the

end of 2005 was $38 million and 2006 was SJP’s most profitable year. (Joint Ex. 9 (Apr. 11, 2007
Draft), at 13, 32.)
288.

SJP expected to work on 75% of the $58 million backlog in 2007. (May 26, 2016

Tr. (Ippensen) 74:15-21; Joint Ex. 1 (Offering Memo), at 27; Joint Ex. 9 (Apr. 11, 2007 Draft), at
13.)
289.

It would have been unusual for Prairie to make any sort of independent verification

of $JP’s backlog. (June 30, 2016 Tr. (Van Horn) 97:11-98:8.)

25

SJP’s 2006 year-end backlog was comprised of contracts that SJP had been awarded in 2002,
2003, 2004, 2005, and 2006. (Joint Ex. 1 (Offering Memo), at 26; May 23, 2016 Tr. (Dugan)
130:2-19 (explaining that the prefix on the Job Number referred to the year in which the contract
had been awarded).)

51

290.

Prairie did not obtain or review any of SIP’s contracts supporting the backlog.

(June 29, 2016 Tr. (Aliferis) 64:13-65:16, 84:13-16.)
291.

FBTS did not independently verify SJP’s representations concerning backlog prior

to the Transaction.26
292.

The significant amount of backlog SIP had going into 2007 was one of the reasons

FBTS and Prairie felt confident that SIP would be able to realize its 2007 projections as set forth
in the April 11, 2007 Drafi Valuation Report. (May 26, 2016 Tr. (Ippensen) 75:6-9; May 25, 2016
Tr. (Cory) 143:19-23, 164:23-165:9; May 27, 2016 Tr. (Serbin) 121:7-9; June 29, 2016 Tr.
(Aliferis) 63:12-17.)
293.

Prairie believed that $JP’s revenue and revenue growth projections were supported

by backlog and bids. (June 29, 2016 Tr. (Aliferis) 106:18.) Prairie, however, did not determine
whether SJP’s profit and expense margins (e.g., gross margins, EBITDA margin, cost of goods sold
margins) were also supported by backlog and bids. (July 29, 2016 Tr. (Aliferis) 131:16-136:10.)
294.

While backlog can be a good indicator of a company’s revenues for the following

year, particularly for a company in the construction industry, (June 29, 2016 Tr. (Aliferis) 153:1122; July 14, 2016 Tr. (Messina) 181:10-12), backlog alone would have been insufficient to assure
a prudent investor that SJP was going to meet its projections for 2007.

(Sept. 19, 2016 Tr.

(Puntillo) 81:22-84:4.)

26

FBTS did not obtain or review any of SJP’s contracts supporting SIP’s backlog figure. (May
26, 2016 Tr. (Ippensen) 75:19-20; May 27, 2016 Tr. (Ippensen) 31:2-7; July 6, 2016 Tr. (Ash)
61:9-12; Sept. 23, 2016 (Cory) 51:24-52:4; see also June 29, 2016 Tr. (Aliferis) 64:13-65:16,
84:13-16 (Prairie did not obtain or review any of SIP’s contracts supporting SIP’s backlog figure).)
Rather, this representation was copied verbatim by Prairie from the Offering Memo. (Compare
Joint Ex. 1 (Offering Memo), at 27, with Joint Ex. 9 (Apr. 11, 2007 Drafi) at 13.)
52

295.

A prudent investor must determine what the backlog consists of, with whom the

company has contracts, whether the backlog is represented by signed contracts, and how long it
will take a company to generate revenue from the backlog. (Sept. 19, 2016 Tr. (Puntillo) 81:2284:4.) Further, backlog is not necessarily correlated with sales because it can be cancelled. (July
14, 2016 Tr. (Messina) 88:5-13.)
296.

Three of the largest jobs in SIP’s backlog had been awarded in 2006 (i.e., Grove at

New Windsor for $14,101,078, Reserve at New Windsor for $5,062,415, and Montvale for
$2,829,289). (May 23, 2016 Tr. (Dugan) 157:22-25; Joint Ex. 1 (Offering Memo), at 26.)
297.

In addition, SJP generally bid approximately $140 million in work per year and had

an average historical hit rate of approximately 45%. (Joint Ex. 1 (Offering Memo), at 27.) The
45% hit rate represented the quantity of jobs SJP successfully bid. (May 23, 2016 Tr. (DiPano)
59:3-17.)
298.

FBTS considered SIP’s historical hit rate of 45% one of the reasons SIP could meet

its 2007 projections as set forth in the April 11, 2007 Drafi Valuation Report. (Joint Ex. I (Offering
Memo), at 26; May 26, 2016 Tr. (Ippensen) 79:10-22; July 6, 2016 Tr. (Ash) 125:13-19 (Ash
believed that SJP had a good chance of making its projections given its $58 million backlog and
45% hit rate on its bids).)
299.

Going into 2007, SIP was starting to expand into New York by bidding on

increasingly large-scale site development projects in that state, including work related to the
Stewart Air Force Base and for Hovnanian. (May 23, 2016 Tr. (Dugan) 145:24-146:23.)
300.

SJP’s growing backlog was a positive indicator that SIP was growing as a company

and winning increased bid work. (May 23, 2016 Tr. (DiPano) 70:20-25.)

53

301.

In the process of carrying out its audit, the Curchin Group reviewed SIP’s contracts

and billings to date, confirmed the total amounts, the amount of work to date, the amounts billed,
and any amounts owed to SIP. (July 1, 2016 Tr. (Fouratt) 3:15-24.)
302.

The Curchin Group also independently verified SIP’s backlog numbers by making

inquiries to management and analyzing the information provided about the remaining work to be
done, as well as contracts awarded but not yet started. (July 1, 2016 Tr. (Fouratt) 9:14-22.)
303.

The Curchin Group did not complete its audit of SIP’s finances for 2006 prior to the

Transaction because it needed the completed SIP valuation to adjust the finances for SJP’s
contribution to the ESOP and did not review any of SIP’s contracts prior to the Transaction. (CFF

¶ 135.)27
304.

Prairie and FBTS did not determine when SIP had been awarded the contracts that

constituted its backlog. (June 29, 2016 Tr. (Aliferis) 107:3-108:10; May 27, 2016 Tr. (Ippensen)
70:20-22.)
305.

On February 7, 2007, SFE&G requested from SIP a description of SJP’s contracts

in excess of $50,000. (Joint Ex. 13 (february 7, 2011 E-mail from Steere to Dugan), at 4.)
306.

On March 29, 2007, SFE&G renewed its request to SIP for a description of

contracts valued in excess of $50,000. (FBTS Ex. 64 (Mar. 29, 2007 E-mail from Steere to
D’Esposito), at D00854.)
307.

In response to SfE&G’s requests for contracts in excess of $50,000, SIP indicated

that it would only provide SFE&G with a single basic form contract. (FBTS Ex. 64 (Mar. 30, 2007
E-mail from Cheslow to Steere), at D00853-54.)

27

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.

54

308.

SJP did not enter into contracts with three out of its top ten customers. (May 23,

2016 Tr. (Dugan) 13 5:2-24.)
309.

FBTS was not aware that SJP conducted business with some of its customers

without entering into a contract.28
iii.
310.

FBTS’s Review ofPrairie’s Consideration ofHistorical Volatility

FBTS reviewed the historical EBITDA and EBITDA margins for SJP for the years

2002 to 2006, and did not consider SJP’s financial performance to be volatile. (May 26, 2016 Tr.
(Ippensen) 56:6-58:7.)
311.

The Offering Memo and April 11, 2007 Draft Valuation Report reflected the

volatility of SJP’s historical margins and growth. (Joint Ex. 1 (Offering Memo), at 34, 38; Joint
Ex. 9 (Apr. 11, 2007 Draft), at 72, 79; July 14, 2016 Tr. (Messina) 89:16-24, 95:25-96:6; 97:2598:4 (describing SIP’s historical EBITDA, EBITDA margins, and cost of goods sold margins as
volatile).)
312.

As reported in the April 11, 2007 Draft Valuation Report, SIP’s historical margins

for EBITDA, income from operations, and income before taxes and gross profit, varied
substantially from one year to the next. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 72, 79 “Percentage
Income Statements,” “Year to Year Growth,” and “EBITDA Margin”; see also Demonstrative 10
(showing SJP’s EBITDA margin standard deviation).)
313.

FBTS never expressed any concern to either Prairie or Duff & Phelps that the

historical financial performance of SJP appeared to be volatile. (May 26, 2016 Tr. (Ippensen)
56:6-8, 58:8-12; May 25, 2016 Tr. (Miscione) 16:15-17:9.)

28

Given that FBTS never independently verified SJP’s representations concerning backlog prior
to the Transaction (CFF ¶291), and in the absence of evidence to the contrary, the Court finds that
FBTS did not know that SJP conducted business with some of its customers without a contract.
55

314.

FBTS believed that SJP’s historical financial performance was not volatile because

SJP’s revenues grew from 2002 to 2006. (May27, 2016 Tr. (Ippensen) 20:16-21:5.)
315.

Revenue and revenue growth rates do not necessarily translate into profit and are

not necessarily good indicators of a company’s financial health, particularly in a cyclical business
or a business with low margins. (July 14, 2016 Tr. (Messina) 81:21-82:9.)
316.

In cyclical or low margin businesses, it is possible for a company to grow revenue

while simultaneously failing to grow its profit. (July 14, 2016 Tr. (Messina) 81:21-82:9.)
317.

It is important to analyze both the top line in terms of revenue and the bottom line

in terms of net income and margins.

(May 27, 2016 Tr. (Serbin) 115:23-116:6 (stating that

“[rjevenue is great, but you got to make money with that revenue. So it has to be smart business
versus the other. Because you can work all day long and make—and lose lots of money”); May
25, 2016 Tr. (Cory) 166:20-167:2.)
318.

SJP’s revenues in 2004 grew by $7.7 million (or 21.31%) and its net income

increased 154.3 5%, yet its EBITDA margin decreased by 1.3% and its gross profit margin
decreased by 5.9%. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 72, 79.)
iv.
319.

FBTS’s Review ofPrairie’s Reliance on Setter’s Projections

Prairie utilized the Offering Memo’s projections, though it made some upwards

adjustments. (Stipulation of Facts

¶ 47; June 29, 2016 Tr.

(Aliferis) 80:1-9, 91:24-92:11; May 26,

2016 Tr. (Ippensen) 41:14-23; compare Joint Ex. 1 (Offering Memo), at 36, 40, 122, with Joint Ex.
9 (Apr. 11, 2007 Draft), at 79.)
320.

FBTS did not recast the seller’s projections; rather, it utilized the seller’s

projections and/or made upward adjustments to various earnings line items (i.e., EBITDA,
EBITDA margin, gross profit, gross profit margin, pretax income) or a downward adjustment to

56

the expense line items (i.e., cost of goods sold). (Stipulation of Facts

¶

47; June 29, 2016 Tr.

(Aliferis) 80:1-9, 91:24-92:11; May 26, 2016 Tr. (Ippensen) 41:14-23; compare Joint Ex. 1
(Offering Memo), at 36, 40, 122, with Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)
321.

A prudent investor typically recasts the projections contained in the seller’s

financial model based on at least some of the investor’s independent due diligence. (Sept. 19,
2016 Tr. (Puntillo) 59:23-61:1; 109:2-6.) Recast projections tend to be more conservative than the
seller’s projections. (Sept. 19, 2016 Tr. (Puntillo) 109:2-110:22.)
322.

Approximately three weeks prior to the Transaction, Prairie sought SJP’s comment

and approval for the projections Prairie sought to utilize in its valuation. (FBTS Ex. 9 (Mar. 24,
2016 E-mail from Aliferis to D’Esposito and Miscione).)
323.

Neither Prairie nor FBTS spoke with SJP’s accountant about SJP’s historical or

projected financial information. (July 1, 2016 Tr. (Fouratt) 23 :22-24:3.)
324.

Prairie assumed that the projections provided by SJP reflected SJP’s best estimates.

Prairie did not undertake any independent analysis to verify whether the stated reasons supporting
the projections were correct apart from reviewing updated financials and speaking with the
Company. (June 29, 2016 Tr. (Aliferis) 79:15-25.)
325.

FBTS never asked Prairie how it arrived at the projection figures it used in its April

11, 2007 Draft Valuation Report. (May 26, 2016 Tr. (Ippensen) 55:7-10.)
326.

FBTS never compared the projections used in the April 11, 2007 Draft Valuation

Report with the projections contained in the Offering Memo. (May 26, 2016 Tr. (Ippensen) 5 5:210.)
327.

FBTS never expressed any concerns that the projected revenues, EBITDA margins,

or cost-of-sales margins were more favorable than SJP’s historical performance. (May 26, 2016

57

Tr. (Ippensen) 42:7-13 (no recollection of expressing concern that projected revenues were too
high in light of historical levels), 44:17-21 (no recollection of expressing concerns to Prairie that
EBITDA margin was higher than historical levels), 46:18-22 (no recollection of expressing
concern regarding projected cost of sales margins lower than historical levels); Sept. 23, 2016 Tr.
(Cory) 38:18-39:2.)
328.

Cory, whom FBTS identified as the employee principally responsible for the

financial review, did not speak to anyone about Prairie’s projections, did not know if anyone else
at FBT$ spoke with either SJP or Prairie about these projections, and did not recall what, if
anything, FBTS did to verify that the projections were attainable. (May 25, 2016 Tr. (Cory)
113:11-1 14:11.)
329.

Ash, who does not have a financial background, felt comfortable with Prairie’s

projections because Prairie felt comfortable with the projections. (July 6, 2016 Tr. (Ash) 60:8-14
(stating that if Prairie is comfortable with the projections, then she is also comfortable with the
projections).)
330.

FBTS did not independently review the accuracy of the financial information that

SJP provided to Prairie. (May 26, 2016 Tr. (Ippensen) 35:10-13.)
331.

FBTS did not review SJP’s final 2006 audited financials as they had not been

completed until after the Transaction, (July 1, 2016 Tr. (Fouratt) 22:8-10), and did not review the
draft audited financials for 2006 prior to the Transaction. (CFf
332.

¶

136.)29

Unlike FBTS, at least one prospective lender solicited by SJP to finance the

Transaction noted the inconsistency between the projected gross profit margins and the historical

29

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
58

margins, and asked Duff & Phelps to explain why SJP believed it would achieve its projections.
Pl.’s Ex. 5 (Jan. 25, 2007 E-mail from Buendia to Miscione), at 3.)
333.

Prairie copied verbatim large portions of SJP’s business description contained in

the Offering Memo and pasted those descriptions directly into its valuation report, including
information pertaining to SJP’s reputation, customer concentration, site job bids, bid hit rate,
backlog, competition, and purported competitive advantages. (Compare Joint Ex. 1 (Offering
Memo), at 22-32, with Joint Ex. 9 (Apr. 11, 2007 Draft), at 8-17; May 26, 2016 Tr. (Stipulation
by Defendant’s counsel) 66:15-20.)
334.

Prairie assumed the information it copied and pasted from the Offering Memo to

be accurate based on discussions with SJP s management and the information that it received from
‘

SJP’s advisors. (June29, 2016Tr. (Aliferis) 52:11-18; June30, 2016Tr. (Gross) 24:6-25:2, 25:1426:6.)
335.

Although Ippensen believed that the written materials that Prairie consulted

independently corroborated SJP ‘s representations regarding its standing in the industry, (May 26,
2016 Tr. (Ippensen) 70:24-71:6), none of these materials specifically mentioned SJP or discussed
SIP’s industry standing. (June 29, 2016 Tr. (Aliferis) 52:19-53:6.)
336.

FBTS did not raise the issue of Prairie’s copying-and-pasting with Prairie. (May

26, 2016 Tr. (Ippensen) 64:12-13.)
337.

FBT$ knew that Prairie had accepted the Offering Memo’s representations as true.

(May 26, 2016 Tr. (Ippensen) 65:15-21.)
338.

Neither FBTS nor Prairie spoke with SJP’s customers, or any trade associations, or

otherwise independently verified the seller’s favorable descriptions of SIP. (May 26, 2016 Tr.

59

(Ippensen) 69:8-18, 73:23-74:9; July 6, 2016 Tr. (Ash) 67:12-20, 80:3-20; Sept. 23, 2016 Tr.
(Cory) 45:1-4.)
v.
339.

FBTS’s Review ofPrairie’s Consideration ofIndustry Cyclically

Cyclical industries tend to operate with more volatility due to fluctuations within the

economy. (July 14, 2016 Tr. (Messina) 61:21-62:1.)
340.

When valuing a company’s historical financial performance within a cyclical

industry, a valuation professional should look back at least five years. (July 14, 2016 Tr. (Messina)
77:19-23.)
341.

The homebuilding industry is cyclical. (July 14, 2016 Tr. (Messina) 61:21-66:16;

May 26, 2016 Tr. (Ippensen) 158:25; July 5, 2016 Tr. (Stoesser) 89:1-14; Joint Ex. I (Offering
Memo), at 12, 47.)
342.

The homebuilding industry cycle is approximately seven to ten years. (July 14,

2016 Tr. (Messina) 66:3-8; July 5, 2016 Tr. (Stoesser) 89:3-14.)
343.

Prairie’s use of 2006 as the baseline for its projections ignored the fact that SIP was

in a cyclical business and led to an inflated value conclusion by projecting SJP’s “peak”
indefinitely into the future. (July 14, 2016 Tr. (Messina) 62:2-10, 77:24-78:23.)
344.

When creating projections for future growth, it is not typical to simply rely on the

growth of the most recent financial year. (May 25, 2016 Tr. (Miscione) 72:9-18.)
345.

At some point in 2006, the housing market in New Jersey began to decline off of

its record, high in 2005. (Joint Ex. 10 (Apr. 27, 2007 Report), at 32 (Residential Building Permits),
at 33 (Non-Residential contracts); Joint Ex. 2 (Mar. 2, 2007 E-mail from Christoffel to Aliferis,
attaching Offering Memo), at 54; May 26, 2016 Tr. (Ippensen) 158:18-25.) According to
information available prior to the SJP ESOP Transaction, residential building permits in New

60

Jersey had declined in 2006, and were expected to further decline in 2007. (Joint Ex. 10 (Apr. 27,
2007 Report), at 32 (residential building permits in 2006 were down from 38,632 in 2005 to 33,328
in 2006, and expected to decline further to 29,996 in 2007).)
346.

FBTS interpreted the April 11, 2007 Drafi Valuation Report as stating that, for the

years 2007 to 2009, there would be a cooling of the national housing market. (May 26, 2016 Tr.
(Ippensen) 161:25-162:13.)
347.

The April 11, 2007 Drafi Valuation Report stated:
Although recent indicators have been mixed, the economy seems
likely to expand at a moderate pace on balance over coming
quarters. The [Federal Open Market Conmiittee (“FOMC”)]
currently acknowledges mixed signals applicable to the economy.
The Beige Book prepared several weeks prior to a meeting of the
FOMC suggested, “Despite continuing sofiness in automobile and
housing-related sales, most Districts reported that consumer
spending increased during October and early November.”

(Joint Ex. 9 (Apr. 11, 2007 Drafi), at 20.)
348.

The April 27, 2007 Post-Transaction Valuation Report explicitly stated that New

Jersey’s housing market was not expected to improve in 2007. (Joint Ex. 10 (Apr. 27, 2007
Report), at 32-33 (“New Jersey’s housing market will not pull out of its slump in 2007”).)
349.

FBT$ understood that during this period, SIP would be working not only on

residential site preparation, but also on commercial and public construction. (May 26, 2016 Tr.
(Ippensen) 162:19-163:9.)
350.

FBTS was unaware, however, of how many commercial or public construction

projects SJP was involved in, and, prior to the Transaction, FBTS was unaware of the percentage
of $JP’s revenues that came from residential as opposed to non-residential projects. (May 27,
2016 Tr. (Ippensen) 36:6-37:12.)

61

351.

FBTS understood that the Federal Treasury Department had predicted that the

housing market was going to rebound after 2007. (May 26, 2016 Tr. (Ippensen) 163:12-16.)
352.

Based on Ippensen’s review of the April 11, 2007 Draft Valuation Report, he

believed that the slowdown in the economy would have less of an effect in the Northeast than in
other parts of the country. (May 27, 2016 Tr. (Ippensen) 90:18-91:2; Joint Ex. 9 (Apr. 11, 2007
Draft), at 26.)
353.

The April 11, 2007 Draft Valuation Report, however, noted that the United States

economy and other dominant world economies showed satisfactory prospects for the forthcoming
quarters of 2006, not 2007. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 29 (referencing projected U.S.
GDP growth for 2006, and projected growth of world economy for 2006, though noting that
consumer spending in the United States was likely to slow in 2007).
354.

Return on assets is an indicator of how profitable a company is relative to its

investments in capital equipment and other assets. (July 14, 2016 Tr. (Messina) 102:7-10.)
355.

Return on assets provides a “sanity check” on projections because companies in

industries tend to have consistent return on assets. (July 14, 2016 Tr. (Messina) 102:10-16.)
356.

Return on assets is typically computed in a valuation report. (July 14, 2016 Tr.

(Messina) 102:-25-103:4; July 15, 2016 Tr. (Messina) 39:14-21; see, e.g., Pl.’s Ex. 8 (Dec. 31,
2007 Report), at 89 “Rate of Return Ratios”; Sept. 23, 2016 Tr. (Cory) 40:18-22.)
357.

Companies with dominant market positions, enormous brand values, and

economies of scale, such as Microsoft, Disney, IBM, and Procter & Gamble, do not achieve return
on assets above 25%. (July 14, 2016 Tr. (Messina) 104:1-13.)

62

35$.

A company without any competitive advantages and earning returns on assets in

the 25% to 30% range would expect to see competition enter its marketplace, thereby driving down
margins to the company’s historical average. (July 14, 2016 Tr. (Messina) 104:20-105:5.)
359.

Prairie did not compute SJP’s historical or projected return on assets in its valuation

for the Transaction. (Joint Ex. 9 (Apr. 11, 2007 Drafi).)
360.

Prairie, however, did compute SJP’s return on assets in subsequent valuation

reports. (See, e.g., Pl.’s Ex. 8 (Dec. 31, 2007 Report), at 89; Pl.’s Ex. 9 (Dec. 31, 200$ Report), at
8$.)
361.

SJP’s historical return on assets were:

Historical Return on Assets
2002

12.6%

2003

0.2%

2004

2.4%

2005

11.9%

2006

25.4%

(Pl.’s Ex. 8 (Dec. 31, 2007 Report), at 89; Demonstrative 7.)
362.

SJP’s five-year historical average return on assets was approximately 11%.

(Demonstrative 7; Demonstrative 17.)
363.

Prairie projected that SJP would achieve return on assets in excess of 25%. (July

14, 2016 Tr. (Messina) 103:13-19; see also Demonstrative 7.)
364.

FBTS never discussed either SJP’s historical or projected return on assets prior to

the Transaction. (Sept. 23, 2016 Tr. (Cory) 41:15-18.)

63

365.

Aliferis testified that he accounted for the decline in the homebuilding industry by

assuming flat revenue growth. (June 29, 2016 Yr. (Aliferis) 102:14-17.)
366.

The flat revenue growth that Prairie projected SJP to experience in 2007 was based

on SJP’s highest year at the peak of the homebuilding industry’s cycle.

(July 14, 2016 Yr.

(Messina) 77:24-78:8 (Prairie projected SJP’s peak cycle indefinitely into the future), 82:10-21
(error to assume a zero percent growth rate from a record year when industry is facing headwinds
and largest customer is stating that it was going to operate as if in a prolonged decline).)
367.

Prairie’s projections assumed that SIP would outperform its entire industry because

Prairie believed that SIP was “run well.” (June 29, 2016 Tr. (Aliferis) 106:1-4.)
368.

Prairie’s valuation failed to account for the likelihood that SJP’s 2006 record

performance was attributable to a contemporaneous or near contemporaneous peak in the
homebuilding cycle during which it obtained several large projects from Hovnanian. (July 14,
2016 Tr. (Messina) 62:4-63:16 (explaining dangers of using peak or trough of cycle), 66:9-16
(noting general consensus that housing cycle was coming to an end around April of 2007), 78:323 (indicating that Prairie used peak of cycle to formulate projections); May 23, 2016 Tr. (Dugan)
130:24-132:2 1 (SJP was awarded several large Hovnanian contracts).)
369.

FBTS did not consider the possibility that SIP’s record 2006 performance was

attributable in whole or in part to a near contemporaneous peak in the homebuilding cycle. (May
26, 2016 Tr. (Ippensen) 81:23-82:11; June 29, 2016 Tr. (Aliferis) 107:17-19, 172:7-17.)
370.

FBTS did not question Prairie as to what Prairie did to account for the cyclicality

of SIP’s industry. (Sept. 23, 2016 Tr. (Cory) 59:1-7.)

64

vL

371.

FBTS’s Review of Prairie’s Consideration of SIP’s Competitive
Advantages

In determining the fair market value of a particular company, it is important to

understand the company’s competition and the competitive landscape.

(June 29, 2016 Tr.

(Aliferis) 10:5-6, 16:13-15; June 30, 2016 Tr. (Gross) 22:21-23:13; July 14, 2016 Tr. (Messina)
33:23-37:7 (discussing concepts of competitive risk and competitive advantage as they pertain to
valuation); Sept. 23, 2016 Tr. (Cory) 44:11-22.)
372.

SJP operates in a highly competitive industry. (July 14, 2016 Tr. (Messina) 42:2-

12; Joint Ex. 1 (Offering Memo), at 27-28 (discussing SJP’s competition, including the trend for
material suppliers to “expand their lay down operations into SJP’s marketplace”), at 46 (discussing
competitive landscape), at 49 (discussing competition from general contractors).)
373.

A valuation report should include the following components:
1.

Size and Competition: Discuss how the absolute and relative
size of the entity affects its value, how the company
determines pricing, who the competitors are and how they
compete.

2.

Product/service Differentiation: Discuss how the company’s
products and/or services differ from its competitors.

3.

Market Share: Discuss the company’s positioning relative to
the industry and competition.

4.

Ease of Market Entry: Discuss the ease, barriers and
obstacles of entering the market. Provide a summary of the
barriers to entry and how they affect the company.3°

(June3O,2016Tr.(VanHom)171:1-9,172:4-11, 178:5-16.)
374.

Prairie failed to include these components in its April 11, 2007 Drafi Valuation

Report, in whole or in part, by failing to identify SJP’s competitors by name, failing to discuss

30

The Court notes that this list constitutes a summary, as opposed to a direct excerpt, of the June
30, 2016 trial transcript.
65

SJP’s positioning relative to the industry and its competition, and failing to discuss the ease of
entry or barriers to entry into SJP ‘s market and the effect on the Company. (June 30, 2016 Tr.
(Van Horn) 171:16-22, 178:5-16.)
375.

FBTS never ascertained the identities of SJP’s competitors or determined what

equipment those competitors possessed. (May 26, 2016 Tr. (Ippensen) 65:9-2 1, 69:8-70:2; May
25, 2016 Tr. (Miscione) 25:16-18; May 25, 2016 Tr. (Cory) 152:24-153:4; July 6, 2016 Tr. (Ash)
47:22-23; June 29, 2016 Tr. (Aliferis) 58:18-20; Sept. 20, 2016 Tr. (Puntillo) 11:21-12:13.)
376.

FBTS could not have analyzed SJP’s competitive landscape without knowing who

its competitors were or determining what equipment they used. (Sept. 20, 2016 Tr. (Puntillo) 13:925.)
377.

Prior to the Transaction, FBTS believed that SJP had a competitive edge or a

competitive advantage, (see May 26, 2016 Tr. (Ippensen) 67:21-25), even though the Offering
Memo reported that smaller companies, which provided one or more of SIP’s primary services—
paving, excavation and underground utilities, rock crushing and recycling, and drilling and
blasting—made up SIP’s competition, and that material suppliers had entered SIP’s marketplace
resulting in a 30% reduction of paving revenues. (Joint Ex. 1 (Offering Memo), at 27-28.)
378.

FBTS did not verify the seller’s representations regarding SJP’s purported

advantages over its competitors. (Sept. 23, 2016 Tr. (Cory) 46:22-25 (stating that she did not know
what FBTS did to verify that SJP had competitive advantages); July 6, 2016 Tr. (Ash) 80:10-20.)
379.

It is generally accepted in finance that sustainable competitive advantages are

typically limited to proprietary technology, brand name, and cost advantage. (July 14, 2016 Tr.
(Messina) 39:18-40:23.)

66

380.

Absent a sustainable competitive advantage, a company cannot continuously

outperform its industry. (July 14, 2016 Tr. (Messina) 40:24-41 : 17.)
381.

A valuation professional should not project that a company will outperform its

industry unless such company possesses a sustainable competitive advantage. (July 14, 2016 Tr.
(Messina) 40:24-41:17.)
382.

$JP operated in an industry with low barriers to entry. (July 14, 2016 Tr. (Messina)

42:22-43:7; Joint Ex. 1 (Offering Memo), at 28.)
383.

SJP did not possess any pricing power as it bid for a vast majority of its business.

(July 14, 2016 Tr. (Messina) 42:8-12.)
384.

SJP did not differentiate its product through non-price strategies as it was dependent

on bidding to obtain business. (July 14, 2016 Tr. (Messina) 43:13-23.)
385.

SJP did not possess any proprietary technology such as patents, trademarks, or

licenses. (FBTS Ex. 64, at D00854 (item 5); June 29, 2016 Tr. (Aliferis) 62:4-9; May 23, 2016
Tr. (Dugan) 191:7-22.)
386.

SJP informed Aliferis that it was in possession of equipment it had imported from

Europe and of which no competitor in the local marketplace was in possession.

(June 29, 2016

Tr. (Aliferis) 59:2-10.)
387.

At or around the time of the Transaction, National accounted for only 12.9% of

$JP’s revenues. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 12.)
388.

In or around 1996, National began using mobile rock crushing equipment. (May

23, 2016 Tr. (DiPano) 27:20-23, 38:7-9; May 23, 2016 Tr. (Dugan) 87:16-25; May 24, 2016 Tr.
(D’Esposito) 19:3-11 (late 1990’s).)

67

389.

SJP ‘s mobile rock crushers were the first of their kind in the United States and were

featured in a CBS television evening news story. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 10; May
23, 2016 Tr. (DiPano) 48:10-14.)
390.

In 2006 and the first quarter of 2007, SJP’s use of mobile rock crushing equipment

allowed it to work in rocky areas that were difficult to develop and, therefore, to provide services
in areas that none of its competitors were able to provide services. (May 23, 2016 Tr. (DiPano)
46:21-47:16.) Because the crushed rock could then be used for other purposes on the job site, this
also eliminated the cost of purchasing and delivering the material that would otherwise be used for
those purposes. (Joint Ex. 9 (Apr. 11,2007 Draft), at 9-10; May23, 2016 Tr. (DiPano) 18:8-20.)
391.

Unlike a stationary rock crusher, a mobile rock crusher was track mounted and able

to move around ajob site. (May 23, 2016 Tr. (DiPano) 27:8-17.)
392.

A mobile rock crusher could move to a blasting location on a site, rather than

trucking the blasting refuse to the crusher. This eliminated an additional cost. (May 23, 2016 Tr.
(DiPano) 29:20-25; May 24, 2016 Tr. (D’Esposito) 19:12-23.)
393.

SJP made modifications to the mobile rock crushing equipment on a yearly basis

and employed new technology for the crushers every two to three years. (May 23, 2016 Tr.
(DiPano) 40:21-41:2.)

One of the upgrades implemented on its mobile rock crushers was a

vibrating screen, which was able to more capably sort smaller rock fragments from dirt. (May 23,
2016 Tr. (DiPano) 39:4-40:2.)
394.

One of the benefits of the mobile rock crusher was that it took less than one day to

set up, as opposed to a stationary rock crusher, which took five days to set up. (May 23, 2016 Tr.
(DiPano) 28:1-9; 29:3-11.)

68

SJP’s use of the mobile rock crushing equipment allowed it to capture certain

395.

customers who wanted to develop sites that were previously prohibitive or more costly to develop.
(May 23, 2016 Tr. (DiPano) 48:6-18.)
396.

SJP’s rock crusher was not proprietary technology because anyone could purchase

one. (June 29, 2016 Tr. (Aliferis) 62:4-6; July 14, 2016 Tr. (Messina) 44:6-14, 45:6-17.)
397.

As of April 16, 2007, and to the best of DiPano’s knowledge, SJP was still the only

company in the United States that had a mobile primary and secondary rock crusher.

(May 23,

2016 Tr. (DiPano) 45:6-17.) But, “other companies [had] started buying crushers that were of the
portable type.

.

.

,

and also cheaper—a configuration of portable and mobile. It could be a mobile

primary, but not of the quality that [SJP] would buy.” (May23 Tr. (DiPano) 45:12-16.)
398.

The Offering Memo described SJP’s use of its rock crushing equipment as a “major

innovation in the industry” because it allowed $JP to reduce haul off costs by reusing the crushed
rock at the worksite, and further stated that SJP’s mobile rock crushing equipment allowed
National to become a “dominant market leader.” (Joint Ex. 1 (Offering Memo), at 11, 23-24.)
399.

Prairie copied these representations about SJP’s rock crushing equipment verbatim

into its April 11, 2007 Draft Valuation Report. (Compare Joint Ex. 1 (Offering Memo), at 23-24,
with Joint Ex. 9 (Apr. 11, 2007 Draft), at 10.)
400.

Prairie obtained its information about SJP’s innovative position in the market only

from “discussions with [SJP’s] management regarding the [C]ompany’s product services,
customers[,] and market” and SJP’s financial advisor. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 7;
June 29, 2016 Tr. (Aliferis) 50:11-52:6, 52:11-18; June 30, 2016 Tr. (Gross) 24:6-25:2, 25:1426:6.)

69

401.

Cory—the individual whom FBTS identified as the person chiefly responsible for

reviewing $JP’s financial materials—believed that SJP’s use of the mobile rock crusher justified
Prairie’s projections of higher profit margins than SJP’s historical profit margins. (May 25, 2016
Tr. (Cory) 145:15-19, 150:24-151:11.)
402.

FBTS determined that $JP’s use of the mobile rock crushing equipment gave it a

competitive advantage, which would enable SJP to reach the projections contained in the April 11,
2007 Draft Valuation Report. (May 26, 2016 Tr. (Ippensen) 67:21-25.)
403.

FBTS believed that SJP’s use of the rock crushing equipment allowed SJP to realize

higher profit margins than its competitors. (May 26, 2016 Tr. (Ippensen) 67:16-25.)
404.

FBTS never spoke with any of SIP’s competitors, customers, or trade associations

to verify the representations concerning SJP’s rock crushing equipment.

(May 26, 2016 Tr.

(Ippensen) 65:9-21, 66:23-70:2, 70:19-23.)
405.

FBTS was unaware of whether Prairie had spoken with any of SJP’s customers.

(May 26, 2016 Tr. (Ippensen) 70:16-18.)
406.

Neither FBTS nor Prairie determined whether anyof SJP’s competitors possessed

similar rock crushing equipment or how easily they could acquire such equipment. (May 25, 2016
Tr. (Cory) 152:24-153:7; May 26, 2016 Tr. (Ippensen) 69:24-70:2; June 29, 2016 Tr. (Aliferis)
57:22-58:17.)
407.

Prairie and FBTS did not determine what quantitative effect, if any, the rock

crushing equipment had on SJP’s expenses or profitability. (July 6, 2016 Tr. (Ash) 47:8-12; May
25, 2016 Tr. (Cory) 152:1-4; June 29, 2016 Tr. (Aliferis) 58:21-59:1; May 26, 2016 Tr. (Ippensen)
68:1-69:7.)

70

408.

The April 11, 2007 Draft Valuation Report represents that SJP possessed

proprietary technology. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 51 (stating “implementation of
proprietary technology and improved processes and controls helped the Company realize higher
margins as well as positioning it well for ongoing growth”).)
409.

The April 11, 2007 Draft Valuation Report did not identify the purported

“proprietary technology” it mentioned. (See generally Joint Ex. 9 (Apr. 11, 2007 Draft).)
410.

SJP’s attorney, Cheslow, specifically advised FBTS’s attorneys that SJP did not

possess proprietary technology (i.e., patents, trademarks, or licenses) prior to the Transaction.
(FBTS Ex. 64 (Mar. 30, 2007 E-mail Chain), at D00854, item 5.)
411.

SJP did not possess any other type of proprietary technology prior to the

Transaction. (June 29, 2016 Tr. (Aliferis) 62:7-9.)
412.

Cory incorrectly believed that SJP’s rock crushing equipment constituted SJP’s

proprietary technology. (Sept. 23, 2016 Tr. (Cory) 45:11-16.)
413.

SJP had made “modifications” to its rock crushing equipment, which Dugan

believed rendered the equipment proprietary. (May 23, 2016 Tr. (Dugan) 191:7-17.)
414.

SJP did not have a patent on this modification to its equipment and any other

company could have made this modification. (May 23, 2016 Tr. (Dugan) 191:18-22.)
415.

There is no mention in the April 11, 2007 Draft Valuation Report of the

modifications that Dugan identified. (See generally Joint Ex. 9 (Apr. 11, 2007 Draft).)
416.

FBTS was not aware of these modifications prior to the Transaction. (June 29,

2016 Tr. (Aliferis) 59:2-12.)

71

417.

FBTS never noticed or resolved the inconsistent representations in the April 11,

2007 Draft Valuation Report (Joint Ex. 9 (Apr. 11, 2007 Draft), at 51) and the e-mail message from
Cheslow (FBTS Ex. 64, at D00854) regarding SJP’s alleged proprietary technology.
418.

If a company possesses a patent or proprietary technology, such technology and the

cost advantages associated with having such technology should be discussed in a valuation report.
(July 14, 2016 Tr. (Messina) 44:15-23.)
419.

SIP did not possess a brand name that provided it with a competitive advantage

over its competitors. (July 14, 2016 Tr. (Messina) 47:9-22.)
420.

SJP did not possess any cost advantages as it was a relatively small, regional site

preparation company. (July 14, 2016 Tr. (Messina) 47:23-48:16.)
421.

SJP ‘s competition included large companies that had the advantage of servicing

multiple types of projects simultaneously. (Joint Ex. 1 (Offering Memo), at 46.)
422.

SIP’s competition included smaller companies that were able to effectively

compete by subcontracting their services to larger firms. (Joint Ex. 1 (Offering Memo), at 46.)
423.

Historically, SIP’s paving division accounted for 20% of SJP’s total revenue. (Joint

Ex. 1 (Offering Memo), at 28; Joint Ex. 9 (Apr. 11, 2007 Draft), at 14.)
424.

Prior to the Transaction, $JP’s paving revenues had been reduced by 30% as a result

of material suppliers expanding their lay down operations into SIP’s marketplace. (Joint Ex. 1
(Offering Memo), at 28; Joint Ex. 9 (Apr. 11, 2007 Draft), at 14.)
425.

Prior to the Transaction, SIP’s suppliers became SIP’s major competition. (Joint

Ex. 1 (Offering Memo), at 28; Joint Ex. 9 (Apr. 11, 2007 Draft), at 14.)
426.

Bargaining power describes the business leverage that one party may have over

another to secure contractual advantages. (July 14, 2016 Tr. (Messina) 61:11-17.)

72

427.

SJP’s relationship with Hovnanian did not constitute a contractual advantage

because SJP did not have any exclusive rights to perform business with Hovnanian; rather, SIP
had to bid for Hovnanian’s business. (July 14, 2016 Tr. (Messina) 58:4-13; June 29, 2016 Tr.
(Aliferis) 70:5-8; July 6, 2016 Tr. (Ash) 65:21-24, 66:14-18, 67:7-17; May 24, 2016 Tr.
(D’Esposito) 76:4-6.)
428.

The Offering Memo downplayed the increase in major competition with SJP’s

business by representing that “[i]n 2005 and 2006[j this trend has slowed and SJP feels it once
again has a competitive advantage.” (Joint Ex. 1 (Offering Memo), at 28.)
429.

Prairie copied the Offering Memo’s representations regarding SIP’s competition

verbatim and pasted them into the April 11, 2007 Draft Valuation Report. (Joint Ex. 9 (Apr. 11,
2007 Draft), at 14.)
430.

Specifically, the April 11, 2007 Draft Valuation Report stated:
Paving while the paving division accounts for approximately 20%
of SIP Group revenues, in recent years, paving revenues have been
reduced by nearly 30%. The major factor contributing to the
reduction of revenues was the trend for some material suppliers to
expand their lay down operations into SIP’s marketplace. Suppliers,
who once gave SJP a competitive edge due to the Company’s
purchasing volume, professionalism, and prompt payment, became
the major competition. In 2005 and 2006 this trend has slowed and
SIP feels it once again has a competitive advantage.
—

(Joint Ex. 9 (Apr. 11, 2007 Draft), at 14.)
431.

Neither the Offering Memo nor the April 11, 2007 Draft Valuation Report

explained why SIP believed that this trend (i.e., material suppliers becoming SJP’s major
competition) had slowed. (See Joint Ex. 1 (Offering Memo); Joint Ex. 9 (Apr. 11, 2007 Draft);
May 26, 2016 Tr. (Ippensen) 8 1:12-16.)

73

432.

FBTS did not resolve the inconsistency between Prairie’s statement that $JP

believed it “once again has a competitive advantage” with the seller’s representation that SJP had
recently lost 30% of its paving revenues to competition.3’
viL
433.

FBTS ‘s Review ofPrairie’s Use ofDiscount Rate

The discount rate in the April 11, 2007 Draft Valuation Report represented the

present value of future earnings and did not represent the risk that SJP would not make its
projections. (July 14, 2016 Tr. (Messina) 70:8-21.)
434.

Typically, no more than two or three percent of any present value discount rate

pertains to company-specific risk factors. (July 14, 2016 Tr. (Messina) 107:1-108:6; see also June
30, 2016 Tr. (Van Horn) 86:22-88:23 (computing the subject company risk premium as 3.3% of
the total discount rate and testifying that the remainder is objective data found from publicly
available hard sources); June 29, 2016 Tr. (Aliferis) 148:15-24 (stating that company-specific
premium added “2 or 2 and a half percentage point risk”).)
435.

To determine a cost of equity discount rate, Prairie reviewed the capital asset

pricing model, the risk-free bond rate, the market risk premium, the size of the Company, and the
Company-specific premium. (June 29, 2016 Tr. (Aliferis) 131:16-133:7.)
436.

The discount rate utilized in the DCF method is primarily based on fixed numbers,

with the exception of the company-specific premium, which typically adds only two to three
percentage points to the total discount rate. (July 14, 2016 Tr. (Messina) 107:1-108:6; see also
June 30, 2016 Tr. (Van Horn) 86:22-88:23 (computing the subject company risk premium as 3.3%
of the total discount rate and testifying that the remainder is objective data found from publicly

31

In light of the lack of evidence concerning FBTS’s knowledge of the inconstancy and fBTS’s
failure to produce evidence as to how FBTS reconciled the inconsistency, the Court finds that
FBTS did not resolve the inconsistency between Prairie and $JP’s statements.
74

available hard sources); June 29, 2016 Tr. (Aliferis) 148:15-24 (stating that company-specific
premium added “[two] or [two-]and[-]a[-]half percentage point risk”).
437.

Prairie considered the issue of customer concentration in formulating the discount

rate, by taking into account Company-specific risk.32 (June 29, 2016 Tr. (Aliferis) 148: 15-24.)
438.

Prairie applied a discount rate of 19.25% in its DCF analysis. (Joint Ex. 9 (Apr.

11, 2007 Draft), at 42.)
439.

Prairie’s free cash flow projections were free cash flows that could be obtained by

all equity holders and took into account interest expense and outstanding long-term debt. (June
29, 2016 Tr. (Aliferis) 13 1:16-132:23.)
440.

Prairie’s projected net cash flow for 2007 was $4,782,800 and Prairie’s projected

revenues for 2007 was $60,715,660. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 81; May 27, 2016 Tr.
(Serbin) 186:24-187:8.)
441.

The 2007 projected net cash flow was then reduced by 25%, for a total of

$3,587,100 in adjusted net cash flow, to account for the fact that three months of the year 2007
had passed by the time of the Transaction.33 (Joint Ex. 9 (Apr. 11, 2007 Draft), at 81; May 27,
2016 Tr. (Ippensen), at 5:18-6:7.)

32

While Aliferis believed that he factored in SJP’s customer concentration into the companyspecific discount rate, he could not recall how much he specifically contributed to the discount
rate. (June 29, 2016 Tr. (Aliferis) 148:15-24.)
The 25% reduction was a necessary adjustment to reflect the fact that the buyer would not be
purchasing the cash flows for January through March of 2007 (i.e., the first quarter of the year),
which is entirely driven by the mathematical ratio of annual cash flows that remain available to
the buyer. (May 27, 2016 Tr. (Ippensen) 79:12-18, 80:1-5.) Further, the 25% discount was
“rounded down” (i.e., in favor of the seller), because sixteen of the fifty-two weeks in 2007 (or
30%) had elapsed prior to the Transaction, and, therefore, the ESOP would not obtain 30% of the
projected cash flows for 2007 as of the Transaction date. (May 27, 2016 Tr. (Ippensen) 79:12-25
(discount should have been larger than 25%, because 25% only accounted for passage of time
75

442.

In the April 11, 2007 Draft Valuation Report, Prairie also included a range of

discount rates and valuation ranges for the SIP stock:
Discount Rate

SIP Stock Valuation Range

18.25%

$16,839,489

18.75%

$16,615,881

19.25%

$16,398,434

(Joint Ex. 9 (Apr. 11, 2007 Draft), at 51.)
443.

Prairie provided three, rather than one, valuation numbers, in an effort to represent

a range of fairness as to price. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 51; June 29, 2016 Tr. (Aliferis)
149: 17-150: 15.)
444.

The April 11, 2007 Draft Valuation Report did not identify or discuss specific

factors or assumptions that were used to arrive at the three different discount rates. (Joint Ex. 9
(Apr. 11, 2007 Draft).)
445.

Prairie concluded that fair market value for 38% of the SJP stock ranged from

$16,398,434 to $16,839,489. (Joint Ex. 9 (Apr. 11,2007 Draft), at 51; June 29, 2016 Tr. (Aliferis)
150: 12-15.)
446.

The 19.25% discount rate amounted to a valuation of $16,398,434. (Joint Ex. 9

(Apr. 11, 2007 Draft), at 48.)
447.

The $16 million purchase price was lower than the low end of Prairie’s range of

fairness as to price. (June 29, 2016 Tr. (Aliferis) 150:16-18.)

through March, and not April); Joint Ex. 9 (Apr. 11, 2007 Draft), at 81; May 27, 2016 Tr.
(Ippensen) 6:1-22.)
76

448.

Ippensen concluded that a lower, less conservative discount rate (i.e., 18.25%)

would have been appropriate. (Joint Ex. 9; May 27, 2016 Tr. (Ippensen) 10:4-13.)
449.

Based on Prairie’s April 11, 2007 Draft Valuation Report, Serbin concluded that

the $16 million purchase price for the SJP stock was fair market value because it was below the
value resulting from the highest discount rate, i.e., $16,398,434 from a 19.25% discount rate. (May
27, 2016 Tr. (Serbin) 123:17-124:7; Joint Ex. 9 (Apr. 11, 2007 Draft), at 51.)
450.

In addition, Prairie included a 5% discount for lack of marketability, which

amounted to an additional reduction in the value of the SJP stock based on the fact that the stock
was not in the publicly traded marketplace. (May 27, 2016 Tr. (Ippensen) 12:15-13:2; June 29,
2016 Tr. (Aliferis) 134:18-23; Joint Ex. 9 (Apr. 11,2007 Draft), at 51.)
451.

The 5% discount for lack of marketability is required under the DCF method if the

company is not publicly traded, and the 5% discount was in the middle range of what Ippensen
would normally expect. (May 27, 2016 Tr. (Ippensen) 80:6-81:4 (5% lack of marketability is
neither too high nor too low, and failure to apply a marketability discount to a privately held
company would be a “clear error”).)
452.

Because the $JP ESOP was purchasing the stock for less than the fair market value

estimated by FBTS and Prairie, FBTS did not negotiate the price with DiPano. (May 27, 2016 Yr.
(Ippensen) 12:8-14; 124:8-15; July 6, 2016 Tr. (Ash) 110:2-7.)
453.

Purchase prices in ESOP transactions are not always negotiated. A trustee may

choose to accept the purchase price offered by the seller if it is reasonable or below a valuation
firm’s assessment of fair market value, and instead focus on negotiating other aspects of the
transaction. (June 21, 2016 Tr. (Fischer) 47:7-48:7.)

77

viii.

454.

FBTS’s Review of Prairie’s Consideration of SJP’s 2007 first Quarter
Performance

SJP’s revenues for January 2007 were 37% below SIP’s revenues for January 2006.

(Pl.’s Ex. 23 (1006 Chart-Q1 Revenues).)
455.

SJP’s revenues progressively declined for each month in the first quarter of 2007.

(Pl.’s Ex. 23 (1006 Chart-Qi Revenues).)
456.

$JP’s revenues for January 1, 2007 through March 31, 2007, were 56.4% below

SJP’s revenues for those months in 2006. (Pl.’s Ex. 23 (1006 Chart-Q1 Revenues).)
457.

According to SJP’s interim financial statements, SJP’s gross profits for January 1,

2007 through March 31, 2007 were 97.4% below SJP’s gross profit for those months in 2006.
(P1.’s Ex. 24 (1006 Chart-Q1 Gross Profit).)
458.

According to SIP’s interim financial statements, SJP’s net income for January 1,

2007 through March 31, 2007 was 128.3% below SJP’s net income for those months in 2006.
(Pl.’s Ex. 25 (1006 Chart- Net Income).)
459.

FBTS did not review any of SJP’s interim financial statements for the first quarter

of 2007 prior to the Transaction. (May 26, 2016 Tr. (Ippensen) 90:12-14.)
460.

During the April 13, 2007 telephone conference, Aliferis claimed to have only

reviewed the interim financial statements for January 2007 and February 2007, and represented
that he would review the March 2007 interim financial statements before finalizing his report.
(Joint Ex. 12 (Apr. 13, 2007 Memo), at 1.)
461.

The April 27, 2007 Post-Transaction Valuation Report, however, indicated that

Prairie only reviewed SJP’s interim financial statements for the period ending February 28, 2007
prior to the Transaction. (Joint Ex. 10 (Apr. 27, 2007 Report), at 3 “Analysis of Information
Provided.”)

78

462.

Ippensen speculated that the reason Prairie did not review the interim financial

statements for March 2007 is because those statements may not have been available prior to the
Transaction. (May 26, 2016 Tr. (Ippensen) 27:12-17.)
463.

Ippensen was never specifically told that the interim financial statements for March

were unavailable. (May 26, 2016 Tr. (Ippensen) 29:4-12.)
464.

Ippensen assumed that the interim financials for March 2007 were unavailable

because the April 27, 2007 Post-Transaction Valuation Report (Joint Ex. 10, at 3) did not reference
them. (May 26, 2016 Tr. (Ippensen) 29:1-7, 90:1-4.)
465.

Even assuming that the March 2007 interim financial statements were not prepared

in their final format, all of the information used to compile the interim financial statements for
March 2007 was known or knowable prior to the Transaction. (June 29, 2016 Tr. (Aliferis) 183:23184:21 (absent accounting changes, revenue and expenses should be documented).)
466.

Prairie was able to use interim financial information current through April 30, 2007

in its post-Transaction valuation of $JP as of April 30, 2007, because, even assuming that the
actual interim statement for April 30, 2007 was not available, all of the information necessary to
create the April 30, 2007 interim statement was known or reasonably knowable as of that date.
(June 29, 2016 Tr. (Aliferis) 185:25-186:4; Pl.’s Ex. 7 (Apr. 30, 2007 Report), at 3.)
467.

FBTS never discussed $JP’s poor 2007 first quarter performance prior to the

Transaction. (May 26, 2016 Tr. (Ippensen) 91:24-92:17; May 25, 2016 Tr. (Cory) 112:19-25;
Sept. 23, 2016 Tr. (Cory) 19:20-20:3, 20:4-17.)
468.

At the time he voted for the Transaction, Ippensen had concluded that SIP had the

capacity (throughout its personnel, equipment, management and backlog) to make up any seasonal

79

fluctuations in its revenues throughout the remainder of 2007. (May 27, 2016 Tr. (Ippensen)
95:25-96:6.)
469.

Ippensen assumed that Aliferis confirmed with SJP that there were no operational

or financial changes based on a representation to that effect in the April 11, 2007 Drafi Valuation
Report, but Ippensen was unaware of what specifically Aliferis did to make that determination.
(May 27, 2016 Tr. (Ippensen) 61:24-62:12, 62:20-63:23; May 26, 2016 Tr. (Ippensen) 92:4-13
(did not recall discussing 2007 first quarter with anyone, but assumed Prairie discussed it because
“the report included commentary about representations from SW about no operational or financial
changes”).)
470.

Ippensen concluded that despite SJP’s 2007 first quarter performance, the numbers

set forth in the April 11, 2007 Drafi Valuation Report were achievable and conservative, based on
Prairie’s use of a 19.25% discount rate, 0% prediction in revenue growth, 5% discount for lack of
marketability, 25% discount of net cash flow, and 40% discount on the market multiple method.
(May 27, 2016 Tr. (Ippensen) 27:5-14.)
471.

At the time she voted for the Transaction, Ash had concluded that SIP could still

meet its projections despite a bad first quarter. (July 6, 2016 Tr. (Ash) 125:20-126:1.) Ash lacked
the necessary ability to determine if, in fact, SIP could realistically meet its projections. (July 6,
2016 Tr. (Ash) 8:8-9:24, 12:1-19; May 26, 2016 Tr. (Ippensen) 37:2-7.) Rather, Ash’s conclusion
was based on the general principle that “you can have a bad quarter and still continue to meet the
projections [because] we had nine months to go.” (July 6, 2016 Tr. (Ash) 125:20-126:1.)
472.

Revenue performance could be affected by “temporary explainable event[s],” such

as adverse weather or maintenance on machinery. (Sept. 20, 2016 Tr. (Puntillo) 42:2-43:2.)

80

473.

Although weather can be a “temporary explainable event” that may affect

performance, it is incumbent on a prudent investor to (1) verify that weather does in fact account
for the extent of the observable effect (Sept. 19, 2016 Tr. (Puntillo) 79:21-80:13); (2) verify if
weather resulted in a delay or cancellation of the projects, and if delayed, for how long (Sept. 19,
2016 Tr. (Puntillo) 80:14-19); and (3) if the projects were delayed, what additional expenses would
be incurred as a result of those delays and thus, the effect of those delays on profitability margins,
such as EBITDA. (Sept. 19, 2016 Tr. (Puntillo) 80:19-81:5.)
474.

FBTS assumed that projects do not just “disappear[] into thin air,” (May 27, 2016

Tr. (Ippensen) 88:11-18), without ever examining what additional costs SJP would expectedly
incur due to those delays (e.g., payroll and equipment leasing) (May 24, 2016 Tr. (D’Esposito)
72:4-73:12), or the mathematical effect that delays would have as a result of the progressive
discounts under the DCF method.
475.

In 2006, SIP’s most profitable year, 87% of SIP’s total year income was earned in

the first quarter of 2006, showing that SIP was capable of having an extremely successful quarter
that would make its year. (Demonstrative 24.)
476.

SJP’s total 2006

first quarter revenues were $15,453,027,

representing

approximately 25% of its total annual revenues of $60.7 million. (P1. ‘s Ex. 23.)
477.

FBTS and Prairie did not look at SIP’s historical quarterly performance to assess

the impact of SIP’s 2007 first quarter performance on the valuation. (May 27, 2016 Tr. (Ippensen)
96:21-24; see also June 29, 2016 Tr. (Aliferis) 100:5-24 (other than January 2007 and February
2007, Aliferis did not recall looking at SJP’s historical quarterly or monthly performance, and did
not recall being asked to do so by FBTS).)

81

478.

A decline of 56% in revenues was significant enough to merit additional discussion

with Prairie. (Sept. 23, 2016 Tr. (Cory) 22:21-24:13.)
479.

Neither the April 11, 2007 Draft Valuation Report, the April 27, 2007 Post-

Transaction Valuation Report, the April 13, 2007 Memo, nor the April 16, 2007 Financial Report
Review34 mentions SJP’s 2007 first quarter financial performance or explains how SJP will be able
to make up for this shortfall during the remainder of the year. (Joint Ex. 9 (Apr. 11, 2007 Draft);
Joint Ex. 10; Joint Ex. 12 (Apr. 13, 2007 Memo); Joint Ex. 15 (Financial Report Review), at 3.).
480.

Generally, a valuation report should identify material information affecting its

value conclusions. (July 15, 2016 Tr. (Messina) 68:9-13.)
481.

Conversely, if a valuation report does not contain a discussion of a particular issue,

that issue, in all likelihood, was not considered material to the valuation. (July 15, 2016 Tr.
(Messina) 68:14-17.)
482.

In light of the significant decline in revenues during the first quarter of 2007, a

reliable valuation report of SJP, as of April 16, 2007, would have had some discussion of the
possible causes of those results. (July 15, 2016 Tr. (Messina) 78:9-15, 78:20-79:12.)
483.

A valuation firm typically discusses its most recent financial results and their effect,

if any, on projections. (July 14, 2016 Tr. (Messina) 86:22-87:2.)

After a transaction closes, FBTS’s financial analyst prepares a document called a “Financial
Report Review.” (Sept. 23, 2016 Tr. (Cory) 26:12-24, 69:22-25; May 26, 2016 Tr. (Ippensen)
120:11-16.) The financial Report Review includes, inter alia, the names of the FBTS officers
who performed a post-transaction review of the valuation, the performance of market indices for
the period under review, a summary of changes to a company’s financial metrics over the
preceding year, and the qualifications of the valuation analyst. (See, e.g., Joint Ex. 15 (Financial
Report Review).)
82

484.

The only record of any discussion concerning SJP’s 2007 first quarter performance

prior to the Transaction is Cory’s handwritten notation that Aliferis “briefly reviewed internally
prepared 2/28/07
485.

(Joint Ex. 12 (Apr. 13, 2007 Memo), at 3.)

$JP’s poor 2007 first quarter performance is first mentioned in connection with

Prairie’s preparation of a post-Transaction report for April 30, 2007. (P1.’s Ex. 7 (Apr. 30, 2007
Report), at 45-46.)
486.

FBTS’s EB Committee notes for the post-Transaction April 30, 2007 Post-

Transaction Valuation Report similarly alluded to SJP’s poor 2007 first quarter performance and
explained it, in part, as a result of the weather. (P1.’ s Ex. 15 (EB Committee Notes), at 3 “PostTransaction Review April 30, 2007.”)
487.

In light of SIP’s actual 2007 first quarter revenues, SIP would need to realize a

compound quarterly rate of approximately 5 8%—more than fourteen times its average historical
rate of approximately 4%—to realize the revenues projected in Prairie’s valuation reports. (Sept.
19, 2016 Tr. (Puntillo) 76:4-77:25; Demonstrative 19.)
488.

A prudent investor would have performed some sort of due diligence in light of the

discrepancy between the projected annualized revenues and net income and the projected revenues
and net income used in Prairie’s valuation reports to determine the reasonableness of Prairie’s
projections. (Sept. 19, 2016 Tr. (Puntillo) 73:18-22; 78:16-77:12.)
489.

Even assuming that SIP achieved a 0% revenue growth rate in the second, third,

and fourth quarters of 2007, SIP’s overall 2007 revenue growth rate would be approximately
negative 15% in light of SIP’s poor performance in the first quarter of 2007. (July 14, 2016 Tr.
(Messina) 85:13-25.)

83

490.

All else being equal, had Prairie utilized a negative 15% revenue growth rate for

2007, SJP’s value under the DCF method would have decreased by $7.2 million. (July 14, 2016
Tr. (Messina) 88:14-21.)
491.

Historically, SIP earned between 15% and 20% of its annual revenues during the

first quarter of a given year. (May 24, 2016 Tr. (D’Esposito) 16:13-21.)
492.

Historically, if the weather during the first quarter of a year is particularly mild, the

first quarter revenues might account for closer to 20% of annual revenues, but if the first quarter
experiences more severe weather, the first quarter revenues might be closer to 15% of annual
revenues. (May 24, 2016 Tr. (D’ Esposito) 16:22-17:1.)
493.

Based on D’Esposito’s testimony regarding the historical relationship between first

quarter revenues and total annual revenues, SIP’s 2007 first quarter revenues of $6.73 million
(Pl.’s Ex. 23) represented between $33.67 million (15%) to $44.89 million (20%) of annual
projected revenues.
494.

SIP’s 2007 first quarter revenues of $6.73 million (Pl.’s Ex. 23) represented

approximately 17% of SIP’s actual annual 2007 revenues of $40.129 million. (P1.’s Ex. 8 (Dec.
31, 2007 Report), at 46.)
495.

Weighing each quarter evenly, SIP’s actual 2007 first quarter revenues of $6.73

million yield projected annualized revenues of less than $27 million—approximately $34 million
below SIP’s projected revenues used in Prairie’s valuation reports. (Demonstrative 24; Sept. 19,
2016 Tr. (Puntillo) 71:6-16.)
496.

Based on SIP’s actual financial performance during the first quarter of 2007, SJP’s

annualized net income was negative $4.7 million—approximately $13.3 million below SIP’s

84

projected net income used in Prairie’s valuation reports. (Demonstrative 24; Sept. 19, 2016 Tr.
(Puntillo) 73:2-23.)
497.

At the end of 2006, SJP’s CFO was expecting SJP to realize approximately $5

million in revenues per month for the first quarter of 2007. (May 24, 2016 Tr. (D’Esposito) 17:24, 17:19-23.)
498.

FBTS never asked Prairie to determine SIP’s historical quarterly growth, or

determine any relationship between SJP’s first quarter historical performance and its annual
performance. (June 29, 2016 Tr. (Aliferis) 27:18-24, 100:5-1 1.)
499.

At trial, FBTS suggested that SJP’s 2007 first quarter performance was due to

abnormally severe weather.

(May 24, 2016 Tr. (D’Esposito) 63:15-64:2; June 29, 2016 Tr.

(Aliferis) 80:17-20; May23, 2016 Tr. (DiPano) 66:1-67:5; May27, 2016 Tr. (Ippensen) 61:4-15.)
500.

Since the 1 990s, SIP has typically experienced lower revenues during the first three

months of the year than in the remaining months of the year because the weather is usually worse
during the first three months of the year. (May 24, 2016 Tr. (D’Esposito) 16:3-12, 36:25-37:5.)
501.

Although Prairie believed that the projects affected by weather-related delays in the

first quarter of 2007 could still be completed in the 2007 fiscal year, (June 29, 2016 Tr. (Aliferis)
159:25-160:6), FBTS never determined whether any of the first quarter projects were cancelled,
as opposed to delayed, (May 25, 2016 Tr. (Cory) 113:4-7), or whether SJP would incur additional
expenses to make up its lost first quarter revenues. (May 24, 2016 Tr. (D’Esposito) 72:24-73:12
(did not recall being asked if SJP would incur additional expenses for wages or equipment leasing
to make up the lost first quarter revenues; see also June 29, 2016 Tr. (Aliferis) 99:12-100:4 (Prairie
never looked at SJP’s financial performance on a quarter-by-quarter basis).)

85

FBT$ did not ask Prairie what the effect on the valuation would be if some of the

502.

revenues projected for 2007 were delayed until 2008. (June 29, 2016 Tr. (Aliferis) 27:11-15.)
SJP’s 2007 first quarter performance was not measured in comparison to the

503.

summer of 2006, but rather the identical winter months of 2006. Accordingly, seasonal winter
weather does not explain the 2007 first quarter decline in relation to the first quarter of 2006.
504.

During particularly severe winters, $JP had earned a minimum 15% of its annual

revenue during first quarters in years prior to 2007. (May 24, 2016 Tr. (D’ Esposito) 16:13-17:1.)
Here, the $6.73 million first quarter revenues were less than 11% of the annual projected revenues
of $61 million.
505.

There was nothing that led FBTS to believe that the weather during the first quarter

of 2007 was out of the ordinary from prior years. (May 27, 2016 Tr. (Ippensen) 60:18-20, 60:236 1:3.)
506.

Dr. David Robinson, New Jersey State climatologist for the Center for

Enviroimiental Protection, Cook College/NJAES, Rutgers University, authored a February 2007
Climate Summary showing that February 2007 was the sixteenth coldest February since 1895 and
the second coldest February since 1979. (FBTS Ex. 28, at D00508.)
507.

Prior to the Transaction, FBTS did not determine the effect of weather on SJP’s

2007 first quarter performance. (May 27, 2016 Tr. (Ippensen) 61:4-15, 67:14-20 (FBTS did not
verify weather conditions in $JP’s region).)
50$.

Neither FBT$ nor Prairie independently verified the weather conditions in SJP’s

region for the first quarter of 2007. (May 27, 2016 Tr. (Ippensen) 67:17-20; June 29, 2016 Tr.
(Aliferis) 80:21-25; Sept. 23, 2016 Tr. (Cory) 37:5-16.)

86

509.

The data from the New Jersey Office of the Climatologist shows that January 2007

was abnormally mild, and that the period of November 2006 through January 2007 was the second
warmest on record, and that precipitation was 0.26 inches below normal. (Pl.’s Ex. 16 (Jan. 2007
Weather Summary), at 1.)
The monthly average temperature for January 2007 was 37.1°F, which was 5.9°f

510.

higher than the normal temperature of 3 1.2°F. (Pl.’s Ex. 17 (Monthly Mean Temperatures), at 2.)
The average temperature in January 2006 was 38.9°f, which was approximately

511.

8°F higher than normal, and the warmest since 1998.

(Pl.’s Ex. 17 (Monthly Temperature

Records), at 2.)
512.

The average temperature in February 2006 was 34.3°F, which was approximately

1°F higher than average. (Pl.’s Ex. 17 (Monthly Temperature Records), at 2.)
513.

The average temperature in March 2006 was 41.8°F, which was slightly higher than

average. (Pl.’s Ex. 17 (Monthly Temperature Records), at 2.)
514.

The average precipitation in February 2006 was 1.9 inches, which was

approximately 0.5 to 1.0 inches below average. (Pl.’s Ex. 18 (Monthly Precipitation Records), at
2.)
515.

The average precipitation in March 2006 was 0.8 inches, which was over three

inches below average, and the driest March on record.

(P1.’s Ex. 17 (Monthly Temperature

Records), at 2.)
516.

FBTS and Prairie understood that SJP’s ability to generate revenue was dependent,

in part, on the weather, and that SJP could generate additional revenues if the weather was
unseasonably mild. (June 29, 2016 Tr. (Aliferis) 99:6-11; May 27, 2016 Tr. (Ippensen) 65:23-25;
Sept. 23, 2016Tr. (Cory) 37:17-23; July5, 2016Tr. (Stoesser) 109:10-13, 114:2-115:4.)

87

517.

Although SJP achieved record high revenues in 2006, neither Prairie nor FBTS

considered the possibility that SJP’s revenues in 2006 might have been the result of abnormally
mild weather. (June 29, 2016 Tr. (Aliferis) 99:21-100:4; May 27, 2016 Tr. (Ippensen) 67:14-16;
6:113:1-3.)
518.

Under the DCF method, revenues realized later in time are discounted more steeply

than revenues realized closer in time—for example, projected revenues for 2008 are worth 13%
less than projected revenues for 2007. (Joint Ex. 9 (Apr. 11, 2007 Drafl), at 81 “Present Value
Factors at 19.25%”; June 29, 2016 Tr. (Aliferis) 25:11-27:10.)
519.

Under the DCF method, a company that is expected to realize revenues in 2007 has

a higher value than one where those revenues are delayed until 2008 or subsequent years as they
are discounted more heavily. (July 14, 2016 Tr. (Messina) 86:22-87:2; July 15, 2016 Tr. (Messina)
84:20-86:12; June 29, 2016 Tr. (Aliferis) 26:25-27:7.)
520.

A prudent investor would not have accepted the seller’s stated explanation that the

Company’s poor first quarter performance was caused by adverse weather without first
independently verifying the purported connection between performance and weather. (Sept. 19,
2016 Tr. (Puntillo) 79:21-80:5.)
521.

A prudent investor would have first verified the purported weather conditions to

determine if in fact they were outside of the historical norms. (Sept. 19, 2016 Tr. (Puntillo) 80:613.)
522.

If the weather was outside the historical norms, a prudent investor would have

additionally investigated whether the target company’s projects were postponed rather than
cancelled as a result of the adverse weather. (Sept. 19, 2016 Tr. (Puntillo) 80:14-19.)

88

523.

If the projects were postponed rather than cancelled, a prudent investor would have

additionally determined the effect of the postponement on SJP’s cash flows and profit margins.
(Sept. 19, 2016 Tr. (Puntillo) 80:19-24.)
524.

At trial, FBTS suggested that SJP’s 2007 first quarter performance was due to

equipment maintenance. (Sept. 20, 2016 Tr. (Puntillo) 38:13-16 (question posed by counsel for
FBTS regarding maintenance); May 23, 2016 Tr. (DiPano) 65:1-9.)
525.

SJP shut down National’s operations in the beginning of January 2007 to conduct

“heavy maintenance.” (May 23, 2016 Tr. (DiPano) 65:1-20.) The shutdown resulted in a lack of
revenue for National and increased maintenance, equipment, and personnel costs, all of which
were absorbed in January 2007. (May 23, 2016 Tr. (DiPano) 65:1-20.)
526.

There is nothing in the April 11, 2007 Draft Valuation Report, April 27, 2007 Post-

Transaction Valuation Report, the April 13, 2007 Memo, or the April 16, 2007 Financial Report
Review that discussed SJP’s first quarter performance or attributed it to equipment
maintenance. (Joint Ex. 9 (Apr. 11, 2007 Draft); Joint Ex. 10; Joint Ex. 12; Joint Ex. 15.)
527.

FBTS did not have any conversations regarding the weather and its potential effect

on SJP’s valuation or regarding SJP performing maintenance on its equipment during the first
quarter of 2007.
528.

Neither the April 30,

2007 Post-Transaction Valuation Report nor the

corresponding EB Committee notes discussed any equipment maintenance. (Pl.’s Ex. 7 (Apr. 30,

Although Cory testified that she recalls some conversation regarding the weather and its
potential connection with SJP’s 2007 first quarter performance (but cannot say if it occurred before
or after the Transaction), (Sept. 23, 2016 Tr. (Cory) 30:12-17), the Court finds that no conversation
took place before the SJP ESOP Transaction based on the lack of corroborating evidence and after
evaluating the credibility of the witnesses. Additionally, Cory has absolutely no recollection of
any discussion regarding $JP performing maintenance on its fleet during 2007 first quarter. (Sept.
23, 2016 Tr. (Cory) 30:18-24.)
89

2007 Report), at 45-46 “Revenues” (referring to weather) and “Gross Profit” (referring to housing
market); Pl.’s Ex. 15 (EB Committee Notes), at 3 “Post-Transaction Review April 30, 2007”
(referring to “horrible weather”).)
529.

Companies typically perform equipment maintenance over a scheduled period of

time because a business can operate more profitably to the extent that it can operate at a steady
pace without disruption. (July 15, 2016 Tr. (Messina) 79:2-12.)
530.

It would be very unusual for a company to take all of its equipment offline for

maintenance in the first quarter and absorb a 56% revenue decline without explanation. (July 15,
2016 Tr. (Messina) 79:2-12.)
ix.
531.

FBTS ‘s Review ofPrairie’s Consideration of Customer Concentration

SJP’s top customer, as a percentage of revenue in 2006, was the homebuilder,

Hovnanian. (Stipulation of Facts

¶

53; May 23, 2016 Tr. (Dugan) 118:21-24 (testifying that,

although Hovnanian was not exclusively a residential builder, it was predominantly a residential
builder).)
532.

SJP was able to grow its business with Hovnanian over the years because of SJP’s

capability to develop sites with rocky land. (May 23, 2016 Tr. (DiPano) 56:19-57:16.)
533.

As of December 31, 2006, Hovnanian accounted for nearly 60% of SJP’s revenues

for 2006. (Joint Ex. 1 (Offering Memo), at 26 (Exhibit 21); Stipulation of Facts
534.

¶ 54.)

As of December 31, 2006, more than 78% of SJP’s reported backlog for 2006 was

on Hovnanian projects (i.e., $45,167,302 out of a total $57,743,170).
Memo), at 26 (Exhibit 22).)

90

(Joint Ex. 1 (Offering

535.

Between 2002 and 2006, SJP’s revenue growth was almost entirely attributable to

Hovnanian. (Demonstrative 22; Sept. 19, 2016 Tr. (Puntillo) 97:20-99:15; Joint Ex. 1 (Offering
Memo), at 34 (historical revenues), 126-28 (historical revenues by customers).)
536.

Between 2002 and 2006, SJP’s concentration in Hovnanian had increased from

44% to 59%. (Demonstrative 22; Joint Ex. 1 (Offering Memo), at 126-28.)
537.

Between 2002 and 2006, Hovnanian revenues grew at a compound annual growth

rate of 25%. (Demonstrative 22; Joint Ex. 1 (Offering Memo), at 34, 36, 126-28.)
538.

Between 2002 and 2006, non-Hovnanian revenues grew at a compound annual

growth rate of 7%. (Demonstrative 22; Joint Ex. 1 (Offering Memo), at 34, 36, 126-28.)
539.

In 2006, Hovnanian was the sixth or seventh largest homebuilder in the United

States, a Forbes Platinum 400 company for five consecutive years and on Fortune Magazine’s list
of “100 fastest Growing Companies” for four consecutive years, and #403 on the 2006 Fortune
500, ranked second based on a five-year total return to investors of 60%. (Pl.’s Ex. 12, at 3.)
540.

After the close of 2006, Hovnanian released its 2006 Annual Report (the

“Hovnanian 2006 Annual Report” or “Hovnanian’s 2006 Annual Report”). (Pl.’s Ex. 11 (HOV
Annual Report).)
541.

Prairie did not review Hovnanian’s 2006 Annual Report prior to the SJP ESOP

Transaction.36

36

Although Aliferis testified that Hovnanian’s 2006 Annual Report is something Prairie “would
have reviewed,” (June 29, 2016 Tr. (Aliferis) 74:19-23), Aliferis did not specifically recall
reviewing the document, the document was never listed as a document reviewed by Prairie, and
neither the April 11, 2007 Draft Valuation Report nor the April 27, 2007 Post-Transaction
Valuation Report mentioned the Hovnanian 2006 Annual Report. (July 14, 2016 Tr. (Messina)
59:15-60:9 (if Prairie relied on Plaintiffs Exhibit 11, it should have been listed in the valuation
report).)
91

542.

Although the Hovnanian 2006 Annual Report contained optimistic statements of

Hovnanian’s future activity, (July 14, 2016 Tr. (Messina) 199:20-200:13 (correspondence from
CEO in Annual Report has lower reliability than 10K, tends to be more optimistic)), it also
indicated that, in 2006, Hovnanian had paid $159 million in penalties for walking away from
projects. (Pl.’s Ex. 11 (HOV Annual Report), at 8.)
543.

The Hovnanian 2006 Annual Report also revealed that 2006 “was a challenging

year” due to the “sudden downturn in many of [Hovnanian’s] housing markets.” (Pl.’s Ex. 11
(HOV Annual Report), at 5.) Hovnanian sustained reduced profits and stated that “it is difficult
to predict when the overall housing market will turn around.” (Pl.’s Ex. 11 (HOV Annual Report),
at 7.)
544.

Hovnanian’s 2006 Annual Report noted the sudden downturn of the homebuilding

industry in that year and stated that it was managing its business as if the industry was in a
prolonged downturn. (P1.’s Ex. 11 (HOV Annual Report), at 7.)
545.

The Hovnanian 2006 Annual Report indicated that Hovnanian’s total revenues had

increased on a year-by-year basis from 2002 to 2006. (Pl.’s Ex. 11 (HOV Annual Report), at 3.)
546.

The Hovnanian 2006 Annual Report also showed that Hovnanian had 36

communities actively being built in New Jersey, which included some of SJP’s backlog. (Pl.’s Ex.
11 (HOV Annual Report), at 4; May 24, 2016 Tr. (D’Esposito) 55:1-22.)
547.

Hovnanian’s 2006 Annual Report announced that Hovnanian would reduce costs

by renegotiate pricing with its subcontractors, over whom it claimed to have “a great deal of
leverage.” (Pl.’s Ex. 11 (HOV Annual Report), at 7.)
548.

Hovnanian had also disclosed this strategy on September 11, 2006, in a symposium

on the homebuilding industry sponsored by Credit Suisse (the “Credit Suisse Report”), in which

92

Hovnanian represented that it would aggressively renegotiate subcontractor costs. (Pl.’s Ex. 12
(Credit Suisse Report), at 17.)
549.

FBTS acknowledged that Hovnanian’s representations concerning its intent to

renegotiate subcontractor contracts to reduce costs as set forth in Hovnanian’s 2006 Annual Report
(Pl.’s Ex. 11 (HOV Annual Report)) and the Credit Suisse Report (Pl.’s Ex. 12) could adversely
affect SJP’s projected margins. (May 26, 2016 Tr. (Ippensen) 95:4-25, 96:14-25.)
550.

FBT$ did not review either the Credit Suisse Report (P1.’s Ex. 12) or the Hovnanian

2006 Annual Report (Pl.’s Ex. 11 (HOV Annual Report)) prior to the Transaction. (May 26, 2016
Tr. (Ippensen) 94:8-23, 97:1-5; July 6, 2016 Tr. (Ash) 54:25-55:6.)
551.

Although Prairie acknowledged that it would have been important to determine

Hovnanian’s stock price prior to the Transaction, (June 29, 2016 Tr. (Aliferis) 72:19-25, 73:1317), neither FBTS nor Prairie looked at the share price of Hovnanian prior to the Transaction.
(May 26, 2016 Tr. (Ippensen) 93:21-25; Sept. 23, 2016 Tr. (Cory) 43:23-44:4; July 6, 2016 Tr.
(Ash) 54:17-25; June 29, 2016 Tr. (Aliferis) 72:19-25.)
552.

Neither FBTS nor Prairie contacted Hovnanian to discuss its relationship with SJP.

(July 6, 2016 Tr. (Ash) 51:4-11; May 26, 2016 Tr. (Ippensen) 85:9-13; Sept. 23, 2016 Tr. (Cory)
42:22-24; June 29, 2016 Tr. (Aliferis) 50:18-22.)
553.

FBTS did not speak with Hovnanian or any other SJP customer because it would

have violated FBTS’s best practices. (May26, 2016 Tr. (Ippensen) 97:10-19.) As proposed ESOP
transactions are not public, FBTS does not speak to customers because spreading information
about a change in ownership of a given company could affect that company’s relationship with its
customers. (May 26, 2016 Tr. (Ippensen) 161:10-20; June 29, 2016 Tr. (Aliferis) 50:11-51:4.)

93

554.

In a minority ESOP purchase, a trustee would not speak with a company’s

customers prior to approving a transaction because the ESOP is not a synergistic buyer looking to
run the company or replace management, but is rather the classic financial buyer, and contacting
customers could place the ESOP in the middle of a very important and delicate relationship. (June
21, 2016 Tr. (Fischer) 45:24-47:6; 61:7-17.)
555.

A valuation report should list the materials reviewed by the valuation advisor. (July

14, 2016 Tr. (Messina) 60:3-4; June 30, 2016 Tr. (Van Horn) 153:5-19.)
556.

Neither the Hovnanian 2006 Annual Report nor the Credit Suisse Report was

identified as one of the documents that Prairie reviewed in either the April 11, 2007 Draft
Valuation Report or the April 27, 2007 Post-Transaction Valuation Report. (Joint Ex. 9 (Apr. 11,
2007 Draft), at 4, 6-7; Joint Ex. 10 (Apr. 27, 2007 Report), at 3, 5-6.)
557.

A prudent investor would have considered a customer’s representations of a

dramatic slowdown in the housing market and its intention to renegotiate agreements with
subcontractors to be material information in determining whether the company’s projections were
reliable. (Sept. 19, 2016 Tr. (Puntillo) 89:20-91:1.)
558.

A prudent investor would have considered a 59% customer concentration to be

material as the target company’s loss of that customer would have large adverse effects on the
target company. (Sept. 19, 2016 Tr. (Puntillo) 91:12-24.)
559.

Based on SJP’s representations regarding (1) its year end 2006 backlog; (2) its

intent to work off 75% of that backlog in 2007; and (3) the percentage of Hovnanian and non
Hovnanian bids outstanding, Hovnanian represented 62% of SJP’s projected revenue for 2007.
(Demonstrative 23; Sept. 19, 2016 Tr. (Puntillo) 101:2-103:7; Joint Ex. 1 (Offering Memo), at 12,
26-27; Joint Ex. 9 (Apr. 11, 2007 Draft), at 13.)

94

560.

Based on $JP’s representations regarding (1) its year end 2006 backlog; (2) its

intent to work off 75% of that backlog in 2007; and (3) the percentage of Hovnanian and non
Hovnanian bids outstanding, non-Hovnanian revenues would need to grow by 117% from 2007 to
2008 to simultaneously meet SJP’s projected revenues while limiting Hovnanian revenues to 20%
of total revenues.37 (Demonstrative 20; Sept. 19, 2016 Tr. (Puntillo) 105:4-19.)
561.

A prudent investor would have been concerned with such a drastic and

unprecedented reduction in the projected Hovnanian revenues given the growth of non-Hovnanian
revenues required to meet SJP ‘5 projections. (Sept. 19, 2016 Tr. (Puntillo) 105:20-106:1.)
562.

A prudent investor would have required a breakdown between projected Hovnanian

and non-Hovnanian revenues in light of SJP’s historical dependence on Hovnanian as well as $JP’s
representation that it was diversifying away from Hovnanian. (Sept. 19, 2016 Tr. (Puntillo) 106:923.)
563.

FBTS believed that Prairie applied a risk discount of 19.25%, which, in part,

accounted for Hovnanian’s large percentage of sales with SJP. (Joint Ex. 9 (Apr. 11, 2007 Drafi)
42; May 26, 2016 Tr. (Ippensen) 82:17-83:18.)
564.

The April 11, 2007 Draft Valuation Report did not identify how much, if any, of

the discount rate was due to customer concentration, and FBTS never discussed the amount of the
discount rate attributable to customer concentration. (May 26, 2016 Tr. (Ippensen) 83:19-84:6;
June 29, 2016 Tr. (Aliferis) 148:4-24.)

‘

The Offering Memo stated that, at the end of 2006, Hovnanian only represented 20% of the
outstanding bids. (Joint Ex. 1 (Offering Memo), at 12.)
95

565.

The Offering Memo’s representation that Hovnanian projects constituted only 20%

of SIP’s outstanding bids was copied into the April 11, 2007 Draft Valuation Report. (Joint Ex. 1
(Offering Memo), at 12; Joint Ex. 9 (Apr. 11, 2007 Draft), at 13, 32.)
566.

In explaining its “diversification plan” to Prairie, SIP made general representations

that it would add additional, unspecified customers, and would solicit unspecified commercial and
municipal developers. (June 29, 2016 Tr. (Aliferis) 85:6-86:8.)
567.

SIP never explained in any detail why it believed it would successfully diversify

away from Hovnanian, other than telling prospective customers that SIP can offer services “for [a]
reasonable pric[e] and [do] quality work.” (June 29, 2016 Tr. (Aliferis) 85:24-86:8.)
568.

FBTS and Prairie never determined which specific customers SIP planned to

cultivate as part of its diversification plan, beyond

s general statement that “there was always

demand for [SIP’s] services from other customers in the marketplace.”

(June 29, 2016 Tr.

(Aliferis) 86:23-87:8 (did not recall SIP specifically explaining how SIP determined that
municipalities and commercial developers had available projects); Sept. 23, 2016 Tr. (Cory) 43:1219 (did not recall discussions about whether SIP was diversifying away from Hovnanian, or how
it could replace Hovnanian if it lost Hovnanian as a customer); July 6, 2016 Tr. (Ash) 56:4-24 (did
not recall SIP explaining specifics of its customer diversification strategy).)
569.

Prairie never considered what effect SJP’s customer or regional “diversification

plan” would have on its profit margins. (June 29, 2016 Tr. (Aliferis) 71:23-72:15 (no recollection
as to differences in margins depending on customer or region).)
570.

FBTS never asked, and was unaware of whether Prairie asked, SIP how it was

specifically planning to reduce its customer concentration in Hovnanian.
(D’Esposito) 24:20-24; May 26, 2016 Tr. (Ippensen) 86:2-6.)

96

(May 24, 2016 Tr.

571.

The seller’s representation that only 20% of SJP’s outstanding bids were for

Hovnanian at the end of 2006, despite SIP’s historical dependence on Hovnanian for more than
half of its revenues, implied that SJP might not in fact meet its projected revenues absent an
explanation as to how it would make up for this shortfall. (Sept. 19, 2016 Tr. (Puntillo) 105:20106:8.)
572.

One of the prospective lenders whom Duff & Phelps solicited to finance the

Transaction asked Duff & Phelps to explain the dramatic decrease in Hovnanian bids in light of
the importance of Hovnanian to SJP’s 2006 revenues and its end of year 2006 reported backlog.
(Pl.’s Ex. 5 (Sovereign Bank E-mail), at 2; May 25, 2016 Tr. (Miscione) 26:8-16, 27:7-11, 28:1619.)
573.

FBTS and Prairie did not consider the possibility that SIP’s stated decline in

Hovnanian bids might signal a problem in SIP’s relationship with its major customer (e.g., lack of
available Hovnanian projects, or Hovnanian’s rejection of SJP’s bids).

(May 26, 2016 Ir.

(Ippensen) 86:15-87:4, 93:10-18.)
574.

FBTS and Prairie did not ask SIP to explain how SIP was planning to make up the

shortfall in revenues that had traditionally been provided by Hovnanian. (Sept. 23, 2016 Tr. (Cory)
43:12-19.)
575.

On April 13, 2007—at the close of market prior to the Transaction—Hovnanian

was trading at $23.69 per share. (Stipulation of Facts
576.

¶ 55.)

During the week of April 9, 2007, Hovnanian was trading at its lowest adjusted

closing price since the week of May 19, 2003. (ECF No. 136-1 (Motion for Judicial Notice), at 1,
facts nos. 2, 3; ECF No. 156 (Order Granting Motion for Judicial Notice as Unopposed).)

97

577.

Hovnanian’s adjusted share price of $23.69 per share at the close of market on

Friday, April 13, 2007, was its third lowest price since May 21, 2003, with the second and third
lowest prices falling on April 10, 2007 and April 11, 2007. (ECF No. 13 6-1 (Motion for Judicial
Notice), at 6 (Chart).)
578.

The share price for Hovnanian steadily decreased from July 22, 2005 to April 13,

2007. (ECF 136-1 (Motion for Judicial Notice), at 1, fact no. 4; ECF 136-5 (Hovnanian Stock
Chart); ECF No. 155 (Order Granting Motion for Judicial Notice as Unopposed).)
x.
579.

FBTS’s Review ofPrairie’s Consideration ofKara Homes’s Bankruptcy

Kara Homes had consistently been one of $JP’s top ten customers from 2004 to

2006. (Joint Ex. 1 (Offering Memo), at 126; Stipulation of Facts
580.

¶ 56.)

Kara Homes accounted for 1.9% of SJP’s total annual revenues as of October 2006

(Joint Ex. 1 (Offering Memo), at 26), 9% of SJP’s total adjusted revenues for 2005 (Joint Ex. 1
(Offering Memo), at 34, 126), and 3.5% of SJP’s total adjusted revenues for 2004 (Joint Ex. 1
(Offering Memo), at 34, 126). Prairie never discussed the number of projects that Kara Homes
historically provided to SJP or the effects of Kara Homes’s bankruptcy on SIP’s ability to either
diversify its customer base or meet its projections. (May 23, 2016 Tr. (Dugan) 175:6-12 (no
recollection of telling Prairie how many projects Kara provided), 189:17-23 (no recollection of
what questions Prairie asked regarding Kara Homes).)
581.

Kara Homes declared bankruptcy in October of 2006—approximately 6 months

prior to the Transaction. (PACER, U.S. Bankruptcy Court, District of New Jersey, Chapter 11,
Case No.: 06-19626(MBK)); ECF No. 136-1 (Motion for Judicial Notice), at 1, fact no. 1; ECF
No. 156 (Granting Motion as Unopposed).)

98

582.

At the time Kara Homes declared bankruptcy, it owed SJP approximately $700,000

that SJP was unable to collect. (May 23, 2016 Tr. (Dugan) 121:7-12.)
583.

In 2006, SJP wrote off $768,810 as an operating expense, which represented the

amount owed to it by Kara Homes plus approximately $70,000 in legal fees. (Joint Ex. 9 (Apr.
11,2007 Draft), at 31.)
584.

The trustee in the Kara Homes bankruptcy action sued SJP to recover payments

that Kara Homes made to SJP shortly before declaring bankruptcy. (May 23, 2016 Tr. (Dugan)
121:20-122:2; FBTS Ex. 34, atD00545.)
585.

Despite the bankruptcy filing, SJP listed Kara Homes as one of its top-ten

customers in the Offering Memo sent to FBT$. (Joint Ex. 1 (Offering Memo), at 26 “Exhibit 21SJP Top Customers YTD.”)
586.

SJP informed Prairie that Kara Homes had declared bankruptcy. (May 23, 2016

Tr. (Dugan) 175:6-176:1.)
587.

Kara Homes was not accounted for in the backlog or projected revenues for 2007

in the April 11, 2007 Draft Valuation Report.38 (May 26, 2016 Tr. (Ippensen) 101:16-2 1.)

Aliferis gave no testimony regarding whether the Kara Homes revenues that were owed—but
not paid and/or returned to the bankruptcy estate—were written off from SJP’s 2006 revenues. As
the valuation reports prepared by Aliferis (Joint Ex. 9 (Apr. 11, 2007 Draft); Joint Ex. 10) do not
break down historic or projected revenues by customer, it is impossible to specifically determine
how Kara Homes’s revenues were accounted for by Prairie in either the backlog or in the projected
revenues. further, although historical expenses were reduced to reflect the costs SJP incurred as
a result of the Kara Homes bankruptcy, it does not appear that either Duff & Phelps or Prairie
adjusted SJP’s historical revenues to account for the fact that SJP could not collect on the revenues
earned. Although Dugan speculated that the Kara Homes revenues might have been written off
SJP’s total revenues in the audited 2006 financials, he testified that he did not know whether Prairie
actually made a revenue (as opposed to an expense) adjustment for Kara Homes (May 23, 2016
Tr. (Dugan) 171:6-8) and was unsure as to the year in which the Curchin Group made the
appropriate write off (May 23, 2016 Tr. (Dugan) 171:9-16). Neither SJP’s draft 2006 financial
report attached to the Offering Memo (Joint Ex. 1 (Offering Memo), at 116-120), nor $JP ‘S draft
2006 financial report prepared in March (Pl.’s Ex. 22 (Combined 2006 Draft)) contained any
99

588.

The April 11, 2007 Draft Valuation Report referenced SIP’s expenses from

litigation involving Kara Homes for purposes of deducting those costs from SIP’s future projected
expenses. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 31 (“Kara Homes w[ri]te-off and legal fees”); May
26, 2016 Tr. (Ippensen) 100:20-101:11.)

529.

The April 11, 2007 Draft Valuation Report failed to discuss the effect of the Kara

Homes bankruptcy on SIP’s projected revenues or its stated customer diversification plan. (See

generally Joint Ex. 9 (Apr. 11, 2007 Draft).)
590.

FBTS and Prairie never discussed the effect of the Kara Homes bankruptcy on

either SIP’s ability to match its 2006 revenues, or on SIP’s stated strategy of diversifying away
from Hovnanian. (May 26, 2016 Tr. (Ippensen) 102:21-103:1; May 23, 2016 Tr. (Dugan) 176:915, 189:17-23.)
xi.
591.

fB TS ‘s Review ofPrairie’s Consideration ofSIP ‘s Bidding

The Offering Memo represented that at the end of 2006, SIP had $60 million in

bids outstanding, and that $JP bids for approximately $140 million in projects per year with a
historical hit rate of approximately 45% on average. (Joint Ex. 1 (Offering Memo), at 27.)
592.

Prairie copied these representations verbatim and pasted them into its April 11,

2007 Draft Valuation Report. (See Joint Ex. 9 (Apr. 11, 2007 Draft), at 13, 32; see also May 26,
2016 Tr. (Ippensen) 79:10-18.)

adjustments to uncollected revenue based on the Kara Homes bankruptcy. As the financial reports
were prepared based on the accrual method, rather than cash received (Pl.’s Ex. 22 (Combined
2006 Draft), at 8 “Basis of Accounting”), SJP’s reported revenues included the amounts owed by
Kara Homes, regardless of whether they were collected.
100

593.

FBTS believed that $JP’s projections were reasonable due, in part, to SJP’s

outstanding hit rate. (May 26, 2016 Tr. (Ippensen) 79:19-22; see also Joint Ex. 12 (Apr. 13, 2007
Memo), at 1 (noting that “$JP wins about 45% of the bids they bid on”).)
594.

An average historical hit rate of 45% on an average bidding volume of$ 140 million

means that SIP was awarded on average $63 million in new projects every year. (May 26, 2016
Tr. (Ippensen) 79:23-80:4; see also July 5, 2016 Tr. (Stoesser) 101:13-24.)
595.

Historically, SJP had never attained $63 million in annual revenues; SJP’s highest

revenues were approximately $61 million and its five-year average revenues were approximately
$43 million. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)
596.

FBTS and Prairie also believed that SIP began bidding on larger, more profitable

projects after Yacuzzio passed away. (May 26, 2016 Tr. (Ippensen) 59-10:19; May 27, 2016 Tr.
(Ippensen) 22:1-2; June 29, 2016 Tr. (Aliferis) 89:7-10. But see July 6, 2016 Tr. (Ash) 43:7-11
(could not remember if she was told that SJP began bidding on more profitable jobs after DiPano
and Dugan took over control of SIP).)
597.

FBTS never verified SJP’s outstanding bids. (May 26, 2016 Tr. (Ippensen) 80:8-

598.

FBTS does not know what evidence, if any, there was to support the statement that

15.)

“SJP was bidding on larger, more profitable projects.” (May 26, 2016 Tr. (Ippensen) 59:10-61:17
(unable to identify any evidence except SJP’s top customers for 2006 as reflected in the Offering
Memo); July 6, 2016 Tr. (Ash) 43:7-16.)
599.

Prairie did not review any of the bid proposals and did not compare SJP’s bidding

under DiPano with SJP’s bidding under Yacuzzio. (June 29, 2016 Tr. (Aliferis) 89:11-24.)

101

600.

Prairie’s representations concerning SJP’s bidding were based solely on

discussions with SIP and its advisors. (June 29, 2016 Tr. (Aliferis) 89:25-90:16 (acknowledging
that SJP’s new business strategy was only based on discussions with management or its financial
advisor).)
xii.
601.

FBTS’S Review of Prairie’s Application of the Market Multiple Method

One of the methodologies used by Prairie in its valuation was the market multiple

method, whereby the value of a closely held company is derived by identifying similar publicly
traded companies (the “peer group”), expressing the known market value of the peer group (based
on publicly traded share price) as a function of a financial metric, and then applying that formula
to derive the closely held company’s value. (June 30, 2016 Tr. (Gross) 13:9-15, 15:5-16:2; July
14, 2016 Tr. (Messina) 111:23-112:8.)
602.

Prairie selected peer group companies that were much larger, had a significantly

more diversified geographical and customer base, and performed far more sophisticated work than
SIP. (July 14, 2016 Tr. (Messina) 112:18-113:8.)
603.

For the market multiple method, Prairie used three metrics, EBITDA, EBIT,39 and

pretax income, from seven guideline companies and reduced those multiples by 40% to develop a
more conservative comparison with SIP. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 43-45)
604.

Prairie applied the 40% discount to the multiples of the public companies used in

the market multiple method for the purpose of taking into account the differences between the
public companies and SIP in terms of size, access to capital, geographic diversity and economies
of scale. (June 29, 2016 Tr. (Aliferis), at 134:1-1 1.)

Earnings before interest and taxes (“EBIT”).
102

605.

Aliferis concluded that the 40% discount was conservative. (June 29, 2016 Tr.

(Aliferis) 135:23-136:10.)
606.

Prairie also attempted to quantify the dilutive aspect of the stock appreciation rights

plan. (June 29, 2016 Tr. (Aliferis) 134:23-25.)
607.

In addition, Prairie looked at dividends in the marketplace to assess what

comparable dividends were trading at as compared to an $JP security. (June 29, 2016 Tr. (Aliferis)
135:11-16.)
60$.

Prairie determined that an SJP security would trade comparably to dividends in the

marketplace or below. (June 29, 2016 Tr. (Aliferis) 135:11-16.)
609.

As the April 11, 2007 Draft Valuation Report sets forth, “when using multiples

from publicly traded companies, a discount is used to account for differences in size, risk,
diversification, customer concentration and other factors.” (Joint Ex. 9, at 45.)
610.

Ippensen determined that the 40% discount utilized by Prairie was even more

conservative than he expected and resulted in his having even greater comfort in relying on the
April 11, 2007 Draft Valuation Report. (May 26, 2016 Tr. (Ippensen) 191:7-17.)
611.

Financial information from SJP ‘s closest competitors, which were private

companies, was not readily available. (May 23, 2016 Tr. (Dugan) 164:2-19; Joint Ex. 9 (Apr. 11,
2007 Draft), at 44.)
612.

It is difficult to find companies that are “exactly” like the subject company because

the guideline companies may have larger operations, access to capital that the subject company
does not, or provide different services; nonetheless, it is prudent to use guideline companies in a
valuation analysis. (June 29, 2016 Tr. (Aliferis) 21:13-25.)

103

613.

FBTS did not find it unusual that SJP outperformed its peer companies, as set forth

in the market multiple method analysis of the April 11, 2007 Draft Valuation Report, in the
categories of EBITDA, EBIT and pretax income percentage, because SIP had less overhead than
these larger publicly traded companies. (Joint Ex. 9 (Apr. 11, 2007 Draft), at 43; May 26, 2016
Tr. (Ippensen) 111:16-112:6.) Publicly traded companies typically perform better, however, than
privately traded companies. (July 14, 2016 Tr. (Messina) 137:1-10.) This is the reason why a
valuation professional must apply a discount when performing the market multiple method. (June
29, 2016 Tr. (Aliferis) 136:3-10; June 30, 2016 Tr. (Gross) 35:1-10.)
614.

Although Aliferis typically consults with company management to ask ifpeer group

candidates performed similar work to that of the target company, Prairie did not consult SIP on
this subject matter. (June 29, 2016 Tr. (Aliferis) 23:1-16; May 23, 2016 Tr. (Dugan) 128:14-22,
163:18-21; Sept. 23, 2016 Tr. (Cory) 64:15-19.)
615.

Prairie selected the following peer group companies in conducting its market

multiple analysis of SJP: Fluor, which engages in engineering for upstream oil and gas production;
Perini, which constructs highways, bridges, light rail transit systems, subways, airports and
wastewater treatment facilities; Jacobs Engineering, which designs and engineers processing
plants, including projects for clients in chemicals and polymers, pharmaceuticals and
biotechnology, oil and gas, refining, and food and consumer products; Granite Construction, Inc.,
which constructs dams, mass transit facilities, pipelines, canals, tunnels, waterway locks and dams,
and airport infrastructure; Meadow Valley Corp., which constructs highway bridges and airport
runways; and URS Corp., which provides systems engineering and technical assistance for the
design and development of new weapons systems and the modernization of aging weapons

104

systems. (July 14, 2016 Tr. (Messina) 113:13-114:12; Joint Ex. 9 (Apr. 11, 2007 Draft), at 6469.)
616.

Although Prairie used Sterling Construction Co., Inc. (“Sterling”) as one of the

publicly traded companies in its peer group (Joint Ex. 9 (Apr. 11, 2007 Draft), at 43; Joint Ex. 10
(Apr. 27, 2007 Report), at 57), Prairie omitted the company description of Sterling from both the
April 11, 2007 Draft Valuation Report and the April 27, 2007 Post-Transaction Valuation Report.
(May26, 2016 Tr. (Ippensen) 110:14-22).
617.

FBTS did not identify the omission of Sterling prior to the Transaction. (Sept. 23,

2016 Tr. (Cory)65:15-20; May 26, 2016 Tr.(Ippensen) 110:14-111:1.)
618.

FBTS was unable to assess the comparability of Sterling with SJP without having

been provided a description of Sterling.
619.

FBTS did nothing to determine if the peer group selected by Prairie was

appropriate. (Sept. 23, 2016 Tr. (Cory) 63:24-65:10; May 26, 2016 Tr. (Ippensen) 114:7-24.)
620.

The peer group companies that Prairie selected were incomparable to SJP. (July

14, 2016 Tr. (Messina) 112:18-23; May 23, 2016 Tr. (Dugan) 122:9-128:10 (stating that for the
period from 2002 to 2007, SJP did not work on any projects involving oil or gas refineries, oil
pipelines, theaters, railroads, airports, casinos, harbors, ports, public highways, public bridges,
dams, canals, waterlocks, correctional facilities, and schools and was unsure if SJP worked on
projects involving hospitals or power plants).)
621.

SJP ‘s financial metrics, market cycle, and operations did not closely resemble the

financial metrics, market cycle, and operations of the peer group companies Prairie selected. (July
14, 2016 Tr. (Messina) 113:1-8; see also Joint Ex. 9 (Apr. 11, 2007 Draft), at 64-69;
Demonstratives 9, 10, 13, 15, 17, 18.)

105

622.

The peer group companies Prairie selected only had minimal exposure to the

housing market and their performance was not strongly correlated with the cyclicality of the
homebuilding industry. (July 14, 2016 Tr. (Messina) 119:13-120:17; Demonstrative 9, 10, 13;
July 14, 2016 Tr. (Messina) 113:9-12.)
623.

From 2002 to 2006, the peer group companies Prairie selected achieved a consistent

return on assets ranging from 4.9% to 5.6%. (Demonstrative 17.)
624.

From 2002 to 2006, SIP achieved a return on assets which fluctuated wildly

between 2.4% and 29.1%. (Demonstrative 17.)
625.

The fluctuations in SIP’s historical return on assets were largely due to the fact that

SIP operated in a competitive cyclical industry. (July 14, 2016 Tr. (Messina) 135:13-21.)
626.

SJP’s historical returns and margins exhibited dramatically more volatility than the

historical returns and margins of the peer group companies Prairie selected. (Demonstrative 10;
July 14, 2016 Tr. (Messina) 120:4-9.)
627.

SJP’s EBITDA margin had a significantly higher standard deviation than the

standard deviation of the EBITDA margin of the peer group companies Prairie selected. (July 14,
2016 Tr. (Messina) 120:4-17; Demonstrative 10.)
628.

It is generally accepted in finance that high volatility in margins is evidence that

the company’s industry is cyclical. (July 14, 2016 Tr. (Messina) 61:18-62:1, 135:13-21.)
629.

The profit margins of the peer group companies Prairie selected were, on average,

approximately 2.3%. (Demonstrative 15.)
630.

SJP’s five-year historical average profit margin was 3.9%. (Demonstrative 15.)

631.

Prairie projected that SIP’s profit margins would average 8.4%. (Demonstrative

16.)

106

632.

SJP’s projected profit margins were over three times higher than the profit margins

of the peer group companies Prairie selected.

(July 14, 2016 Tr. (Messina) 133:13-17;

Demonstrative 15, Demonstrative 16.)
633.

According to the April 27, 2007 Post-Transaction Valuation Report, SJP’s

projected return on assets was approximately five times higher than the historical returns of the
peer group companies selected by Prairie.

(July 14, 2016 Tr. (Messina) 138:6-139:4;

Demonstrative 1 8.)
634.

According to the April 27, 2007 Post-Transaction Valuation Report, SJP’s

projected profit margins of 8.4% (Demonstrative 16) were between two to eight times higher than
the profit margins of each of the peer group companies used by Prairie. (Demonstrative 15; July
14, 2016 Tr. (Messina) 133:10-17.)
635.

Although it is generally accepted in finance that a company may temporarily realize

returns in excess of its industry, that company cannot indefinitely realize above-industry returns
absent a sustainable competitive advantage. (CFF
636.

¶ 380.)°

Prairie’s execution of the market multiple method overemphasizes $JP’s

abnormally strong performance in 2006 and minimizes $JP’s weaker performance during other
times within the homebuilding industry cycle. (July 14, 2016 Tr. (Messina) 123:16-124:1.)
637.

Under Prairie’s approach, approximately 80-90% of SJP’s fair market value was

driven by SJP’s 2006 performance. (July 14, 2016 Tr. (Messina) 123:11-124:1.)

°

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
107

638.

SIP’s net income in 2006 was approximately $5 million, whereas its three-year

historical average net income and five-year average net income were approximately $2.5 million
and $2 million, respectively. (Demonstrative 11.)
639.

Despite the fact that the majority of SJP’s projects were in site preparation for

homebuilders, Prairie did not include the Homebuilders Index in the peer group, even though
homebuilders had similar financial metrics to SJP. (July 14, 2016 Tr. (Messina) 64:2-13, 114:1824, 117:16-119:6; Demonstrative 9.)
640.

Homebuilder companies were more comparable peer group companies than the

peer group companies selected by Prairie because SJP’s financial results and end-market demands
more closely resembled those of homebuilder companies. (July 14, 2016 Tr. (Messina) 114:1924, 117:11-119:6; Demonstrative 9.)
641.

The homebuilder companies used by Messina in his market multiple method

analysis included: Brookfield Homes, Beazer Homes, DR Horton, Dominion Homes, Hovnanian,
KB Homes, Lennar Corp., Orleans Homebuilder, MDC Holdings, Inc., M/I Homes, Meritage
Homes Corp., NVR Inc., Pulte Group, The Ryland Group, Standard Pacific Corp., Toll Brothers,
Tousa Inc., and WCI Communities (collectively, the “Homebuilder Peer Group”). (July 14, 2016
Tr. (Messina) 115:8-116:24.)
642.

Prairie should have utilized SJP’s five-year historical performance in its market

multiple method to normalize for SJP’s historical performance. (July 14, 2016 Tr. (Messina)
124:2-6.)
643.

Prairie’s application of a 40% discount to the multiples of the peer group companies

selected by Prairie did not adequately account for the differences between SIP and those peer
group companies. (July 14, 2016 Tr. (Messina) 128:2-129:2.)

10$

644.

Even after applying a 40% discount to the multiples of the peer group companies

selected by Prairie, the multiples of the Homebuilder Peer Group companies were more similar to
SIP. (July 14, 2016 Tr. (Messina) 129:10-130:2; Demonstrative 13.)

Q.

Miscellaneous Errors in Prairie’s Valuation Reports

645.

Prairie incorrectly identified the target company as “The Care of Trees Earnings”

instead of “SIP” in a chart in both the April 11, 2007 Draft Valuation Report and the April 27,
2007 Post-Transaction Valuation Report. (Joint Ex. 9 (Apr. 11, 2007 Draft), at $6; Joint Ex. 10
(Apr. 27, 2007 Report), at 100.)
646.

There is no evidence that FBTS noted this error prior to the Transaction or

considered this error to be critical. (Sept. 23, 2016 Tr. (Cory) 78:2-16.)
647.

The Offering Memo and all of the transactional documents, including the SPA, the

ESOP Promissory Note, and the ESOP Pledge Agreement described the. stock to be sold to the SIP
ESOP as “Class B Shares” or “Series B Convertible Common Stock.” (Joint Ex. 1 (Offering
Memo), at 1; Joint Ex. 5 (Stock Purchase Agreement), at 2; Pl.’s Ex. 40 (Promissory Note), at 1;
Pl.’s Ex. 41 (ESOP Pledge Agreement), at 1.)
648.

Both the April 11, 2007 Draft Valuation Report and the April 27, 2007 Post-

Transaction Valuation Report identify the securities as “Super Common Stock.” (Joint Ex. 9 (Apr.
11, 2007 Draft), at 49; Joint Ex. 10 (Apr. 27, 2007 Report), at 63.)
649.

FBTS did not consider Prairie’s misidentification of the shares to be a critical error

prior to the Transaction. (Sept. 23, 2016 Tr. (Cory) 81:16-22.)
650.

Both the April 11, 2007 Draft Valuation Report and the April 27, 2007 Post

Transaction Valuation Report contained numerous mathematical errors. (June 30, 2016 Tr. (Van
Horn) 163:7-164:8.)

109

R.

April 13, 2007 Teleconference

651.

FBTS conducted a conference call on April 13, 2007, where presentations were

given by its advisors, Aliferis and Greenapple, about the April 11, 2007 Drafi Valuation Report and
legal due diligence, respectively. (May 25, 2016 Tr. (Cory) 105:4-8; May 27, 2016 Tr. (Serbin)
108:2-7; July 6, 2016 Tr. (Ash) 25:7-12; 115:7-21; Stipulation of facts
652.

¶ 48.)

The April 13, 2007 conference call consisted, in part, of a presentation by Prairie

of its April 11, 2007 Drafi Valuation Report, and a presentation by SFE&G of legal issues relating
to the anticipated Transaction. (Stipulation of Facts ¶ 4$; May 27, 2016 Tr. (Serbin) 108:2-7; July
6, 2016 Tr. (Ash) 25:7-12, 122:18-123:2.)
653.

The April 13, 2007 conference call attendees included EB Committee members Ash,

Serbin, and Cory, as well as Greenapple and Aliferis. (Joint Ex. 12 (Apr. 13, 2007 Memo).) Cory,
Serbin and Ash were the only EB Committee members to attend this meeting. (May 25, 2016
(Cory) 103:15-21; see also Joint Ex. 12 (Apr. 13, 2007 Memo).) In other words, only three of the
eight to nine members of the EB Committee attended this final EB committee meeting on April 13,
2007. (May 26, 2016 Tr. (Ippensen) 132:17-19, 138:21-25; May 27, 2016 Tr. (Serbin) 145:5-10;
May 25, 2016 (Cory) 103:15-21; see also Joint Ex. 12 (Apr. 13, 2007 Memo).) Ippensen, who
typically attended the final EB Committee meeting, did not attend the April 13, 2007
teleconference. (May 25, 2016 Tr. (Cory) 92:10, 103:15-21; see also Joint Ex. 12 (Apr. 13, 2007
Memo).)
654.

Cory took notes during the teleconference on April 13, 2007. (Joint Ex. 12; May

25, 2016 Tr. (Cory) 102:17-103:11.)

Cory’ s two pages of handwritten notes, which were

subsequently typed, were the only notes that memorialized the April 13, 2007 conference call. (See
Joint Ex. 12 (Apr. 13, 2007 Memo); May 26, 2016 Tr. (Ippensen) 17:13-21.)

110

655.

The April 13, 2007 conference call began at 2:00 p.m. and lasted two to three hours.

(FBTS Ex. 10 (E-mail from M. Steere to P. Aliferis dated April 13, 2007) (noting a 2:00 p.m. start
time); July 6, 2016 Tr. (Ash) 25:22-26:7 (testifying that meetings typically last two to three hours);
June 29, 2016 Tr. (Aliferis) 163:6-9.)
656.

According to the notes of the meeting, the only41 issues discussed pertaining to

valuation were:
1.

SIP has a competitive edge by bringing large equipment to
the site and making gravel with the old pavement instead of
hauling the old pavement away and bringing in the new
gravel.

2.

Post-transaction director positions.

3.

The transaction is for 38%.

4.

A collective bargaining agreement to which SIP was a party.

5.

An OSHA exam.

6.

Company management’s focus and enthusiasm about SIP
and the proposed transaction.

7.

SJP is vertically integrated in its paving operations.

8.

SIP wins 45% of the jobs it bids on.

9.

SIP’s succession planning. If something happened to Frank
Dugan, “this would not be devastating.”

10.

Aliferis stated that he “briefly reviewed” the interim
financials through February 28, 2007 and would review the

41

Defendant alleges that not all topics discussed during the meeting were included in the meeting
notes. (May 27, 2016 Tr. (Serbin) 109:3-18; 110:21-111:8; June 29, 2016 Tr. (Aliferis) 163:1215.) The Court acknowledges that the notes are not transcripts and most likely do not memorialize
absolutely everything said during the conference call. The Court, however, finds that only the
topics encompassed within the notes were discussed in significant detail, absent specific testimony
concerning other discussions that the Court expressly sets forth in its findings of fact. The Court
finds that other discussions may have occurred but only in an informal and cursory fashion. The
Court’s finding is supported by the fact that the testimony cited by Defendant does not specifically
identify any issues discussed but excluded from the memo. For example, even with regard to
Defendant’s purported discussion about “some” industry talk, Defendant fails to identify what
information was discussed. (See May 27, 2016 Tr. (Serbin) 132:8-16).)

ill

interim financials through March 31, 2007 to finalize the
valuation report.42
(Joint Ex. 12 (Apr. 13, 2007 Memo).)
657.

The participants of the April 13, 2007 teleconference did not discuss industry trends

prior to the Transaction.43 (June 29, 2016 Tr. (Aliferis) 37:15-38:19; Sept. 23, 2016 Tr. (Cory)
59:10-21.)
658.

Aliferis walked the EB Committee through the April 11, 2007 Draft Valuation

Report, helping it understand how Prairie arrived at its valuation and conclusion that the $JP ESOP
was paying less than fair market value for SJP’s shares, and taking the time to go through the
pertinent pages of the report, with the EB Committee having the opportunity to ask questions
throughout the process. (July 6, 2016 Tr. (Ash) 118:10-119:1; May 27, 2016 Tr. (Serbin) 110:420.)
659.

Aliferis informed the EB Committee that, based on his review of interim financial

statements for the period ending on February 28, 2007 and what he had been advised verbally by
SJP, there were no “substantial changes” and stated that SJP remained in position to realize its
revenue projections for 2007 and beyond. (Joint Ex. 12; May 25, 2016 Tr. (Cory) 123:10-16; June
29, 2016 Tr. (Aliferis) 162:11-163:2.)
660.

Although Prairie represented in the April 11, 2007 Draft Valuation Report that

“discussions with management have yielded that the [sic] conclusion there has been no material

42

The Court notes that this list constitutes a summary, as opposed to a direct excerpt, of Joint
Exhibit 12.

The notes memorializing the April 1.3, 2007 teleconference—either those created
contemporaneously or those created subsequently—did not discuss the industry trends. (Joint Ex.
12 (Apr. 13, 2007 Memo); FBTS Ex. 12 (Draft Valuation with Notes; Joint Ex. 15 (Financial
Report Review), at 3-4; P1.’s Ex. 15 (EB Committee Notes), at 3 (SJP Group Annual Review Apr.
16, 2007).)
112

change in the operations and financial statements of the Company from December 31, 2006 to April
16, 2007,” the financial data for the first quarter of 2007 revealed that SIP’s revenues for January
1, 2007 through March 31, 2007, was 56.4% below SJP’s revenues for those months in 2006, that
SIP’s gross profit for January 1,2007 through March 31, 2007 was 97.4% below SJP’s gross profit
for those months in 2006, and that SJP’s net income for January 1, 2007 through March 31, 2007
was 128.3% below SIP’s net income for those months in 2006. (CFF
661.

¶J 454-58.)

During the April 13, 2007 conference call, FBTS did not discuss SJP’s poor 2007

first quarter performance prior to the Transaction.45 (May 26, 2016 Tr. (Ippensen) 91:24-92:17;
May25, 2016 Tr. (Cory) 112:19-25; Sept. 23, 2016 Tr. (Cory) 19:20-20:3, 20:4-17; May 24, 2016
Tr. (D’Esposito) Tr. 18:17-24; June 29, 2016 Tr. (Aliferis) 37:15-20, 38:16-19.)
662.

Prior to voting, Serbin reviewed the projected financial statements in the April 11,

2007 Draft Valuation Report, including the historical sales numbers, net income, EBITDA,
company profits, projected revenue, projected net income, and projected EBITDA margins. (May
27, 2016 Tr. (Serbin) 115:13-116:22; Joint Ex. 9 (Apr. 11, 2007 Draft), at 79.)
663.

Based on Serbin’s review of the April 11, 2007 Draft Valuation Report, Serbin felt

that she was able to evaluate the risk for the buyer. (May 27, 2016 Tr. (Serbin) 116:11-22.)

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
“

Defendants allege that “Aliferis relayed all information he learned from [SIP] management
about the [C]ompany’s financial performance for the first quarter of 2007, as well as the causes of
that performance, to FBTS during the April 13, 2007 meeting.” (June 29, 2016 Tr. (Aliferis)
201:13-20.) Based on the testimony, Cory’s notes, and the Court’s evaluation of the witnesses’
credibility, the Court finds that FBTS did not discuss SIP’s poor 2007 first quarter performance
prior to the Transaction.
113

664.

Serbin felt comfortable voting to approve the Transaction based, in part, on the

April 11, 2007 Draft Valuation Report’s projection of zero percent revenue growth in 2007. (May
27, 2016 Tr. ($erbin) 119:18-25.)
665.

In addition, Serbin voted to approve the Transaction as a result of the strength of the

management team and the $58 million backlog, approximately 75% of which SJP was expected to
complete in 2007. (May 27, 2016 Tr. (Serbin) 120:1-6, 120:16-121:6.)
666.

$erbin also reviewed the April 11, 2007 Draft Valuation Report to determine

whether Prairie was using appropriate methodologies to calculate the enterprise value of SJP and
weighing the approaches correctly. (May 27, 2016 Tr. (Serbin) 122:2-16.)
667.

In addition to considering the April 11, 2007 Draft Valuation Report, Ippensen

considered his independent knowledge and experience, as well as information he gained from
reading and watching the news, when voting to approve the Transaction. (May 27, 2016 Tr.
(Ippensen) 89:4-90:14.)
668.

Based on media reports and his general knowledge, Ippensen believed that the

economy would slow down during 2007, but subsequently trend upward.

(May 27, 2016 Tr.

(Ippensen) 90:11-14.)
669.

Ippensen voted affirmatively to approve the Transaction.

(May 27, 2016 Tr.

(Ippensen) 22:23-23:1.)
670.

FBTS had no further discussions regarding Prairie’s valuation of SJP prior to April

13, 2007 (see P1.’s Ex. 4(b); Pl.’s Ex. 4(c) (Index of FBT$’s Rule 34 Responses)), and did not have
any prior meetings in which valuation issues were discussed. (May 26, 2016 Tr. (Ippensen) 19:320:24, 21:9-25, 25:22-26:7 (apart from a possible meeting on April 6, 2007 based solely on the
handwritten portion of FBTS Exhibit 12, at 1, is not aware of any other meetings); May 25, 2016

114

Tr. (Cory) 105:19-106:1 (believes there were meetings prior to April 13, 2007, but concedes she
may not have participated in those meetings and is unaware of any documents memorializing those
meetings); Sept. 23, 2016 Tr. (Cory) 75:17-23 (cannot recall any other discussions apart from
March 29, 2007, where valuation was not discussed, April 13, 2007, and April 16, 2007).)
671.

Each member of the EB Committee casts a vote to approve or reject a transaction.

(May 26, 2016 Tr. (Ippensen) 139:14-21.)

¶ 40.)46

672.

Unanimity was required to approve the Transaction. (CFF

673.

Members of the EB Committee were permitted to cast a vote even if they had not

participated in the presentation by the valuation advisor. (July 6, 2016 Tr. (Ash) 26:25-27:2; May
27, 2016 Tr. (Serbin) 147:16-24, 159:18-22.)
674.

It was the EB Committee’s job to thoroughly review the April 11, 2007 Draft

Valuation Report, be prepared to ask questions and, if necessary, challenge the information that
had been provided to the EB Committee. (May 27, 2016 Tr. (Serbin) 107:8-18.)
675.

If the EB Committee determines that a valuation report needs to be revised, it can

either: a) request that the information be provided and wait for it prior to voting; or b) ask its
professional advisors to provide additional detail as to the requested information and ask that it be
included in the valuation report when available. (May 27, 2016 Tr. (Serbin) 130:15-131:23.) The
EB Committee did not take either of these courses of action with regard to the SJP ESOP
Transaction.

46

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
115

676.

FBT$ has not produced any records or documents showing who voted to approve

the Transaction. (See P1.’s Ex. 4; P1.’s Ex. 4(a); Pl.’s Ex. 4(5); PL’s Ex. 4(c) (Index of FBTS’s
Rule 34 Responses).)
S.

FBTS’s Lack of Negotiation as to Price and Other Terms

677.

In private equity transactions, a prudent investor will typically negotiate the price

of the securities. (Sept. 19, 2016 Tr. (Puntillo) Tr. 61:19-22.)
67$.

Serbin testified that FBTS typically negotiates the purchase price in ESOP

Transactions. (May 27, 2016 Tr. ($erbin) 127:23-128:7.)
679.

In this case, Duff& Phelps had been retained to negotiate with FBTS. (Joint Ex. 8

(Duff& Phelps Engagement Agreement), at 2 ¶b(iii), (iv); May 25, 2016 Tr. (Miscione) 18:1-1 1.)
680.

FBTS had been retained to negotiate with SJP and DiPano. (Joint Ex. 6 (FBTS

Engagement Agreement), at 2
681.

¶ 3.a.)

FBT$ did not make any counteroffers or engage in any negotiations with DiPano

or his agents over the $16 million asking price. (May 27, 2016 Tr. (Serbin) 127:17-25; July 6,
2016 Tr. (Ash) 64:2-15, 108:24-109:1; May25, 2016 Tr. (Miscione) 22:7-9.)
682.

FBTS did not propose a counteroffer to the proposed $16 million purchase price

for the stock in the Offering Memo because FBTS concluded that the fair market value of 38% of
$JP’s shares was in excess of $16 million. (Joint Ex. 1 (Offering Memo), at 8; May 26, 2016 Yr.
(Ippensen) 116:20-117:20.)
683.

SARs are an item that can be negotiated between the buyer and seller of stock.

(May 25, 2016 Tr. (Miscione) 55:6-9.)

116

684.

Here, the SARs were not “negotiated” as opposed to being a subject of discussion.47

(See FBT$ Ex. 11 (Mar. 29, 2007 Conference Call Memo) (indicating that “clarification” was
needed for the second tranche for the stock appreciation rights).)
685.

Contrary to fBTS’s claim otherwise, the evidence shows that FBTS also did not

negotiate the indemnification provision and representations and warranties in the SPA.

(CFF

¶ 199.)48
686.

FBTS negotiated the ESOP interest rate on the ESOP loan, which the SJP Plan

would be taking out from the Company to make the stock purchase. (May 26, 2016 Tr. (Ippensen)
171:15-172:1.)
687.

FBTS did not negotiate aspects of the employment agreements with Dugan and

DiPano, including compensation and non-compete and non-solicitation provisions.49

FBTS alleges that it negotiated the SARs. (May 26, 2016 Tr. (Ippensen) 171:15-172:1; May 27,
2016 Tr. (Serbin) 126:3-5.) FBTS, however, has offered no testimony or documentary evidence
concerning how the SARs were negotiated, the terms of such negotiation, and/or who negotiated
the SARs. Further, Cory testified that she believed SARs only conferred an intangible value to a
company and could not recall discussing what effect SARs had on the fair market value of SW, or
asking Prairie to quantify the effect of SARs on the final purchase price. (May 25, 2016 Tr.
(Miscione) 54:23-55:5; May 25, 2016 Tr. (Cory) 107:21-23, 110:4-6.) Based on the evidence
presented and upon the Court’s evaluation of the credibility of the witnesses, the Court finds that
the parties did not “negotiate” the SARs terms.
48

In light of the extensive findings by the Court, the Court repeats its earlier finding of fact to
provide the necessary context, due to its relevance to this section of the Court’s findings.
Although Serbin testified that there were “discussions” about employment agreements with key
employees of SJP, (May 27, 2016 Tr. (Serbin) 124:23-125:16), there is no corroborating evidence
that FBTS engaged in any negotiations with respect to the employment agreements. In fact, FBTS
has not produced any record evidence of employment agreements, or even as to discussions or
negotiations about such employment agreements. Based on the evidence presented and upon the
Court’s evaluation of the credibility of the witnesses, the Court finds that the parties did not
“negotiate” aspects of the employment agreements with Dugan and DiPano.
‘

117

T.

April 16, 2007 Closing

688.

Before the Transaction closed, on the morning of April 16, 2007, FBTS had a “very

short” telephone conversation with $JP’s management to inquire whether there had been any
substantial changes to SJP’s performance in the first quarter of 2007. (Sept. 23, 2016 Tr. (Cory)
32:7-20.)
689.

On April 16, 2007, FBT$ authorized the Plan to purchase 380,000 shares of SJP

from DiPano, representing 38% of SIP’s outstanding shares, for $16 million. (Stipulation of Facts

¶ 59; Joint Ex.
690.

5 (Stock Purchase Agreement).)
The Transaction closed with the same material terms as those that the seller initially

proposed during the November 15, 2006 Meeting and in the Offering Memo. (Joint Ex. 1 (Offering
Memo), at 8; July 6, 2016 Tr. (Ash) 10:2-5.)
U.

Post-Transaction

691.

On April 27, 2007, FBTS received the April 27, 2007 Post-Transaction Valuation

Report from Prairie. (Joint Ex. 10 (Apr. 27, 2007 Report), at 1, “04-27-07” date stamp; see also
May 25, 2016 Tr. (Cory) 110:7-24; May 26, 2016 Tr. (Ippensen) 15:14-21.)
692.

The April 27, 2007 Post-Transaction Valuation Report largely reached the same

value conclusions as the April 11, 2007 Draft Valuation Report—approximately $36 million under
the DCF method and approximately $53 million under the market multiple approach—but it
contained an additional fifteen pages discussing economic trends relevant to SJP’s industry.50
(Compare Joint Ex. 10 (Apr. 27, 2007 Report), at 29-43, 56, 60, with Joint Ex. 9 (Apr. 11, 2007
Draft), at 30, 42, 46.)

50

The April 11, 2007 Draft valued SJP at $36,105,000 under the DCF method and $53,607,000
under the market approach, whereas the April 27, 2007 Post-Transaction Valuation Report valued
SIP at $35,470,000 under the DCF method and $52,743,000 under the market approach.
118

693.

The industry analysis contained in the April 27, 2007 Post-Transaction Valuation

Report described a softening in the housing industry, particularly in New Jersey, and forecasted
that New Jersey’s housing market would not pull out of its slump in 2007. (Joint Ex. 10 (Apr. 27,
2007 Report), at 32-33.)
694.

The industry analysis noted that, in 2006, new housing permits in New Jersey fell

by 13.7% and that construction contracts fell by 11%. (Joint Ex. 10 (Apr. 27, 2007 Report), at 3233.)
695.

The information regarding industry trends contained in the April 27, 2007 Post-

Transaction Valuation Report, which set forth Prairie’s opinion of SJP’s value as of April 16, 2007,
was known or reasonably knowable as of the date of the Transaction. (June 29, 2016 Tr. (Aliferis)
9:2-17 (information used in a valuation report must be reasonably knowable as of the date the
company is being valued).)
696.

The fact that the economic trends are referenced in the post-Transaction April 30,

2007 valuation EB Committee notes, but not in the April 16, 2006 EB Committee notes, suggests
that FBTS did not discuss the economic trends prior to the Transaction.

(P1.’s Ex. 15 (EB

Committee Notes), at 3 (cf. entry for “SJP Group Annual Review April 16, 2007” and “SJP Group
Post-Transaction Review April 30, 2007”).)
697.

As the seller, DiPano executed the SPA, along with Ash of FBTS, and Dugan of

SJP dated April 16, 2007. (Joint Ex. 5.)
698.

The SPA set forth various terms and conditions relating to the sale of 38% of SJP’s

stock to the SIP ESOP by DiPano. (Joint Ex. 5.)
699.

Paragraph 3.11 of the SPA between DiPano and FBTS provides, in relevant part:
All information, reports, financial statements, exhibits and schedules
furnished or to be furnished by or on behalf of the Seller or the

119

Company pursuant to the terms of this Agreement (the
“Documents”) are, to the knowledge of the Seller and the Company,
accurate and complete in all material respects and do not and will not
omit to state any material fact necessary in order to make the
information furnished, in the light of the circumstances under which
such information is furnished, not misleading, and are sufficient to
provide a prospective [Employee Stock Ownership Trust (“ESOT”)]
of Company stock with appropriate information about the Company
and its affairs. To the knowledge of the Seller and the Company, no
information, report, financial statement, exhibit or schedule prepared
or furnished by or on behalf of the Seller or the Company in
connection with any of the transactions contemplated under this
Agreement, the Documents, or included herein or therein, contained
or contains as of the date prepared or furnished any material
misstatement of fact or omitted or omits to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(Joint Ex. 5, at 6.)
700.

Paragraph 8.1 of the SPA between DiPano and FBTS provides, in relevant part:
Subject to the provisions of Section 8.2 below, the Seller shall
indemnify the ESOT for any loss, cost, expense or other damage,
including attorney’s fees suffered by the ESOT (“Damages”),
resulting from, arising out of or incurred with respect to any
misrepresentation or breach of any representation, warranty or
covenant made by the Seller or the Company herein.

(Joint Ex. 5, at 20.)
701.

Following the Transaction, FBTS was retained to serve as the Plan’s ongoing

trustee, and Prairie was retained to prepare the Plan’s annual valuation reports. (Stipulation of
Facts62; May26, 2016 Tr. (Ippensen) 5:18-6:12.)
702.

FBTS served as the ongoing trustee for the Plan until 2014. (May 27, 2016 Yr.

(Ippensen) 5:18-6:1, 68:18-24; Stipulation of Facts
703.

¶ 62.)

In situations where FBTS serves as an ongoing trustee, FBTS follows a four-step

process for reviewing post-transactional annual valuation reports: (1) it reviews a draft valuation
report; (2) it conducts a conference call with the valuation professional; (3) FBTS’s internal

120

financial analyst completes a number of forms documenting certain aspects of the draft valuation
report, and forwards the report with his analysis to FBTS’s president; and (4) FBTS’s president
reviews the draft report and the internal financial analyst’s report, and presents his
recommendations to FBTS’s committee for its review. (Pl.’s Ex. 14 (Oct. 4, 2009 E-mail from
Cory to Munoz); May 26, 2016 Tr. (Ippensen) 119:7-22.)
704.

FBTS does not follow the four-step review process described above in reviewing

initial acquisition transactions. (Sept. 23, 2016 Tr. (Cory) 68:10-23; May 26, 2016 Tr. (Ippensen)
118:23-119:22.)
705.

After a transaction closes, FBTS’s financial analyst prepares a document called a

“financial Report Review.” (Sept. 23, 2016 Tr. (Cory) 26:12-24, 69:22-25; May 26, 2016 Tr.
(Ippensen) 120:11-16.)
706.

The Financial Report Review includes, inter cilia, the names of the FBTS officers

who performed a post-transaction review of the valuation, the performance of market indices for
the period under review, a summary of changes to a company’s financial metrics over the
preceding year, and the qualifications of the valuation analyst. (See, e.g., Joint Ex. 15 (Financial
Report Review).)
707.

As part of the Financial Report Review, FBTS inputs data into a program called the

“Baker Hill” system to run a risk analysis on the company. (May 26, 2016 Tr. (Ippensen) 120:19122:3; see also Joint Ex. 15 (Financial Report Review), at 5-8 (containing the footer “Baker Hill”).)
708.

FBTS does not prepare a Financial Report Review or generate a Baker Hill Report,

or prepare any comparable reports, prior to a transaction. (Sept. 23, 2016 Tr. (Cory) 70:5-72:11;

see also May26, 2016 Tr. (Ippensen) 120:11-16.)

121

709.

The purpose of the Financial Review Report is to provide a starting point for

subsequent reviews, and to allow EB Committee members who were not involved prior to the
transaction to “come up to speed.” (Sept. 23, 2016 Tr. (Cory) 70:1-4, 71:16-21.)
710.

The Financial Report Review for the SIP Transaction was prepared months after

the Transaction. (May 26, 2016 Tr. (Ippensen) 120: 14-16; Sept. 23, 2016 Tr. (Cory) 27:24-28:14;
Joint Ex. 15 (Financial Report Review), at 1 “Date of Report”).)
711.

Handwritten notes taken by Aliferis after the Transaction closed reflected

information received from SJP’s management, including information on the impact of the weather
and SJP having $45 million of work remaining to complete in 2007, which was communicated to
FBTS after the Transaction closed.5’ (Plaintiff Ex. 36; June 29, 2016 Tr. (Aliferis) 158:13-159:23.)
These notes also showed that Aliferis was also given information about SJP’s efforts to keep more
work in-house, rather than subcontracting it out, which would result in higher profit margins. (June
29, 2016 Tr. (Aliferis) 160:13-19.)
712.

Sometime after the Transaction, Cory took notes entitled “SIP Transaction

Questions.”52 (FBTS Ex. 12, at D00082.)

51

The language in Plaintiffs Exhibit 36 concerning the weather and SIP’s 2007 first quarter
performance is virtually identical to the language that appears in Aliferis’s post-Transaction
valuation (Pl.’s Ex. 7, at 45-46), but is wholly lacking in either of the pre-Transaction valuations
(Joint Ex. 9 (Apr. 11, 2007 Draft) and Joint Ex. 10; June 29, 2016 Tr. (Aliferis) 179:12-181:7.)
Accordingly, the Court finds that the handwritten notes at Plaintffs Exhibit 36—which reference
the “first four months of the year” and the precipitation for the month of April—were taken after
the Transaction. (See Pl.’s Ex. 36; see also June 29, 2016 Tr. (Aliferis) 176:20-178:13.) Aliferis
testified that he did not know, either way, when the notes at Plaintiffs Exhibit 36 were prepared,
and that “one could infer that they might have been prepared after the [T]ransaction.” (June 29,
2016 Tr. (Aliferis) 182:8-18.)
52

FBTS’s Exhibit 12, which references content by page numbers in the valuation report, primarily
corresponds with the content and pages numbers in the April 27, 2007 Post-Transaction Valuation
Report, rather than the content in the April 11, 2007 Draft Valuation Report. For instance, Cory’s
notes refer to CAPM on Page 53. Only page 53 of the April 27, 2007 Post-Transaction Valuation
122

713.

The notes show that Cory reviewed the April 27, 2007 Post-Transaction Valuation

Report through the feasibility analysis which comes at the end of the report. (FBTS Ex. 12, at
D00082; May 25, 2016 Tr. (Cory) 142: 8-17.)
714.

The notes show that Cory had discussions about backlog, employee relations,

employee participation in benefits, top-line growth of the Company, competitive advantage of the
mobile rock crusher, SJP’s liquidity ratio, and the capital asset pricing model with Aliferis after
the SJP ESOP Transaction had closed. (FBTS Ex. 12, D00082; May 25, 2016 Tr. (Cory) 142:21147:25.)
V.

Fair Market Value

715.

SJP’s fair market value as of April 16, 2007 was $17,144,737. (July 14, 2016Tr.

(Messina) 33:13-16.)
716.

SJP’s fair market value as of April 16, 2007, using the DCF method, was

$13,859,289. (July 14, 2016 Tr. (Messina) 33:19-22, 110:8-10.)
717.

SIP’s fair market value as of April 16, 2007, using the market multiple method,

was $20,430,185 million.55 (July 14, 2016 Tr. (Messina) 33:19-22.)

Report, however, contains a discussion of CAPM. Page 53 of the April 11, 2007 Draft did not
contain a discussion of CAPM, rather, that page is the Reconciliation and Conclusion of Value.
Messina rounded the value in his trial testimony to S 17.1 million. The precise figure is contained
in Messina’s expert report (Pl.’s Ex. 19, at 6), which was not admitted into evidence. Because
Messina was describing the figures in his expert report when rounding the values in his testimony,
the Court finds that Messina was referring to the precise value contained in his expert report.
Messina rounded the value in his trial testimony to $13.9 million. The precise figure is contained
in Messina’s expert report (Pl.’s Ex. 19, at 6), which was not admitted into evidence. Because
Messina was describing the figures in his expert report when rounding the values in his testimony,
the Court finds that Messina was referring to the precise value contained in his expert report.
Messina rounded the value in his trial testimony to $20.4 million. The precise figure is contained
in Messina’s expert report (Pl.’s Ex. 19, at 6), which was not admitted into evidence. Because
123

718.

The fair market value of 38% of $JP as of April 16, 2007 was $6,515,000.56 (July

14, 2016 Tr. (Messina) 33:13-16.)
719.

Unlike Prairie’s valuation, Messina adjusted SJP’s projected growth to account for

SIP’s abnormally profitable year of 2006 and the peaks and troughs of a typical cycle. (July 14,
2016 Tr. (Messina) 78:15-79:8.)
720.

In performing the DCF analysis, Messina utilized a negative 15% revenue growth

rate for 2007, which was based on the assumption that SIP was down 56% in revenue in the first
quarter of 2007 and would generate 0% revenue growth in the remainder of 2007. (July 14, 2016
Tr. (Messina) 85:13-25; see also Demonstrative 8.)
721.

According to Messina, Prairie’s use of a 0% growth rate in 2007 when its business

was down 56% in the first quarter of 2007 and in light of the industry headwinds was not supported
by the data and facts. (July 14, 2016 Tr. (Messina) 82:10-21.)
722.

Had Prairie utilized SIP’s five-year57 average historical gross profit margin of

21.06%, SIP’s fair market value under the DCF method would have been $12.1 million lower.
(July 14, 2016 Tr. (Messina) 93:12-94:23.)

Messina was describing the figures in his expert report when rounding the values in his testimony,
the Court finds that Messina was referring to the precise value contained in his expert report.
56

Messina rounded the value in his trial testimony to $6.5 million. The precise figure can be
derived from Messina’s expert report (P1.’s Ex. 19, at 6), which was not admitted into evidence.
Messina’s expert report finds the total value of SIP to be $17,144,737, of which 38% is $6,515,000.
Because Messina was describing the figures in his expert report when rounding the values in his
testimony, the Court finds that Messina was referring to the precise value as derived from his
expert report.
fish v. Greatbanc Tr. Co., No. 09-1668, 2016 WL 5923448, at *51 (N.D. Ill. Sept. 1, 2016)
(finding a five-year historical average to be an appropriate benchmark for valuation projections).
124

723.

Messina computed SJP’s fair market value under the DCF method by assuming

negative 15% sales in 2007, growing thereafter at a rate of 5%, using historic operating margins
for gross margin and EBITDA to achieve a return on assets ranging between 10.2% and 13.8%.
(July 14, 2016 Tr. (Messina) 109:12-110:12; Demonstrative 8.)
724.

Unlike Prairie’s valuation, Messina’s projected growth accounts for the

unfavorable industry “headwinds,” which Prairie identified in its April 27, 2007 Post-Transaction
Valuation Report but failed to account for in its valuation of SJP. (July 14, 2016 Tr. (Messina)
85:12-25.)
725.

Unlike Prairie’s valuation, Messina’s projected growth accounts for the 56%

decline in SIP’s 2007 first quarter revenues and its likely effect on SIP’s margins. (July 14, 2016
Tr. (Messina) 79:24-80:11, 82:12-21, 85:12-25, 86:15-87:2, 168:2-16.)
726.

Unlike Prairie’s valuation, Messina’s projected growth is grounded in SIP’s

historical gross margins and EBITDA margins, and is slightly higher than SIP’s historical return
on assets. (July 14, 2016 Tr. (Messina) 109:8-2 1.)
727.

Messina also based his growth rate projections on the 3% growth of the economy

at the time of the Transaction. (July 14, 2016 Tr. (Messina) 87:12-22.)
728.

Messina used a 20% discount rate in contrast to Prairie’s 19.25% discount rate to

account for the various risks associated with SIP such as customer concentration. (July 14, 2016
Tr. (Messina) 102:7-14.)
729.

The fair market value of 38% of $JP as of the date of the Transaction was

$6,515,000, or $9,485,000 less than the $16 million price that FBTS caused the SJP ESOP to pay
for DiPano’s shares. (July 14, 2016 Tr. (Messina) 140:23-141:4; Demonstrative 8; Demonstrative
14.)

125

III.

Parties’ Positions58

Plaintiff, the Secretary of Labor, asserts that FBTS failed to meet its fiduciary duties of
loyalty and prudence under ERISA

§ 404(a)(l)(A) and (B).

(Pl.’s Post Trial Br. 7, ECF No. 224.)

Plaintiff further asserts that Defendant committed a prohibited transaction under ERISA

§

406 by

causing the SJP ESOP to pay more than the fair market value for the stock. (Pl.’s Post Trial Br.
7-8.)
A.

Duty of Loyalty

Plaintiff asserts that Defendant “violated its duty of loyalty mandated by ERISA” by failing
to protect the interest of the Plan “over and above any other party’s interest.” (Id. at 25-26.)
Specifically, Plaintiff argues that Defendant caused the SJP ESOP to execute an imprudent
transaction because Defendant sought retention as the SJP ESOP’s ongoing trustee upon
completion of the Transaction. (Id. at 27.)
Plaintiff argues that “[w]hen a fiduciary is presented with unsubstantiated evidence
supporting the seller’s valuation, the duty of loyalty compels the fiduciary to diligently question
and probe such evidence.” (Id. at 26.) Plaintiff further argues that Defendant “consistently
accepted, without substantiation, information in favor of DiPano and.

.

.

accepted his explanations

without independently verifying those explanations” to remain the Plan’s trustee. (Id. at 27.)
Plaintiff additionally argues that although Defendant had a duty to negotiate the best possible price
for SJP’s shares, Defendant never even attempted to negotiate the price. (Id. at 26.) Plaintiff
asserts that “[s]uch deference to the [s]eller is wholly inconsistent with a true arm’s length

58

The Court primarily utilizes the parties’ post-trial submissions to briefly summarize their
positions. (Pl.’s Post Trial Br., ECF No. 224; Def.’s Proposed Findings of Fact and Conclusions
of Law, ECF No. 225; Pl.’s Resp. Br., ECF No. 226; Def.’s Resp. Br., ECF No. 227.) Although
the Court utilizes the parties’ post-trial submissions in compiling this summary, the Court
considers the totality of the evidence and arguments presented at trial in reaching its decision.
126

transaction.” (Id. at 27.) As such, Plaintiff argues that Defendant breached its duty of loyalty by
acting in its own interest to the detriment of the Plan. (Id. at 25-27.)
Defendant argues that it did not breach its duty of loyalty. (Def.’s Resp. Br. 28, ECF No.
227.) Defendant argues that it verified all information, ensured the information provided to it was
“complete,” and asserts that there “is no evidence of any information that [Defendant] should have
considered, but did not.” (Id. at 28.) Furthermore, Defendant argues that it was not required to
negotiate the price of the stock, as the offer price was already at fair market value. (Id. at 28-29.)
Defendant finally asserts that Plaintiffs claim that it acted in its own interest is “patently absurd.”
(Id. at 29.)
B.

Duty of Prudence

Plaintiff argues that Defendant violated a trustee’s duty of prudence as required under
ERISA

§

404(a)(l)(B) by failing to conduct a prudent investigation as to the fair market value of

the shares. (Pl.’s Post Trial Br. 7-9.)

Plaintiff asserts that when Defendant’s conduct is weighed

against that of a prudent investor making a comparable purchase, Defendant’s conduct fails to
reach the required standard of care because Defendant failed to: (1) follow up and resolve red flags
in the April 11, 2007 Draft Valuation Report; (2) independently verify material information;
(3) ensure that the April 11, 2007 Draft Valuation Report was reliable; and (4) employ an adequate
review process. (Pl.’s Post Trial Br. 10-21.)
Defendant, on the other hand, argues that the “prudence standard is not concerned with
results, but rather looks at the conduct and procedures utilized.” (Def.’s Proposed Findings of Fact
and Conclusions of Law ¶ 561, ECF No. 225 (citing Roth v. Sawyer-Cleator Lumber Co., 16 F.3d
915, 918 (8th Cir. 1994)).) Defendant argues that a trustee may obtain the advice of an expert to

127

demonstrate good faith, but make his own decisions based upon that advice. (Id.

¶J

Defendant states that it satisfied its legal obligations to investigate under ERISA. (Id.

¶11 569-99.)

1.

562-68.)

Red Flags

To prove a breach of the duty of prudence, Plaintiff relies upon testimony by its expert,
Professor Richard Puntillo (“Professor Puntillo”), that Defendant failed to identify, follow up, or
resolve red flags with regard to the transaction. (Pl.’s Post Trial Br. 10.) The red flags Plaintiff
identified were: (1) SJP’s poor financial performance in the three months prior to the Transaction;
and (2) the reduction of bids from Hovnanian projects, which had previously accounted for 50%
of SJP’s revenue, to a mere 20% of SJP’s outstanding bids at the end of 2006. (Id. at 10-12.)
Plaintiff argues that Defendant’s failure to identify these red flags constituted “a profound
departure from the custom and practice of prudent investors.” (Id. at 13.)
Defendant, however, argues that Professor Puntillo’s “red flags’ are fabrications” and that
the “investor due diligence” standard Professor Puntillo relied upon in reaching his conclusions is
inapplicable to the ESOP industry. (Def.’s Resp. Br. 9-11; Def.’s Proposed Findings of Fact and
Conclusions of Law ¶J 634-3 5.) Defendant asserts that because Professor Puntillo is “unfamiliar
with the ESOP industry,” he was unable to determine the standard of care and whether a breach of
that standard had occurred. (Def.’s Resp. Br. 9; Def.’s Proposed Findings of Fact and Conclusions
of Law ¶J 649-5 2.) Defendant argues that its expert witness, Fischer, was the only expert to opine
as to the customs in ESOP transactions. (Def.’s Proposed Findings of Fact and Conclusions of
Law

¶J 576-8 1.)

Defendant asserts that Fischer is familiar with ESOPs based on his education

and experience. (Id.) Defendant argues that Fischer testified that there is “no bright line rule with
regard to what a fiduciary must do to comply with ERISA.” (Def. Resp.’s Br. 10; Def.’s Proposed
Findings of Fact and Conclusions of Law ¶ 575.)

128

Defendant responds that Defendant considered the poor performance of SIP in the first
quarter of 2007 before the Transaction but believed that SIP would recover and meet its revenue
projections. (Def.’s Resp. Br. 12-13; Def.’s Proposed Findings of Fact and Conclusions of Law

¶J 653-5 5.)

Defendant believed that the 2007 downturn was due to weather conditions and that

SIP had historicallyrecovered from downturns. (Def.’s Resp. Br. 12-13; Def.’s Proposed Findings
of Fact and Conclusions of Law

¶J 65 8-72.)

Defendant argues that Plaintiffs red flag argument

regarding Hovnanian was also “fabricated.” (Def’s Resp. Br. 13.) Defendant asserts that SIP was
attempting to diversify away from Hovnanian and obtain new clients. (Id. at 14.) Defendant
further argues that SIP’s diversification strategy “did not mean dropping Hovnanian as a client”
and “was not a radical departure” from SIP’s business strategy. (Id.) Additionally, Defendant
states that Hovnanian continued to be a “terrific” customer for SIP and that SIP was working on a
“$100 million job” for Hovnanian in 2006. (Id.)
2.

Independent Verification of Material Information

Plaintiff argues that “[a] prudent investor cannot blindly accept self-serving representations
by a conflicted party, but must exercise a healthy degree of skepticism to ensure there is sufficient
basis to rely on those representations.” (Pl.’s Post Trial Br. 13.) Plaintiff asserts that Defendant
failed to independently verify material information, including: “(1) SIP’s reported backlog;
(2) SIP’s purported ‘dominance’ in its industry; (3) SIP’s supposed ‘competitive advantages’;
(4) SJP’s stated ‘diversification away’ from Hovnanian; and (5) SIP’s status as the preferred site
developer for Hovnanian in New lersey.” (Id.)
Plaintiff argues that this is particularly troubling as

s representations were contradicted

by other disclosed information such as: (1) rock crushing equipment that was projected to increase
profits over previous years that had already been in use for the past ten years; (2) claims that the

129

growth was based on “proprietary technology” when SJP had no proprietary technology; and
(3) statements that SJP had been diversifying away from Hovnanian when SIP’s concentration in
Hovnanian had increased in the previous four years. (Id. at 13-14.) Furthermore, Plaintiff asserts
that Defendant failed to sufficiently investigate the relationship between Hovnanian and SJP, in
light of SIP’s historical reliance on Hovnanian. (Id. at 14-15.)
Defendant argues that it conducted appropriate verification as the professionals it retained
were qualified, it took steps to ensure the accuracy of the financial information provided, and it
reviewed and questioned the valuation report before relying upon it. (Def.’s Resp. Br. 14-18;
Def.’s Proposed Findings of Fact and Conclusions of Law ¶J 569-72.) Defendant claims that SJP’s
backlog was not disputed and that “no further verification was needed.” (Def.’s Resp. Br. 16.)
Furthermore, Defendant claims that it verified that backlog by speaking with SIP management.
(Id. at 17.) Defendant states that Plaintiffs expert, Messina, agreed that the backlog was work that
would be finished in 2007 or 2008 and there was no indication that SJP would not be able to
replenish its backlog. (Id.) Defendant also argues that “SIP’s pattern of industry success and
competitive advantage was thoroughly reviewed and considered by [Defendant] at the time of the
transaction and there is no evidence that further diligence would have uncovered anything to the
contrary at the time.” (Id. at 17-18.)
Furthermore, Defendant argues that “the record evidence shows that [Defendant] and its
advisors obtained appropriate information regarding Hovnanian and took this information into
account.” (Id. at 18.) Defendant points to the Offering Memo, which analyzed Hovnanian’s
“financial performance in 2005 and 2006” and stated that “25.7% of Hovnanian’s proposed
communities are in New Jersey.” (Id.) Defendant also states that Hovnanian’s impact on SIP was
discussed in the November 15, 2006 meeting. (Id.) Defendant asserts that it reviewed publicly

130

available information about Hovnanian and that it is not industry custom or practice to contact
customers and doing so “would have had an adverse effect on [SJP’s] business.” (Id. at 15.)
3.

Prairie Valuation

Plaintiff asserts that the April 11, 2007 Draft Valuation Report prepared by Prairie was
unreliable and that Defendant breached its fiduciary duty by not ensuring that its reliance on the
draft report was reasonably justified.

(PL’s Post Trial Br. 15.) Plaintiff argues that “Prairie

expressly advised [Defendanti that it was not verifying any of the inputs used to create its
valuation.” (Id.) Plaintiff asserts that Prairie copied the seller’s descriptions verbatim into its
reports and did not investigate the seller’s claims.

(Id.)

Furthermore, Plaintiff asserts that,

according to the April 11, 2007 Draft Valuation Report, SIP’s “projected performance was far
more favorable than its historical performance” and the draft report used SIP’s financial
performance in 2006 as a baseline for comparison, even though 2006 was an outlier year. (Id.)
Plaintiff further asserts that the April 11, 2007 Draft Valuation Report used higher profit margins
than SIP had previously ever attained and incorrectly chose engineering firms instead of
homebuilders as peer group companies for the market multiple method of valuation. (Id. at 16.)
Defendant argues that its expert, Fischer, testified that the April 11, 2007 Draft Valuation
Report was “detailed, thorough, professional, well-organized, and of high quality” and could be
relied upon. (Def.’s Resp. Br. 10; Def.’s Proposed Findings of Fact and Conclusions of Law

¶J 587-89.)
“reasonable

Defendant states that because Prairie was a “major player” in the ESOP world, it was
.

.

.

to be more comfortable with Prairie[’s]

unfamiliar company.

.

.

.

work product” than that of another

(Def.’s Proposed Findings of Fact and Conclusions of Law

¶

590.)

Furthermore, Defendant asserts that its expert, Van Horn, opined that Prairie’s valuation reports
were “comprehensive and in line with the normal and customary valuation procedures that were

131

expected at the time to produce a reliable opinion.” (Def.’s Resp. Br. 10; Def.’s Proposed Findings
of Fact and Conclusions of Law

¶

591-99.)

Defendant argues that Plaintiffs own expert,

Messina, used very similar projected sales growth rates as Prairie and was “unaware of any
information provided by SJP.

.

.

that was misleading, inaccurate or erroneous.” (Def. ‘s Resp. Br.

17, 23.) Additionally, Defendant argues that the information Prairie received from SJP was
primarily in the form of audited financial statements, which could reasonably be relied upon. (Id.
at 19-20.) Defendant, therefore, argues that it reasonably relied on the April 11, 2007 Draft
Valuation Report. (Id. at 22.)
Defendant further argues that it gave the April 11, 2007 Draft Valuation Report a
“meaningful review” and “understood its obligations with respect to evaluating the report and
fulfilled those obligations” by ensuring Prairie had accurate information and raising questions on
numerous topics. (Id. at 22-23.) Defendant argues that SJP experienced growth in the past two
years and it was reasonable for Prairie to predict continued growth. (Id. at 23-25.)

In fact,

Defendant argues that the final projections in the April 11, 2007 Draft Valuation Report were
conservative. (Id. at 24-25.) Defendant additionally argues that the peer group companies Prairie
selected for the market multiple method were appropriate because SJP was not a homebuilder. (Id.
at 25.) Instead, the group that SJP was compared to included “construction and engineering firms
with similar characteristics to SIP.” (Id.) Furthermore, Defendant states that it applied “an
extremely conservative discount rate” to make the comparison even more conservative. (Id.)
4.

Review Process

Finally, Plaintiff asserts that Defendant breached its duty of prudence by engaging in a
hasty and inadequate review process. (P1.’s Post Trial Br. 17.) Plaintiff claims that Defendant
received the April 11, 2007 Draft Valuation Report only three days before the Transaction and that

132

Cory, who FBTS claims was in charge of reviewing the underlying documents, never saw the
financial statements underlying the Offering Memo prior to the Transaction. (Id.)
Plaintiff further argues that, despite Defendant’s assertion that there were “numerous”
discussions about the Transaction, there was no evidence presented that anyone at FBTS reviewed
the April 11, 2007 Draft Valuation Report prior to the April 13, 2007 teleconference. (Id. at 1$;
Pl.’s Resp. Br. 4.) Plaintiff urges the Court to reject Defendant’s assertion that the April 11, 2007
Draft Valuation Report must have been reviewed because it is routine practice to review draft
valuation reports. (Pl.’s Post Trial Br. 1$.) Plaintiff argues that Defendant cannot demonstrate
that it satisfied the duty of prudence simply by pointing to its typical process for reviewing
valuation reports. (Pl.’s Resp. Br. 2.)
furthermore, Plaintiff argues that even if the purported “numerous discussions” had
occurred, the lack of records of a review process is troubling, stating “it does not matter how many
people staffed a transaction if they cannot account for what they did or why they did it.” (Id. at
19-20.) Plaintiff additionally argues that Defendant’s own witness, Ash, stated that there might
not have been meetings if”a report makes sense to her and the asking price is within the [valuation]
reports’ concluded range,” thus contradicting Defendant’s claim that FBTS followed the typical
process on this Transaction. (Id.)
Finally, Plaintiff argues that based upon Horn v. McQueen, 215 F. Supp. 2d $67 (W.D. Ky.
2002), Defendant’s “generally vague and unsupported testimony” does not support a finding of
good faith in determining fair market value.

(Pl.’s Post Trial Br. 21.)

Plaintiff asserts that

Defendant’s statements of due diligence are “vague and unsupported” as there is no record of the
numerous meetings and investigations that Defendant claims occurred and Defendant’s witnesses
fail to recall with specificity what was discussed at the purported meetings. (Pl.’s Resp. Br. 4-9.)

133

Defendant argues that it acted in good faith in determining the value of the shares. (Def. ‘5
Resp. Br. 18-19.) Defendant states that it “engaged highly competent, experienced advisors that
sufficiently vetted the Transaction, and.

..

[Defendant] not only reasonably relied on its advisors,

but took measures to confirm their work as well.” (Id. at 19.) Defendant alleges that it had multiple
meetings about the April 11, 2007 Draft Valuation Report and gave the draft report a “meaningful
review.”

(Id.)

Defendant states that Prairie is a “highly respected valuation firm” and the

information provided to Prairie was “accurate.” (Id. at 19-20.) Defendant further argues that its
reliance on the April 11, 2007 Draft Valuation Report was “reasonably justified under the
circumstances” because Defendant’s employees discussed the draft report with Prairie, reviewed
liquidity reports, and reviewed the pricing model. (Id. at 20.)
C.

Prohibited Transactions

Plaintiff argues that under ERISA

§ 406(a) (1) (A) and (D), Defendant was prohibited from

causing the SIP ESOP to purchase employer stock. (Pl.’s Post Trial Br. 7.) Plaintiff further asserts
that the “adequate consideration” exemption does not apply because Defendant caused the SIP
ESOP to pay more than the “fair market value” of the shares. (Id. at 7-8, 22-23.) Plaintiffs expert
witness, Messina, testified that the “fair market value of DiPano’s shares at the time of the
Transaction was only $6,51 5,000—only a fraction of the price that [Defendant] caused the Plan to
pay.” (Id. at22.)
Plaintiff argues that Defendant’s criticism of Messina is “without merit.” (Pl.’s Resp. Br.
26.) Plaintiff asserts that Messina was qualified as an expert since he had previously performed
valuations of homebuilder construction companies. (Id.) Plaintiff further argues that the fact that
SJP was able to obtain a loan in the amount of $22.5 million is not a corroboration of its value.
furthermore, Plaintiff states that while Messina predicted record revenues, he adjusted them in

134

light of $JP’s poor performance in2007. (Id. at 26-27.) Plaintiff additionally argues that Messina
disregarded the high end market multiples in his valuation of SJP as they reflected companies that
were larger and more profitable than SJP. (Id.)
On the other hand, Plaintiff asserts that Defendant’s expert witness, Fischer, gave
testimony that was “self-serving,” “vague,” and inconsistent. (Id. at 23.) Plaintiff also argues that
Defendant’s expert witness, Van Horn, gave testimony that was based on “circular reasoning” and
“unsupported assumptions” and that he relied upon a checklist that was “facially unhelpful, [and]
arbitrar[y]. (Id. at 23-24.) Finally, Plaintiff argues that Defendant’s expert witness, Joel Stoesser
(“Stoesser”), was “unpersuasive” because he “did not know the value the banks assigned to SJP
or what process they may have used to reach a value” and could not explain his conclusions.
(Id. at 24.)
Defendant argues that the Transaction was not prohibited, as the SJP ESOP paid the fair
market value of the stock, and because the April 11, 2007 Draft Valuation Report was reliable.
(Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 608-33; Def’s Resp. Br. 26-28.) In
fact, Defendant’s expert witness, Stoesser, opined that the price projected by Prairie was too
conservative. (Def’s Resp. Br. 26-28.) On the other hand, Defendant argues that Plaintiffs expert
witness, Messina, gave testimony as to the value of the stock that “improperly considered $JP’s
performance in hindsight” and was “not credible” as Messina has “no experience in the
construction industry” and did not investigate the industry. (Id. at 26-27.) Furthermore, Defendant
argues that, while calculating SJP ‘5 value, Messina disregarded high multiples that would have
“increased [the value] by approximately $10 million” with no explanation, rendering his valuation
“biased and flawed.” (Id.)

135

D.

Indemnification

Defendant asserts that the SPA between DiPano and Defendant states that DiPano has
provided full and accurate information to Defendant and that DiPano will indemnify the Plan for
any failure to do so. (Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 3 17-26.)
Plaintiff asserts that Defendant “cannot escape liability based on the Indemnification
Provision contained in the [SPA].” (Pl.’s Resp. Br. 18.) Plaintiff argues that these provisions “do
not provide a safe harbor” for Defendant because Defendant still had a fiduciary duty to verify
material representations and the indemnification clause only takes effect if DiPano “knowingly”
provided false information. (Id. at 19-20.)
E.

Loan Forgiveness

Defendant states that SJP forgave $9.6 million of the $22.5 million loan that was used to
finance the transaction, bringing the amount of the loan below the amount of Plaintiffs assessment
of SIP’s fair market value.59 (Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 705.)
On the other hand, Plaintiff argues that, although SIP’s loan was forgiven several years
later by SIP, the loan forgiveness does not retroactively reduce the purchase price that the SJP
ESOP paid to DiPano. (Pl.’s Resp. Br. 28-29.) Furthermore, Plaintiff argues that because neither
the loan documents nor the forgiveness documents were entered into evidence, the Court should
not consider them. (Id.) Plaintiff also asserts that there is no legal exception for loan forgiveness
under ERISA

§ 406(a) (1) (A), (D).

(Id.)

Defendant alleges inconsistent amounts with regard to the loan forgiveness. (See CFF ¶ 177
n. 15.) For the purpose of summarizing Defendant’s legal position, however, the Court
characterizes Defendant as contending that the write-down was for $9.6 million because Defendant
makes this argument using the $9.6 million figure in its post-trial submission. (See Def.’s
Proposed Findings of Fact and Conclusions of Law ¶J 704-10.)
136

IV.

Conclusions of Law
Congress enacted ERISA to “protect.

.

.

the interests of participants in employee benefit

plans and their beneficiaries” by setting out substantive regulatory requirements for employee
benefit plans and to “provid[e] for appropriate remedies, sanctions, and ready access to the Federal
courts.”

29 U.S.C.

§

1001(b).

ERISA’s “comprehensive legislative scheme” includes “an

integrated system of procedures for enforcement.” Mass. Mitt. Life Ins. Co. v. Russell, 473 U.S.
134, 147 (1985) (citation omitted).

ERISA subjects employee benefit plans to participation,

funding, and vesting requirements, and to uniform standards on matters like reporting, disclosure,
and fiduciary responsibility. See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90-91 (1983).
“Under ERISA, a plan that primarily invests in the shares of stock of the employer that
creates the plan is referred to as an ESOP.” Chao v. Hall Holding Co., 285 F.3 d 415, 425 (6th Cir.
2002). “Even though ESOPs can be much riskier than a typical ERISA plan, the fiduciaries of
[ESOP] plans are still held to their fiduciary responsibilities.” Id.
ERISA defines a “fiduciary” as:
a person is a fiduciary with respect to a plan to the extent (1) he
exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or
control respecting 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

fitnctional terms of control and authority over the plan, thus expanding the universe of persons
subject to fiduciary duties.” Mertens v. HewittAssocs., 508 U.S. 248, 262 (1993) (internal citation
omitted). “ERISA requires every plan to have one or more named fiduciaries.” Renfro v. Unisys

137

Corp., 671 F.3d 314, 323 (3d Cir. 2011) (citing 29 U.S.C.

§

1 102(a)(1)). Additionally, “[uJnder

ERISA, even if a person is not named as a fiduciary in plan documents, he may still be ‘a fiduciary
with respect to a plan to the extent

.

.

.

he

.

.

.

exercises any authority or control respecting

management or disposition of its assets.” Sec ‘y of Labor v. Doyle, 675 f.3d 187, 200 (3d Cir.
2012) (quoting 29 U.S.C.

§

1002(21)(A)(i)).

Section 404 of ERISA provides that “a fiduciary shall discharge his duties with respect to
a plan solely in the interest of the participants and beneficiaries

.

.

.

[and] 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.”

29 U.S.C.

§

1 104(a)(1)(A), (B).

Section 406 supplements an ERISA

fiduciary’s general duties of loyalty and prudence to the plan’s beneficiaries, as set forth in Section
404, “by categorically barring certain transactions deemed ‘likely to injure the pension plan.”
Harris Tr. & Say. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241-42 (2000) (quoting
Comm ‘r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160 (1993)). Specifically, Section 406 of
ERISA categorically bars transactions for the purchase of employer stock on behalf of an employee
benefit plan by a plan fiduciary. 29 U.S.C.

§

1106(a)(1)(A), (D). Section 408, however, exempts

certain transactions prohibited under Section 406. 29 U.S.C.

§

1108.

Here, the Secretary6° asserts that FBTS, acting as the Plan’s fiduciary, breached its duty of
loyalty under Section 404(a)(l), breached its duty of prudence under Section 404(a)(1)(B), and

60

Section 502(a)(2) of ERISA provides that the Secretary may bring a civil action for appropriate
re1ief, including losses suffered by a plan as a result of a fiduciary’s breach and to enjoin a fiduciary
from any further act or practice that violates ERISA. 29 U.S.C. § 1 132(a)(2).

138

engaged in a prohibited transaction under Section 406(a)(1)(A) and (D) that was not exempt
pursuant to Section 408(e).
A.

Duty of Prudence

ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries
in general, except that they need not diversify the fund’s assets.

F/1h Third Bancorp v.

Dudenhoeffer, 134 S. Ct. 2459, 2463 (2014). Section 404(a)(1)(B) of ERISA provides that a

fiduciary must act “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.” 29 U.S.C.

§

1 104(a)(l)(B).

“These duties are the ‘highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.
1996) (quoting Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982)).
“[T]he courts measure [S]ection 1104(a)(l)(B)’s ‘prudence’ requirement according to an
objective standard, focusing on a fiduciary’s conduct6’ in arriving at an investment decision, not
on its results, and asking whether a fiduciary employed the appropriate methods to investigate and
determine the merits of a particular investment.” In re Unisys Say. Plan Litig., 74 F.3d 420, 43435 (3d Cir. 1996) (citations omitted). “A trustee’s lack of familiarity with investments[, however,]
is no excuse: under an objective standard[,] trustees are to be judged ‘according to the standards
of others acting in a like capacity and familiar with such matters.” Katsaros v. Cody, 744 F.2d

61

Because the analysis is focused on conduct, the Court finds unpersuasive FBT$’s argument that
First American Bank’s willingness to finance the SJP ESOP Transaction indicates that the
Transaction was prudent, especially in light of the evidence of FBTS ‘s failure to act as a prudent
investor. (CFF ¶ 171; Def.’s Proposed Findings of Fact and Conclusions of Law ¶ 702.)
Additionally, Defendant asserts that Plaintiffs arguments are based on hindsight, (Def. ‘s Proposed
Findings of Fact and Conclusions of Law ¶ 683), but that argument is untenable where the analysis
is focused on a fiduciary’s conduct at the time of the Transaction. Perez v. Britister, 823 F.3d 250,
264 (5th Cir. 2016).
139

270, 279 (2d Cir.), cert. denied, 469 U.s. 1072 (1984) (citation omitted). “[T]he definition of
‘prudent behavior’ is an evolving concept that is given meaning by the facts and circumstances of
each case.” Brock v. Teamsters Local Union No. 863, 113 F.R.D. 32, 34 (D.N.J. 1986) (quoting
Donovan v. Walton, 609 F. Supp. 1221, 1240 (s.D. Fla. 1985)).
Additionally, although “[e]mploying a financial advisor is evidence of adequate
investigation,

.

.

.

reliance on experts is not a shield—it is ‘but a single factor to be weighed in

determining whether a fiduciary has breached [its] duty.” Chesemore v. All. Holdings, Inc., 886
F. Supp. 2d 1007, 1041-42 (W.D. Wis. 2012), aff’d sub nom., Chesemore v. Fenkell, 829 F.3d 803
(7th Cir. 2016) (quoting Eyler v. Comm ‘r ofInternal Revenue, 88 F.3d 445, 456 (7th Cir. 1996)).
In other words, “[a]n independent appraisal is not a magic wand that fiduciaries may simply wave
over a transaction to ensure that their responsibilities are fulfilled.” Donovan v. Cunningham, 716
F.2d 1455, 1474 (5th Cir. 1983). While fiduciaries may “rely on the expertise” of a valuation
expert such as Prairie, fiduciaries remain “responsible for ensuring that [the] information is
complete and up-to-date.” Id.
Upon reviewing the totality of the evidence presented at trial, the Court finds that FBTS
breached its duty of prudence. Despite FBTS’s purported expertise and capacity for conducting
the requisite diligence in an ESOP transaction,62 FBTS did little more than delegate all of its
responsibilities to third parties.

In sum, FBT$ relied entirely on information provided by its

valuation advisor, Prairie, who in turn relied entirely on infonriation provided by the seller and his
financial advisor, Duff& Phelps.63 (See CFF ¶J 129-3 6.) By merely retaining Prairie and SFE&G,

62

(CFF

¶J 38,

57.)

63

Although Duff& Phelps was retained by 5JP, it was understood that Duff& Phelps’s role in the
Transaction was to represent the seller. (See CFF ¶ 37.)

140

holding pro forma meetings that lacked substantive review of the Transaction, and engaging in
cursory informal discussions,64 FBTS failed to fulfill its duty of prudence to the SIP ESOP.
Principally, FBTS failed to fulfill its duty to “make an honest, objective effort to read
[Prairie’s] valuation [report], understand it, and question the methods and assumptions that [did]
not make sense.” Howard, 100 F.3d at 1490. Regardless of whether a fiduciary retains a thirdparty valuation expert, ERISA requires a fiduciary to “evaluate the advice given and ‘exercise [its]
own judgment’ about the transaction.” All. Holdings, Inc., 886 F. Supp. 2d at 104 1-42 (quoting

Jenkins v. Yager, 444 F.3d 916, 927-28 (7th Cir. 2006)). Accordingly, “[t]he degree to which a
fiduciary makes an independent inquiry is critical” when determining whether the fiduciary
breached its duty of prudence. Eyler, 88 F.3d at 456 (emphasis added).
Here, FBTS’s independent inquiry into Prairie and Duff& Phelps’s valuations of SIP was
effectively nonexistent. For example, when reviewing the April 11, 2007 Drafi Valuation Report,
FBTS attributed SIP’s success to change in management, (CFF
diversification effort in customers, (CFF

¶J

¶

253), the purported

148, 164), and SIP’s expansion of bidding on larger

64

Various witnesses proffered by Defendant alleged that they engaged in numerous informal
discussions, but failed to specify the substance of the discussions with any meaningful detail and
failed to produce sufficient corroborating testimony or documentary evidence. See supra, note 6.
The Court, accordingly, finds that the lack of notes or any other corroborating evidence in
conjunction with the lack of detailed testimony failed to establish that any of these informal
discussions occurred. See supra, note 6. In making this finding, the Court acknowledges that
“[t]he focal point of [the Court’s] inquiry under ERISA is not whether a fiduciary took adequate
notes of its investigation, but whether it acted with the prudence required of a fiduciary under the
prevailing circumstances at the time of the transaction.” Henry v. Champlain Enters., Inc., 445
F.3d 610, 620 (2d Cir. 2006). Even in the absence of sufficient notes, for example, other evidence,
such as evidence of a meeting generally to raise concerns, and evidence that “the report changed
in ways that reflected those concerns” can demonstrate that a fiduciary satisfied its duty. Id. at
620-21. Here, however, no such evidence was presented. The purported informal conversations
were uncorroborated by specific testimony or documentary evidence, and the April 11, 2007 Draft
Valuation Report was never altered in a manner that would indicate that the alleged conversations
had occurred.

141

projects and on projects in New York (CFF ¶ 257). FBTS never verified or attempted to quantify
the effects of these purported rationales for SJP’s purported continued success, and instead felt
satisfied after a superficial review of the draft report. (CFF ¶ 254, 256, 257.) The mere fact that
the April 11, 2007 Draft Valuation Report called for zero percent growth after a record year in
2006, and the use of a 19.25% discount rate, were FBTS ‘s primary bases for concluding that the
projections were conservative. (CfF

¶ 227-29, 259-60, 449, 470, 563.)

When FBTS retained Prairie, Prairie expressly stated that it would be relying on
information provided by FBTS and SJP without conducting independent verification.

¶J 129-3 1.)

(CFF

Accordingly, a prudent investor would have recast projections from the April 11, 2007

Draft Valuation Report after having completed at least some independent due diligence. (CFF

¶ 321.)

FBTS, however, never asked Prairie how it arrived at the projection figures it used in the

April 11, 2007 Draft Valuation Report and never compared the projections from Prairie with the
Offering Memo. (CFf

¶J 147, 214,

325-26, 498, 502, 570, 574); see also Chao, 285 F.3d at 432

(stating that one indicator of the lack of prudence was that the trustee did not know which
documents the valuation advisor reviewed in preparing the valuation report).
Additionally, FBTS never independently reviewed the accuracy of the financial
information SJP provided to Prairie. (CfF ¶ 330.) Although FBTS argues that it reasonably relied
on audited financial statements, FBTS had never obtained or reviewed $JP’s audited financials for
2006, which Prairie used as a baseline for its projections. (Cff ¶ 134-35.) fBTS has consistently
argued that it did not conduct an independent inquiry because it never had any reason to doubt the
acctiracy of the information provided by SJP and Duff& Phelps. (Def.’s Resp. Br. 19-23.) Yet,
that argument is self-serving given that FBTS would have discovered reasons to doubt the accuracy
of the seller’s representations had FBTS conducted the required level of due diligence.

142

Similarly, FBTS suggests that it took reasonable care to ensure that Prairie received
complete and accurate information from SJP because the SARs between DiPano and FBTS
provided that DiPano would indemnify the SJP ESOP for damages arising out of DiPano or SJP’s
misrepresentation or breach of any representation, warranty, or covenant. (See Def. ‘s Proposed
Findings of Fact and Conclusions of Law

¶J 317-20

(citing Joint Ex. 5 (SARs between DiPano

and FBTS), at 20).) In conjunction with an agreement between Duff & Phelps and SJP, ensuring
that SIP would provide accurate and complete information to Duff & Phelps, FBTS believed that
the indemnification provision precluded the need to conduct its own independent inquiry. (See Id.

¶J 3 17-26.)
ERISA makes clear, however, that “any provision in an agreement or instrument which
purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or
duty under this part shall be void as against public policy.” 29 U.S.C.

§

1110(a); see also Pfahler

v. Nat’l Latex Prods. Co., 517 F.3d 816, 837 (6th Cir. 2007) (“Indemnification agreements do not
prevent a fiduciary from being held liable, but instead only provide that if the fiduciary is held
liable, then someone else will compensate the fiduciary for that liability.”). The mere fact that SJP
and DiPano agreed to provide complete and accurate information, therefore, did not relieve FBT$
of its fiduciary obligation to conduct an independent inquiry.
The Court next considers the most glaring issues that any meaningful review of the April
11, 2007 Drafi Valuation Report would have revealed.

Although the April 11, 2007 Draft

Valuation Report superficially contained many of the critical components of a valuation report,
(CFF ¶ 211), it contained a blank page where it indicated that information about the state of SJP ‘s
industry and region was missing. (CFF ¶ 204). A prudent investor would not have moved forward
with the Transaction where a valuation report was missing an entire industry analysis section.

143

(CFF

¶J 204-07.)

Similarly, the EBITDA gross profits and margins in the April 11, 2007 Draft

Valuation Report differed from the Offering Memo without any explanation. (CFF

¶J 282-83.)

With regard to the rest of the April 11, 2007 Draft Valuation Report, Prairie copied and pasted
entire sections from the Offering Memo into its draft report. (CFF

¶J 216, 333-34, 336, 399,

429,

565, 592.) The Court finds it odd that FBTS never raised the verbatim copying-pasting by Prairie,
and that FBT$ never questioned Prairie’s blanket adoption of Duff& Phelps’s position. Moreover,
the April 11, 2007 Draft Valuation Report contained numerous other obvious errors. (CFF ¶J 212,
645-50.) The fact that FBTS failed to follow up and question Prairie about any of these glaring
issues is troublesome.
Beyond these glaring errors, FBTS’s failure to inquire about the critical assumptions within
the April 11, 2007 Draft Valuation Report is even more troubling. See Cunningham, 716 F.2d at
1469-70 (“The insufficiency of [the fiduciary’s] investigation lies in [its] failure to identify the
facts and assumptions underlying the [valuation report] and to consider whether they remained
valid at the time of the ESOP transactions.”); see also Id. at 1470 (finding that the fiduciary
breached its duty of prudence where “[c]ursory study of [the valuation report] would have shown
that [the author of the report] did not [identify the facts and assumptions underlying the valuation
report and did not consider whether they remained valid] in several material respects”). First,
while FBTS attributed SJP’s 2006 growth to SIP’s bidding on larger projects and moving into
areas outside of New Jersey, such as New York, FBTS never verified whether this was true. (CFF

¶ 257.)

Next, FBTS relied on Prairie’s rationale that the optimistic projections beyond 2006 were

attributable to SJP’s vertical integration. (CFF

¶J 277-78.)

FBTS, however, never raised the fact

that SIP was vertically integrated since 1996, making it questionable that vertical integration was
the cause of the 2006 record revenues. (CFF

¶ 279-8 1.)

144

Another example where FBTS failed to independently verify critical facts is with regard to
SJP’s backlog. (CFf

¶J 221,

291.) FBTS relied entirely on Prairie’s copied-and-pasted section

from the seller’s Offering Memo. (CFF

¶J 2 15-16, 290-91.)

Although it may be unusual for an

ESOP fiduciary to verify every contract related to backlog, a prudent investor would have
conducted some minimal level of due diligence given how significant backlog is for predicting
future revenues. (CFf

¶J 294-95.)

In addition, FBT$ did not review the audits for SJP’s 2006

financials prior to the Transaction. (CFF

¶ 136.)

Similarly, FBTS failed to raise any issues with Prairie regarding Prairie’s failure to account
for industry cyclicality in the April 11, 2007 Drafi Valuation Report, despite the fact that the
market had begun to trend downward at the end of 2006.65 (CfF

¶J 339-70.)

Moreover, SJP’s

largest customer, Hovnanian, had similarly begun to trend downward in performance, but FBTS
had never reviewed Hovnanian’s 2006 Annual Report or stock prices, which would have revealed
the trend. (CFF

¶J 531-78.)

Instead, fBTS failed to consider that the homebuilding industry had

potentially peaked when adopting Prairie and SJP’s overly optimistic projections. (CfF

¶ 343,

366-70.) Additionally, FBTS did nothing to determine whether Prairie’s selection of peer group
companies was appropriate when applying the market multiple method. (CFF

¶ 619.)

Although

SJP closely resembled homebuilders, Prairie selected peer companies that had minimal exposure
to the housing market. (CFf

¶J 6 10-44.)

FBTS also failed to question Prairie’s overstatement of SJP’s mobile rock crusher as a
sustainable competitive advantage, where it did not fall into any of the established categories of
sustainable competitive advantages: (1) proprietary technology; (2) brand name; or (3) cost

65

fBTS also failed to raise any issues with respect to Prairie’s failure to account for SJP’s
historical volatility. (CfF ¶ 3 10-18.)
145

advantage.

(CFF

¶J

371-415.)

Although the mobile rock crusher provided a competitive

advantage, FBTS failed to establish or verify that it would be sustainable to support the long term
projections of SIP’s performance. (CfF

¶J

37 1-415.) Moreover, although the April 11, 2007

Draft Valuation Report represented that SIP possessed proprietary technology, the draft report did
not identify the purported proprietary technology. (CFF

¶J

408-09.) As further indication of

FBTS’s failure to properly review the April 11, 2007 Draft Valuation Report, FBTS failed to
question SJP’s unsubstantiated claim of possessing proprietary technology.

(CFF

¶

417.)

Moreover, FBTS never recognized or resolved the inconsistency between the April 11, 2007 Draft
Valuation Report’s claim that SIP “fe[lt] it once again ha[d] a competitive advantage,” and the
draft report’s representation that SIP’s revenues were falling due to increased competition. (CfF

¶J 428-3 2.)
Finally, the two most significant indicators of fBTS’s breach of its duty of prudence are:
(1) fBTS’s failure to consider SJP’s poor performance in the first quarter of 2007; and (2) FBTS’s
failure to consider SIP’s customer concentration.

“A trustee who simply ignores changed

circumstances that have increased the risk of loss to the trust’s beneficiaries is imprudent.”
Armstrong v. LaSalle Bank Nat ‘1 Ass ‘n, 446 F.3d 728, 734 (7th Cir. 2006). When reviewing the
April 11, 2007 Draft Valuation Report, FBTS ignored the increased risk associated with SIP’s
poor performance in the first quarter of 2007 and SIP’s increased reliance on Hovnanian.
SIP struggled during January 2007, bringing in 37% below SIP’s January 2006 revenues,
and SIP’s revenues progressively declined in each of the three months of the first quarter. (CFf

¶J

454-55.)

Combined, SJP’s first quarter revenues were 56.4% lower than the first quarter

revenues in 2006, and SIP’s first quarter gross profits were 97.4% below the first quarter gross
profits in 2006. (CfF

¶J 456-67.)

Oddly, however, neither the April 11, 2007 Draft Valuation

146

Report nor the April 27, 2007 Post-Transaction Valuation Report mentioned SJP’s first quarter

performance in 2007. (CFF ¶ 479.) Consistent with FBTS’s pattern of blind adoption of Prairie’s
draft report, FBTS never reviewed the interim financials for SIP in 2007. (CFF

¶ 459, 467); see

Cunningham, 716 F.2d at 1469 (finding that a company’s underperformance in the time since the
valuation report, but before the ESOP transaction, should be taken into consideration when
determining the final purchase price of the company’s stock).
Although FBTS claims to have attributed the first quarter performance to weather and
maintenance, FBTS did not behave like a prudent investor because it never verified whether its
reasoning was accurate and what the consequences would be on SIP’s valuation. (CFF

¶J 473-

530.) In addition, FBTS never discussed these purported conclusions with Prairie or among its
own employees to indicate any diligence with respect to these considerations. (CFF

¶J 477,

484-

86, 498, 502-02, 507-08, 527-28.) FBTS’s conclusion that SIP could still make up the revenues
reflected nothing more than an unsubstantiated belief without a diligent review of the facts. (CFF

¶J 468, 471); see Citnningham, 716 F.2d at

1469 (finding that relying upon “knowledge they had

gained as managers [of the company] to conclude that the company was just as strong, and hence
just as valuable” despite recent underperformance was an insufficient basis for relying on a
valuation report generated prior to the underperformance period); id. at 1474 (stating that “[i]n
these circumstances, it was not enough for fiduciaries to simply rely on their generalized notions
that the company’s prospects were good”).
The other significant indicator of FBTS ‘s breach of its duty of prudence was its failure to
consider SIP ‘s increasing reliance on Hovnanian and FBTS ‘s simultaneous failure to investigate
Hovnanian’s projections. Katsaros, 744 F.2d at 276, 279 (finding that the fiduciary breached its
duty of prudence where “red flags would have been uncovered if a reasonably careful inquiry had

147

been made”). Here, SIP and Duff & Phelps represented that SIP was actively diversifying away
from Hovnanian, which Prairie, and later FBTS, adopted without question. (Cff ¶J 146-49.) SIP,
however, never explained how it would accomplish diversifying and what effect that would have
going forward. (Cf F

¶J

146-49.)

In addition to the inherent risk of SIP’s dependence on a single customer, Hovnanian’s
2006 Annual Report contained numerous red flags that Prairie and FBTS never considered.
Hovnanian, as a whole, was experiencing slowdowns, and had to pay $159 million in penalties for
walking away from projects.

(Cff

¶

542.)

In fact, Hovnanian’s 2006 Annual Report

acknowledged a sudden downturn in the homebuilding industry and stated that Hovnanian was
managing its business as if the industry was in a prolonged downturn.

(CFF

¶J

543-44.)

Additionally, Hovnanian announced that it would reduce costs by renegotiating pricing with its
subcontractors, such as SIP, because Hovnanian possessed substantial leverage. (Cff ¶J 547-48.)
FBTS never reviewed the Hovnanian 2006 Annual Report and even a brief review of the report
would have revealed these material concerns regarding SIP’s future. (CFF

¶

550.) Moreover,

FBTS and Prairie failed to even look at Hovnanian’s stock price or conduct any other form of
minimal due diligence to check the health of Hovnanian and its relationship with SIP. (CFF ¶ 551.)
Further, while a prudent investor would have required a breakdown between Hovnanian and non
Hovnanian projected revenues, FBTS and Prairie failed to do so as part of their overall failure to
consider customer concentration in their valuation of SIP. (CFf

¶J 562-68.)

In addition to the two key red flags that FBTS and Prairie failed to identify or consider, the
April 11, 2007 Draft Valuation Report, and FBTS ‘s adoption of the draft report, ignored another
issue. By the time the Offering Memo listed Kara Homes as a top ten customer, Kara Homes had
already declared bankruptcy. (CFF

¶J 579-82.)

Although SIP informed Prairie that Kara Homes

148

was bankrupt (CFf

¶

586), Prairie and FBTS never accounted for Kara Homes in the backlog,

SJP’s diversification plan, or projected revenues for 2007, other than deducting litigation costs
from SJP’s future projected expenses. (CFF

¶J

587-90); see Cunningham, 716 F.2d at 1471

(finding that a prudent ESOP investor must consider something that will drain cash from the
company).
Beyond fBTS’s failure to conduct a meaningful substantive review and independent
inquiry, FBT$’s review process for the Transaction also suffered from procedural deficiencies.
First, the April 11, 2007 Draft Valuation Report was given to FBTS less than three business days
before the Transaction, and less than two business days before Prairie’s April 13, 2007
presentation. (CFF

¶ 223.)

Ippensen reviewed the April 11, 2007 Draft Valuation Report and

merely conducted a “gut check” calculation to determine that he was comfortable with the
valuation. (CFF

¶J 227-31.)

He did not review or independently verify any of the underlying

information. (See, e.g., CFF ¶J 91, 136, 152, 221, 256, 291); Brundle v. Wilmington Tr., N.A., No.
15-1494, 2016 WL 6542718, at *12 (E.D. Va. Nov. 3, 2016) (stating that concerns may also arise
when the fiduciary or its independent advisers are pressed for time (citing Perez v. first Bankers
Tr. Servs., Inc., No. 12-8648, 2016 WL 5475997 (S.D.N.Y. Sept. 28, 2016))).
Additionally, while Ash was the only person from FBT$ to attend the November 15, 2006
meeting and was assigned as the team lead on the Transaction, she did not possess any expertise
in finance or valuation, and did not take notes during the meeting, which would have permitted
her to effectively report back to someone with the appropriate credentials. (CFF ¶J 77-7 8.) While
this November meeting was introductory in nature, where Ash introduced the ESOP Transaction
process to SJP, Ash’s lack of financial expertise was significant because the November meeting
was the only time that FBTS would ever meet with SJP or Duff & Phelps prior to the Transaction.

149

(CFF ¶ 85); see Katsaros, 744 F.2d at 275 (finding that the fiduciary breached its duty of prudence
where the fiduciary’s employees that received the presentation for the proposed transaction did not
have “sufficient training to express an opinion as to the soundness of the [transaction]” nor the
proper expertise or background in the important matters of the evaluating the transaction).
Moreover, Ash never reported what was discussed at the meeting to FBTS before signing the
engagement letter. (CFF

¶ 94.)

Further, there was miscommunication among FBTS’s employees. Ash was the FBTS team
lead on the $JP E$OP Transaction, but expected Cory to be principally responsible for reviewing
SJP’s financial documents. (CFF ¶ 6$.) In contrast, Cory believed that all EB Committee members
were equally responsible for reviewing the financial documents. (CFF

¶ 70.)

Even if Cory had

known she was principally in charge of reviewing SIP’s financial documents, however, she was
not a valuation expert and, therefore, did not possess the requisite competency to properly evaluate
the Transaction. (CFF ¶ 69.) Nevertheless, Ippensen believed that Cory and Ash, neither of whom
were qualified to evaluate the April 11, 2007 Draft Valuation Report, would be able to identify
any issues in the Transaction and report them to him. (CFF

¶ 71.)

The numerous problems with FBTS’s conduct as a fiduciary ultimately culminated in
FBTS’s failure to negotiate the price that the SJP ESOP would pay for DiPano’s shares.66 Howard,
100 F.3d at 1489 (identifying the failure to negotiate price as one indication of the lack of
prudence). FBTS blindly adopted Duff & Phelps’s original offer of $16 million in the Offering
Memo via Prairie’s adoption of Duff & Phelps’s analysis. (CFF

¶ 92,

68 1-82.) Although the

failure to negotiate price alone is insufficient to demonstrate that FBTS breached its fiduciary duty,

66

The only thing FBTS negotiated was the ESOP loan interest rate. (CFF

150

¶J

199, 452, 684-87.)

it weighs heavily against FBTS in light of the substantial evidence indicative of FBTS’s imprudent
conduct. Perez, 2016 WL 5475997, at *12.
In sum, the Court need not determine whether any single action or inaction by FBTS may
have constituted a breach of its fiduciary duty because the totality of FBTS’s missteps conclusively
prevented FBT$ from exercising its own judgment regarding the Transaction. See All. Holdings,
Inc., 886 F. Supp. 2d at 1041-42 (“The fiduciary must still evaluate the advice given and “exercise
[its] ownjudgment” about the transaction.” (quotingJenkins, 444 F.3d at 927-28.)). Here, FBTS’s
failure to conduct an independent inquiry into the myriad of red flags, glaring errors, and other
significant issues affecting the valuation of SIP led to a passive and blind adoption of the seller’s
optimistic valuation.67 These failures, in conjunction with FBTS’s decision to accept the seller’s
initial offer without negotiating the price, demonstrate that FBTS failed to fulfill its duty of
prudence under ERISA.
B.

Duty of Loyalty

Section 404(a)(l)(A) of ERI$A provides that “a fiduciary shall discharge [its] duties with
respect to a plan solely in the interest of the participants and beneficiaries.” 29 U.S.C.

§

11 04(a)(l )(A). A “tmstee[] violate[s its] duty of loyalty when [it] act[s] in the interests of the

plan sponsor rather than with an eye single to the interests of the participants and beneficiaries of
the plan.” Reich v. Compton, 57 F.3d 270, 291 (3d Cir. 1995) (citation omitted). “A fiduciary
breaches [its] duty of loyalty whenever [it] acts to benefit [its] own personal interest” or “when [it]
acts in favor of the interests of a third party, even if [its] own personal interest is not directly

67

Katsaros, 744 F.2d at 275 (finding that the fiduciary breached its duty of prudence where it
“passively received a rosy superficial picture of [a] bank and its holding company from persons
with an interest in obtaining their approval” before the fiduciary approved a loan from the pension
fund to the bank).
151

implicated.” Bevel v. Higginbottom, No. 98-474, 2001 WL 1352896, at *14 (E.D. Okia. Oct. 4,
2001) (citing Marshall v. Kelly, 465 F. Supp. 341, 350 (W.D. Okla. 1978) (loans and payment to
plan fiduciary and his wholly-owned company; fiduciary extended loans to personal friend on
terms more favorable than those available to plan participants).
“The duty of loyalty is grounded in the motivation driving a fiduciary’s conduct, and
liability will not lie where a fiduciary’s decisions were motivated by what is best for the ESOP,
even if those decisions also incidentally benefit the fiduciary.” Perez, 2016 WL 5475997, at *13
(citing Bierwirth, 680 F.2d at 271). “The presence of conflicting interests imposes on fiduciaries
the obligation to take precautions to ensure that their duty of loyalty is not compromised.” Perez
v. Bruister, 54 F. Supp. 3d 629, 654 (S.D. Miss. 2014) (quoting Bussian v. RJR Nabisco, Inc., 223
F.3d 286, 299 (5th Cir. 2000)). “The level of precaution necessary to relieve a fiduciary of the
taint of a potential conflict should depend on the circumstances of the case and the magnitude of
the potential conflict.” Id. (quoting Bussian, 223 F.3d at 299).
One instance where a fiduciary may have dual loyalties is where a plan is acquiring the
stock of the sponsoring corporation. See Donovan v. Bierwirth, 538 F. Supp. 463, 468 (E.D.N.Y.
1981), modfied, 680 F.2d 263 (2d Cir. 1982). “[T]o ensure that actions are in the best interests of
plan participants and beneficiaries, fiduciaries under certain circumstances may have to ‘at a
minimum’ undertake an ‘intensive and scrupulous independent investigation of [the fiduciary’s]
options.” Bussian, 223 F.3d at 299 (quoting Leigh v. Engle, 727 F.2d 113, 125-26 (7th Cir. 1984)
(second alteration in original)). Accordingly, in an ESOP transaction where a fiduciary has dual
loyalties, the fiduciary’s “independent investigation into the basis for an investment must be both
intensive and scrupulous and must be discharged with the greatest degree of care that could be
expected under all the circumstances by reasonable beneficiaries and participants of the plan.”

152

Bierwirth, 538 F. Supp. at 470; see

Bitssian,

223 F.3d at 299 (finding that the duty of loyalty

overlaps with the duty of care). Here, fBT$ was subject to dual loyalties because it was in its
interest to complete the ESOP Transaction so that it could earn $15,000 in annual fees as the SJP
ESOP’s ongoing trustee.68 (CFF

¶J 101-03,

701-02.)

Upon reviewing the totality of the evidence presented at trial, the Court finds that FBTS
breached its duty of loyalty. FBT$ failed to conduct the requisite due diligence and failed to
negotiate the price of the stock. While lack of negotiation by itself is not dispositive, courts have
found a breach of the duty of loyalty in ESOP transactions where the purchase price was reached
without negotiation and the fiduciary also failed to conduct a thorough investigation. See, e.g.,
Chao, 285 F.3d at 437 (holding that the trustee breached his duties when: (1) the trustee relied on
incorrect information; (2) the trustee was generally unaware of what was going on; (3) the trustee
was not consulted on major decisions; (4) there was no negotiation as to the stock price; (5) there
was more concern for the return on investment for the Master Trust; and (6) the ESOP was charged
several thousand dollars more so that defendants could deal in round numbers).69
Here, it is undisputed that Defendant did not negotiate the purchase price. (See May 27,
2016 Tr. (Serbin) 127:17-25; July 6, 2016 Tr. (Ash) 64:2-15, 108:24-109:1; May 25, 2016 Ir.

68

Moreover, Ash, FBTS’s team lead on the Transaction, would receive an additional 20%
commission on fees generated in the first year in which FBTS was retained to serve as an ongoing
trustee. (CFF ¶ 47.) Similarly, Prairie provided ongoing valuation services for approximately 80%
of the plans for which it performed the initial valuation. (CFF ¶ 117.)
69

See also Howard, 100 F.3d at 1489 (finding a breach where the trustee accepted a valuation
without further investigation and did not attempt to negotiate the purchase price); Dimond v. Ret.
Plan for Emps. of Michael Baker Corp. & Affiliates, 582 F. Supp. $92, 89$ (W.D. Pa. 1983)
(finding a breach when the trustee conducted no investigation and relied solely upon the words of
the seller without seeking independent advice); Horn, 215 F. Supp. 2d at 882 (finding a breach
when the trustee failed to complete negotiations for the purchase price and could not articulate
where the purchase price came from).
153

(Miscione) 22:7-9.) Additionally, for the reasons set forth in the above discussion regarding the
duty of prudence, FBTS failed to conduct the SJP E$OP Transaction at arm’s length, as evidenced
by its repeated deference to the seller’s representations, and failed to conduct an intensive and
scrupulous investigation. See Howard, 100 F.3d at 1488-89. Accordingly, the Court finds that
FBT$ breached its duty of loyalty.
C.

Prohibited Transaction

Section 406 of ERISA categorically bars transactions for the purchase of employer stock
on behalf of an employee benefit plan byaplan fiduciary. 29 U.S.C.

§

1 106(a)(1)(A), (D). Section

408, however, exempts certain transactions prohibited under Section 406. 29 U.S.C.

§

1108.

Specifically, Section 408(e) exempts certain transactions if the purchase of the employer stock was
for “adequate consideration.” 29 U.S.C.

§

1 108(e)(1).

“In transactions involving securities with no known market value, as is the case here,
ERISA defines ‘adequate consideration’ as ‘the fair market value of the asset as determined in
good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance
with regulations promulgated by the Secretary.” Henry v. Champlain Enters., Inc., 445 F.3d 610,
618 (2d Cir. 2006) (quoting 29 U.S.C.

§

1002(18)(B)).

“In order to rely on the adequate

consideration exemption, a trustee or fiduciary has the burden to establish that the ESOP paid no
more than fair market value for the asset, and that the fair market value was determined in good
faith by the fiduciary.”7° Keach v. US. Tr. Co., 419 F.3d 626, 636 (7th Cir. 2005). “Although fair

70

The majority of courts addressing this issue have adopted a two-part standard for evaluating the
adequacy of consideration under Section 408(e): (1) fair market value; and (2) good faith. See
Henry, 445 F.3d at 619; Chao, 285 F.3d at 436-37; Eyler, 88 F.3d at 454-55; Howard, 100 F.3d at
1488; Cunningham, 716 F.2d at 1467. They have done so based on a 1988 Department of Labor
proposed regulation that has yet to be approved for publication in the Code of Federal Regulations.
See Proposed Regulation Relating to the Definition of Adequate Consideration, 53 Fed. Reg. 17,
632 (May 17, 1988) (to be codified at 29 C.F.R. § 2510-3(18)(b)).
154

market value and good faith are ofien stated as distinct requirements, they are closely intertwined.”
Perez, 2016 WL 5475997, at *8 (quoting Heniy, 445 F.3d at 619).

“Whether a fiduciary has made a proper determination of ‘fair market value’ depends on
whether the parties ‘are well-informed about the asset and the market for that asset.’ Thus, in
practice, the ‘fair market value’ inquiry overlaps considerably with the ‘good faith’ inquiry; both
are ‘expressly focused upon the conduct of the fiduciaries.” Henry, 445 F.3d at 619 (quoting
Cunningham, 716 F.2d at 1467). It is the fiduciary’s burden to prove that the ESOP received
“adequate consideration” for its purchase of company stock by a preponderance of the evidence.
Id.

Accordingly, “the ESOP fiduciaries will carry their burden to prove that adequate

consideration was paid by showing that they arrived at their determination of fair market value by
way of a prudent investigation in the circumstances then prevailing.” Cttnningham, 716 F.2d at
1468; see also In re Unisys Say. Plan Litig., 74 F.3d at 446 (quoting Cunningham’s incorporation
of the duty of prudence to demonstrate adequate consideration); Perez v. Bruister, 823 F.3d 250,
262 (5th Cir. 2016) (stating that the adequate consideration “requirement must be interpreted, ‘so
as to give effect to the Section 404 duties,” which includes the duty of prudence (quoting
Cunningham, 716 F.2d at 1467)).
Additionally, “[a]lthough securing an independent assessment from a financial advisor or
legal counsel is evidence of a thorough investigation, it is not a complete defense to a charge of
imprudence.” Howard, 100 F.3d at 1489 (citation omitted). A fiduciary must “investigate the
expert’s qualifications,” “provide the expert with complete and accurate information,” and “make
certain that reliance on the expert’s advice is reasonably justified under the circumstances.” Id.
(citing Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th Cir. 1983), and Cunningham, 716 F.2d at
1474).

155

Here, the parties do not dispute that the SJP ESOP Transaction was a prohibited transaction
within the meaning of Section 406 of ERISA. The issue, therefore, is whether the adequate
consideration exemption to Section 406 applies. Specifically, the Court must determine whether
the SIP ESOP received adequate consideration for $16 million in the SJP ESOP Transaction. As
set forth in the Court’s discussion regarding the duty of prudence, FBTS was not well-informed
about the asset and blindly adopted a valuation report that failed to consider material facts
concerning SJP’s market. Accordingly, the Court finds that FBTS failed to overcome its burden
to demonstrate an exemption to its engagement in a prohibited transaction.
D.

Remedies

As a preliminary matter, FBTS argues that because SIP forgave $9.6 million in loans that
the SIP ESOP had used to fund the Transaction, the SIP ESOP really paid only $6.3 million, which
is less than the fair market value alleged by Plaintiff71 (Def.’s Proposed Findings of Fact and
Conclusions of Law

¶ 704-10.)

The case law FBTS relies upon, however, does not support

FBTS’s position. In fact, in Henry v. US. Tritst Co. of California, N.A., the Second Circuit flatly
disagreed with the position espoused by FBTS, finding that the cancellation of debt in an ESOP
context cannot “be construed as having reduced, postfacto, the purchase price” in an earlier ESOP
transaction. 569 F.3d 96, 99-100 (2d Cir. 2009).
FBTS also relies on Harris v. Bruister, which is distinguishable because the seller in Harris
was paid less than the market value estimated by the Secretary of Labor’s valuation expert. No.
10-77, 2013 WL 6805155, at *17 (S.D. Miss. Dec. 20, 2013). Here, the seller received $16 million,

71

Defendant alleges inconsistent amounts with regard to the loan forgiveness. (See CfF ¶ 177
n.15.) For the purpose of summarizing Defendant’s legal position, however, the Court
characterizes Defendant as contending that the write-down was for $9.6 million because Defendant
makes this argument using the $9.6 million figure in its post-trial submission. (See Def.’s
Proposed Findings of Fact and Conclusions of Law ¶ 704-10.)
156

which far exceeded Messina’s estimate of the fair market value for the purchased shares.
Similarly, FBTS’s reliance on Henry v. Champlain Enterprises, Inc., is unavailing because the
plaintiff in Henry “did not specifically allege any loss” from the alleged breach of duty. 28$
F. Supp. 2d 202, 230 (N.D.N.Y. 2003). Here, as set forth in Hemy, the purported cancellation of
debt does not affect Plaintiffs request for damages. Accordingly, the Court does not consider
SIP’s cancellation of the SJP ESOP’s debt in assessing damages.
1.

Restitution of Plan Losses

Section 409(a) of ERISA provides that a fiduciary who breaches its duty to a plan “shall
be personally liable to make good to such plan any losses to the plan resulting from each such
breach.” 29 U.S.C.

§

1109(a). Here, “the correct measure of damages is the amount [the SJP

ESOP] overpaid.” Brïtister, $23 f.3d at 266 (quoting Brîtister, 54 F. Supp. 3d at 676). As set
forth in the Court’s findings of fact above, the fair market value of DiPano’s shares at the time of
the SJP ESOP Transaction was $6,515,000, for which the SIP ESOP paid $16 million.
Accordingly, the Court awards $9,485,000, plus interest, representing the lost opportunity cost
suffered by the SJP ESOP,72 subject to the appropriate reduction outlined in the Court’s April 20,
2016 final Judgment and Bar Order as to DiPano. (ECF No. 150.)
2.

Injunctive Relief

Plaintiff also seeks injunctive relief permanently enjoining FBTS “from serving as a
fiduciary to an ERISA-covered Plan in the future.” (Pl.’s Post-Trial Br. 29.) Section 409(a) of
ERISA permits the Court to issue “equitable or remedial relief as the court may deem appropriate,

72

“Prejudgment interest exists to make plaintiffs whole and to preclude defendants from garnering
unjust enrichment.” Nat’l Sec. Sys., Inc. v. lola, 700 F.3d 65, 102 (3d Cir. 2012). Prejudgment
interest on restitution for violations of ERISA is determined by 26 U.S.C. § 6621, 6622. See,
e.g., Whitfieldv. Tomasso, 682 F. Supp. 1287, 1306 (E.D.N.Y. 1988) (applying 26 U.S.C. § 6621,
6622).
157

including removal of [a] fiduciary.” 29 U.S.C.

§

1109(a). Upon reviewing the totality of the

evidence presented, the Court does not find that FBTS’s conduct warrants the requested injunctive
relief.
V.

Conclusion
For the reasons set forth above, the Court finds that FBTS breached its duties of prudence

and loyalty, and engaged in a prohibited transaction under ERISA. Accordingly, the Court awards
$9,485,000, plus interest, subject to the appropriate reduction outlined in the Court’s April 20,
2016 Final Judgnient and Bar Order as to DiPano. (ECF No. 150.) An order consistent with this
Opinion will be entered.

s/ Michael A. $hipp
MICHAEL A. SrnP
UNITED STATES DISTRICT JUDGE

Dated: March 31, 2017

158