The 10th U.S. Circuit Court of Appeals has found that an employee stock ownership plan (ESOP) sponsor was required to prove a transitional trustee was at fault for a failed transaction and failed to do so.

The Case 

Pioneer Centres Holding Company owned and operated (through its subsidiaries) several automobile dealerships in Colorado and California, including Land Rover, Audi, and Porsche. In 2001, Pioneer sponsored an ESOP under the Employee Retirement Income Security Act (ERISA). Matthew “Jack” Brewer, Pioneer’s founder, initially owned 100% of Pioneer’s stock. Over the course of several years, Brewer sold 37.5% of his Pioneer stock to the plan and retained 62.5% ownership. 

In 2009, the Plan’s trustees proposed a stock transaction whereby the ESOP would become the 100% owner of Pioneer. To avoid any conflict of interest issues, the plan hired Alerus as an independent “transactional trustee.” Alerus’ job was to determine whether, and on what terms, the plan should purchase Brewer’s shares. 

According to the court’s opinion, Pioneer’s dealership agreement with Land Rover required approval before any changes in ownership or management occurred, stating: “[T]here will be no change in the foregoing [dealership ownership and management] in any respect without [Land Rover’s] prior written approval.” The agreement also granted Land Rover a right of first refusal to purchase any of Pioneer’s stock offered for sale. 

Pioneer sent a letter to Land Rover in which it asked Land Rover to consent to Brewer’s transfer of his remaining Pioneer stock to the plan to make the plan the 100% owner of Pioneer. The letter included the proposed terms of the transaction and informed Land Rover that Pioneer’s management would not change. 

Land Rover responded with a letter stating terms of its dealership agreement with Pioneer and other objections to the purchase. Pioneer (assisted by Alerus) responded, interpreting Land Rover’s letter as announcing a prohibition against ESOP-owned dealerships, and asserting that this position violated California and Colorado law, as well as federal public policy favoring ESOP ownership.

Land Rover responded by indicating it had not yet received a formal ownership transfer proposal from Pioneer, but that Pioneer was free to submit any ownership transfer proposal and Land Rover would consider it in good faith and on the merits. Pioneer never responded to this.

In November 2009, Alerus sent Brewer draft stock redemption and stock purchase agreements that required Brewer to make certain representations and warranties. Brewer’s attorney, Richard Eason, revised the drafts by adding thirty-two “best of knowledge” qualifiers. In his transmittal letter, Eason told Alerus: “This is as far with the reps and warranties as [Mr. Brewer] will go.” Alerus decided that the revisions to the representations and warranties were unacceptable and refused to sign the revised transaction documents. As a result, Pioneer could not submit a signed copy of the revised transaction documents to Land Rover. Formal Land Rover review was thus never triggered and the transaction was abandoned.

More than a year after the transaction was abandoned, Pioneer sold most of its assets to Kuni Enterprises for more than $10 million above what the plan would have paid for Pioneer’s stock. Brewer “expressed regret that he was unable to complete his plan to sell Pioneer to the employees,” and identified “the resistance or disapproval of one of the manufacturers” as a cause of that failure.

After Pioneer sold its assets to Kuni, the plan filed suit against Alerus for breach of fiduciary duty under ERISA. Alerus moved for summary judgment, arguing it did not breach any fiduciary duties, and even if there was a breach, Alerus did not cause any losses to the plan because the plan did not establish that Land Rover would have approved the transaction. 

According to the 10th Circuit’s opinion, a lower court concluded the plan could not demonstrate a resulting loss because the evidence that Land Rover would have approved the transaction was too speculative. The plan contends this was an error because the district court improperly required the plan to prove causation, rather than shifting the burden to Alerus to disprove causation.

The appellate court focused first on which party is responsible for the burden of proof. It noted that ERISA provides that a fiduciary who breaches its duties under ERISA shall be personally liable for any losses to the plan resulting from each such breach. “The plain language of Section 1109(a) establishes liability for losses ‘resulting from’ the breach, which we have recognized indicates that ‘there must be a showing of some causal link between the alleged breach and the loss plaintiff seeks to recover,’” the court wrote in its opinion. It noted that the statute is silent as to who bears the burden of proving a resulting loss, and citing prior case law found that where a statute is silent on burden allocation, the “ordinary default rule [is] that plaintiffs bear the risk of failing to prove their claims.”

The appellate court agreed with the district court that, even assuming Alerus carries the burden to disprove causation once the plan establishes a prima facie case, the plan had not established a prima facie case of a loss in the first instance.

The 10th Circuit said there is nothing in the language of Section 1109(a) or in its legislative history that indicates a Congressional intent to shift the burden to the fiduciary to disprove causation. The majority of federal circuits that have considered the issue agree. The language “resulting from” in 29 U.S.C. Section 1109(a) makes “[c]ausation of damages . . . an element of the claim, and the plaintiff bears the burden of proving it,” the court said. “We see no reason to depart from the 'ordinary default rule that plaintiffs bear the risk of failing to prove their claims.'”

By suing Alerus for breach of fiduciary duty, the plan assumed the burden of proof on each element of its claim. In order to prove the causation element, the plan must demonstrate that Alerus’ alleged breach (refusal to sign the revised transaction documents) caused the plan to suffer damages (failure of the transaction). According to the appellate court, this means that Pioneer bears the burden of establishing by a preponderance of the evidence—more likely than not—that Land Rover would have approved the sale had Alerus signed the revised transaction documents, which would have allowed Pioneer to submit them to Land Rover for review.

The appellate court rejected the plan’s argument that Land Rover would have approved the sale if Alerus had signed the documents because Colorado and California law would have required Land Rover to do so. “To the contrary, the record evidence indicates that even in the face of references to the state laws and Land Rover’s alleged legal obligations, Land Rover steadfastly refused to approve 100% plan ownership,” the court concluded.