Court Forgives Use of Prior Year Stock Valuation for Plan Distributions

U.S. District Judge Shira A. Scheindlin found the plan not only condoned, but explicitly required, defendants’ use of the June 30, 2008, valuation to establish the Fair Market Value (FMV) of Company Stock at the time of the distribution in 2009. Scheindlin rejected Paul McCabe’s argument that the plan’s rules for determining fair market value should have been overridden given the “extraordinary” circumstance that the company was going under and the plan fiduciaries decided to end participants’ interest in the plan.  

The court said the distinction between ordinary and extraordinary circumstances does not appear anywhere in the plan or the summary plan description (SPD).

In addition, Scheindlin found that reliance on the June 30, 2008, valuation seemed to best serve participant interests. “Based on the cost in previous years, a new valuation would run at least twenty thousand dollars, practically a third of the Company’s total value at the time,” Scheindlin wrote. In deciding not to do an interim FMV valuation, the company followed the Employee Retirement Income Security Act’s (ERISA) charge to “defray reasonable expenses of administration” as part of the duty of loyalty.  

According to the opinion, McCabe  alleged that Capital Mercury Apparel and certain officers breached their fiduciary duty by applying a year-old valuation of the company that did not reflect its fair market value at the time of the distribution to participants with under $1,000.  

The plan dictates that any cash distribution to participants is “based upon the Fair Market Value of Company Stock as of the Allocation Date immediately preceding the date of distribution.” Specifically, participants are informed that the value of the vested interests in their accounts is determined by the Fair Market Value “as of the June 30 coinciding with or immediately preceding the date of distribution.”  

The valuations indicated a steady increase in stock price until June 30, 2001, when a series of poor managerial business decisions and declining industry performance reversed the Company’s fortunes. As a consequence of “the Company’s likely liquidation, as well as its poor historical performance and uncertainty of positive future performance,” an appraiser used by the company determined that the market and income approach he typically used was not “likely to result in a meaningful indication of value,” and switched to the “adjusted book value approach” (“ABVA”) for the June 30,2008.