Compliance April 30, 2020

DowDuPont Pension Spin Off Lawsuit Dismissed

A court found most actions alleged in participants' complaint were not fiduciary functions.

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An Employee Retirement Income Security Act (ERISA) lawsuit questioning the transfer of a pension plan during corporate restructuring of companies E. I. du Pont de Nemours and Co. (Historical DuPont) and the Dow Chemical Co. (Historical Dow) has been dismissed.

As background, on December 11, 2015, Historical DuPont and Historical Dow announced a plan to merge and restructure their businesses. Under the terms of the restructuring, the two entities were to merge temporarily under a single entity, DowDuPont Inc., and then separate out their product lines into three independent companies. This resulted in three agriculture, materials science and specialty products companies: Corteva Inc., Dow Inc. and DuPont de Nemours Inc., respectively. Historical DuPont emerged from the spin-offs as a subsidiary of Corteva.

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The plaintiffs in the case are participants in the U.S. DuPont Pension and Retirement Plan, which provides benefits to retirees of Historical DuPont.

In their first amended complaint (FAC), the plaintiffs allege that the defendants eviscerated Historical DuPont’s business operations and made it a subsidiary of Corteva, an undercapitalized and overburdened spin-off, so as to relieve DuPont and Dow of any obligations with respect to the plan. They further allege that the defendants engaged in these corporate transactions without proper disclosures to plan participants.

In the original lawsuit, the plaintiffs suggested that plan fiduciaries “are kicking the plan down the road along with the retirees that built the historical company.”

“The new companies, by leaving Historical DuPont as the plan sponsor and moving that company, after having eviscerated the plan sponsor’s business operations, to Corteva, have removed themselves from the controlled group of the plan,” the complaint stated. “In summary, were Corteva to fail and file for bankruptcy, the plan can be terminated through a distress proceeding without affecting the other companies. If the other companies had not removed the plan from their controlled group, the plan could not be terminated through a bankruptcy filing unless all members of the controlled group also filed for bankruptcy.”

In addition, the lawsuit argued, “The plan documents do not contemplate, nor do they authorize, the evisceration of the business activities of Historical DuPont and the shift of the plan sponsor, along with the plan assets and liabilities, to a newly created company and controlled group. By removing Historical DuPont’s business activities, leaving it a shell corporation, Historical DuPont is no longer able to make the contributions that the plan documents require be made by the plan sponsor, Historical Dupont. Both actions are violations of the plan documents.”

In her order dismissing the case, U.S. District Judge Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of California noted that the 9th U.S. Circuit Court of Appeals has held that the “decision to spin a [pension] plan off … is not a fiduciary act.” Rogers said that insofar as plaintiffs’ claim arises out of defendants’ decisions regarding corporate restructuring, the claim fails. The plaintiffs said they do not take issue with the merger and spin-offs per se, but bring this action challenging changes made to Historical DuPont’s operations and controlled group as part of the restructuring. Again, Rogers said such changes do not implicate fiduciary duties.

She added that the plaintiffs’ allegations are conclusory and speculative regarding whether Historical DuPont or Corteva—the post-spin-off entities responsible for fulfilling plan obligations—will be able to do so.

In their fifth count in the complaint, the plaintiffs alleged that by “choosing to only contribute the minimum amount required … the [d]efendants have created a plan that is so underfunded that it is at an increased risk of failure.” Rogers said this claim ultimately fails because the plaintiffs themselves concede that the DuPont defendants satisfied ERISA’s minimum funding requirements. “Plaintiffs cite no on-point authority for their contention that fiduciary obligations impose a higher funding requirement than that imposed by ERISA. Plaintiffs also do not explain what level of funding would be enough to satisfy defendants’ fiduciary duties. Without a legal basis to find a breach of fiduciary duty where statutory requirements have been met, plaintiffs’ claim fails,” Rogers wrote in her order.

Regarding the claim for failure to follow plan documents, Rogers reiterated that corporate restructuring decisions are not fiduciary in nature. Thus, the defendants’ decision to change Historical DuPont’s controlled group does not trigger the fiduciary’s obligation to follow plan documents. In addition, she found that the plaintiffs did not identify any portions of the plan that were violated by defendants’ implementation of the spin-offs or management of the plan.

Rogers noted that ERISA prohibits fiduciaries from causing a pension plan to engage in transactions if the fiduciary “knows or should know that such transaction constitutes a direct or indirect … transfer to, or use by or for the benefit of a party in interest, of any assets of the plan.” In the sixth count in the complaint, the plaintiffs alleged that the transfer of Historical DuPont, which included the plan and its assets, to a new controlled group within Corteva is a prohibited transaction under ERISA.

Rogers found that the plaintiffs’ claim as currently pleaded suffers from similar deficiencies as its other claims. That is, to the extent their claim is based on the corporate restructuring, they have not pleaded any fiduciary acts. She also found the FAC does not plead facts showing that the plan or its assets were involved in any prohibited transaction with a party-in-interest. She cited a prior court decision upholding dismissal of a prohibited transaction claim that “did not involve the investment or management of plan assets,” but rather, “there was a change in sponsors of the plans while the plans’ assets remained unaffected.” In fact, Rogers noted, in several places, the FAC suggests the challenged transactions involve Historical DuPont’s corporate assets, instead of plan assets. Accordingly, she dismissed the plaintiffs’ prohibited transaction claim.

Rogers determined, however, that amendment of the claims would not be futile, so she granted the plaintiffs leave to amend as to all claims, with a second amended complaint to be filed within 28 days of issuance of her order.

Compliance April 30, 2020

Consultant Named in ESOP Buyback ERISA Lawsuit

One of the defendants in the case, the trustee who oversaw a questioned ESOP buyback transaction, was at the time allegedly working as the chief financial officer of a large chain of dental practices.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the Western District of Kentucky, Louisville Division, naming a laundry list of defendants that includes various trusts, individuals and corporate entities.

ISCO Industries Inc., a global customized piping solutions provider based in Louisville, Kentucky, is the most recognizable of the defendants. Other defendants includes trusts into and out of which the proceeds of the sale of employer stock have been paid, as well as the family owners of ISCO Industries Inc.

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The lawsuit is directly related to another filed recently under ERISA, which Wilmington Trust agreed to settle in January to the tune of $5 million. In the new case against ISCO, the plaintiffs seek “relief relating to losses they incurred in connection with the sale of stock of ISCO Industries Inc. from a now terminated employee stock ownership plan [ESOP] in which they were participants back to the prior owners of that stock at a grossly deficient price in a prohibited and imprudent transaction.”

While it is not normally necessary to describe in detail most of the plaintiffs and defendants named in a case of this nature to understand its arguments and potential merit, in this particular matter it is essential to understand who several of the defendants are. For their part, the plaintiffs were all participants in the ISCO Industries Inc. ESOP. Their interests in the ISCO ESOP were vested on or before February 14, 2018, according to the complaint.

The complaint details its list of defendants as follows: “Defendant Stephen C. James is a Louisville-based consultant. Mr. James became the trustee of the ISCO ESOP in the fall of 2017, after the Kirchdorfers determined to replace then-trustee Wilmington Trust, N.A., for its reluctance to approve buyback transaction described further below. At the time, Mr. James had very limited experience serving as an independent trustee for an ESOP and instead was the full-time CFO [chief financial officer] of a large chain of dental practices.”

The complaint continues: “Defendant James J. (Jimmy) Kirchdorfer, Jr., is the chair and CEO of ISCO, a company his father, James J. Kirchdorfer Sr., formed in 1962. Defendant Mark T. Kirchdorfer is president of ISCO and Jimmy’s brother. The various trust defendants all are structured for the benefit of the Kirchdorfer family and were among the purchasers of ISCO stock in the buyback transaction described further below. The plan administrator of the ISCO ESOP was a committee appointed by ISCO’s board of directors, which at all relevant times was controlled by Jimmy and Mark Kirchdorfer. Indeed, publicly available information indicates that they have been ISCO’s only or majority directors at all relevant times.”

The complaint further alleges that Jimmy and Mark Kirchdorfer were “the sole or controlling directors of ISCO” enjoying “full authority to dictate membership of the committee charged with administering the ESOP.”

With those facts laid out, the complaint notes that ISCO formed the ISCO ESOP in 2012, with the Kirchdorfers and their trusts agreeing to sell the outstanding shares of ISCO stock to the ESOP for $98 million, or approximately $24.50 per share. In connection with the sale, the complaint states, ISCO loaned the ESOP $98 million to fund the transaction. Wilmington Trust, then serving as trustee, represented the ESOP in that transaction. The now-settled lawsuit that targeted Wilmington Trust directly alleged that the firm had violated its ERISA duties in agreeing to “a dramatically inflated valuation and price for the shares of ISCO stock as of 2012.”

“By summer 2016, with ISCO experiencing financial doldrums, the Kirchdorfer defendants saw an opportunity to buy back the ISCO stock they had sold to the ESOP four years earlier and began plotting to do so,” the complaint states. “Because the price for any buyback would necessarily be determined in large measure based on trailing 12 months of financial results and informed financial forecasts for the coming year, the timing of any buyback necessarily would have a major impact on the appropriate sales price.”

According to the complaint, by August 2017, ISCO’s financial fortunes had begun to look up, “dramatically so,” as a result of a confluence of events including Hurricane Harvey, which had the effect of driving great demand for industrial piping at the same time that a large part of the supply was being eliminated. The complaint says the company had experienced a similar trend in 2006 and 2007 in the wake of Hurricane Katrina.

“As a result, Jimmy Kirchdorfer accelerated the plot to take ISCO’s stock back from the ESOP, including by expressing his views that the ESOP was inconsistent with the company’s business circumstances and pressuring plan participants to write out short narratives for him to the effect that they disliked the ESOP and did not value ownership of ISCO stock through the plan, for use in his strategy to terminate the ESOP,” the complaint states.

The complaint then alleges that, in October 2017, ISCO executives gathered in person in Louisville to finalize financial forecasts for 2018. The alleged consensus view of the numerous executives present was that 2018 would be a stellar year financially in light of the continuation of trends that had emerged in the second half of 2017.

“Of course, those forecasts necessarily would need to be reflected in any fair sales price for ISCO stock,” the complaint states. “As a result, at the forecast meeting, Jimmy Kirchdorfer repeatedly and uncharacteristically attacked the forecasts as too high, demanding that they be lowered.”

Subsequently, James, in his role as the new trustee for the plan, approved the plan’s sale of ISCO stock back to the Kirchdorfer defendants for $96.6 million. Thus, according to those values, the outstanding shares of ISCO were worth about $1.4 million less in 2018 than when the ESOP was formed in 2012, “despite that the company was substantially more profitable, and facing a rosy forecast, when the ESOP terminated than when it was formed.”

“Mr. James made no inquiry of any ISCO sales executives concerning the company’s forecasts or valuation, and to plaintiffs’ knowledge, did not solicit the opinion of any participants, much less conduct even an informal survey of participants concerning the proposed transaction or its terms,” the complaint states. “Fully anticipating that the true forecasts would come to fruition, the Kirchdorfer defendants became the owners of ISCO’s stock on February 14, 2018, so that they, and not the plan participants, could enjoy those record-breaking financial results.”

The complaint concludes its technical fiduciary breach and prohibited transaction allegations by calling on the court to issue various remedies including re-establishment of the ESOP, monetary compensation and the installment of an independent trustee.

In response to a request for comment about the litigation, David Haick, ISCO general counsel, provided the following: “ISCO is aware of this complaint which was filed by three former employees of the company. The allegations and claims made by these plaintiffs have absolutely no merit in law or fact, and ISCO intends to vigorously defend itself in the matter.”

The full text of the complaint is available here.

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