DelRosario and Taylor v. King & Prince Seafood Corporation

U.S. District Court Opinion Rendered in King & Prince Seafood Corporation ESOP Litigation discusses the opinion rendered by the U.S. District Court for the Southern District of Georgia in DelRosario and Taylor v. King & Prince Seafood Corporation. The article summarized the findings as follows:

"In summary, the court declined to find that plaintiffs had a valid claim to benefits based upon the plan's distribution policies, and found that the trustees had not violated the terms of the plan in fashioning distribution policies. The court left open the possibility of some form of remedy for violation of the consent rule, underscoring the importance of plan administrators' responsibility to provide timely and proper notice to participants. The court also recognized the validity of considering repurchase obligations in connection with distribution policies and declined to second guess the business judgment of trustees in crafting distribution policies."

While the facts and circumstances of this case are unique, here are some takeaways from the case:

1. Repurchase liability funding decisions such as using ESOP cash instead of redeeming the stock is a matter of business judgment.
   
   
2. Changing the distribution policy to manage the repurchase liability is reasonable.
   
   
3. Changing the distribution policy, rather than amending the plan, is not a violation of the anti-cutback rule. This is consistent with IRC Section 411(d)(6)(C) - Minimum vesting standards - Special rules - Accrued benefit not to be decreased by amendment - Special rule for ESOPs, which provides that the distribution provisions of ESOPs may be modified in a nondiscriminatory manner.
   
   
4. Participants must be provided with the appropriate forms and a notice that meets the 402(f) Safe Harbor Notice requirements no less than 30 days (subject to waiver) and no more than 180 days before the date of which a distribution is made. The article discusses the failures in this case that the resulted from not satisfying the 402(f) requirements:
   
   "The court explained that while the trustees may have implemented the distribution rules in accordance with the ESOP and ERISA, it could not find that rank and file terminated participants were apprised of the material rules of the distribution policy. The court found that participants were not provided consent forms more than 30 days prior to distribution, in violation of the rule. The court further found that the failure of the notices to apprise participants of their right to defer distribution until age 65, of their option to roll stock into an IRA, of the availability of the put option periods, and of the tax consequences of their decision violated the consent rule, as did the failure of the notices to inform participants that they would receive a year old valuation."
   
   
5. In addition to ensuring that you are using the most current fair market value, you also need to make sure the value has not become stale. Here is an excerpt from ESOP Planning: Distributions:
   
   Is the fair market value that you are using an accurate reflection of the market value or has the value become "stale"? If you pay someone a distribution on December 15, 2007, based on the December 31, 2006 stock value, the value is almost 350 days old. Some experts would argue that you are not paying the participant at fair market value. Does a stock value become "stale"? If so, when? There is no clear guidance in this area, and the determination of if and when a value becomes "stale" is subjective and is based on the facts and circumstances of your situation.

UPDATE 5/12/08:

Is ESOP Sponsor Liable for Paying Out Sooner Than Required? is an Employee Ownership Update from 2006 that reviews the then pending lawsuit:

In an unusual lawsuit, former employees of King & Prince Seafood are charging that a change in ESOP distribution rules to pay out former participants three years after departure instead of five violated ERISA's anti-cutback requirements. The plan was also changed so that the payout was based on the valuation as of the end of the prior year, rather than when the payout occurred. Paying out sooner than the law requires and basing payments on the last valuation are common plan provisions in ESOPs. A district court certified the case for class action. Employees were upset because under the old rules, they would have received substantially more than under the new ones because the company's stock price rose sharply in the year of the payout. The case Del Rosario v. King & Prince Seafood Corp., No. CVF 204-036 (S.D. Ga. 3/7/06) now must be decided on its merits, but it is a novel theory that what would normally be perceived to be a change in the plan to benefit employees could be interpreted as damaging them by not allowing them the maximum possible time to hold onto their shares.

Order (3/7/06)