United States District Court – Eastern District of North Carolina Renders Pro-ESOP Trustee Decision

In Lee v. Argent Trust Company, the district court dismissed the Plaintiff’s claim that Argent, as trustee of the Choate Construction Company ESOP, committed a fiduciary breach when it paid $198 million for the purchase of 100% of the company’s stock. The Plaintiff had alleged that she suffered damages because the ESOP’s stock was valued at $64.8 million, less than one month after the ESOP’s original purchase of its shares.
In granting Argent’s motion to dismiss, the Court held that the Plaintiff plausibly failed to prove the claim. The Court concluded that the Plaintiff fundamentally misunderstood the nature of the transaction because she had not properly accounted for the $198 million in debt the company incurred as part of the financing of the ESOP’s purchase. Equating the ESOP transaction to the purchase of a 100% mortgage-financed home, the Court reasoned that the ESOP actually acquired its shares at a discount rather than a premium. Because the ESOP paid $198 million to acquire its shares and the company had incurred $198 million in debt as part of the transaction, “the expected value of the ESOP’s shares—at least in the short term—would be $0.” However, the $64.8 million valuation, conducted less than one month after the transaction, “reflects the fact that the Choate ESOP,” like the hypothetical buyer of a 100% mortgage-financed home that appreciates in value subsequent to its purchase, “realized an immediate equitable benefit.” Therefore, because the ESOP participants did not lose any money, they did not suffer any harm. Accordingly, the Court dismissed the complaint based on the Plaintiff’s failure to prove the sustainment of damages.
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