DOL Sues PBI Bank For Alleged Fiduciary Breach In Sale of ESOP Stock


Labor Department files suit to restore losses to the Miller’s Health Systems Employee Stock Ownership Plan

Bank or other plan trustees and fiduciaries of Employee Stock Ownership Plans or other employee benefit plans holding company stock, sponsoring employers and their management should heed the new Perez v. PBI Bank, Inc. lawsuit filed by the U.S. Department of Labor of the importance of not running afoul of the fiduciary responsibility rules of the Employee Retirement Income Security Act when conducting business sales, bankruptcies or other corporate business transactions involving stock or other plan assets.

The U.S. Department of Labor filed the PBI Bank, Inc.  in U.S. District Court to recover losses to the Miller’s Health Systems, Inc., Employee Stock Ownership Plan. The suit alleges that PBI Bank, Inc., the trustee of the plan, authorized the purchase of company stock for $40 million, an amount far in excess of the fair market value of the stock. The suit also alleges that PBI Bank approved financing for the transaction at an excessive interest rate. Miller’s Health is a Warsaw-based company that manages long-term care and assisted-living facilities. The lawsuit also seeks to remove PBI as a fiduciary and service provider of the plan and to permanently bar it from serving as a fiduciary or service provider to ERISA-covered plans in the future.

ERISA’s fiduciary responsibility rules generally require trustees and other fiduciaries of employee stock ownership or other employee benefit plans to act prudently and for the exclusive benefit of participants and beneficiaries and abstain from self-dealing or prohibited transactions involving the plan.  Fiduciaries that violate these rules risk personal liability for damages incurred by the plan, restoration of profits realized from prohibited transactions or other fiduciary breaches, as well as attorneys fees and other costs as well as disqualification from serving as a fiduciary for employee benefit plans and other potential civil or criminal relief.

The PBI Bank, Inc. case highlights how these risks can arise when a trustee or other fiduciary is asked to approve the sale of company stock held as a plan asset of an employee stock ownership or other employee benefit plan.

An investigation by the Chicago Regional Office of the department’s Employee Benefits Security Administration focused on a September 2007 stock purchase. The suit alleges that PBI violated ERISA by imprudently and disloyally approving the purchase of stock by the plan.  The suit seeks to require PBI to restore all losses suffered by the ESOP, plus interest. As of September 30, 2012, the ESOP had 2,939 participants and assets of $12,848,000.

At the time of the stock purchase, Miller’s Health managed 31 long-term care facilities under the name of Miller’s Mary Manor and 10 assisted living facilities under the name Miller’s Senior Living. Miller’s Health also operated Theracare, Inc., an Indiana corporation, which primarily provided physical and occupational therapy and speech-language pathology to residents in Miller’s Health facilities.

After conducting its investigation, the department concluded that, as a result of the design of the transaction and the fiduciary breaches of PBI, the stock purchase was not for the primary benefit of participants and did not promote employee ownership in Miller’s Health. As a result, the department concluded that PBI was responsible and liable for violations of the Employee Retirement Income Security Act.

When announcing the lawsuit, Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi said,  “Fiduciaries must act with undivided loyalty to plan participants.  When it comes to ESOP stock purchases, they must ensure that the plan receives full value for its money.”

The PBI Bank suit highlights the challenges that trustees and other fiduciaries often face when dealing with employee stock ownership or other employee benefit plans holding stock of the sponsoring company.  Valuation, purchase, sale, and other decisions about the stock fall within the prudence, exclusive benefit and other fiduciary responsibility rules of ERISA.  These duties attach when the stock is purchased and continue thereafter as long as the stock remains a plan asset.  Additionally sales or other transactions which result in the sale or other disbursement of the stock as asset of the plan, as well as a decision to continue to hold the stock during market or value changes also trigger these responsibilities.

A trustee or other fiduciary exercising discretion or control in name or functionally generally must be prepared to prove not only that its actions are prudent, but also that the value of the stock and other actions involving the plan and its assets were made for the exclusive benefit of the plan and its participants and beneficiaries.   Because of the special issues and perception of potential conflict of interest that often inherently arise when a trustee or other fiduciary makes or influences decisions involving stock held by an employee stock ownership or other ERISA-covered plan, fiduciaries involved in these transactions should exercise particular care to act, and document appropriate evidence that he or it complied with these and other fiduciary requirements.

For Assistance or More Information

If you have questions or need help with these or employee benefit, human resources, insurance, health care matters or related documents or practices, please contact the author of this update, Cynthia Marcotte Stamer.

A Fellow in the American College of Employee Benefit Council, immediate past Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Group and current Co-Chair of its Welfare Benefit Committee, Vice-Chair of the ABA TIPS Employee Benefits Committee, a council member of the ABA Joint Committee on Employee Benefits, and past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer is recognized, internationally, nationally and locally for her more than 25 years of work, advocacy, education and publications on cutting edge health and managed care, employee benefit, human resources and related workforce, insurance and financial services, and health care matters.

A board certified labor and employment attorney widely known for her extensive and creative knowledge and experienced with these and other employment, employee benefit and compensation matters, Ms. Stamer continuously advises and assists employers, employee benefit plans, their sponsoring employers, fiduciaries, insurers, administrators, service providers, insurers and others to monitor and respond to evolving legal and operational requirements and to design, administer, document and defend medical and other welfare benefit, qualified and non-qualified deferred compensation and retirement, severance and other employee benefit, compensation, and human resources, management and other programs and practices tailored to the client’s human resources, employee benefits or other management goals. A primary drafter of the Bolivian Social Security pension privatization law, Ms. Stamer also works extensively with management, service provider and other clients to monitor legislative and regulatory developments and to deal with Congressional and state legislators, regulators, and enforcement officials about regulatory, investigatory or enforcement concerns.

Recognized in Who’s Who In American Professionals and both an American Bar Association (ABA) and a State Bar of Texas Fellow, Ms. Stamer serves on the Editorial Advisory Board of Employee Benefits News, HR.com, Insurance Thought Leadership, Solutions Law Press, Inc. and other publications, and active in a multitude of other employee benefits, human resources and other professional and civic organizations. She also is a widely published author and highly regarded speaker on these matters. Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, Modern and many other national and local publications. Her widely respected publications and programs include more than 25 years of publications on health plan contracting, design, administration and risk management including a “Managed Care Contracting Guide” published by the American Health Lawyers Association and numerous other works on vendor contracting.  You can learn more about Ms. Stamer and her experience, review some of her other training, speaking, publications and other resources, and register to receive future updates about developments on these and other concerns from Ms. Stamer here.

Other Helpful Resources & Other Information

We hope that this information is useful to you.   If you found these updates of interest, you also be interested in one or more of the following other recent articles published on the Coalition for Responsible Health Care Reform electronic publication available here, our electronic Solutions Law Press Health Care Update publication available here, or our HR & Benefits Update electronic publication available here .  You also can get access to information about how you can arrange for training on “Building Your Family’s Health Care Toolkit,”  using the “PlayForLife” resources to organize low-cost wellness programs in your workplace, school, church or other communities, and other process improvement, compliance and other training and other resources for health care providers, employers, health plans, community leaders and others here. If you or someone else you know would like to receive future updates about developments on these and other concerns, please be sure that we have your current contact information – including your preferred e-mail by creating or updating your profile here. You can reach other recent updates and other informative publications and resources.

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©2013 Cynthia Marcotte Stamer.  Nonexclusive right to republish granted to Solutions Law Press, Inc. All other rights reserved.

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