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Marine Midland Bank, based in Buffalo, New
York, has been sued by the U.S. Department of Labor to recover losses to a
North Tonawanda, New York, employee stock ownership plan for which the bank had
served as Trustee.
According to James Benages, New England regional
director of the U.S. Labor Department’s Pension and Welfare Benefits
Administration (PWBA), the bank was the trustee for the Lawless Holding
Corporation Employee Stock Ownership Plan (ESOP) established in 1989 by the
Lawless Holding Corporation (LHC) of North Tonawanda, New York. The plan was
established for the benefit of the employees of that company.
An investigation by PWBA revealed that the ESOP
held shares of convertible preferred stock equal to 40 percent of the common
shares of Lawless Holding Corporation stock outstanding. Prior to January 24,
1994, a company called Chesapeake Corporation confirmed its interest in
acquiring LHC by means of a merger transaction. Included in this transaction
was the liquidation of LHC stock held by the ESOP.
Marine Midland Bank, the ESOP’s Trustee,
retained a valuation appraisal firm to compute the value of the stock held by
the ESOP to make sure that the merger transaction would result in the ESOP
receiving the proper price for its LHC stock.
The Labor Department’s suit alleges that the
fair market value of the ESOP’s stock shares was understated by the
appraisal firm and that the defendant Trustee caused or permitted the plan to
enter into the transaction without performing a prudent investigation into the
value of the stock. Allegedly, this resulted in the Trustee causing or
permitting the ESOP to accept a price per share for the purchase of the stock
which did not represent adequate consideration as defined in the Employee
Retirement Income Security Act (ERISA).
According to Benages, ERISA protects and governs
the administration of employee benefit plans such as pension plans, 401(k)
plans, employer provided health insurance plans, and the like. “Needless
to say, employee stock ownership plans such as the one in this case are also
covered by the law,” he noted.
Specifically, the suit accuses Marine Midland Bank
of breaching its fiduciary obligations by failing to discharge its duties with
respect to the ESOP solely in the interest of the plan’s participants and
beneficiaries. Since the stock was purchased from the ESOP by LHC, which was
also the plan’s sponsor, the suit also alleges that the Trustee bank
caused or permitted the plan to engage in transactions which it knew or should
have known constituted a sale or exchange of property between the plan and a
party in interest, namely the company, which benefitted the company rather than
the ESOP.
The Department’s suit, which was filed in the
U.S. District Court for the Western District of New York on Aug. 31, 1999,
seeks the restoration to the plan of all losses resulting from the alleged
breaches of fiduciary duty and asks the court to enjoin the defendant from
future violations of ERISA.
The Labor Department’s Pension and Welfare
Benefits Administration is headquartered in Boston, Mass. The Civil Action
Number of this case is: 99-CV-605. |
