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.

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.

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.