The United States Court of Appeals for the 11th Circuit has ruled against five employees of seafood processor Inland Seafood, which now conducts business as Inland Foods, who alleged that the company’s leadership overvalued 100,000 shares of common stocks they sold back to the company within the framework of its employee stock ownership plan.
“As a result, the participants’ benefits were allegedly worth less than they would have been had the plan purchased the shares at a price commensurate with their fair market value,” the court explained in its ruling. “The plaintiffs also alleged that the trustee failed to conduct proper due diligence before settling on the purchase price. The plaintiffs sought restoration of the plan’s losses, disgorgement of the director and officers’ ill-gotten gains, and other forms of equitable relief.”
The appeals court affirmed that a lower court was right to dismiss the lawsuit back in 2023, when it determined that the employees had not exhausted “their administrative remedies” in resolving their issues. However, the appeals court left the door open for the employees to file suit again if those administrative remedies prove fruitless.
The Inland Foods employee stock ownership plan was created in 2016, when the Atlanta, Georgia, U.S.A.-based company took out a USD 92 million (EUR 79 million) loan to purchase common stock from four officers and directors. The company would then distribute those stocks to employees’ pension accounts based on tenure, so the longer an employee had worked at Inland Foods, the more ownership of the company they would receive. Like other stock ownership plans, this meant the value of each individual’s pension was directly tied to the company’s stock value.
Five employees filed suit, claiming that leadership misrepresented the company’s sales projections and inventory to boost the value of the stocks they sold back, effectively removing tens of millions of dollars in value from the pension plan.
However, the stock ownership plan included administrative claims procedures for resolving issues like that, and in 2023, a district court judge dismissed the lawsuit, agreeing with defendants that the employees had not exhausted those administrative remedies before filing suit.
The plaintiffs filed an appeal in 2024, challenging the requirement that they follow the internal process to conclusion before filing suit. They also challenged the lower court’s decision not to grant the plaintiffs a stay while they pursued an administrative claim.
The U.S. Department of Labor also filed a brief in favor of the plaintiffs, arguing that the administrative procedures outlined in the plan were “inapplicable” to the issue at hand.
In the recent 15 October opinion, the 11th Circuit Court of Appeals upheld the substance of the district court's opinion, affirming that the employees needed to try the internal administrative process first before suing.
“After reviewing the parties’ briefs and the record, and with the benefit of oral argument, we agree with the district court that dismissal was warranted because no valid excuse relieves the plaintiffs of that obligation,” the court stated.
Still, the employees may have room for recourse.
The appeals court remanded the case back to the district court to decide whether the plaintiffs can resume their lawsuit if they are unsatisfied by the administrative process.
“Whether the plaintiffs may return to federal court after exhausting the plan’s claims procedures should be decided by the district court, at least in the first instance,” the court stated.
