The U.S. Department of Labor is urging a U.S. appeals court to reconsider a lawsuit filed against Inland Seafoods, alleging mismanagement of an employee stock ownership plan.
The DOL has filed an amicus brief urging the U.S. Eleventh Circuit Court of Appeals to consider an en banc review of Rani Bolton, et al. v. Inland Fresh Seafood Corporation Of America, Inc., et al., a lawsuit alleging Inland Seafood’s financial situation was misrepresented during a sale of the company to its employees in 2016. The suit was dismissed by U.S. District Court Judge Leigh Martin May in December 2023 on the grounds that the plaintiffs did not exhaust efforts to pursue their claims internally before filing suit.
The dismissal was appealed to the U.S. Eleventh Circuit Court of Appeals on 4 January 2024, and the appeal was filed 15 May. In its 22 May brief, the DOL asked the court to reconsider the precedent that employees must first exhaust internal remedial procedures related to employee stock ownership (ESOP) plans before advancing legal claims under the Employee Retirement Income Security Act (ERISA).
The DOL said the issue “involves a question of exceptional importance,” as there are numerous rulings on the matter it said are contradictory.
“The Eleventh Circuit … stands increasingly alone in its unique and absolute requirement of exhaustion for ERISA statutory violations,” it said.
The DOL argued ESOP managers are employed by companies to administer plans, not interpret federal statutes such as the Employee Retirement Income Security Act. Moreover, due to the terms of their employment, ESOP managers potentially face conflicts of interest in their evaluations of federal statutes such as the one involved in the Inland case.
“ERISA makes fiduciaries personally liable to the plan for losses caused by their breaches. It makes little sense to force participants to bring their statutory grievances to fiduciaries whose personal liability hinges on the outcome,” the brief said.
The DOL said the procedures outlined in ERISA for challenging ESOP structure or management are “facially inapplicable” for dealing with the problems identified with Inland’s plan in the original lawsuit, which accused Inland’s executive team of massively inflating the value of the company, which was sold to employees for USD 92 million (EUR 85 million) to be repaid over 30 years, which the employees said caused over USD 40 million (EUR 37 million) in lost retirement benefits for Inland’s 578 ESOP participants.
“Plaintiffs’ complaint is not that defendants misapplied the plan and improperly denied them individual benefits, but that defendants transgressed ERISA’s fiduciary standards and harmed the plan as a whole,” DOL said. “Even if a plan’s benefit-review procedures could be used to assert statutory violations, plan fiduciaries – aside from potentially being conflicted – often are utterly incapable of providing the full relief enumerated by ERISA. For example, the Inland plan administrator has no inherent power to compel the Inland executives who sold their stock to the ESOP to make restitution to the plan or disgorge their ill-gotten profits. In short, there is no sound basis to require participants to bring their statutory claims to plan fiduciaries who are powerless and disincentivized to do anything about it.”
The appeal itself also challenges a claim by Inland Seafood and its owners for USD 500,000 (EUR 455,000) in compensation for their legal fees. And, it argues the plaintiffs only discovered alleged ERISA violations in September 2022, giving them just two months to seek remediation from the company before the six-year federal statute of limitations was breached.
“[The] exhaustion requirement diminishes the ability of workers … to enforce their rights and protect the security of their retirement accounts, while upending the uniform regulatory regime over employee benefit plans that Congress intended,” it said. “Plaintiffs filed suit within the statutory period, thereby providing defendants fair notice of the claims against them. Defendants cite no authority suggesting that a defendant is also entitled to have any extrajudicial administrative process completed within the statutory period.”
