Fourth Circuit Reduces Damages Award in DOL Action Against ESOP Company Owner

In Walsh v. Vinoskey, __F.4th__, 2021 WL 5764250 (4th Cir. Dec. 6, 2021), a matter brought by the Secretary of Labor alleging ERISA violations against fiduciaries of an employee stock ownership plan (ESOP), the district court found that Adam Vinoskey, owner of Sentry Equipment Erectors, Inc., breached his fiduciary duties under ERISA Section 405(a)(1) and (3), as a “co-fiduciary” for Evolve Bank’s fiduciary breaches, where Evolve served as the ESOP’s independent fiduciary and overvalued Sentry stock Vinoskey sold to the ESOP by over $6.5 million dollars. The district court also found Vinoskey liable under ERISA Section 502(a)(5), as a “knowing participant” in a prohibited transaction. The Secretary settled with Evolve and Vinoskey appealed. On appeal, the Fourth Circuit considered whether the district court erred in imposing liability against Vinoskey and in calculating damages.

On the issue of Vinoskey’s liability as a knowing participant in a fiduciary breach, the Fourth Circuit determined that the district court’s finding that Vinoskey knew the offer price was above fair market value was not clear error. Vinoskey had extensive knowledge of Sentry and its prior valuations. The valuation by which he sold his remaining shares to Sentry was based on an almost 40% spike in price from assessments he saw for the past five or six years. There was no significant change in the company’s performance and projections had the company performing about the same, if not slightly worse. The district court did not need to find that Vinoskey “obviously” knew the offer price exceeded fair market value to infer actual knowledge of the underlying circumstances that rendered the transaction unlawful. The court affirmed the district court’s decision on Vinoskey’s liability under ERISA Section 502(a)(5) and did not address whether he was also liable as a co-fiduciary under ERISA Section 405(a)(1) and (3).

On the issue of damages, the Fourth Circuit determined that the district court erred in its conclusions of law that Vinoskey’s liability should not be reduced by the $4.6 million in loans that he forgave the ESOP. When he sold his shares to the ESOP, it was for $10.4 million in cash and a promissory note for $10.3 million. Four years later, he forgave $4.6 million of the ESOP’s outstanding debt. The Fourth Circuit distinguished this case from other cases where courts did not factor in debt cancellation when determining the amount of a defendant’s damages. In the cases relied upon by the district court, the debt cancellation was wholly unrelated to the illegitimate transaction. Vinoskey’s loan forgiveness had a bearing on the ESOP’s loss by reducing its debt. The court offered the following analogy: “if an individual sold a fake painting for $10,000 to be paid with $5,000 cash and a loan for $5,000, and four years later the individual cancelled the $5,000 loan, the restitution value is only $5,000 because the purchaser only paid $5,000 for the fake painting. That is exactly what happened here.” By not crediting Vinoskey’s damages by the amount he forgave the ESOP, the ESOP would get away with a $4.6 million windfall. The court reversed the district court’s final judgment that Vinoskey is jointly and severally liable in the amount of $6.5 million and ordered that he is instead liable for approximately $1.7 million.