Second Circuit Affirms Dismissal of ESOP Prohibited Transaction Lawsuit for Lack of Standing

In Plutzer v. Bankers Trust Company of South Dakota, et al., No. 22-561-CV, 2022 WL 17086483 (2d Cir. Nov. 21, 2022), Plaintiff-Appellant Edward Plutzer, on behalf of the Tharanco Group, Inc. Employee Stock Ownership Plan (the “Plan”), sued Bankers Trust Company of South Dakota, LLC, the Plan’s trustee, as well as senior directors and officers of Tharanco, who he alleged sold overpriced stock to the Plan. In April 2015, the Plan bought 100% of Tharanco’s stock for $133,430,000 financed by a loan from Tharanco to the Plan (“the Transaction”). Plutzer alleged that the Plan overpaid for Tharanco. He sued the defendants for causing and engaging in a prohibited transaction under ERISA as well as for breaches of fiduciary duty and related violations. The district court entered “a judgment dismissing the complaint for lack of jurisdiction, concluding that Plutzer had failed to plead Article III standing as the complaint lacked sufficient allegations of a concrete and particularized actual injury in fact. The district court further concluded that even if Plutzer had pleaded an injury in fact, he had failed to plead sufficient facts such that the injury could be traced to the defendants.” The Second Circuit affirmed.

The court explained that the allegation of overpayment constitutes an injury in facto for standing purposes, but even if it may constitute a sufficient injury in fact in the general case, the complaint here does not adequately allege that an overpayment occurred. Though Plutzer pointed to post-transaction equity valuations of Tharanco (net of Tharanco’s loan to the Plan) over a four-year period which ranged from $9,800,000 to $30,800,000, the court found no reasonable inference can be drawn from these up and down valuations. Plutzer also alleged that the Plan paid a “control premium” for Tharanco, even though it did not initially obtain control over the company. The court found that Plutzer did not allege any facts suggesting that the Plan actually paid a control premium; he only alleged that the Plan did not obtain control. Finally, Plutzer alleged that Bankers Trust relied on unreasonable financial projections, used inappropriate valuation methods, and did not conduct sufficient diligence. The court found that these allegations are speculative and conclusory because he failed to specify what errors the company committed. Because Plutzer failed to adequately allege an injury in fact, the district court properly dismissed the case for lack of standing.