David R.  Johanson

Hawkins Parnell Wins Significant ERISA Trial Against U.S. Government in ESOP Valuation Case

November 18, 2021 – Press Release

November 18, 2021 (Honolulu, HI) – On September 17, 2021, Hawkins Parnell & Young secured a complete victory for its clients Brian J. Bowers, Dexter C. Kubota, and Bowers + Kubota Consulting, Inc. (B+KC) in an Employee Retirement Income Security Act of 1974, as amended, (ERISA), action brought by the Secretary of the United States Department of Labor (DOL) following a bench trial in June 2021 in the U.S. District Court for the District of Hawai’i. This defense victory was proceeded by a seven-year DOL investigation that the Los Angeles Regional Office of the Employee Benefits Security Administration (EBSA) initiated allegedly in late December 2014.

The DOL and EBSA investigation started after a supervisory investigator asked his subordinate to find some employee stock ownership plan and trust (ESOP) companies to investigate in Hawai’i. The DOL investigation focused on an ESOP transaction that closed in December of 2012. Before and following the opening of the investigation, the DOL and EBSA opened 16 investigations targeting the trustee and independent fiduciary who closed the Hawai’i ESOP transaction. Business owners who have availed themselves of the ERISA provisions to navigate business succession through a sale to an ESOP have long been subject to the DOL routinely targeting these sales as improper and occurring at inflated values. Despite the growth of an industry dedicated to developing legally compliant transactions for ESOP sales that include effective employee communications about an employee ownership culture and related topics, the DOL has attacked the sellers in dozens of cases in federal district courts throughout the United States. The decision in favor of Mr. Bowers, Mr. Kubota, and B+KC by Senior Judge Susan Oki Mollway is one of the first to reject the DOL’s ESOP legislation through litigation strategy during the past four decades and hold that the selling shareholders acted in full compliance with ERISA and applicable law. The decision is virtually one of a kind during the past 50 years. 

Lead trial counsel David R. Johanson noted, “the tyranny of the DOL’s use of the threat of litigation to discourage business owners from establishing and selling to ESOPs in legitimate transactions designed to comply with the complex rules of ERISA has now ended. This litigation proved just how valuable the ESOP has been as a stock-based employee benefit plan for B+KC, the ESOP plan sponsor, and its employees during the past almost ten years”.

The Court held that Mr. Bowers and Mr. Kubota did not inflate the projections used in the valuation process, properly monitored the institutional trustee that approved the December 2012 ESOP transaction, and did not participate in a prohibited transaction under ERISA.

“The decision supports the Congressional intent to allow an appropriate path to liquidity through an ESOP sale that respects the ERISA standards for such transactions,” said Hawkins Parnell partner Rachel J. Markun, who advised Mr. Johanson and the trial team on ERISA matters.

“The decision will operate to both encourage employee ownership and alter the way that ESOP cases are litigated to the benefit of business owners and companies who have been targeted unfairly by the DOL’s overreaching allegations of wrongdoing,” added Mr. Johanson.

Hawkins Parnell litigators Douglas A. Rubel and Robert S. Thompson assisted in the victory with support by local counsel William M. Harstad of Carlsmith Ball LLP. Scott Batterman of Clay Chapman Iwamura Pulice & Nervell provided independent legal advice to the ESOP plan sponsor and ESOP throughout the litigation.

The DOL chose not to appeal. This decision by the DOL not to appeal underscores the strength of the federal court ruling in favor of Messrs. Bowers and Kubota and B+KC.