New York Bank Sued By U.S. Department Of Labor To Recover Losses To Employee Stock Ownership Plan For Which Bank Was Trustee

Archived News Release — Caution: Information may be out of date.

Marine Midland Bank, based in Buffalo, New York, has been sued by the U.S. Department of Labor to recover losses to a North Tonawanda, New York, employee stock ownership plan for which the bank had served as Trustee.

According to James Benages, New England regional director of the U.S. Labor Department’s Pension and Welfare Benefits Administration (PWBA), the bank was the trustee for the Lawless Holding Corporation Employee Stock Ownership Plan (ESOP) established in 1989 by the Lawless Holding Corporation (LHC) of North Tonawanda, New York. The plan was established for the benefit of the employees of that company.

An investigation by PWBA revealed that the ESOP held shares of convertible preferred stock equal to 40 percent of the common shares of Lawless Holding Corporation stock outstanding. Prior to January 24, 1994, a company called Chesapeake Corporation confirmed its interest in acquiring LHC by means of a merger transaction. Included in this transaction was the liquidation of LHC stock held by the ESOP.

Marine Midland Bank, the ESOP’s Trustee, retained a valuation appraisal firm to compute the value of the stock held by the ESOP to make sure that the merger transaction would result in the ESOP receiving the proper price for its LHC stock.

The Labor Department’s suit alleges that the fair market value of the ESOP’s stock shares was understated by the appraisal firm and that the defendant Trustee caused or permitted the plan to enter into the transaction without performing a prudent investigation into the value of the stock. Allegedly, this resulted in the Trustee causing or permitting the ESOP to accept a price per share for the purchase of the stock which did not represent adequate consideration as defined in the Employee Retirement Income Security Act (ERISA).

According to Benages, ERISA protects and governs the administration of employee benefit plans such as pension plans, 401(k) plans, employer provided health insurance plans, and the like. “Needless to say, employee stock ownership plans such as the one in this case are also covered by the law,” he noted.

Specifically, the suit accuses Marine Midland Bank of breaching its fiduciary obligations by failing to discharge its duties with respect to the ESOP solely in the interest of the plan’s participants and beneficiaries. Since the stock was purchased from the ESOP by LHC, which was also the plan’s sponsor, the suit also alleges that the Trustee bank caused or permitted the plan to engage in transactions which it knew or should have known constituted a sale or exchange of property between the plan and a party in interest, namely the company, which benefitted the company rather than the ESOP.

The Department’s suit, which was filed in the U.S. District Court for the Western District of New York on Aug. 31, 1999, seeks the restoration to the plan of all losses resulting from the alleged breaches of fiduciary duty and asks the court to enjoin the defendant from future violations of ERISA.

The Labor Department’s Pension and Welfare Benefits Administration is headquartered in Boston, Mass. The Civil Action Number of this case is: 99-CV-605.

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Archived News Release — Caution: Information may be out of date.

Contact Name: John M. Chavez
Phone Number: 617.565.2075