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Acosta v. Vinoskey

United States District Court, W.D. Virginia, Lynchburg Division

April 17, 2018

R. Alexander Acosta, Plaintiff,
Adam Vinoskey, ET AL., Defendants.



         Congress enacted the Employee Retirement Income Security Act of 1974, or ERISA, to protect employees and the benefit plans employers create for them. Congress did this by imposing high standards of fiduciary duty on plan administrators and banning certain types of transactions with “interested parties.” These transactions with interested parties are banned because they present opportunities for employer self-dealing at the employees' expense. But one specific type of benefit plan envisioned by ERISA is an employee stock ownership plan, or an ESOP. In an ESOP, part of the employees' remuneration is made in shares of their employer's company. Definitionally then, an ESOP requires the very transactions with interested parties that are generally anathema. And so ERISA carves out an exception for ESOPs, allowing these plans if any purchases of the employers' stock are for “adequate consideration.”

         In this case, the Secretary of Labor (“the Secretary”) alleges an employer (“Sentry”), its CEO (“Vinoskey”), and certain other alleged fiduciaries (“Evolve” and “New”) violated ERISA by approving an ESOP's purchase of the employer's stock at an allegedly inflated price. The Secretary now moves for summary judgment on these claims. (Dkt. 78). The defendants respond by moving to exclude the Secretary's expert on “adequate consideration, ” (dkts. 80 & 82), and some of the defendants have additionally moved for summary judgment. (Dkts. 83 & 85). The Court will partially exclude the Secretary's expert testimony because portions of his damages theory are novel and underdeveloped. Concomitantly, the Court will grant the defendants' motions for summary judgment on the claims the Secretary no longer has expert testimony to support. The Court will also grant one of the alleged fiduciaries' motions because no reasonable jury could find he is a de facto fiduciary. However, the Court will deny the parties' motions on the remaining claims because factual disputes (namely whether reliance on a valuation report was reasonable) remain.

         I. Daubert Motions to Exclude the Secretary's Expert

         The Court jointly addresses Vinoskey's and Evolve's motions to exclude the Secretary's expert, Dana Messina. (Dkts. 80 & 82). “Because the testimony defendants seek to strike is essential for plaintiffs to withstand defendants' summary judgment motion, the court will address [these] motion[s] first.” Ruffin v. Shaw Indus., Inc., 149 F.3d 294, 296 (4th Cir. 1998).

         A. Legal Standard

         “The Federal Rules of Evidence provide that a qualified expert witness ‘may testify in the form of an opinion or otherwise if [his] scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue.'” United States v. Landersman, No. 16-4066, 2018 WL 1514417, at *13 (4th Cir. Mar. 28, 2018) (quoting Fed.R.Evid. 702). “Implicit in the text of Rule 702, . . . is a district court's gatekeeping responsibility to ‘ensure that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand.'” Nease v. Ford Motor Co., 848 F.3d 219, 229 (4th Cir. 2017) (alteration omitted, emphasis in original) (quoting Daubert v. Merrell Dow Pharms., 509 U.S. 579, 597 (1993)). “With respect to reliability, the district court must ensure that the proffered expert opinion is based on scientific, technical, or other specialized knowledge and not on belief or speculation, and inferences must be derived using scientific or other valid methods.” Id. (internal quotation marks and emphasis omitted). With respect to relevance, the district court must ensure the proffered testimony will help “the trier of fact to understand the evidence or to determine a fact in issue.” Daubert, 509 U.S. at 591.

         Here, the parties are primarily concerned with the reliability of the Secretary's expert, and so the Court will also focus on that prong of its gatekeeping responsibility. Rule 702 provides expert testimony is only admissible if (1) “the testimony is based upon sufficient facts or data, ” (2) “the testimony is the product of reliable principles and methods, ” and (3) “the expert has reliably applied the principles and methods to the facts of the case.” Likewise, the Fourth Circuit has directed district courts to “consider whether the expert witness theory or technique: (1) can be or has been tested; (2) has been subjected to peer review and publication; (3) has a high known or potential rate of error; and (4) is generally accepted within a relevant scientific community.” Bresler v. Wilmington Tr. Co., 855 F.3d 178, 195 (4th Cir. 2017) (citation and internal quotation marks omitted); see also Daubert, 509 U.S. at 593-94. This list of factors is not exhaustive. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999). Importantly, “courts may not evaluate the expert witness' conclusion itself, but only the opinion's underlying methodology.” Bresler, 855 F.3d at 195. If the methodology is reliable, further criticisms of the expert's testimony will go to its weight, not its admissibility.

         Finally, the Court has increased discretion in how to perform its gatekeeping role in bench trials: “There is less need for the gatekeeper to keep the gate when the gatekeeper is keeping the gate only for himself.” United States v. Brown, 415 F.3d 1257, 1269 (11th Cir. 2005); see also 29 Charles Wright & Arthur Miller, Fed. Prac. & Proc. Evid. § 6270 (2d ed.) (“[S]ince Rule 702 is aimed at protecting jurors from evidence that is unreliable for reasons they may have difficulty understanding, in a bench trial there is greater discretion regarding procedure and even the stringency of gatekeeping.”). But it is error for a district court to merely consider the Daubert factors in determining the weight attributable to certain evidence, a separate admissibility determination “still must be made at some point.” Metavante Corp. v. Emigrant Sav. Bank, 619 F.3d 748, 760 (7th Cir. 2010).

         B. Discussion

         Messina, the Secretary's expert, calculates two categories of damages allegedly suffered by the ESOP: (1) the amount overpaid for Sentry shares, and (2) the loss in value to existing plan participants' shares because of the structure of the purchase. (Dkt. 79-19 at ECF 4-5). The report calculates the first category of damages by determining a fair market value for Sentry stock and then asking how much more than that the ESOP actually paid. The Court finds Messina's testimony concerning this category of damages will be partially admissible. Messina's second category of damages is calculated by multiplying the amount allegedly overpaid per stock by the existing shares held by plan participants. These damages are supposed to represent a separate harm: the loss in value to the existing shares because of the transaction's structure. Because the Court finds this methodology is unreliable and underdeveloped, it will be excluded. The defendants' other objections to the admissibility of Messina's testimony will be overruled.

         1. Is the testimony the product of reliable principles and methods?

         The Court will overrule the defendants' objections to the reliability of the general method Messina used in calculating his first category of damages, i.e., those damages the ESOP allegedly suffered by overpaying for the new Sentry stock. Messina calculated these damages by subtracting his calculation of the fair market value of the shares purchased by the ESOP from the price the ESOP actually paid. This is a common approach. See, e.g., Perez v. Bruister, 823 F.3d 250, 265 (5th Cir. 2016) (“The court's basic approach was to estimate the FMV of the BAI stock at the time of each transaction and deduct it from the higher amount the ESOP actually paid. This is the approach generally used by courts to compute overpayments.” (citation omitted)). Messina determined the fair market value of Sentry shares with a discounted cash flow model and a comparison to a guideline company. (Dkt. 79-19 at ECF 27-33). Other courts have accepted the use of these models. See, e.g, Brundle on behalf of Constellis Employee Stock Ownership Plan v. Wilmington Tr. N.A., 241 F.Supp.3d 610, 618 (E.D. Va. 2017) (referring to these models as “two basic methodologies” that valuation professionals “commonly employ”). As discussed below, Messina may not have reliably applied the methodology, but the methodology itself was reliable and there is no reason to exclude this first category of damages in toto.

         Messina's second category of damages, i.e., the damages the ESOP allegedly suffered from a decrease in the value of the Sentry stock it already owned, suffers from a more fundamental problem. Messina calculated these losses by multiplying the alleged overpayment per share from his first category of damages by the number of shares existing at the time of the transaction. (Dkt. 81-8 at ECF 36). This calculation falters for two primary reasons. First, it double counts the losses allegedly caused by the defendants. The defendants correctly demonstrate that any reduction or increase in the first category has a proportional effect on this second category. (See dkt. 79-26 at ECF 43). This is problematic because it effectively claims the ESOP overpaid twice: once for the shares it was purchasing in this transaction and once for the shares it already owned. Messina is never able to sufficiently explain why he is applying the overpayment damages to the shares the ESOP already owned. In his rebuttal report, he compares his methodology to a hypothetical situation where joint owners of a car receive a refund due to a recall on the car. (See dkt. 79-27 at ECF 21). He correctly notes they should split those damages. However, his analogy falls flat in this case because the first category of damages already includes the parties' entire alleged overpayment: the overpayment per share multiplied by all of the shares purchased. If the joint car owners requested the entire refund be sent to one of the two owners, the other could not come asking for a separate refund. Perhaps realizing these problems, the Secretary's opposition focuses on a separate “corroboration” for his calculation. (Dkt. 92 at ECF 22-24). But this corroboration is based on a different methodology, and does not support the unreliable methodology actually used to calculate this category of damages.

         Second, despite the Secretary's allegations of loss in stock value to the existing employees, the account balances of the existing Sentry plan participants increased as a result of the transaction. (Dkt. 79-11 at ECF 64 (“Their account balances probably went up because there was a significant amount of cash utilized to purchase the shares, and those shares would have immediately been allocated to their accounts as of year end. Their share value may have dropped, but I think the value of their account balances would have stayed consistent or gone up, because they would have had more shares in their accounts.”); dkt. 81-7 at ECF 42-44; dkt. 81-17 at ECF 4-5). It is difficult to see how the existing shareholders could have incurred this second category of damages if their accounts increased. Even if they hypothetically did incur some damage, for example, if their accounts would have increased more without the transaction, Messina's methodology does not provide any basis to figure out what those damages would be. His methodology would produce the same damages regardless of whether the stock was purchased with cash or debt; it is entirely focused on the amount of overpayment, not where that money came from.

         Finally, the Secretary briefly raises other defenses concerning the relevance of its calculations and the tax ramifications of the deal's structure.[1] But none of these arguments, even if credited, can rehabilitate the problems with reliability identified above. The Secretary has not provided any examples of this methodology being used or accepted elsewhere, and the Court has found none. Accordingly, the Court concludes the methodology used to calculate the second category of damages is unreliable, and so it will be excluded here. The Court addresses the defendants' remaining objections insofar as they concern the first category of damages.

         2. Has the expert reliably applied the principles and methods to the facts?

         Messina's methodology must not just be reliable, but it also must be reliably applied. Fed.R.Evid. 702(d). The defendants allege five different examples of unreliable application. One of these, the first discussed below, is significant enough to warrant exclusion of part of Messina's testimony. The other objections may provide reasons to assign less weight to Messina's testimony, but do not provide a basis to exclude it.

         First, Messina complemented his discounted cash flow valuation of Sentry with a “market comparable” methodology. (Dkt. 79-19 at ECF 29). This methodology involves finding comparable companies, and then making adjustments to analogize them to Sentry. The defendants criticize Messina for only using one publicly traded company as a comparison. This criticism is valid: Normally a “market comparable” approach would look to the average of a group of comparable companies, not just one other company. See, e.g., Horn v. McQueen, 353 F.Supp.2d 785, 826 (W.D. Ky. 2004) (“[W]e have used as few as two or three guideline companies . . . . Our confidence rises sharply when we can find four to seven good guideline publicly traded companies.” (quoting Shannon P. Pratt, et al., Valuing a Business: The Analysis and Appraisal of Closely Held Companies 233 (4th ed. 2000))); In re Joy Recovery Tech. Corp., 286 B.R. 54, 79 (Bankr. N.D.Ill. 2002) (“There should be at least several relevant transactions before a useful comparison can be made.”); Estate of Joyce C. Hall, 92 T.C. 312, 339 (1989) (“[I]t is inconceivable to us that a potential buyer of Hallmark stock would consider only one alternative ‘comparable.'”). This flaw does not necessarily require exclusion; it could simply lead the factfinder to place less weight on that part of a valuation. See Hartmann v. United States, No. 97-1335, 1999 WL 550252, at *2 (C.D. Ill. June 24, 1999) (noting Hall did not require exclusion of the expert report simply because it only relied on one comparable company). Here, however, the Court concludes the application of this methodology is unreliable both because there is only one other company used and because that company is insufficiently comparable to Sentry. See, e.g., Metabyte, Inc. v. Canal Technologies, S.A., No. C-02-05509, 2005 WL 6032845, at *3 (N.D. Cal. June 17, 2005) (“[The expert]'s selection of TiVo as the only ‘guideline' company in itself renders his analysis unreliable. The differences between TiVo and MNI are so significant that [the expert]'s utilization of the ratio between the market capitalizations of the two companies for calculating MNI's value renders [the expert]'s analysis unreliable.”). Messina's comparable company is Key Technology. (Dkt. 79-19 at ECF 29). This company derives approximately 44% of its revenue from conveyor systems similar to those produced by Sentry, but approximately 56% of its revenue from automated inspection systems that are distinct from Sentry's product line. (Dkt. 79-26 at ECF 34). Likewise, over 50% of Key Technology's revenue is generated internationally, while all of Sentry's business is domestic. (Id.). Taken by themselves, these distinctions would normally go to the weight this portion of Messina's methodology deserves. But because Messina only utilizes one comparable company, the Court finds this market comparable approach was unreliably applied and so it will be excluded.[2]

         Second, the defendants claim Messina disavowed the Secretary's guidance on how to value businesses under ERISA. Specifically, they repeatedly argue Messina should have relied on IRS Revenue Ruling 59-60, guidance Messina did not find relevant. The Secretary has Proposed Regulations that have some overlap with this IRS ruling, but has never adopted them. The Secretary correctly points out this guidance is all unpromulgated, and Messina's approach considers similar factors by considering “fair market value” and ERISA's definition of “adequate consideration.” While some courts have still found these sources helpful, they are not mandatory, and Messina did not need to cite to the unpromulgated regulations or the IRS ruling in order to apply his methodology reliably. See Donovan v. Cunningham, 716 F.2d 1455, 1473 (5th Cir. 1983) (“Judicial adoption of this revenue ruling is no substitute for the regulations the Secretary has never promulgated . . . . Appraisal of closely-held stock is a very inexact science; given the level of uncertainty inherent in the process and the variety of potential fact patterns, we do not think a court should require fiduciaries to follow a specific valuation approach as a matter of law under [ERISA] Section 3(18).”). Accordingly, this objection to admissibility will be overruled.

         Third, the defendants criticize Messina for his application of a discount to Sentry's value for lack of control. They contend the ESOP did purchase a controlling interest in Sentry, and it paid more for the interest because it was controlling. Additionally, the defendants note Messina has applied an identical discount in cases that were factually different. Generally, there are multiple factors that may indicate shareholder control, including the shareholders' abilities to: “unilaterally direct corporate action, select management, decide the amount of distribution, rearrange the corporation's capital structure, and decide whether to liquidate, merge, or sell assets.” Brundle, 241 F.Supp.3d at 638. Here, the parties dispute which of these aspects of control the ESOP purchased. The defendants claim the ESOP was able to replace the board; Messina focuses on the control Vinoskey and management retained over the company. Whether or not the ESOP purchased control is a fundamentally factual dispute. See Estate of Godley v. C.I.R., 286 F.3d 210, 215 (4th Cir. 2002) (“Our view that the question of whether to apply a minority discount is factual in nature is one that is widely shared.”). Accordingly, Messina's disagreements with the defendants do not provide a basis for exclusion of his testimony and so this dispute will be left for trial.

         Fourth, the defendants argue Messina's fair market valuation of Sentry is facially unreliable because it is less than the liquidation value of the Sentry's assets and less than half of the appraised value made at the time of stock purchase. The latter of these contentions can be dismissed quickly-the Secretary's general position is the initial appraisal was flawed in many ways, and so it is unsurprising that his valuation is significantly less than the defendants'. The former is more substantial-the Eastern District of Virginia has held that an expert's methodology is “questionable on its face” when the valuation was less than the value of the company's assets. See Chesapeake Corp. v. Sainz, No. 3:00cv816, 2002 U.S. Dist. LEXIS 28702, at *27-*28 (E.D. Va. Mar. 19, 2002). But the defendants overstate their argument here: Messina's valuation of Sentry ($20.8 million) is less than Vinoskey's calculation of Sentry's liquidation value ($30.3 million), but not less than Messina's own calculation of Sentry's liquidation value ($19.9 million). (Compare dkt. 79-26 at ECF 39 with dkt. 79-27 at ECF 20). This still raises questions-Messina is saying that Sentry's value as an operational company is only $1 million more than the “fire-sale price” of its assets “if the company was under extreme need to sell with time constraints and significant discounts.” (Dkt. 81 at ECF 24-26). The defendants understandably make much of this, but the defendants' original comparison is of (Messina's) apples and (the defendants') oranges. This is different than the facial unreliability in Sainz, and is better considered as going to the weight of testimony. This objection to admissibility will be overruled.

         Fifth and finally, the defendants put forward a battery of other alleged errors. None of them provide a basis to exclude Messina's testimony. The defendants claim Messina made transcription errors in his calculations of working capital as a percentage of revenue. These alleged errors flow into Messina's valuation of Sentry's fair market value and from there into his first category of damages. The parties also dispute other assumptions that flow into the working capital percentage, although any error here is less clear. Other alleged mistakes are smaller: Messina's report contradictorily describes Sentry both as a non-dividend paying company and as having a history of paying large dividends. Messina's control discount is also allegedly justified by a factor that he considered elsewhere. Messina, at one point, appears to compare seven years of Sentry's financial information to six years of a comparable company's. While the Secretary has not provided convincing responses to any of these mistakes, they are not significant enough to undermine Messina's testimony. See Bresler, 855 F.3d at 196 (“[C]hallenges to the accuracy of [the expert]'s calculations ‘affect the weight and credibility' of [the expert]'s assessment, not its admissibility.” (citations omitted)).[3]

         In conclusion, only one flawed application is sufficiently unreliable to merit exclusion: Messina's “market comparable” approach. The other alleged errors will go to the weight the Court assigns to Messina's testimony.

         3. Is Messina qualified?

         The defendants also argue Messina is not qualified to testify as an expert. In order to be excluded, “the purported expert must have neither satisfactory knowledge, skill, experience, training nor education on the issue for which the opinion is proffered.” Kopf v. Skyrm, 993 F.2d 374, 377 (4th Cir. 1993) (internal quotations omitted). The Court must “liberally judge[]” the expert's qualifications when determining whether to exclude him. Id.

         While the defendants concede Messina's general experience in private equity, they argue this experience is not relevant to the more specific ERISA context. Vinoskey repeatedly objects that Messina “holds no business valuation certifications, is not a Certified Public Accountant or Chartered Financial Analyst, and is not a member of any of the national ESOP organizations.” (Dkt. 81 at ECF 6, 9). Evolve relatedly criticizes Messina for not paying enough attention to the internal standards of the ESOP community. Variations on this theme fill the defendants' briefs. (See dkt. 81 at ECF 6, 11 (arguing Messina is unqualified because he has only worked with one ESOP); id. at 10 (arguing Messina does not meet the Secretary's self-imposed standards)).

         Despite Messina's limited experience with ESOPs, the Court finds he is sufficiently qualified to testify about the value of Sentry. He has a M.B.A. from Harvard Business School and more than twenty-five years of experience in valuing, buying, and selling businesses. (Dkt. 79-19 at ECF 37). Messina worked in investment banking before starting his own firm that provides “advice in connection with leveraged recapitalizations, restructurings, and other complex financial transactions.” (Id.). Multiple other courts have found Messina qualified.[4]

         Evolve separately argues Messina is unqualified to opine on “whether Evolve met its fiduciary obligations when acting as the Special Independent Trustee for [the ESOP].” (Dkt. 82 at ECF 4-6). Evolve notes that Messina focused on the standards in the private equity industry, and his first expert report did not discuss ERISA “trustee fiduciary process and procedure.” (Id. at ECF 5-6). It was only after the defendant's expert, Howard Kaplan, criticized this that he included opinions on trustee process and procedure in his rebuttal report. (Dkt. 93-1). The Secretary responds by relying on Messina's vast experience advising in private equity transactions; the Secretary maintains this experience is relevant because “the private market has bearing on the prudence of ERISA transactions.” (Dkt. 93 at ECF 9).

         The Court finds Messina's experience with purchasing closely held companies provides guidance on the sort of diligence required in this transaction. This is especially true, as the Secretary correctly notes, because “ERISA's standards for fiduciaries . . . are at least as high as the due diligence standards followed in private industry.” (Dkt. 93 at ECF 9); Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 358 (4th Cir. 2014) (fiduciary duties under ERISA are “the highest known to the law”). To the extent Messina's testimony is inappropriately shaped by standards ...

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