Thomas Perez, Secretary v. Herbert Bruister, 823 F.3d 250

Background

Bruister owned Bruister & Associates, Inc. (BAI), created an ESOP, and between 2004–2005 caused the ESOP to buy 100% of BAI stock in three challenged transactions where the seller was Bruister Family LLC (BFLLC).
Trustees for the ESOP included Bruister (owner/operator), Amy Smith (employee), and Jonda Henry (outside CPA); valuations used to set price were performed by Matthew Donnelly.
Plaintiffs (DOL Secretary and participant Sealy) alleged trustees breached ERISA fiduciary duties and engaged in prohibited transactions by causing the ESOP to overpay for stock based on inflated valuations and conflicted processes.
After a 19-day bench trial, the district court found breaches of the duties of loyalty and prudence, prohibited transactions, and awarded equitable restitution of $4,504,605.30 (overpayment) plus prejudgment interest; BFLLC was held jointly and severally liable for the cash it received.
On appeal the Fifth Circuit affirmed liability and most remedial rulings, clarified the applicable tests for ESOP fiduciaries relying on expert valuations, and modified concurrent judgments into a single consolidated judgment.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Standing of participant-plaintiff (Sealy) to sue on behalf of ESOP	Sealy may pursue plan-wide relief under ERISA §502(a)(2); relief benefits the plan	Defendants argued Sealy needed class safeguards or lacked standing to represent absent beneficiaries	Court: Sealy had standing; Secretary’s joinder eliminated concerns about protecting absent participants
Whether Bruister was an ERISA fiduciary for the transactions	Plaintiffs: Bruister functionally exercised authority/control (two-hats doctrine) despite abstaining from votes	Bruister: abstention and seller role preclude fiduciary status	Court: affirmed functional fiduciary status due to participation, influence, and communications that affected valuations
Breach of fiduciary duties and prohibited transactions (reliance on Donnelly)	Plaintiffs: trustees failed prudently to investigate Donnelly, hid information, and permitted conflicts → breaches and sale lacked adequate consideration under §408(e)	Defendants: reliance on Donnelly (and later expert overlap) was reasonable; FMV ultimately fell within range so no breach	Court: affirmed breaches—fiduciaries did not conduct prudent investigation or reasonably justify reliance; defendants failed to prove adequate consideration
Remedy: equitable restitution v. rescission; computation of damages	Plaintiffs: measure damages as amount ESOP overpaid (FMV vs. contract price) rather than rescission	Defendants: rescission or offset by unpaid debt/loan forgiveness; challenge to FMV method and inclusion of debt/interest	Court: rescission denied; equitable restitution affirmed (overpayment measure). Debt unpaid/forgiven does not reduce recoverable loss; district court’s FMV averaging approach acceptable

Key Cases Cited

Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983) (describing ESOP mechanics and standard for adequate consideration/prudent investigation)
Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000) (factors for reasonable reliance on expert valuation)
LaRue v. DeWolff, Boberg & Assocs., 551 U.S. 248 (2007) (participant may recover for losses to individual account caused by fiduciary breach)
Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985) (ERISA §502(a)(2) remedies inure to the plan, not individual beneficiaries)
Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985) (duty of loyalty; fiduciaries must avoid conflicts and place beneficiaries’ interests first)
Reich v. Lancaster, 55 F.3d 1034 (5th Cir. 1995) (two-hats doctrine and mixed question standard for fiduciary status)
Henry v. Champlain Enters., Inc., 445 F.3d 610 (2d Cir. 2006) (adequate consideration and interplay of FMV and good faith)
Henry v. U.S. Trust Co. of Cal., N.A., 569 F.3d 96 (2d Cir. 2009) (debt-financing of ESOP purchases does not reduce recoverable damages when stock was overpaid)