Walsh v. Reliance Trust Company
2:19-cv-03178
D. Ariz.Feb 13, 2023Background
- In 2014 RVR (doing business as Cruise America/Cruise Canada) created an ESOP to buy 100% of company stock; the ESOP paid $105 million and financed the purchase with a long-term loan from RVR; sellers (the Smalley brothers and related trusts) received seller notes and warrants that allowed rapid reacquisition/dilution.
- Chartwell advised the directors (Randall and Robert Smalley) on forming the ESOP and introduced Reliance Trust as the independent trustee; Reliance engaged SRR (valuation) and K&L Gates (counsel).
- Negotiations: Reliance began substantive diligence in mid-April 2014 and within weeks offered ~$100M; final contract closed May 28, 2014 at $105M despite terms (severance, warrants, incentive rights, trustee/trust structure) that left the directors with significant indirect control and dilution power.
- Secretary of Labor sued Reliance and the Director Defendants under ERISA, alleging prohibited transactions and fiduciary breaches based principally on the claim that the ESOP overpaid (Secretary’s valuation ≈ $15M) and defendants failed to protect the plan.
- The court resolved numerous pretrial discovery/evidentiary disputes, denied most motions in limine and summary judgment motions (with limited partial grant), and set the case for trial due to numerous material factual disputes about valuation, process, and motivations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sealing of discovery/expert materials | Secretary filed many documents; opposes blanket sealing because materials central to claims should be public | Reliance/Directors/SRR claim confidential business processes and financials warrant sealing | Motions to seal denied without prejudice; court applies Ninth Circuit "compelling reasons" standard for dispositive/tangential filings and ordered targeted redactions or joint motion identifying specific sealed portions |
| Expert testimony on legal conclusions | Secretary: exclude expert statements that purport to state legal conclusions or interpret ERISA duties | Defendants: experts may give industry-standards and fact-based opinions; pure legal conclusions will be handled at trial | Motion denied without prejudice; court will exclude pure legal conclusions at trial but allow factual/industry opinion testimony and rule contextually |
| Use of post-transaction stock performance | Secretary: post-closing performance irrelevant to whether consideration was adequate at the time | Defendants: post-performance informs reasonableness of projections and damages | Motion denied without prejudice; post-transaction events not probative of prudence at time but may be relevant to damages and other issues |
| Admissibility of draft Reliance policy | Secretary: use draft to show Reliance departures from policy/practice | Reliance: draft was never adopted and has limited probative value | Denied in part; draft may be used with foundation (e.g., for cross-examination) but not automatically excluded |
| Admissibility of financial advisor notes and emails | Secretary: notes/emails show what advisors knew and Reliance’s concerns; admissible as recorded recollection/business record or nonhearsay to show knowledge | Directors: hearsay, Chartwell not agent, defendants unaware of emails | Motions to exclude denied; notes likely admissible under recorded recollection/business-record exceptions; emails admissible against Reliance and possibly for other purposes at trial |
| Exclusion of Secretary’s experts (Wert, Wazzan) | Defendants: experts unqualified, unreliable, or opine on legal issues and valuation incorrectly | Secretary: experts have domain experience and used accepted methodologies; deficiencies go to weight, not admissibility | Motion denied; both experts admissible subject to cross-examination and court’s bench-trial gatekeeping flexibilities |
| Reliance’s fiduciary status & prohibited transaction | Secretary: rule Reliance a fiduciary who caused the ESOP to enter a prohibited transaction | Reliance: disputes narrowed; Reliance already admitted fiduciary role | Summary judgment granted to establish Reliance was ESOP fiduciary and caused the transaction (liability/exemption issues remain) |
| Director Defendants’ fiduciary status (incl. Bensen) & duty to monitor | Secretary: Directors (Smalleys and Bensen) were fiduciaries who had duty to monitor Reliance; they ignored red flags | Directors: Bensen lacked authority; duty narrow and satisfied | Court granted summary judgment that the Director Defendants (including Bensen) acted as fiduciaries in retaining Reliance but denied summary judgment on whether they breached the duty to monitor (numerous factual disputes/"red flags" exist) |
| Co-fiduciary timing / backdating ESOP committee charter | Secretary: backdated charter (May 28, 2013) makes Directors co-fiduciaries earlier | Directors: date was a typographical error (should be 2014) | Court refused to hold Directors co-fiduciaries as of 2013 on this record; temporal co-fiduciary questions reserved for trial |
| Validity of indemnification/advancement provisions | Secretary: indemnification provisions void as against public policy and ERISA | Defendants: indemnities limited by caveats and provided by RVR (not plan) so may be lawful | Summary judgment denied; provisions not facially void—legality deferred until merits/liability determinations |
| Reliance duty of loyalty claim (Reliance SJ) | Reliance: no unique facts support a loyalty claim (only prudence) | Secretary: facts support loyalty breach (reliance on referrals, fee incentives) | Reliance’s motion denied; evidence on loyalty survives summary judgment |
| Director Defendants’ motion for full judgment | Directors: seek dismissal of all claims | Secretary: argues multiple red flags and factual disputes preclude SJ | Denied; significant disputed facts (valuation, disclosure, control, process) require trial |
Key Cases Cited
- Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (context on ESOPs and fiduciary framework)
- Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998 (9th Cir. 2004) (experts may address ultimate issues of fact but not ultimate legal conclusions)
- Elosu v. Middlefork Ranch Inc., 26 F.4th 1017 (9th Cir. 2022) (Rule 702 admissibility guidance; expert foundation vs impeachment)
- Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000) (nonfiduciary liability for knowing participation in ERISA part 4 violations analyzed)
- Mertens v. Hewitt Associates, 508 U.S. 248 (1993) (limits on remedies/relief against nonfiduciaries discussed)
- Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009) (indemnification/advancement under ERISA and fiduciary-monitoring duties)
- Kayes v. Pacific Lumber Co., 51 F.3d 1449 (9th Cir. 1995) (individuals exercising authority over plan assets may be fiduciaries regardless of corporate role)
- Acosta v. City Nat’l Corp., 922 F.3d 880 (9th Cir. 2019) (damages measure in prohibited transaction context)
- Kool, Mann, Coffee & Co. v. Coffey, 300 F.3d 340 (3d Cir. 2002) (DCF method appropriate for valuing closely held private company stock)
- United States v. Flores, 901 F.3d 1150 (9th Cir. 2018) (bench-trial context relaxes Daubert gatekeeping)