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Insurer May Renew Defense in Tangled ESOP Lawsuit

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Asset-stripping scheme appears to have looted ERISA retirement plan

Detroit, MIOn March 4, The District Court for the Eastern District of Michigan held that Great American Fidelity Insurance Co. (Great American) could renew its argument that it should not be required to defend Stout Risius Ross (Stout) against a claim by Appvion Retirement Savings and Employee Stock Ownership Plan (Appvion ESOP). Great American Fidelity Insurance Co. v. Stout Risius Ross Inc., an insurance contract claim, is one piece of the fallout from the sprawling ERISA lawsuit that includes Appvion v. Buth. The facts are complicated.

The basic ERISA claim was that Stout negligently or fraudulently appraised and overstated the value of Paperweight Development Corp.’s stock (Paperweight was then the parent company of Appvion, Inc.). Stout was insured by Great America for claims arising from valuations, but not ERISA or securities law claims. The insurance policy provides that Great American will pay for Stout’s legal defense in the event of a qualifying valuation lawsuit. Great American Fidelity Insurance is about whether the insurance policy covers the claims at issue.

The underlying ERISA lawsuit, however, tells an all-too-familiar story about an officer and director raid on a tempting pot of employee retirement savings. By the time of Appvion’s bankruptcy in 2017, all of the company’s stock was held by the Appvion ESOP. The corporate insiders who sold their stock to the ESOP at an apparently inflated price left with the money. Employees were left with a worthless company. Cries of fraud ensued, but it may have been too late for the employees.

Stripping assets out of the employee retirement plan


In 2001, Appleton Papers, Inc., a Wisconsin-based paper products company, which was then owned by a French conglomerate, Arjo Wiggins Appleton, was purchased for $810 million, by Paperweight. The purchase was funded by Appleton Paper employees' $106 million contribution from their 401(k) retirement accounts.

The Appleton ESOP was converted into an ESOP. Under the terms of a newly amended plan, the ESOP trustee used the employee contributions to purchase all of Paperweight’s common stock. Paperweight, in turn used the funds from that purchase, together with other financing, to purchase Appleton Papers. Upon completion of the transaction, employees continued to make contributions of their retirement savings to purchase additional Paperweight stock.

Appleton Papers later changed its name to Appvion, Inc. In October 2017, 16 years after the ESOP transaction, Appvion filed for bankruptcy, making the stock of Paperweight worthless.

The complex transactions, changing retirement plan structures, fast moving funds and corporate name changes created quite a bit of fog. Local, contemporaneous news coverage, however, seems to have cut to the human story:


“A lawsuit filed late Monday by Employee Stock Owner­ship Plan committee administrator Grant Lyon claims ‘fraud and concealment ’in the handling of the ESOP from the time it was formed in 2001. It demands a jury trial, according to the Appleton Post-Crescent news­paper.

The complaint charges the company’s past senior management, directors, ESOP committee, ESOP trustees and advisory firms with negligent misrepresentation of the true value of the stock and breach of fiduciary duty.

As a result of their actions over 18 years, employees suffered ‘hundreds of millions in damages, including what they had invested in the ESOP Plan.’” [Italics in original].

ERISA lawsuit


Appvion v. Buth, the lawsuit referenced in the news article, alleged violations of ERISA as well as federal securities fraud and various state law claims. It claimed that the defendants, including 51 individuals and 8 entities, played various roles in fraudulently inducing Appvion's employees to adopt the ESOP as part of their retirement plan. Over the following years, the Complaint charges that they collaborated to artificially inflate the value of stock owned by the ESOP, ultimately resulting in losses to the retirement plan. Stout was among the named defendants.

In July 2020, the ERISA and securities law charges of Appvion v. Buth were dismissed because, among other reasons, they appear to have been inadequately pleaded and the alleged violations fell outside the applicable statute of limitations. A subsequent lawsuit, brought by the Appvion Bankruptcy Liquidation Trustees was similarly dismissed.

The insurance dispute


Great American Fidelity Insurance Co. v. Stout, Risius, Ross, Inc. has proceeded somewhat independently. The insurer maintains that the Complaint by the Appvion ESOP falls outside the bounds of the professional liability policy issued to Stout.

In February 2020, the Eastern District of Michigan ruled that Great American had a continuing duty to defend Stout in the underlying lawsuits. The Great American lawsuit was stayed in June 2020, pending the outcome of the underlying claims. As of late 2020, those lawsuits appear to have been limited to state law claims, to the extent they exist at all. Therefore, the Court has lifted the stay.

This means, among other things, that Great American may renew its claim that the exclusions in the policy apply to any remaining charges. If Great American is successful, it will mean that yet another corporate player at the edges of a complex scheme will apparently walk away unscathed.

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