Churchill Mortgage Corp., a mortgage lender based in Brentwood, Tennessee, and its executives reached a settlement agreement with former employees, who alleged fiduciary breaches that harmed workers' vested retirement assets in the company's employee stock ownership plan (ESOP).
The lawsuit, filed in May 2023 in the U.S. District Court for the Middle District of Tennessee, was brought by three former participants who claimed that the company failed to ensure the ESOP received every cent from dividends held by the plan on preferred shares acquired from 2013 through 2019. They also alleged that the plan bought remaining shares of Churchill for more than fair market value in a 2020 transaction.
The defendants in the case included Prudent Fiduciary Services LLC, an Employee Retirement Income Security Act (ERISA) consultant to the ESOP, and Lawson Hardwick, a plan trustee and the president, CEO, and a director at Churchill Mortgage. Hardwick was accused of converting plan assets for his and the company's own use and benefit. In December 2020, Hardwick sold his remaining equity in Churchill - 510,000 shares of common stock - to the plan for $74 million. The transaction was financed through a note payable to Hardwick, which Churchill subsequently assumed from the plan.
The plaintiffs argued that as a result of the prohibited stock transaction in 2020, Hardwick received plan assets in payments above fair market value for his Churchill stock, thereby misusing the plan's money to his benefit. The defendants filed motions in August 2023 to dismiss the suit for lack of standing and failure to state a claim. While a dismissal of one breach of duty was granted by the court later that month, the remaining claims continued. The plaintiffs later filed a motion for class certification in August 2024, which was granted by the court. A class settlement was negotiated by January 28, 2025.
The settlement details are not yet explicitly stated in court filings, but a mediation report included in the court docket indicates that the parties resolved all issues and will file a notice, stipulation, or proposed order of dismissal by March 14, 2025. https://www.plansponsor.com/churchill-holdings-settles-esop-lawsuit/
Commentary
One of the allegations in the above matter was self-dealing. When a claim involves self-dealing, the fiduciary duty of loyalty is typically violated.
The duty of loyalty requires fiduciaries to act in the best interests of the beneficiaries or the plan participants, avoiding conflicts of interest and not using their position for personal gain. In cases of self-dealing, the fiduciary is accused of putting their own interests ahead of those they are supposed to serve, which is a breach of this duty.
For example, in the Churchill Mortgage Corp. case, Lawson Hardwick, a plan trustee and the president, CEO, and a director at Churchill Mortgage, was accused of converting plan assets for his and the company's own use and benefit. This type of action is a violation of the duty of loyalty, if it involves using the plan's assets for personal gain rather than for the benefit of the plan participants.
In any matter that involves conversion of plan assets, it is a best practice is to seek a legal opinion, perhaps more than one. A legal opinion should provide an objective assessment of the proposed transaction, highlighting any potential conflicts of interest, breaches of fiduciary duty, or violations of relevant laws and regulations. This helps fiduciaries make informed decisions that are in the best interests of the plan participants. Additionally, a legal opinion can serve as a protective measure, demonstrating that the fiduciaries sought expert advice and acted with due diligence, which can be crucial in defending against any future legal challenges or allegations of misconduct.
