The Brundle v. Wilmington Trust N.A. case has generated numerous summaries, debates, and digests. In this article, the author reflects on lessons that can be taken from the case. This came to her attention during an internal discussion of litigated ESOP cases and piqued her interest.
The Brundle v. Wilmington Trust N.A. (919 F.3d 763, 4th Circuit 2019) case has generated numerous summaries, debates, and digests. It came to my attention during an internal discussion of litigated ESOP cases and piqued my interest. As I read the full text of the case, I was surprised by the numbers of “epic fails” represented therein. As we ascend, or descend, further into AI-land, it seemed timely to discuss this case once more considering issues of professional competency, credibility, and ethics, as well as defensible outcomes for the client.
The following discussion will be based on the full text of the Appeals Court case. Rather than highlight the firms involved in the case and thus diffuse the impact of my message, I will simply refer to them as “Company”, “Owners”, “ESOP Trust”, “Trustee”, “Investment Banker”, and “Valuator”.
Governing Legal Principles
For the reader who is not familiar with ESOPs, an ESOP is an employee pension plan that invests in the employer’s stock. The employer makes contributions to the ESOP Trust that are used to buy this stock. These contributions qualify as deferred compensation for the employees and can be treated as a 100% tax-deductible ordinary business expense by the employer. It creates a nice exit strategy for owners and a great opportunity for employees to own their company as a result.
The tricky part is that ERISA requires purchases of employer stock by the ESOP Trust (using these employer contributions) to be made for no more than “adequate consideration”. While the Department of Labor has not defined “adequate consideration”, the intent of the rule is to protect employees within the ESOP Trust from suffering a loss by paying excessive prices for Company stock.
“For this reason, ‘[t]he fiduciary obligations of the [ESOP] trustees to the participants and beneficiaries [of an ESOP] plan are … the highest known to the law.’”[2] As may be imagined, “adequate consideration” is a point of contention and subject to lawsuits.
Background Facts
After several prior failures to sell the Company, Owners were seeking an exit strategy and went to Investment Bank for guidance. Investment Bank suggested an ESOP as the best option because it would optimize Owners’ after-tax cash returns. The suggested ESOP transaction involved a novel transaction strategy that required a three-month completion window (to year-end) and resulted in Owners retaining de facto control of the Company although the ESOP Trust would hold 100% of Company shares. In addition, this transaction structure would enable Owners to avoid the downside risk of holding equity yet profit from any upside.
Owners liked this strategy and hired Investment Bank. Investment Bank, in turn, hired Trustee and Trustee hired Valuator. It is noteworthy that Investment Bank, Trustee, and Valuator had significant, lucrative, and long-term business relationships with each other.
The transaction timeline was as follows:
- November 12: Valuator submitted a draft valuation of a single share of Company stock to Trustee.
- November 14: Trustee discussed valuation with Valuator.
- November 15: Trustee engaged in negotiations with Investment Bank that lasted only five hours and resulted in a share price at the top of Trustee’s authorized negotiation range.
- November 18: ESOP Trust issued a tender offer for the shares at this price, with a closing date of December 20.
- November 18 to December 19: Valuator revised its valuation downward slightly, but the transaction price remained the same.
- December 19: Trustee and Valuator met for a half hour to discuss the revised valuation and Trustee approved the transaction.
- December 20: The deal closed.
At this point, Trustee had completed due diligence, made pricing decisions, conducted negotiations, and launched a tender offer in less than two months. Trustee’s staff had met only three times to discuss the transaction and met only once with Owners for the same. Each meeting was less than 90 minutes long and several Trustee staff were missing each time.
Less than two months after the transaction closed, a major competitor of the Company began discussions to acquire the Company. Within five more months, the Company was acquired at a slightly higher price per share than that paid by the ESOP a few months prior.
Within the year, two ESOP Trust participants filed an action against Trustee, contending that the ESOP had paid substantially more than “adequate consideration” for the stock. After a bench trial, the district court found that Trustee had violated its fiduciary duty to the ESOP and concluded the ESOP Trust had overpaid by approximately $30 million for Company stock.
Court Findings
While the district court did not find that Trustee had acted in bad faith, it did find that Trustee had failed to meet its duty to act solely in the interest of plan participants and identified four areas of Trustee failure. These failures, although held against Trustee as fiduciary, were significant failures on the part of Valuator. This is where the “pure heart and empty head” comes into play.
Failure One
Valuator’s report omitted to mention a valuation report, prepared just months earlier by another valuation firm, that priced Company stock at approximately 25% of Valuator’s concluded price. Company officers testified that business prospects had not materially changed during this interim period. However, Valuator chose to mention a different valuation that was significantly older (but concluded a price more in line with Valuator’s).
Even though the Court did not find that the other current valuation’s conclusion was necessarily more accurate, it did find that Trustee failed as a fiduciary by neither questioning nor investigating the “vast discrepancy”[2] between these two contemporaneous reports.
Failure Two
Trustee either ignored or downplayed several red flags that Company management’s financial projections were inflated. Several well-supported factual determinations relate to potential inflation:
- While both contemporaneous valuations mentioned in Failure One relied on management projections, the projection period used for Valuator’s analyses was considerably longer, allowing for increased lack of reliability.
- The transaction structure allowed management to receive 5% of the purchase price in cash bonuses, sullying the integrity and intent of projections.
- There were ongoing government investigations regarding Company accounting and record-keeping errors, reflecting on the reliability of projections.
- 70% of the Company’s revenue depended on just two government contracts. Yet, Valuator used a beta in its cost of capital that indicated the Company was less risky than the market as a whole. In addition, a neutral third-party expert testified that government contractors (the Company’s industry peers) were definitively no less risky than the market as a whole. This level of risk was not reflected in the projections or the analysis.
- The Company prepared multiple sets of projections that were unwarranted due to lack of changes in the market and in business prospects during the most current historical year. Multiple sets appeared to imply a fishing expedition for a pre-selected outcome.
Failure Three
Trustee breached its fiduciary obligations because it did not investigate “the appropriateness of applying a 10% control premium”[3] even though transaction terms allowed:
- Owners to retain the power to appoint a majority of the Company Board;
- The ESOP governing plan document and ESOP Trust Agreement to require Trustee to vote its shares as the Board directed, rather than as the ESOP directed; and
- The ESOP to pursue only one contravention of the plan documents, e.g., filing a lawsuit, effectively exercising the limited relief available to minority shareholders.[4]
Failure Four
Rather than seeking the lowest acceptable price for Company stock, Trustee failed to question Valuator’s consistent rounding up of intermediate results throughout the valuation analysis, which noticeably increased the final stock price.
Discussion of Price Paid by Acquiror
Trustee argued that the price paid by Acquiror just a few months after the ESOP transaction substantiated the price paid by the ESOP trust.
The district court found that Acquiror would benefit substantially from synergies with the Company and should have been willing to pay significantly more than the ESOP had paid. In addition, the Acquiror purchased full control versus the ESOP’s purchase which contained lack of control. This should have increased the price of the acquisition. Yet the acquisition price was only slightly above the price paid by the ESOP just months before.
All in all, after discounting synergy value plus a debt write-off by Owners plus the expected tax reduction from the ESOP sale, the Court found that the Company’s fair market value should have been concluded at almost half of the value concluded by the Valuator and subsequently utilized in the ESOP transaction.
Note: The Appeals Court upheld the findings of the District Court regarding all the abovementioned issues.
Valuator Errors and Omissions
The facts of this case are not an isolated occurrence. It simply took the fiduciary status of Trustee and its negligence to bring them to light. The unfortunate part is that, while Trustee certainly carried its side of the onus, Valuator was the real party at fault. The following is a synopsis of errors and omissions by Valuator:
- Allowing a lucrative referral source to “guide” the valuation analysis and results;
- Agreeing to a highly compacted delivery timeline when there was a strong chance it could seriously impair the work product;
- Failing to insist on regular discussions with Trustee that would encourage Trustee to examine analysis output and ask questions, but not influence them;
- Effectively hiding a contemporaneous valuation that would have brought Valuator’s analysis and results into question, rather than mentioning, examining, and dealing with that valuation;
- Pushing management projections through without detailed examination of their credibility, without subsequent detailed discussions with management, and without possible revisions for improved reasonableness;
- Failing to take into account substantial, possibly material, Company risks that were factually documented;
- Failing to consider or address management’s contractual financial incentives tied to projections that would yield skewed results;
- Failure to protect management’s reputation by permitting the production and use of multiple projections that had the appearance of fishing for a specific result;
- Naïve application of a cost of capital formula developed from the public capital markets but not intended for use with privately-held companies without further risk adjustment;
- Failure to ensure that the beta used in this cost of capital formula was actually applicable to the Company and its industry;
- Rote application of a premium for control without due consideration of legal and operating reality;
- Using layers of rounding up of intermediate results to noticeably edge stock price upward; and
- Using the stock price from the acquisition of the Company that took place seven months after the ESOP purchase transaction as confirmation of the stock price in the ESOP transaction. This demonstrated lack of understanding of the dynamics of acquisitions in general and the misunderstanding of the comparability of the Company acquisition to the ESOP transaction.
This is a substantive and extensive list, all perpetrated by a well-known, well-credentialed, well-respected Valuator with long experience and expertise in ESOP valuations. The same could be said about Trustee and Investment Banker. As for Owners, a quote from Su v. Bensen says it all, “Pigs get fat and hogs get slaughtered.”[5]
Pure Heart but Empty Head
Lest the reader forget, the above scenario plays out far more often than we would like to admit. It just does not get caught so publicly (or at all) because it is not generally under the spotlight of litigation.
So, why would something like this happen to a quality valuation firm, well-known trustee, and capable investment banker? What can we learn from Brundle? Here are some thoughts for consideration.
Pressure from Outside Parties
Explicit or implicit pressure from referral sources, clients, or even our own leadership can push us to make compromises. Yet, our work and conclusions are to be our own, independent, not the achievement of a target “suggested” by someone else. We all know it is far more costly to lose our integrity and credibility than to lose revenue from a potential client. What we also need to remember is that it is far easier than we think to politely refuse the pressure and offer viable alternatives.
Pressure of Time
Meeting client time-demands at the expense of due professional care is a dangerous game. It is wise to assess staff and other resources prior to taking on complex engagements with unreasonably tight time frames. While it is tempting to throw AI at a time-sensitive matter, we must remember that not only does AI require carefully crafted instructional inputs that take time but also in-depth output reviews that take time. Caveat emptor.
Rote Application of Theory and Standard Practice
These types of errors could be due to inadequate understanding of formulas and models we commonly use, lack of analyst experience coupled with inadequate review by more experienced staff, failure to remember that “it depends” is the rule for all valuations not just some, reliance on automated models without proper review of results, or haste due to too many engagements with similar delivery deadlines.
One of my personal concerns for our profession is that we tend to make our work into a series of routines and models and execute these without much further thought; the “pure heart but empty head” syndrome. Brundle is a textbook—and costly—case of this syndrome. We should ask ourselves, what does rote analysis and work product cost those clients who do not end up under the bright lights of litigation? After all, whether our clients appreciate it or not, we are providing them with an important service, not just a point estimate of value.
Failure to Ask Sufficient Questions and Communicate Regularly with all Parties
Both failures referred to here can create consequential misunderstandings and work product errors, as Brundle illustrates in spades. I suggest that we should be training even the most junior staff to be inquisitive, think broadly, ask many questions, and communicate clearly and often regarding the details of an assignment. Trustee and Valuator would have spared themselves and Owners much future angst and expense had they taken the time and effort to do these things up front.
Back to the Future
As I contemplated this case, I felt a certain sadness. I could see why people outside our profession might think we believe that value is anything we want it to be and why our work and our character are viewed with a skeptical eye. But that is not how it should be.
The antidote may be for us to remember that, when we perform a valuation, we are not just giving clients a number; we are affecting the futures of someone’s family and employees. When we substitute speed and quantity for thoughtfulness and quality, we risk impairing our integrity and credibility, and may harm the client. When we allow time and fee pressures to supersede common sense and independence, we compromise professional ethics and someone will pay the price. When we avoid personal risks integral to the art of valuation and fall back on the self-protective notion that real accuracy/science can be gained by simply deploying vast data, sophisticated models, and increased automation, we deny a critical part of our humanity. For, appraisal is an anciently human discipline.
Don’t get me wrong; there is a place and time for speed and quantity. Computers, sophisticated models, and good data are important tools, but our goal as appraisers is to be experts who use our tools, wisdom, integrity, and common sense to create insightful, defensible, and powerful stories that genuinely inform and assist our clients. For these and all the reasons stated throughout this article, Brundle teaches us that we must strive to keep our hearts pure and make sure we do not cultivate empty heads. The future depends on it.
[1] From Brundle full text of appeals case, p. 14. Cited from Donovan v. Cunningham, 716 F.2d 1455. 1467 (5th Cir. 1983).
[2] From Brundle full text of appeals case, p. 9. Cited from Ibid., at 356 (alterations in original) (quoting Donovan v. Bierwith, 680 F.2d 263, n.8 [2d Cir. 1982]).
[3] Ibid., p. 18.
[4] Ibid., p. 22.
[5] Paraphrased from Ibid., p. 23.
[6] Julie A. Su, Plaintiff, v. Eric Bensen, et al., Defendants. United States District Court for Arizona. No. CV-19-03178-PHX-ROS. August 15, 2025. LEXIS 145404. Full text, p. 10.
Sarah Von Helfenstein is a Forensic and Valuation Services Associate Director at Dean Dorton and is based in Raleigh, NC. For the past 30 years, she has specialized in financial valuation and served as a valuation professional and educator in her own firm, public accounting firms, for the AICPA, and for the American Society of Appraisers. During this time, she also participated in several tech startups. In addition, Ms. von Helfenstein performed seminal research for the U.S. Department of Defense Office of Force Transformation in the valuation of information systems and human capital. Her experience includes the valuation of business enterprises, business interests, and intangible assets for operating companies in all stages of life cycle, ESOPs, holding companies, and private equity.
Sarah von Helfenstein may be contacted at (919) 746-9027 or by e-mail to svhelfenstein@deandorton.com.
