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Fourth Circuit Holds Debt Forgiveness Can Offset Damages in Vinoskey Case

by Jessica Wilhelmy | Dec 20, 2021

On December 6th, the Fourth Circuit affirmed in part and reversed in part the ruling by the District Court for the Western District of Virginia in the case of Walsh v. Vinoskey. In its ruling, the Fourth Circuit felt it lacked evidence of “clear error” to overturn the District Court’s decision against the selling shareholder of a subsequent employee stock ownership plan (ESOP) company and its fiduciary, despite acknowledging several facts that indicated the defendant may not have reasonably known the ESOP plan participants were paying more than fair market value for the ESOP plan’s shares.

However, the Fourth Circuit did hold that the defendant’s (selling shareholder’s) forgiveness of ESOP debt, absent its connection to any subsequent transaction, should have been deducted from the final calculation of damages. This aligns with ASA’s views, shared in an amicus brief to the Fourth Circuit, that such debt forgiveness should be considered when assessing damages. This holding departs somewhat from prior precedent, but mirrors valuation principles generally applied in valuation related damages calculations.

While the Fourth Circuit affirmed the District Court's judgement that Vinoskey should have known of the overvaluation of the company’s shares, it indicated a willingness to accept a higher valuation for control premiums even when less than absolute control is given to the ESOP. In its decision, the Fourth Circuit stated that the defendant, while not ceding all control:

“[W]as at least ceding power in some “important corporate matters.” [] If ceding such authority warrants the buyer paying a premium, one can also question how Vinoskey could have known the offer price was more than the fair market value.”

ASA had argued this position in its amicus brief to the Fourth Circuit, that something less than absolute control by the ESOP participants could still merit paying a control value for the interest purchased.

To read the Fourth Circuit ruling, click here. To read the amicus brief ASA filed in support of Vinoskey’s appeal, click here.