December 9, 2021

The Fourth Circuit Court of Appeals has provided relief to a defendant who sold shares of company stock to an employee stock ownership plan (“ESOP”) by rejecting the district court’s legal conclusion concerning the calculation of the amount of the award to the ESOP in connection with the sale of shares to the ESOP. The Fourth Circuit affirmed the district court’s conclusion of the seller’s liability to the ESOP for receiving consideration that was in excess of fair market value, however, because it determined that the district court did not clearly err in its liability findings. Walsh v. Vinoskey Fourth Circuit, Case No. 20-1252 (December 6, 2021)


The case concerned a 2010 sale of company stock by Adam Vinoskey to an ESOP sponsored by the company he founded. The sale was for $20.7 million of which $10.4 million was paid in cash and $10.3 million was paid in the form of a written promissory note. Four years after the transaction, Vinoskey forgave just over $4.6 million of the ESOP’s outstanding debt to him pursuant to the written promissory note.

The Secretary of U.S. Department of Labor (“DOL”) subsequently brought an action against Vinoskey and the ESOP’s trustee in 2016 alleging that the ESOP paid consideration to Vinoskey that was in excess of the fair market value of the stock sold and, therefore, a prohibited transaction occurred. After a week-long trial, the district court held for the DOL and ordered the defendants to pay $6.5 million to the ESOP, with no offset provided for with respect to Vinoskey’s debt forgiveness.

The ESOP trustee and Vinsokey separately appealed to the Fourth Circuit; however, the ESOP trustee subsequently settled with the DOL. Vinoskey’s appeal contended that both theories under which he was held liable (either as a co-fiduciary or as a knowing participant in the prohibited transaction) required that he knew or should have known that the amount he received from the ESOP was greater than the fair market value of the stock he sold. He further argued that the district court’s holding that he knew or should have known the sales price was excessive was clearly erroneous. Finally, he also argued that the district court’s refusal to reduce the damages caused by the amount of the debt forgiveness was incorrect as a matter of law.

The Decision

The Fourth Circuit found that the district court’s holding that Vinoskey knew or should have known that the purchase price was in excess of fair market value was not clearly erroneous. While the court does not necessarily agree with some of the factual findings and the inferences and bases upon which the district court’s findings were derived, it did not conclude that these holdings were clearly erroneous. Accordingly, the Fourth Circuit affirmed Vinoskey’s liability to pay damages to the ESOP.

However, the Fourth Circuit reversed the district court’s refusal to offset Vinoskey’s debt forgiveness against the $6.5 million liability award. This reversal reduces the damage award to the ESOP to just over $1.8 million, a very substantial reduction.

In doing so, the Fourth Circuit noted that the prior case law used by the district court was distinguishable on the facts where a damage reduction made little sense. Here, the Court noted that the reduction was necessary to prevent a double recovery windfall to the ESOP, which is not only contrary to ERISA’s damage restoration provisions but makes no economic sense.

The Fourth Circuit rejected an analogy put forth by the DOL. The DOL analogized the debt forgiveness to an individual who sold a fake painting for $10,000, and then four years later gave the same buyer $500 as a wedding present. The DOL stated that the seller could not then later use the wedding present as an offset to the amount that it would owe to a defrauded buyer. Instead, in its opinion, the Fourth Circuit put forth as the proper analogy the following: if an individual sold a fake painting for $10,000 to be paid with $5,000 cash and a loan for $5,000, and four years later the individual cancelled the $5,000 loan, the restoration value is only $5,000 because the purchaser only paid $5,000 for the fake painting after the debt was forgiven.


A very solid positive result of this decision is that the Fourth Circuit reduced the award to the ESOP by the amount of the debt forgiveness already provided by Vinoskey. The decision also provided clarity on why a reduction was appropriate in this content. Without this, any seller who receives a promissory note in a sale of company stock to an ESOP would be loathed to forgive any portion of such note. It is disappointing that the Fourth Circuit did not find the district court’s decision on Vinoskey’s liability to be “clearly erroneous” and the Fourth Circuit also provided little or no clarity on why Vinoskey was a co-fiduciary with respect to the sale of the ESOP.

Post Script

Polsinelli submitted an amicus brief in this case on behalf of a client. Interestingly, the debt forgiveness offset analogy put forth by the Fourth Circuit in the decision is substantially similar to the example set forth in our amicus brief.