Foster v. Adams and Associates, Inc.

Background

Carol Foster and Theo Foreman brought this class action under the Employee Retirement Income Security Act of 1974 (ERISA) on behalf of participants and beneficiaries of the Adams and Associates Employee Stock Ownership Plan. The complaint alleged that Adams and Associates, Inc.; Roy A. Adams; Leslie G. Adams; Daniel B. Norem; Joy Curry Norem; and The Daniel Norem Revocable Trust Dated January 9, 2002, breached fiduciary duties, participated in prohibited transactions, failed to make required disclosures, and agreed to improper indemnification.

The court had previously certified a class under Federal Rule of Civil Procedure 23(b)(1) and (b)(2), and had granted in part and denied in part the parties’ cross-motions for summary judgment. Four claims remained after summary judgment: alleged prohibited transactions by Roy Adams and Daniel Norem; alleged fiduciary-duty breaches by those individuals; alleged disclosure violations by Adams and Associates as plan administrator; and a claim that the indemnification provisions were void under ERISA section 410 and violated fiduciary duties.

The parties reached a settlement shortly before trial was scheduled to begin. The opinion addresses only the plaintiffs’ motion for preliminary approval of that class-action settlement.

Settlement Terms

The proposed settlement class consists of:

All participants of the Adams and Associates ESOP from October 25, 2012 to December 31, 2020 who vested under the terms of the Plan and those participants’ beneficiaries.

The estimated class size is 2,800 people. Defendants and their immediate family members, plan fiduciaries, specified officers and directors, entities in which a defendant has a controlling interest, and the legal representatives, successors, and assigns of those excluded people are excluded from the class.

The non-Adams and Associates defendants agreed to pay $3 million into a settlement fund. After court-approved deductions and expenses, the fund will be distributed to class members on a pro rata basis according to the number of vested Adams and Associates shares allocated to each person’s ESOP account. Depending on eligibility, a class member may receive a check, roll the payment into an individual retirement account or another eligible retirement account, or have the money remain in or transfer to an Adams and Associates 401(k) account.

The settlement administrator, RG/2 Claims Administration LLC, will send notice and assist with distribution instructions. Class members may object, but may not opt out because the previously certified class is a non-opt-out class. The settlement also includes a release of claims based on the same factual predicate as Count IV of the complaint through the settlement date, along with a waiver of rights under California Civil Code section 1542.

Court’s Analysis

At the preliminary-approval stage, the court asks whether it is likely to be able to certify the settlement class for purposes of judgment and approve the settlement under Rule 23. The court does not conduct the full fairness analysis at this stage; the proposed settlement need only appear potentially fair, free of obvious deficiencies, non-collusive, and within the range of possible approval.

The court approved the requested modification adding December 31, 2020, as the class end date because the change did not alter the reasoning supporting the earlier class certification. The court also found that the settlement process supported preliminary approval. The parties had conducted extensive fact and expert discovery, litigated class certification and summary judgment, and participated in three settlement conferences with Magistrate Judge DeMarchi before accepting a mediator’s proposal.

The court found no obvious deficiencies and no indication at this stage that the settlement provided improper preferential treatment. Class members would receive pro rata payments based on vested shares. The court deferred deciding whether the proposed $5,000 service awards for Foster and Foreman were appropriate until final approval.

The settlement’s monetary and nonmonetary terms also fell within the range of possible approval. The court considered the risks, expense, and length of continued litigation, including defendants’ continuing dispute over wrongdoing and their contention that the transaction exceeded Adams and Associates’ projections by $50 million. The settlement included $3 million, tax-deferred distribution options, a provision that Adams and Associates would not pay for or indemnify the other defendants, and an agreement that Adams and Associates would issue a new Summary Plan Description as required by ERISA.

Notice, Fees, and Costs

The court found the proposed notice generally adequate because it described the claims and settlement in plain language, defined the class, included personalized recovery estimates and calculation information, explained distribution options, and described how to object or challenge the settlement amount. The court required revisions so that notice would be sent by both U.S. mail and email. It also required the notice to identify December 2, 2021, as the deadline for class counsel’s attorney-fee and cost motion.

The court did not award attorney’s fees or costs in this order. Class counsel intended to seek $1 million, or 33.3 percent of the settlement fund, and defendants agreed not to oppose a request up to that percentage. The court required the fee motion to include declarations and billing records so that it could determine a reasonable amount and give class members an opportunity to object. Plaintiffs were also required to submit an itemized summary of litigation costs.

Disposition

The court GRANTS the motion for preliminary approval of the class-action settlement. It modifies the class definition, appoints RG/2 Claims Administration LLC as settlement administrator, directs that notice be provided within 21 days, sets a 60-day objection period measured from the initial mailing of notice, and establishes deadlines for the fee motion, final-approval motion, and other settlement materials. The court schedules the final approval hearing for February 17, 2022. The order grants preliminary approval only; it does not state that the settlement received final approval.