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Fernandez v. K-M Holding Co., Inc.

Todd Jackson, Dan Feinberg and Nina Wasow recovered $55 million in pension benefits for employees of Kelly Moore Paint who participated in the company ESOP. Using their expertise in ERISA law and their experience in securing full benefits for employees whose companies create ESOPs, these Feinberg, Jackson, Worthman & Wasow attorneys reached a settlement of the case after hard-fought litigation.

ESOPs are intended to motivate employees by giving them a stake in the companies where they work. Like a 401(k) plan, an ESOP holds stock for the benefit of the employees. But ESOPs only hold stock of the employer company, and employees can’t move their stock to any other investment until after they leave the company or retire.

The Plaintiffs alleged, on behalf of a class, that the stock the ESOP bought for employees was overpriced because the valuation of the stock ignored major legal liabilities for Kelly-Moore products that had contained asbestos until the late 1970s.

After the employees bought the stock it suffered a steep decline in value, shocking employee stockholders who were led to believe their company stock was a safe investment by their ESOP trustee and that the ESOP had paid a fair price. Trustees are required by ERISA to act in the interests of the ESOP. Dan Feinberg, Todd Jackson, and Nina Wasow represented clients who alleged in 2006 that K-M Industries breached their fiduciary duties under ERISA by purchasing employer stock at an inflated price.

Complicating this case, the ESOP switched trustees between the stock purchase and when the lawsuit was filed. The new trustee had an indemnification agreement with the company, but the Court ruled that the indemnification agreement was impermissible because the company was partially owned by the ESOP, so any payment by the company would have reduced the value of the stock. Attorneys for the employee stockholders fought to keep the new trustee from getting let off the hook for its own errors – and letting the plan beneficiaries bear the cost. This key ruling helped clarify a murky area of ERISA law.

Plaintiffs settled with K-M Industries, the family trust of its founder William Moore, and the successor trustee of the ESOP, North Star Trust Company, for a total of $55 million. In addition to the sizeable settlement, the litigation resulted in two published decisions: Fernandez v. K-M Industries Holding Co., 585 F.Supp.2d 1177 (N.D. Cal. 2008), and Fernandez v. K-M Industries Holding Co., 646 F. Supp. 2d 1150 (N.D. Cal. 2009).

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