On July 26, 2019, the U.S. District Court for the Eastern District of California denied in part a motion to dismiss in Zavala v. Kruse-Western, Inc. et al. (No. 1:19-cv-00239-DAD-SKO). Plaintiff alleges that the sale of Kruse-Western stock to the Western Milling Employee Stock Ownership Plan (ESOP) was a prohibited transaction and a breach of fiduciary duty under ERISA because the transaction price was inflated. Specifically, Kruse-Western – a milling and animal feed manufacturer – was at the time of the transaction facing significant liability for contamination resulting in the deaths of many cattle and horses, and Plaintiff (a participant in the ESOP) alleges that the stock price paid by the ESOP did not reflect that liability. Further, Defendant GreatBanc Trust Company failed to conduct a prudent investigation to ensure that the interests of the ESOP participants and beneficiaries would be appropriately protected. The ESOP paid $244 million for the company, and the value dropped to $26 million less than two months after the transaction and did not substantially recover in the following two years.
Judge Dale Drozd permitted Plaintiff’s claims against GreatBanc and the Kruse-Western Board of Directors to move forward, holding that Defendants cannot prove at the pleadings stage that the ESOP paid no more than adequate consideration for Kruse-Western stock. Plaintiff will file an amended complaint to resolve issues Judge Drozd found with other claims in the lawsuit.
A copy of the complaint is available here, and a copy of the Court’s Order is available here. Coverage of the case is available here . For more information, please contact Dan Feinberg, Nina Wasow, or Andrea Obando.