Animal feed company Kruse-Western Inc. must face the bulk of a lawsuit claiming it forced workers to pay $244 million for company stock worth only $27 million following a contamination and recall, according to a California federal judge’s ruling.
The proposed class action by former Kruse-Western employee Armando Zavala states a valid claim for a prohibited transaction between the company’s employee stock ownership plan and a party in interest to the plan under the Employee Retirement Income Security Act, Judge Dale A. Drozd of the U.S. District Court for the Eastern District of California said Monday. That’s because the relief Zavala seeks—the return of money allegedly in the defendants’ possession—is equitable in nature and therefore allowable under the statute, Drozd said.
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The case centers on Kruse-Western’s employee stock ownership plan, which was created two months after the company issued a recall for Western Blend Horse Feed due to a possible contamination in 2015. Zavala says the defendants caused the stock plan to pay $244 million for all the company’s stock in a debt-financed transaction that relied on unreliable valuations and unrealistic management projections that didn’t adequately account for the contamination issues.
On the same day Drozd ruled on Kruse-Western’s motion to dismiss, he issued a separate opinion denying the company’s motion for summary judgment, which argued Zavala had released his claims against the company under a severance agreement.
Feinberg Jackson Worthman & Wasow LLP and Cohen Milstein Sellers & Toll PLLC represent Zavala.
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