July 29, 2019
  • Stock value allegedly lower after horse deaths.
  • Judge allows failure-to-monitor claim under ERISA.

A lawsuit challenging a $224 million transaction involving Kruse-Western Inc.'s employee stock ownership plan is moving forward after a federal judge trimmed certain claims.

The proposed class action alleges the animal feed company’s stock plan was forced to take out a loan to buy company stock worth only one-tenth the amount it paid. The transaction relied on unreliable valuations that didn’t account for a recent feed contamination that killed at least 21 horses and 850 cattle and led to fines and litigation, according to the lawsuit.

Judge Dale A. Drozd of the U.S. District Court for the Eastern District of California allowed the plan’s participants to press claims of fiduciary breach and prohibited transactions against the plan’s trustee, GreatBanc Trust Co. GreatBanc can’t defeat the fiduciary breach claims by pointing to the strict pleading standard announced by the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer , because that case doesn’t apply to the stock of privately held companies, Drozd said in a July 26 decision.

Drozd also green-lit claims that Kruse-Western violated the Employee Retirement Income Security Act by failing to monitor GreatBanc’s actions. The participants argued that Kruse-Western’s stock lost “essentially its entire worth” less than two months after GreatBanc facilitated the transaction, which Drozd found sufficient to state a failure-to-monitor claim against the company.

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The Kruse-Western plan participants are represented by Cohen Milstein Sellers & Toll PLLC and Feinberg Jackson Worthman & Wasow LLP.