Milling company Kruse-Western Inc.'s board of directors must face a proposed class action for allegedly overcharging its employees in a $244 million stock deal before an animal feed contamination problem drove the company's share value down, a California federal judge has ruled.
U.S. District Judge Dale Drozd ruled on Monday that the lawsuit from former Kruse-Western worker Armando Zavala can proceed against various defendants including Kruse-Western's board of directors, the plan's administration committee, employee stock ownership plan trustee GreatBanc Trust and Kevin Kruse, the president of Western Milling, which is one of Kruse-Western's companies.
Judge Drozd found that Zavala had sufficiently alleged that the selling shareholders, Kruse and GreatBanc were fiduciaries to the company's employee stock ownership plan and had engaged in a prohibited transaction in violation of the Employee Retirement Income Security Act. However, the judge granted a motion to dismiss a second cause of action brought by Zavala against the plan's administration committee, charging that the complaint failed to properly purport foul play in the orchestration of the deal by the stock ownership plan's administration committee.
Zavala filed the suit in February 2019, claiming that a $244 million sale of Kruse-Western stock to its employee stock ownership plan was far over fair market value. Zavala claimed that merely two months after the challenged sale, the Kruse-Western stock was worth just $26.6 million and that a year later, it was worth $24.8 million — meaning the purchase of stock had occurred at nearly 10 times its actual value.
In a separate order, the judge also rejected the argument from the defendants that Zavala's complaint should be tossed because he signed a severance agreement when he left Kruse-Western containing a release that barred him from suing under ERISA and other laws.
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The proposed class is represented by Michelle C. Yau and Mary J. Bortscheller of Cohen Milstein Sellers & Toll PLLC, and Daniel Feinberg and Nina Wasow of Feinberg Jackson Worthman & Wasow LLP.
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