Zavala v. Kruse-Western, Inc., 1:19-cv-00239-DAD-SKO

• Decision Date: 26 July 2019
• Docket Number: No. 1:19-cv-00239-DAD-SKO,1:19-cv-00239-DAD-SKO
• Court: U.S. District Court — Eastern District of California
• Parties: Armando ZAVALA, Plaintiff, v. KRUSE-WESTERN, INC., et al., Defendants.

398 F.Supp.3d 731

Armando ZAVALA, Plaintiff,

v.KRUSE-WESTERN, INC., et al., Defendants.

No. 1:19-cv-00239-DAD-SKO

United States District Court, E.D. California.

Signed July 26, 2019

Mary J. Bortscheller, Pro Hac Vice; Michelle C. Yau, Pro Hac Vice; Cohen Milstein Sellers & Toll, Washington, DC, Nina R. Wasow, Andrea M. Obando, Daniel Mark Feinberg, Feinberg Jackson Worthman and Wason LLP, Berkeley, CA, for Plaintiffs.

Chelsea Ashbrook McCarthy, Pro Hac Vice; Holland & Knight LLP, Chicago, IL, Ian Blade Wieland, Howard A. Sagaser, Sagaser, Watkins & Wieland, PC, Fresno, CA, Lynn E. Calkins, Pro Hac Vice; Holland & Knight LLP, Washington, DC, for Defendants.

ORDER GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

Dale A. Drozd, UNITED STATES DISTRICT JUDGE

This matter is before the court on the motion of defendants Kruse-Western, Inc., Kevin Kruse, and GreatBanc Trust Company (collectively, "defendants") to dismiss the complaint. (Doc. No. 17.) On July 16, 2019, that motion came before the court for hearing. Attorney Nina R. Wasow appeared on behalf of plaintiff Armando Zavala, and attorneys Lynn E. Calkins, Chelsea A. McCarthy, and Ian B. Wieland appeared on behalf of defendants. Having considered the parties' briefing and heard from counsel, and for the reasons that follow, defendants' motion will be granted in part.

BACKGROUND

This case arises from the sale of stock of defendant Kruse-Western, Inc. ("Kruse-Western") to the Western Milling Employee Stock Ownership Plan (the "ESOP"). According to the allegations of the complaint, Western Milling, LLC ("Western Milling") is a milling and feed manufacturer, and at all relevant times manufactured Western Blend Horse Feed and other animal feed blends. (Doc. No. 1 ("Compl.") at ¶¶ 21, 23.) In some instances, manufacturing animal feed for different animals requires segregating the feeds from one another. (Id. at ¶ 23.) As relevant here, an antibiotic known as monensin can be added to cattle and poultry feed, but that same antibiotic is toxic to horses. (Id. ) In September 2015, 21 horses died and many others became ill in Clovis, California due to monensin poisoning caused by Western Blend Horse Feed. (Id. at ¶ 24.) That same month, Western Milling issued a recall of its Western Blend Horse Feed due to possible contamination. (Id. at ¶ 25.) In 2016, the same facility that manufactured the tainted Horse Feed improperly mixed monensin into medicated cattle feed, contributing to the deaths of several dairy calves. (Id. at ¶ 26.)

In February 2016, Western Milling was named as defendant in an action filed in Fresno County Superior Court, and ultimately agreed to pay $2.4 million to the plaintiffs to settle claims arising from monensin poisoning caused by its horse feed. (Id. at ¶ 27.) In addition, the California Department of Food and Agriculture fined Western Milling $726,000.00 and revoked their commercial feed license "for repeated and multiple violations." (Id. at ¶ 29.) Western Milling agreed to stop production of all horse feed at its Goshen, California plant by April 15, 2017. (Id. ) Western Milling separately paid over $2 million to settle claims of the owners of cattle that consumed excessively high levels of monensin in 2014. (Id. at ¶ 30.) More than 850 cattle died as a result of consuming feed produced by Western Milling.¹ (Id. ) In addition to these liabilities, Western Milling and its operating companies faced significant liability due to wage and hour violations at its California facilities. (Id. at ¶ 34.)

The complaint alleges that, according to the Articles of Incorporation obtained from the California Secretary of State, Kruse-Western was incorporated on September 11, 2015. (Id. at ¶ 36.) Kruse-Western, in turn, operates various companies including Western Milling, OHK Transport LLC, OHK Logistics, LLC, and Winema Elevators, LLC. (Id. at ¶ 20.) As described in plaintiff's opposition to the pending motion to dismiss, Kruse-Western is the "parent company" of these entities. (Doc. No. 23 at 11.) Less than two months later, on November 4, 2015, the ESOP was created. (Compl. at ¶ 39.) The ESOP is a pension plan under the Employee Retirement Income Security Act ("ERISA") that is primarily invested in the stock of Kruse-Western. (Id. at ¶ 1–2.) On the same day the ESOP was created, GreatBanc Trust Company ("GreatBanc") caused the ESOP to purchase 100 percent of the outstanding shares of Kruse-Western stock. (Id. at 39–40.) GreatBanc was appointed trustee of the ESOP by defendants John and Jane Doe 10–20, the individual members of the Kruse-Western Board of Directors (the "Board defendants"). (Id. at ¶ 17.) The ESOP purchased the stock from defendant Kruse and John and Jane Doe 20–30 (the "selling shareholders"), which the ESOP financed by borrowing the entire purchase price of $244 million from Kruse-Western. (Id. at ¶ 40.)

Less than two months later, on December 31, 2015, the value of Kruse-Western had dropped to $26,600,000.00. (Id. at ¶ 41.) By the end of 2016, that value had fallen still further, to $24,800,000.00. (Id. at ¶ 42.) By the end of 2017, the value had recovered only marginally, to $27,400,000.00. (Id. at ¶ 43.) Thus, as of that date, the ESOP had purchased Kruse-Western's outstanding stock for almost ten times its actual value.

The complaint alleges that the sale to ESOP did not adequately reflect the future revenue and earnings, given the recurring monensin contamination in Western Milling's animal feed, nor did it reflect Kruse-Western's potential liability for its wage and hour law violations. (Id. at ¶¶ 45, 47.) It is also alleged that Kruse-Western and its officers knew of these problems at the time of the sale, but the financial projections used to value Kruse-Western's stock did not account for them. (Id. at ¶ 46.)

Plaintiff, a former Kruse-Western employee and current participant in the ESOP (id. at ¶ 12), alleges four causes of action against defendants, all of which arise under provisions of ERISA. Count one alleges a violation of 29 U.S.C. § 1106(a) against the selling shareholders and GreatBanc, alleging that they engaged in a transaction prohibited by ERISA. Count two alleges a violation of 29 U.S.C. § 1106(b) against the Board defendants who sold Kruse-Western stock to the ESOP, and also contends that these individuals engaged in a transaction prohibited by ERISA. Count three alleges that defendant GreatBanc violated 29 U.S.C. § 1104(a)(1)(A) and (B) by breaching its fiduciary duties to the ESOP. Count four alleges that the Board defendants violated 29 U.S.C. § 1104(a)(1)(A) and (B) by failing to monitor GreatBanc and ensure that the ESOP paid no more than fair market value for the Kruse-Western stock. On April 15, 2019, defendants moved to dismiss the complaint. (Doc. No. 17.) Plaintiff filed an opposition on June 25, 2019. (Doc. No. 23.) Defendants filed a reply on July 2, 2019. (Doc. No. 25.)

LEGAL STANDARD

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal sufficiency of the complaint. N. Star Int'l v. Ariz. Corp. Comm'n , 720 F.2d 578, 581 (9th Cir. 1983). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't , 901 F.2d 696, 699 (9th Cir. 1990). A plaintiff is required to allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

In determining whether a complaint states a claim on which relief may be granted, the court accepts as true the allegations in the complaint and construes the allegations in the light most favorable to the plaintiff. Hishon v. King & Spalding , 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984) ; Love v. United States , 915 F.2d 1242, 1245 (9th Cir. 1989). However, the court need not assume the truth of legal conclusions cast in the form of factual allegations. U.S. ex rel. Chunie v. Ringrose , 788 F.2d 638, 643 n.2 (9th Cir. 1986). While Rule 8(a) does not require detailed factual allegations, "it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. A pleading is insufficient if it offers mere "labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ; see also Iqbal , 556 U.S. at 676, 129 S.Ct. 1937 ("Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."). Moreover, it is inappropriate to assume that the plaintiff "can prove facts which it has not alleged or that the defendants have violated the ... laws in ways that have not been alleged." Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters , 459 U.S. 519, 526, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983).

ANALYSIS

Broadly speaking, defendants advance two arguments as to why dismissal of plaintiff's complaint is warranted. First, defendants argue for dismissal under Federal Rule of Civil Procedure 10(b), which provides that "each claim founded on a separate transaction or occurrence ... must be stated in a separate count" if doing so "would promote clarity." (Doc. No. 17-1 at 3– 6.) Second, defendants contend that the complaint as pleaded is insufficient under Rule 8(a)(2) and should therefore be dismissed pursuant to Rule 12(b)(6). (Id. at 7–15.) Each argument is addressed in turn.

A. Dismissal Pursuant to Rule 10(b)

The court first analyzes defendants' argument that the complaint should be dismissed under Federal Rule of Civil Procedure 10(b). That rule states that:

A party must state its claims or defenses in

...