Jose Davalos, a former employee of Western Milling LLC, has filed a class action lawsuit in a California federal court, alleging that the company forced the sale of its employee stock ownership plan (ESOP) assets at an unreasonably low price. In preparation for a larger transaction in which Western Milling was sold to Viserion Milling LLC, Western Milling's ESOP sold about two million Kruse-Western shares back to the company.
Davalos alleges that Western Milling violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) in significantly undervaluing the ESOP's assets. As a result, he is seeking to certify a class on behalf of all ESOP participants, restitution for their financial losses, injunctive relief, and judicial monitoring of future ESOP stock transactions to avoid further ERISA violations.
The current lawsuit is only one in a long list of lawsuits involving Western Milling's ESOP. In 2019, employees alleged that the ESOP purchased the company's stock in a 2015 transaction for a highly inflated figure without accounting for its liabilities, including some related to feed contamination and wage-and-hour claims. In that case, the ESOP paid $244 million for stock whose value dropped to $26.6 million in a matter of months. In that earlier case, the court denied Western Milling's motions to dismiss and for summary judgment on several ERISA claims, allowing the case to proceed to discovery. That case is still pending.
In contrast, Davalos focuses on the acquisition of Western Milling by Viserion. Davalos contends that the ESOP was forced to sell its shares to Western Milling, and by extension, to Viserion, at a below-market rate and without any competing bids. Furthermore, Kruse-Western arranged the sale of ESOP shares to a wholly owned affiliate. Davalos alleges this insider transaction constitutes a prohibited transaction under ERISA due to the lack of independent review and fair market valuation.
These cases illustrate the risks of allowing company insiders to control the valuation and sale of ESOP stock. When that situation occurs, fiduciaries open themselves up to litigation concerning both overpayment and undervaluation of the ESOP assets. Federal courts nationwide are examining private-stock ESOP transactions to determine whether the fiduciaries obtained independent appraisals of the stock and actively protected the interests of plan participants during the transactions.
As a result, if the Court allows some claims, such as those related to valuation fairness and insider control, Western Milling could face substantial restitution and judicially mandated reform of its ESOP. An adverse ruling could provide broader guidance on fiduciary obligations in privately held ESOPs, particularly concerning valuation procedures and avoidance of insider conflicts.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
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