United States District Court, E.D. California
ORDER GRANTING IN PART DEFENDANTS' MOTION TO
DISMISS (DOC. NO. 17)
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.
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.)
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. (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.)
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.)
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.
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.)
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.)
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 (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 (2009).
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 (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
Iqbal, 556 U.S. at 678. 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; see
also Iqbal, 556 U.S. at 676 (“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
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.
Dismissal Pursuant to Rule 10(b)
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 numbered
paragraphs, each limited as far as practicable to a single
set of circumstances. A later pleading may refer by number to
a paragraph in an earlier pleading. If doing so would promote
clarity, each claim founded on a separate transaction or
occurrence-and each defense other than a denial-must be
stated in a separate count or defense.
Fed. R. Civ. P. 10(b). Stating separate claims for each
transaction or occurrence “permit[s] pleadings to serve
their intended purpose to frame the issue and provide[s] the
basis for informed pretrial proceedings.” Bautista
v. Los Angeles County, 216 F.3d 837, 841 (9th Cir.
2000). “Although the rules do not specifically
authorize motions to require a separate statement of claims
[under Rule 10(b)], courts have used their inherent power to
issue such orders and have dismissed actions for
noncompliance under Rule 41(b).” Id. Utilizing
this rule, district courts have required plaintiffs to draft
amended complaints sufficient to permit defendants to
“reasonably frame a responsive pleading.”
Bobosky v. adidas AG, No. 3:10-cv-00630-PK, 2011 WL
13250946, at *2 (D. Or. June 21, 2011); see also Hendrix
v. Health & Soc. Servs. of Solano Cty., No.
2:15-cv-02689-MCE-EFB, 2017 WL 4004168, at *5 (E.D. Cal.
Sept. 12, 2017) (“Any amended complaint shall also use
clear headings to delineate each claim alleged and against
which defendant or defendants the claim is alleged, as
required by Rule 10(b)[.]”), report and
recommendation adopted, 2017 WL 4340166 (E.D. Cal. Sept.
however, the court finds that Rule 10(b) is inapplicable. By
its terms, that provision applies only where a single cause
of action encompasses multiple transactions or occurrences.
Thus, so long as each cause of action addresses only a single
transaction or occurrence, Rule 10(b) is satisfied. See
Bobosky, 2011 WL 13250946, at *4 (“Rule 10(b)
states that each claim founded on a separate transaction or
occurrence must be stated in a separate count if doing so
would promote clarity. Fed.R.Civ.P. 10(b). Defendants
argument fails because plaintiffs' claims arise out of a
single transaction, and because Rule 10(b) does not apply in
that scenario.”); Dimmick v. Regents of Univ. of
Cal., No. C 04-4965 PJH, 2006 WL 279350, at *4 (N.D.
Cal. Feb. 3, 2006) (“The court declines to break down
the first claim into two separate claims . . . because
contrary to the other claims which do appear to involve
separate occurrences, this claim involves the same facts and
the same underlying transactions.”); 5A Charles Alan
Wright & Arthur Miller, Federal Practice and
Procedure § 1324 (4th ed. 2019) (“Rule 10(b)
does not make it necessary to use separate counts to state
different theories of recovery or to seek relief under
separate statutory provisions, although the pleader may
choose to do so for clarity or out of caution.”)
(footnote omitted). Because here all four causes of action
stated in the complaint arise out of ESOP's purchase of
Kruse-Western's stock, Rule 10(b) provides no basis for
defendants argue that the complaint is deficient under Rule
8(a) in multiple respects. (Doc. No. 17-1 at 6-7.) Most of
these arguments are mooted by the discussion that follows and
will not be addressed here. However, the court does wish to
address defendants' contention that plaintiff has failed
to meet its pleading requirements because it has alleged
claims against Doe defendants. (Id.) As a general
rule, “Doe pleading” is disfavored in federal
court. See Gillespie v. Civiletti, 629 F.2d 637, 642
(9th Cir. 1980). However, the practice is not entirely
forbidden, particularly where the identities of alleged
defendants are unknown prior to filing the complaint.
Id.; see also Lopes v. Vieira, 543
F.Supp.2d 1149, 1152 (E.D. Cal. 2008). Here, the complaint
lists three groups of Doe defendants: (1) persons serving on
the Administration Committee of the ESOP; (2) the individual
members of the Kruse-Western Board of Directors; and (3) the
shareholders who sold their stock to the ESOP. (Compl. at
¶¶ 15, 17, 18.) Of the second and third groups,
only defendant Kruse is personally known. However, it is