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Zavala v. Kruse-Western, Inc.

United States District Court, E.D. California

July 26, 2019

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


         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.


         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.)


         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 (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).

         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 (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. 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 (1983).


         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 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. 29, 2017).

         Here, 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 dismissal.

         Next, 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 ΒΆΒΆ 15, 17, 18.) Of the second and third groups, only defendant Kruse is personally known. However, it is ...

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