Plaintiffs in Rainbow ESOP class action ready to settle case

BVWireIssue #215-2
August 12, 2020

ESOP valuations
breach of fiduciary duty, fair market value (FMV), prohibited transaction, trustee, employee stock ownership plan (ESOP), erisa

Last week, we reported on the resolution of two major ESOP litigations. Recently, the plaintiffs in another big class action, Hurtado v. Rainbow Disposal, asked the court for approval of a settlement they have worked out with the defendants, including GreatBanc Trust, the trustee, in connection with the allegedly improper sale of all ESOP stock to a third party.

Contested sale of ESOP assets: Rainbow Disposal was one of the largest trash disposal and recycling companies in southern California. Before October 2014, the company’s ESOP owned 100% of company stock. As of June 2014, Rainbow stock made up 97% of the plan’s assets. GreatBanc was hired as the trustee of the ESOP. Under the plan, any sale of stock the ESOP held “must be made at a price no less than the Fair Market Value as of the date of the sale.” FMV was defined as “[t]he fair market value of Company stock, as determined by the Trustee … based upon a valuation by an independent appraiser.” ESOP participants were entitled to direct the trustee to vote their shares on corporate matters such as a merger or liquidation of the company. Rainbow was the plan administrator.

In August 2014, the executive chairman of the company executed an amendment to the ESOP that gave the trustee discretionary authority to sell all or substantially all shares in the company to a third party in a change-of-control transaction. In October 2014, the plaintiffs, who were plan participants, learned from a letter GreatBanc had sent that all of the stock in the ESOP was sold to the defendant Republic Services Inc. In a follow-up letter, the plaintiffs were told the stock sold at $17.66 per share. In their court complaint, the plaintiffs stated they ultimately only received about $15.10 per share. They said that DOL filings and ERISA-mandated disclosures showed that $15 million of the sale proceeds were left in undiversified investments for nearly three years resulting in “a return of virtually zero (and expenses exceeding returns).”

In September 2017, the plaintiffs filed suit, raising a host of claims against GreatBanc as well as other ESOP fiduciaries and Republic under ERISA. For example, the plaintiffs alleged GreatBanc breached its fiduciary duties to the plan by permitting the sale of Rainbow stock the ESOP held and by failing to require a participant vote to authorize the sale. GreatBanc also failed to disclose important information to plan participants regarding the October 2014 sale and proceeds from it.

In April 2019, a federal district court granted the plaintiffs’ motion for class certification.

Proposed settlement terms: In their July 27, 2020, motion for preliminary approval of settlement, the plaintiffs note two attempts at mediation that concluded with a proposal to which both sides agreed in January 2020, subject to allocation and funding. The parties later entered into a formal settlement agreement on July 23, 2020.

Under the proposed settlement, the defendants will pay $7.9 million into a settlement fund to be allocated to the class: Republic will pay $7.5 million, and GreatBank will pay $400,000. In exchange, the class will dismiss all claims against the defendants. “Given the uncertainty of establishing both liability and damages the Settlement presents an excellent result for the Class and the Court should preliminarily approve it,” the plaintiffs say in support of the proposed settlement.

The case, which is litigated in federal court, central district of California, is Hurtado v. Rainbow Disposal Co., Case No.: 8:-17-cv-01605-JLS-DFM (Hon. Josephine L. Staton).

Please let us know if you have any comments about this article or enhancements you would like to see.