Rainbow ESOP Challenge Easily Beats Motions to Dismiss

The U.S. District Court for the Central District of California has denied defendants’ motions to dismiss a complex lawsuit involving the allegedly imprudent and disloyal sale of employee stock ownership plan (ESOP) assets.

Several corporate entities are involved in the matter, including Rainbow Disposal Co., Southeastern Renewables, West Florida Recycling and Republic Services. In reaching this decision, the court considered five distinct motions to dismiss filed by defendants, which the plaintiffs opposed in a single omnibus brief—in response to which defendants filed separate replies. After reviewing the extensive written arguments, the court denies all the motions to dismiss.

Plaintiffs in the lawsuit are participants and beneficiaries of the Rainbow Disposal Co., Inc. Employee Stock Ownership Plan, who seek to restore losses to the plan and to otherwise remedy a complicated series of alleged breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA). In all, some 14 counts are included in the underlying complaint.

The text of the decision shows that on July 1, 1995, the plan was first created and held 100% of Rainbow’s stock. The plan is governed by a plan document, which was restated most recently in 2004. As noted in the text of the decision, the plan document includes a number of original provisions and ad hoc amendments made over a series of years which are relevant to court’s thinking.

The lawsuit alleges a long and complicated series of alleged bad-faith dealings made by the executive leadership of Rainbow, through which they funded the creation of new companies and otherwise redirected ESOP assets. Apart from allegedly violating the plan document, these investments caused losses to the Raindbow ESOP while benefiting the executives, according to plaintiffs. Eventually the entire amount of Rainbow stock was unilaterally sold to a third party, triggering the filing of the lawsuit.

In the decision, there is a section that describes the alleged role played by a fake attorney who, according to plaintiffs, basically attempted to intimidate or misdirect potential plaintiffs. There is a lengthy discussion of all 14 counts and why each is capable of surviving the defendant’s motions to dismiss. Generally, the court concludes there is ample evidence to suggest that plaintiffs indeed may have been harmed by disloyal or imprudent behavior on the part of the defendants, making an examination of the facts at trial appropriate.

Ultimately, after all distributions had been made, plaintiffs received approximately $15 per share, which is less than the $16.67 per share as set forth in a June 2014 valuation and less than the $17.66 per share as set forth in an October 17, 2014, letter to plan participants. Even these amounts are less than what the stock would have been worth had the defendants acted more prudently and loyally, the plaintiffs argue.

The full text of the decision is available here.