Former Employee Brings Class Action Complaint Against ESOP in California

    June 01, 2020, 07:55 AM

    On August 28, 2015, the KPC Healthcare, Inc. ESOP (the “KPC ESOP”) purchased 100% (i.e., 10,000,000 shares) of the stock of KPC Healthcare Holdings, Inc., a California corporation (KPC Healthcare), from Dr. Kali Pradip Chaudhuri for $227,107,262 (the “Transaction”). The entire purchase price was financed by a $217,107,262 term loan agreement with KPC Healthcare and a $10,000,000 cash contribution from KPC Healthcare.

    Danielle Gamino, a former employee of KPC Healthcare, filed a class action complaint on June 1, 2020, alleging that, among other things, (i) in approving the Transaction, Alerus Financial, N.A. (Alerus), the Trustee of the KPC ESOP, caused the KPC ESOP to pay more than fair market value for KPC Healthcare’s stock; (ii) the purchase price for the Transaction was based, in part, on an “unreliable” valuation report that did not address the fact that “less than two years before the transaction[,] the selling shareholder had valued the Company at less than a quarter of the sale price and that during the intervening period[,] the Company had experienced substantial financial distress, instability, layoffs, and persistent inability to make budgets”; and (iii) the KPC ESOP Committee did not file a 2018 Form 5500 and did not provide Plaintiff with an up-to-date summary plan description or valuation reports requested by Plaintiff.1

    Finally, Plaintiff contended that the KPC ESOP’s trust agreement contained indemnification provisions that are “void against public policy under ERISA § 410.”

    The complaint represents only Plaintiff’s side of the story, and none of the allegations have been proven as yet. We will update this blog as developments in the case occur.

    1 Class Action Complaint, Gamino v. KPC Healthcare Holdings, Inc., No. 5:20-cv-01126-SB-SHK (C.D. Cal. June 1, 2020), ECF No. 1.