Current ESOP Participant can Represent Former Participants in Suit

January 3, 2008 ( - The U.S. District Court for the Eastern District of California has determined that a current participant in an Employee Stock Ownership Plan (ESOP) can adequately represent a class that includes former, cashed-out participants in a fiduciary breach suit.

Defendant David R. Johanson argued that Darleen Stanton cannot adequately represent the interest of those individuals whose interests in the plan have been cashed out and terminated because the interests of Stanton and other current participants is antithetical to the interests of the former participants as a distribution to one “class” necessarily reduces the amount distributable to the other. Johanson said that creates an adversarial relationship.

The court disagreed, saying Stanton’s first claim seeks recovery for the benefit of the plan, which concerns the financial integrity of the plan – a common interest of both classes. The court pointed out that irrespective of the sharing arrangement of any recover – which is yet to be determined – the interests of the current participants and former participants is “coextensive – maximize recovery.”

Since the plan is currently in existence, any recovery can be paid directly to the plan, and the extent to which former participants will share in that recovery is not a matter to be addressed at this stage of proceedings, the court noted.

Johanson also claimed Stanton had no basis for her claims because she failed to identify a particular fund or property traceable to the ill-gotten gains she alleged Johanson received at the expense of the plan. However, the court said the identification of such funds or property need not be identified in the complaint, but will be decided during discovery.

“To accept Johanson’s argument would require a person seeking to impose a constructive trust to engage in a significant degree of pre-filing investigation and obtain information peculiarly in the possession of the defendant that is normally part of the discovery process in civil actions,” the opinion said.

In her complaint, Stanton alleged that Johanson, and other plan fiduciaries personally enriched themselves from breaches of fiduciary duties and that the ESOP is entitled to the imposition of a constructive trust on the ill-gotten profits.

The opinion in Stanton v. Couturier, E.D. Cal., No. 2:05-cv-02046-RRB-KJM, 12/26/07 is here .