May 1, 2023
Remarkable Lawsuit Filed Against B-K Lighting
Lawsuit questions ESOP transactions, corporate jet, $2M consulting agreement, $5M insurance payout and a “sham” forklift lease
A remarkable lawsuit has been filed against California-based architectural lighting manufacturer, B-K Lighting – along with other company stakeholders including members of the Hagen family and company CEO, Nathan Sloan. The suit alleges that that the numerous participants in the Employee Stock Ownership Plan (ESOP) have suffered millions of dollars in losses as a direct result of the defendants' actions related to ESOP transactions and other alleged misappropriations.
A common thread of the accused actions is that they each allegedly enriched the company founder Douglas Hagen and his family at the expense of the ESOP stakeholders.
There are two plaintiffs:
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Linna Chea, is a former employee of B-K Lighting and a participant in the ESOP. Chea worked at B-K Lighting between September 2015 and June 2021 as a Human Resources Generalist.
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Lite Star Employee Stock Ownership Plan (ESOP). It is stated that Chea is suing on behalf of the ESOP.
According to the complaint, in 2014, operational control of the company was handed over to Nathan Sloan, stepson of B-K Lighting founder, Douglas Hagen. The complaint alleges that Sloan lacked the requisite managerial experience to effectively run B-K Lighting. The company reportedly spent hundreds of thousands of dollars on outside consultants to train Sloan and manage daily operations.
The plaintiffs’ complaint also points to a significant decline in B-K Lighting's sales in 2017. The company's inability to keep up with industry changes, such as the slow adoption of LED and Bluetooth technologies in its products, was a contributing factor, according to the complaint. Our communication with multiple B-K Lighting reps indicate disagreement to the notion that B-K was late to adopt LED technology. The plaintiffs further alleged that the company failed to implement an effective digital marketing strategy, resulting in a virtually non-existent social media presence by 2021.
The lawsuit goes on to allege that B-K Lighting's declining revenue was further exacerbated by inexperienced management and high turnover rates among management and sales teams. Despite Sloan's alleged lack of experience, he was allegedly paid a salary significantly above the market rate for a company president in the Fresno, California area.
Lawsuit alleges irresponsible ESOP valuation and setup:
According to the complaint, Douglas Hagen, the company's founder, owned 100% of B-K Lighting's stock before the establishment of the Lite Star Employee Stock Ownership Plan (ESOP) on August 29, 2017 with an effective date of September 1, 2016. The ESOP transaction was primarily financed through a loan from Mr. Hagen to B-K Lighting, with the ESOP issuing a corresponding promissory note to the company. The plaintiffs claim that the ESOP paid more than the fair market value for B-K Lighting's stock and assumed excessive debt in the process.
On December 31, 2017, Mr. Hagen reportedly sold 100% of B-K Lighting’s stock to the ESOP for $25,270,000. The lawsuit also claims that the transaction price did not accurately reflect future revenue and earnings, given the known or foreseeable conditions at the time. The plaintiffs also allege that the Hagen family retained control of the company even after the ESOP paid a control premium for B-K Lighting's stock.
The plaintiffs argue that a prudent fiduciary who had conducted a thorough investigation would have concluded that the ESOP was overpaying for B-K Lighting's stock in the transaction. The plaintiffs also criticize the Trustee's due diligence, claiming that it was less extensive than what third-party buyers would typically conduct in similar-sized corporate transactions.
The Hagen family, acting on behalf of B-K Lighting, is alleged to have appointed Mr. Paredes and Prudent as the Trustee of the ESOP, but the plaintiffs argue that they failed to ensure that the trustee was acting prudently and in accordance with the Employee Retirement Income Security Act's (ERISA) fiduciary requirements.
$2 million consulting agreement called into question
According to the court documents, on January 1, 2018, a day after the day after Hagen sold 100% of B-K Lighting’s stock to the ESOP for $25,270,000, Nathan Sloan, the company president, allegedly signed a $2 million consulting agreement that would pay Hagen $500,000 per year for four years.
Despite Hagen's reported ill-health preventing him from rendering any services under this agreement, he was allegedly paid until his death in December 2021. The lawsuit claims that the valuation relied upon by the Trustee for the ESOP Transaction did not consider the negative financial impact of this consulting agreement.
$5 million insurance payout questioned
The complaint further alleges that Mr. Hagen was covered by a $5 million "key man" life insurance policy, which was paid for by B-K Lighting and named the company as the beneficiary. The death benefit was reportedly paid to the company following Mr. Hagen's death. However, the plaintiffs assert that the funds have been set aside in a separate bank account, and the current President, Nathan Sloan, has yet to decide whether the money will be transferred to Mr. Hagen's family.
Private Jet: Alleged misappropriation
In another accusation, the complaint alleges that in 2018, B-K Lighting agreed to loan money to a Hagen family investment company, Coarsegold Equipment LLC, for the purchase of a jet airplane. Coarsegold then purportedly leased the jet back to B-K Lighting. The company is said to have even hired a full-time pilot for the jet. However, the jet was allegedly used predominantly for the Hagen family's personal travel, not for the company’s sales employees as originally stated.
The lawsuit also alleges that the decision to purchase the jet airplane using money loaned from B-K Lighting to Coarsegold was made prior to the ESOP transaction, but this decision was not disclosed to the Trustee. Consequently, the valuation for the ESOP transaction did not properly account for the financial impact of the planned purchase of the jet airplane.
A “sham” recurring forklift lease payment to Sloan and Hagen’s daughter
In a further claim, it is alleged that Coarsegold had a sham leasing agreement with B-K Lighting, leasing a forklift that does not appear to exist. Despite this, the company reportedly continues to make monthly payments to Nathan Sloan and Douglas Hagen's daughter, Kim Minard. The lawsuit asserts that the ESOP Transaction's valuation did not adequately account for the negative financial impact of this supposed sham leasing agreement.
The plaintiffs are requesting that the court take several actions to instill proper governance in the ESOP. They are also seeking the court to recover any ill-gotten gains that the company or the Hagen family may have obtained and return them to the ESOP. Moreover, they are asking the court to order the parties to compensate the ESOP for any actions that resulted from a breach of their fiduciary duties.
Court records indicate that B-K Lighting and the other defendants have yet to be served with the lawsuit that was just filed in United States District Court for the Eastern District of California on Thursday, April 27. Once served, the defendants will have 30 days to file a response.
In a brief response to our inquiry, B-K Lighting CEO, Nathan Sloan, indicated that he and the company will defend themselves in this lawsuit. Our multiple messages to the attorneys representing the plaintiffs were not returned.
