United States District Court District of North Dakota

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UNITED STATES DISTRICT COURT DISTRICT OF NORTH DAKOTA

BERNARD MCKAY, on behalf of himself, Individually and on Behalf of All Others Similarly Situated,

Plaintiff, CLASS ACTION v. COMPLAINT

GARY D. THARALDSON,

Defendant,

and

THARALDSON MOTELS, INC. EMPLOYEE STOCK OWNERSHIP PLAN,

Nominal Defendant.

Plaintiff, as a participant and/or beneficiary of the Tharaldson Motels, Inc. Employee

Stock Ownership Plan and Trust, individually and on behalf of all those similarly situated, by and through his attorneys, hereby alleges as follows:

NATURE OF THE ACTION

1. This action arises under the Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. § 1001, et seq. and is brought on behalf of current and former employees

of Tharaldson Motels, Inc. (“TMI” or “the Company”), who were participants in the Tharaldson

Motels, Inc. Employee Stock Ownership Plan (the “ESOP” or “the Plan”) to remedy ERISA

breaches of fiduciary duty by the Defendant Gary D. Tharaldson arising out of his failure, as the

Trustee of the ESOP, to bring a derivative action against himself as the sole Director, President

and Chief Executive Officer of TMI for breaches of corporate fiduciary duties owed to the

shareholders of TMI, including the ESOP. The breaches of corporate fiduciary duties resulted Case 3:08-cv-00113-RRE-KKK Document 1 Filed 11/13/08 Page 2 of 14

from the misuse, dissipation and misappropriation of approximately $4 million in TMI assets, which Defendant improperly caused to be paid by a TMI affiliate to his ex-wife under a settlement agreement related to their divorce in exchange for unnecessary and worthless marketing and sales consulting services which were never performed and were of no value to

TMI or its affiliate. Because the ESOP owned almost all of TMI’s common stock during the relevant time period, these corporate fiduciary breaches directly resulted in a diminution in the value of the stock held by the ESOP and a diminution in the value of plan participants’ accounts.

2. This action seeks relief against Defendant Gary Tharaldson, as a fiduciary of the

ESOP, to make good to the Plan any losses to the Plan resulting from this breach and to obtain such other equitable or remedial relief as the Court may deem appropriate pursuant to ERISA §

502(a)(2), 29 U.S.C. § 1132(a)(2), and ERISA § 409, 29 U.S.C. § 1109.

JURISDICTION & VENUE

3. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331 because

this is a civil action arising under the laws of the United States and pursuant to 29 U.S.C. §

1132(e)(1), which provides for jurisdiction of actions brought under Title I of ERISA.

4. This Court has personal jurisdiction over the Defendant because Defendant,

during the times relevant to this Complaint, had extensive contacts with the State of North

Dakota as a result of his positions as the sole Director, President and Chief Executive Officer of

TMI, a North Dakota Corporation, and as the Trustee of the Plan, which at all relevant time was

administered in North Dakota, and because ERISA provides for nationwide service of process.

5. Venue is proper in this district pursuant to 29 U.S.C. § 1132(e)(2) because (a) the

Plan is administered in this district, (b) the breaches of fiduciary duty alleged herein took place

in this district, and (c) ERISA provides for nationwide service of process.

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PARTIES

THE PLAINTIFF

6. Plaintiff Bernard McKay is a former employee of TMI and a current vested

participant in the Plan whose current account balance exceeds $150,000. Plaintiff McKay resides in Sun City, Arizona and during the time of his employment at TMI resided in Jolliet,

Illinois.

THE DEFENDANT

7. Defendant Gary D. Tharaldson (“Gary Tharaldson”), in his capacity as the sole

Director of TMI, appointed himself Trustee of the ESOP on December 17, 1998, and remained

as the ESOP Trustee until August 29, 2006, the effective date of his resignation. As the Trustee,

Gary Tharaldson had the authority to institute and prosecute any an all legal proceedings on

behalf of the Plan and to take any other action for the purpose of enforcing any claims of the

Plan and was, therefore, a fiduciary with respect to the Plan within the meaning of ERISA § 3

(21), 29 U.S.C. § 1002 (21). At times relevant to this Complaint, Gary Tharaldson was also the

sole Director, President and Chief Executive Officer of TMI, as well as various TMI affiliated

companies, including Tharaldson Property Management, Inc. (“TPM”), Tharaldson Development

Co., Tharaldson Employee Management, Inc., Tharaldson Lodging I, Inc. and Tharaldson

Lodging I-A, Inc.

NOMINAL DEFENDANT

8. The ESOP is a defined contribution pension plan within the meaning of ERISA

§§ 3(2)(A), 3(3) and 3(34), 29 U.S.C. §§ 1002(2)(A), 1002(3) and 1002(34). The ESOP is

named as a defendant in this action pursuant to Federal Rules of Civil Procedure Rule 19, solely

to assure that complete relief can be granted.

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RELEVANT NON-PARTIES

9. Tharaldson Motels, Inc. (“TMI” or “the Company”), is a holding company incorporated in North Dakota with its principal place of business located in Fargo, North Dakota.

The Company’s principal business consists of the ownership and operation of hundreds of

“limited service” hotels and motels in over thirty-six (36) states.

10. Tharaldson Property Management (“TPM”), is a wholly-owned subsidiary of TMI headquartered and incorporated in Fargo, North Dakota, which is responsible for managing the motels and other related non-TMI motel properties. TPM provides the day-to-day operations for

TMI and non-TMI properties and other entities, including training, payroll, human resources, bank relations, and information systems in exchange for a percentage of motel property room revenue. TPM’s personnel are located in Fargo, North Dakota.

11. Linda Tharaldson is the former wife of Defendant Gary Tharaldson.

FACTUAL ALLEGATIONS

The ESOP

12. The ESOP is an employee benefit plan within the meaning of ERISA, and was established by Gary Tharaldson purportedly for the exclusive purpose of providing retirement benefits for TMI employees.

13. At times relevant to this Complaint, the terms of the Plan were governed by the governing Plan documents, effective January 1, 1998, or upon information and belief, substantially similar terms (hereinafter “the Governing Plan Documents”).

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14. Pursuant to Paragraph 9.3 of the Governing Plan Document the “the purpose of

this Trust is to invest primarily in and hold Company [TMI] stock for the benefit of Participants

and Beneficiaries of Participants.”

15. At times relevant to this Complaint, the ESOP owned a majority of the outstanding shares of TMI common stock. Pursuant to agreements entered into on December 17,

1998, between Gary Tharaldson, Tharaldson family members and trusts established for the benefit of Tharaldson family members, the ESOP agreed to purchase 5,000,000 of the

10,000,000 outstanding shares of TMI common stock for $250,000,000. Pursuant to agreements entered into on December 27, 1999, between Gary Tharaldson, Tharaldson family members, trusts established for the benefit of Tharaldson family members, and the Fargo-Moorhead Area

Foundation, the ESOP agreed to purchase an additional 4,999,900 shares of TMI common stock for an additional $256,594,800. On or after December 27, 1999, the ESOP owned a total of

9,999,900 shares of TMI stock which constituted over 99.99% of the outstanding shares of TMI common stock.

The Corporate Fiduciary Breach

16. Defendant Gary Tharaldson was married to Linda Tharaldson from 1966 until

1978 and from 1980 until 1984 when they divorced.

17. Upon information and belief, Plaintiff alleges that Linda Tharaldson, during the

course of her marriage and divorce from Gary Tharaldson, accumulated common stock in certain

hotels.

18. In March 1998, Linda Tharaldson conveyed her interest in the common stock

referenced above to Defendant Gary Tharaldson in exchange for a twenty year consulting

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contract with TPM. Under the terms of the contract, Linda Tharaldson was to be paid $40,000 per month by TPM for sales and marketing consulting.

19. From the inception of the contract in 1998 until sometime in 2000, Linda

Tharaldson provided very limited sales and marketing consultation services for TPM. She did

not work a 40 hour work week, but instead only visited hotels owned by TMI to assist personnel

with sales calls when requested to do so. Even though she performed little or no services to

TPM during this time period, she received a monthly $40,000 check from TPM.

20. In 2000, Linda Tharaldson was informed that her consulting services were no

longer needed by TPM and she received no more requests to provide consulting services.

Despite the fact that she provided no consulting services to TPM after 2000, Linda Tharaldson

continued to receive $40,000 per month from TPM until August 2007, when her services were

terminated by the TMI trustees.

21. From 1998 until 2007, Linda Tharaldson received approximately $4 million from

TPM even though she provided limited services to TPM before 2000 and no services after that

date.

22. Sections 10-19.1-50 and 10-19.1-60 of the North Dakota Century Code impose a

duty upon officers and directors of a corporation to discharge their duties in good faith, in a

manner reasonably believed to be in the best interest of the corporation, and with the care an ordinary prudent person in a like position would exercise under similar circumstances.

Defendant Gary Tharaldson, in his role as the sole Director, President and Chief Executive

Officer of TMI, violated his corporate fiduciary duties by failing to act in good faith, in a manner reasonably believed to be in the best interest of TMI, and with the care an ordinary prudent person in a like position would exercise when he arranged for and allowed Linda Tharaldson, his

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former wife, to be paid approximately $40,000 per month by TPM from 1998 until 2007 when he knew or should have known that she was providing no services for TPM. This dissipation and waste of approximately $4 million of TMI assets resulted in a diminution in the value of TMI stock, including the TMI stock held by the ESOP.

23. Defendant Gary Tharaldson is personally liable to TMI or its shareholders for monetary damages for the breaches of fiduciary duty described in paragraph 22, above. Under

Section 10-19.1-50(5) of the North Dakota Century Code, Defendant Gary Tharaldson’s personal liability for these fiduciary breaches may not be eliminated or limited under TMI’s Articles of

Incorporation because his actions in arranging and allowing for the payment of approximately $4 million to Linda Tharaldson in order to obtain TMI stock held by her constitutes a breach of his duty of loyalty, an act that was not in good faith and involves intentional misconduct, and a transaction for which he derived an improper personal benefit.

The Failure of the Defendant as Trustee of the ESOP to institute and prosecute a derivative action against the Defendant to prevent the waste and dissipation of assets of TMI and to recover losses sustained by TMI

24. The ESOP, as a holder of almost all common shares of TMI stock, was entitled to

bring an action under Section 10-19.1-85.1 of the North Dakota Century Code for equitable relief

against Gary Tharaldson alleging that he violated Sections 10-19.1-49 and 10-19.1-50 of the

North Dakota Century Code when he arranged for and allowed TMP to pay his former wife,

Linda Tharaldson, $40,000 per month from 1998 until 2007 for consulting services when she

provided little or no services to TMP.

25. Pursuant to Section 9.8 of the Governing Plan Document, Defendant Gary

Tharaldson, as the Trustee, had the following powers, among others:

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(a) “To institute and prosecute any an all legal proceedings . . . on behalf of the Plan,

or to take any other action for the purpose of enforcing any such claim.”

(b) “To employ suitable agents and counsel, and to pay their reasonable expenses and

compensation.”

deem necessary and proper for the protection of the property [of the Plan] and to carry out the

purposes of the Plan.”

26. As a fiduciary, Defendant Gary Tharaldson was required by ERISA § 404(a)(1),

29 U.S.C. § 1104(a)(1), to manage and administer the Plan and the Plan’s investments solely in the interest of the Plan’s participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

27. As a fiduciary, Defendant Gary Tharaldson had the duty to bring an action on behalf of the ESOP against himself, as the sole Director, President and Chief Executive Officer of TMI, alleging violations of North Dakota corporate law and seeking to recover the assets improperly paid to his former wife, Linda Tharaldson. Had he brought such an action on behalf of the ESOP, the lawsuit would have been successful.

28. Defendant Gary Tharaldson failed to consider or bring such an action against

himself for breaches of corporate fiduciary duty and, therefore, violated his fiduciary duties to

the ESOP under ERISA.

29. Defendant Gary Tharaldson’s failure as the ESOP Trustee to bring a corporate

fiduciary breach action against himself resulted in a diminution in the value of the ESOP stock,

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resulting in approximately $4 million in losses to the ESOP which affected the value of each and every Plan participants’ account. For example, the account balance of Plaintiff Bernie McKay would have been increased by approximately $1500 had such an action been brought.

CLASS ACTION ALLEGATIONS

30. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure on behalf of a Class of all persons who were participants of the ESOP at any time from December 30, 1998 to the present and who received an allocation of Plan assets to their accounts which they did not subsequently forfeit under the terms of the Plan and the beneficiaries of such participants.

31. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are thousands of such participants or beneficiaries. According to the 2004 Form 5500, there were over 3,300 current active participants in the Plan, 225 retired or separated participants entitled to future benefits, 26 retired participants receiving benefits and 7 beneficiaries of deceased participants receiving benefits or entitled to receive benefits.

32. Plaintiff’s claims are typical of the claims of the Class, as Plaintiff is a participant or beneficiary of the ESOP.

33. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in Class action and ERISA litigation.

Plaintiff has no interests that are contrary to or in conflict with those of the Class he seeks to represent.

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34. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting only individual members of the Class, and include the following:

(a) Whether Defendant Gary Tharaldson in his capacity as the sole Director,

President and Chief Executive Officer of TMI breached corporate fiduciary duties

owed to the shareholders of TMI, including the ESOP, by improperly causing

TPM, a subsidiary of TMI, to dissipate, misuse and waste corporate assets by

paying over $4,000,000 to his ex-wife under a settlement agreement related to

their divorce in exchange for unnecessary and worthless marketing and sales

consulting services, which were never performed and were of no value to TMI or

its affiliate, TPM.

(b) Whether TMI and its subsidiary TPM have sustained losses as a result of breaches

of corporate fiduciary duties owed by the Defendant in his capacity as the sole

Director, President and Chief Executive Officer TMI to the shareholders of TMI,

including the ESOP, and, if so, what is the proper measure of those losses.

prudence and loyalty owed to the Plan by failing to bring a derivative action

against himself as the sole Director, President and Chief Executive Officer of

TMI to recover losses to TMI and its subsidiary TPM for breaches of corporate

fiduciary duties owed to the shareholders of TMI, including the ESOP, resulting

from the improper dissipation, misuse and waste of TMI assets and those of its

subsidiary, TPM.

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(d) Whether the Plan has sustained losses and, if so, what is the proper measure of

such losses.

(e) Whether members of the Class are entitled to injunctive and declaratory relief.

(f) Whether members of the Class are entitled to attorneys’ fees.

35. The prosecution of separate actions by individual class members would create a risk of (a) inconsistent adjudications that would establish incompatible standards of conduct or

(b) adjudications with respect to individual members of the Class which would as a practical matter be dispositive of the interests of other members not parties to the adjudications or substantially impair or impede their ability to protect their interests, thereby making certification

under Rule 23(b)(1) appropriate.

36. The actions of Defendant affected the Plan and all Class members in the same

manner and make final declaratory and injunctive relief appropriate with respect to the Class as a

whole, thereby satisfying the certification requirements of Rule 23(b)(2).

37. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Since the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to seek redress for the wrongful conduct alleged. Plaintiffs know of no

difficulty which will be encountered in the management of this litigation which would preclude its maintenance as a class action. Accordingly, certification under Rule 23(b)(3) is appropriate.

COUNT I

(Violation of ERISA § 404(a) Against the Defendant Gary Tharaldson as Trustee)

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38. Plaintiffs repeat and incorporate the allegations contained in the foregoing

paragraphs as if fully set forth herein.

39. Defendant Gary Tharaldson breached his fiduciary duties under ERISA by failing

to discharge their duties with respect to the Plan solely in the interest of the participants and beneficiaries (1) for the exclusive purpose of providing benefits to participants and their beneficiaries; (2) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and like aims, all in violation of ERISA §

404(a)(1)(A) and (B), 29 U.S.C. § 1104(a)(1)(A) and (B), by failing to bring a derivative action against himself as the sole Director, President and Chief Executive Officer of TMI to recover losses to TMI and its subsidiary TPM for breaches of corporate fiduciary duties owed to the shareholders of TMI, including the ESOP, resulting from the improper dissipation, misuse and waste of TMI assets and those of its subsidiary, TPM.

ENTITLEMENT TO RELIEF

40. By virtue of the violations of ERISA described in the preceding paragraphs,

Plaintiffs are entitled to sue Gary Tharaldson pursuant to ERISA § 502(a)(2), 29 U.S.C. §

1132(a)(2) for relief on behalf of the Plan as provided in ERISA § 409, 29 U.S.C. § 1109,

including recovery for the Plan of any losses to the Plan resulting from each such breach, to

restore to the Plan any profits which may have been made by Defendant Gary Tharaldson for his

failure to bring a shareholder action on behalf of the ESOP against himself, and for such other

equitable or remedial relief as the court may deem appropriate.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment against Defendant Gary Tharaldson on each

Count of the Complaint and the following relief:

A. An order requiring Defendant Gary Tharaldson to pay such amount to the Plan as is necessary to make the Plan whole for any losses which resulted from said breaches of fiduciary duty;

B. An order requiring the disgorgement of any profits made by Defendant Gary

Tharaldson as a result of his failure to bring a shareholder action on behalf of the ESOP;

C. An order requiring the proceeds of any recovery for the Plan to be allocated to the accounts of Participants in the Plan in proportion to the injury that they suffered as a result of the breach of fiduciary duty;

D. A declaration pursuant to ERISA that the Defendant Gary Tharaldson violated his fiduciary duties in the manner described;

E. The cost of the suit, including attorneys’ fees under ERISA § 502(g)(1), 29 U.S.C.

§ 1132(g)(1), and/or pursuant to the common fund theory this Court’s inherent equitable authority and powers;

F. Pre-judgment and post-judgment interest; and

G. Other such and further relief as the Court deems appropriate.

Dated: November 13, 2008 Respectfully submitted,

/s/ Al Baker Al Baker (ND #04122) Stacey Tjon Bossart (ND #05440) SOLBERG STEWART MILLLER & TJON 1129 Fifth Avenue South P.O. Box 1897 Fargo, ND 58107-1897

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(701) 237-3166 Telephone (701) 237-4627 Facsimile

R. Joseph Barton Bruce Rinaldi COHEN, MILSTEIN, SELLERS & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005-3934 (202) 408-4600 Telephone (202) 408-4699 Facsimile

Marc I. Machiz COHEN, MILSTEIN, SELLERS & TOLL, P.L.L.C. 255 S. 17th Street Suite 1307 Philadelphia, PA 19103 (267) 773-4682 Telephone (267) 773-4690 Facsimile

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