Compliance

Court Finds ERISA Violation from Following Terms of ESOP

By Rebecca Moore editors@plansponsor.com | June 13, 2012

June 13, 2012 (PLANSPONSOR.com) – A federal district court has found employee stock ownership plan (ESOP) fiduciaries “abused their discretion by following the plan’s directions.”

Rejecting Community National Bank Corporation’s (CNBC) motion to dismiss, U.S. District Judge James S. Moody, Sr. of the U.S. District Court for the Middle District of Florida cited the recent decision in Lanfear v.Home Depot, Inc., in which the 11th U.S. Circuit Court of Appeals said “[u]nless a plaintiff pleads facts sufficient to raise a plausible inference that the fiduciary abused its discretion by following the plan’s directions, the complaint fails to state a valid claim and a motion to dismiss should be granted.”     

According to Moody, the plaintiffs' allegations are sufficient to state a claim that the defendants breached their fiduciary duties to plan participants in violation of the Employee Retirement Income Security Act (ERISA) by failing to prudently and loyally manage the plan’s investments in CNBC stock. The evidence showed that in 2008, the Office of the Comptroller of the Currency of the United States of America (OCC) entered into an agreement with CNBC whereby the OCC found unsafe and unsound banking practices relating to the lending of CNBC.  The agreement was signed by defendants in their capacity as directors and officers of CNBC.  Despite the agreement with OCC, the defendants failed to address unsafe and unsound practices and the bank’s critically undercapitalized condition.  CNBC stock is now worthless and by extension, the majority of the plan asserts are worthless.   

However, Moody dismissed plan participants’ claims for failure to provide complete and accurate information and failure to monitor fiduciaries, finding they did not provide sufficient factual allegations.  

The opinion in Guididas v. Community National Bank Corporation is available here.