The court granted summary judgment to the ESOP committee and also determined that under the ESOP and Employee Retirement Income Security Act (ERISA) provisions, the benefits otherwise due Kennon Patterson, former President and Chief Executive Officer of Community Bancshares, Inc. and Community Bank, can be used to repay damages to the ESOP.
After determining that Patterson was a fiduciary to the plan since he served on the plan’s committee at the time he was using bank money to pay for personal ventures, the court concluded he breached his fiduciary duty to the plan by failing to disclose his bank fraud to other ESOP Committee members and ESOP participants before the 1998 purchase of more company stock for the plan. “Patterson committed fraud against the company, engaged in fraudulent accounting, concealed that fraud from the ESOP administrators and ESOP plan participants, and encouraged the continued purchase of company stock,” the opinion said.
The court further said that Patterson not only committed fraudulent acts but also “knowing the Plan’s investment had been impaired by [his] own fraudulent acts, . . . failed to take any steps to protect the Plan’s assets. . . .”
The district court said Patterson could not claim innocence of the wrongful acts in the present case because a jury had found him guilty beyond a reasonable doubt in a criminal case and a federal appellate court had affirmed that decision. His argument that the terms of the ESOP dictated investment in company stock was rejected as the court pointed out ERISA allows an ESOP to reject that mandate if it is prudent to do so.
“[T]he ESOP Committee could have deviated from the ESOP provisions and chosen not to invest in Bancshares stock if and when the ESOP Committee obtained notice that the corporation was facing serious mismanagement issues and public scandal,” the court said.
The case is Pension and Employee Stock Ownership Plan Administrative Committee of Community Bancshares Inc. v. Patterson, N.D. Ala., No. CV-04-BE-00531-S, 3/31/08.