Pension and Employee Stock Ownership v. Patterson

Decision Date31 March 2008
Docket NumberNo. CV-04-BE-00531-S.,CV-04-BE-00531-S.
Citation547 F.Supp.2d 1230
PartiesPENSION AND EMPLOYEE STOCK OWNERSHIP PLAN ADMINISTRATIVE COMMITTEE OF COMMUNITY BANCSHARES, INC. on behalf of the Community Bancshares, Inc. Stock Ownership Plan; and North Star Trust Company, Plaintiffs, v. Kennon R. PATTERSON, Sr., Defendant.
CourtU.S. District Court — Northern District of Alabama

Larry B. Childs, Randall D. Quarles, Waller Lansden Dortch & Davis LLP, John C. Morrow, Burr & Forman LLP, Birmingham, AL, Michael T. Graham, McDermott Will & Emery, Chicago, IL, for Plaintiffs.

Ashley Lomers McDavid, Glen M. Connor, Whatley Drake & Kallas LLC, Birmingham, AL, for Defendant.


KARON OWEN BOWDRE, District Judge.

The case is before the court on Plaintiffs' Motion for Partial Summary Judgment (doc. 51) and Defendant's Motion for Summary Judgment (doc. 48). For the reasons stated in this opinion, the court will DENY Defendant's Motion for Summary Judgment. The court will GRANT Plaintiffs' Motion for Partial Summary Judgment with respect to the claim in Counts I, II, and III that Defendant breached his fiduciary duty to disclose his own wrongful conduct to the ESOP Committee. The court will further GRANT in part Plaintiffs' Motion for Partial Summary Judgment on Count Four of the complaint to the extent that it seeks a declaratory judgment establishing that the ESOP has a right of set-off against Defendant and that the ESOP Committee correctly delayed distributing benefits to Defendant until the right of set-off was determined. However, the court will DENY Plaintiffs' motion with respect to other claims.


The Plaintiffs in this suit are the Pension and Employee Stock Ownership Plan Administrative Committee of the Board of Directors of Community Bancshares, Inc.1 ("ESOP Committee") and North Star Trust Company ("North Star"), Trustee of the ESOP. They bring this action for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 ("ERISA")2, as amended, 29 U.S.C. § 1104; 29 U.S.C. § 1109; 29 U.S.C. § 1132(a)(2) and (3) against Defendant, Kennon Patterson, former President and Chief Executive Officer of Community Bancshares, Inc. ("Bancshares") and Community Bank ("the Bank"). Plaintiffs also request the court to "enter a judgment declaring that (1) the Community ESOP has a right of setoff against the funds or assets demanded by Patterson in the amount of the damages sustained by the Community ESOP as a proximate result of Patterson's misconduct and breaches of duty; (2) that Patterson is not entitled to a payment or distribution of funds or other assets held by North Star as Trustee of the Community ESOP; and (3) that the ESOP Committee's decision and direction that Patterson is not entitled to a payment or distribution of funds or other assets held by North Star as Trustee of the Community ESOP is proper under the terms of the Community ESOP Plan and ERISA."

Defendant subsequently filed a counterclaim, asserting that he is entitled to benefits from the ESOP, and requesting injunctive and declaratory relief from the court, compelling the ESOP to provide those benefits. Plaintiffs filed a Motion for Partial Summary Judgment, requesting the court to rule on the issue of Defendant's liability to the ESOP for breach of fiduciary duty with the amount of damages to be determined in further proceedings. Defendant also filed a Motion for Summary Judgment, asking the court to find that he is entitled to benefits from the ESOP. These motions have been fully briefed.


While disputes of fact exist in this matter, the tacts listed below are generally undisputed.

Defendant, Kennon Patterson, was the founding Chairman of the Board of Directors. Chief Executive Officer and President of Bancshares and served almost twenty\ years in those roles. He was also the Chairman of the Board of Directors and Chief Executive Officer of the Bank, which is a wholly owned subsidiary of Bancshares. During the years that he held various positions at Bancshares and the Bank, Patterson was a participant in the Bancshares ESOP, which was an employee benefit plan as defined by the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq. (ERISA).

In addition to his employment at Bancshares and the Bank, Patterson personally owned and operated Heritage Valley Farms ("HVF"), a 1,100 acre horse and cattle farm located in Blountsville, Alabama, where Bancshares and the Bank were headquartered. In 1998, Patterson began constructing buildings at HVF for his personal use. As revealed later, Patterson defrauded the Bank, beginning at least as early as 1998 and continuing at least through mid-2000, by having contractors bill the Bank for construction on and improvements to the HVF property. Patterson also mismanaged the Bank's loan portfolio and the Bank suffered loan losses as a result.

At various times during 1997, 1998, 1999, and 2002, Patterson served on the ESOP Committee of Bancshares. The ESOP Committee members are named fiduciaries of the ESOP and are responsible for its day-to-day administration and operation. The Board of Directors selects the members of the ESOP Committee, makes the determination whether to approve any amendments to the ESOP, and approves recommendations of the ESOP Committee.

The ESOP was designed to provide corporate finance to Bancshares. In addition, it enabled participating employees to share in the growth and prosperity of Bancshares and to provide participants with an opportunity to accumulate capital for their future economic security. It was constructed to invest primarily in Bancshares stock and, indeed, its assets consist entirely of Bancshares stock. It is funded solely by employer contributions, made at the discretion of Bancshares' Board of Directors, and participants are neither required nor permitted to make contributions. The ESOP borrowed money from the Bank and used that money to purchase common stock of Bancshares, which shares in turn secured the note. The ESOP Trustees executed the first promissory note in the amount of $1,200,000.00 in November 1993 to purchase Bancshares stock and 80,000 shares of purchased stock secured the note. The promissory note was refinanced subsequent to 1993 as the ESOP purchased additional shares. Bancshares guaranteed payment of the loan and made annual contributions to the ESOP in an amount sufficient to amortize the note. Those annual contributions could not be less than the amount required to cover the debt service on the ESOP loan. During the years that Patterson held positions at Bancshares, the contributions were equal to the amount necessary to amortize the note. Upon payment of the annual contributions to the ESOP, a portion of the shares of stock in the ESOP trust were released. The released shares of stock were then allocated to the eligible employee's individual accounts in proportion to their compensation.

On November 19, 1998, a shareholder derivative suit ("the Towns litigation") was filed against the Board of Directors of the Bank, alleging in part that the Board had acquiesced in Patterson's mismanagement and misconduct, including self-dealing, excessive compensation, misappropriation of corporate opportunities and misappropriation of funds. The Towns lawsuit did not include allegations of construction overcharges or fraudulent billing of the Bank for Patterson's personal construction at HVF.

Twelve days later, on December 1, 1998, the ESOP refinanced its promissory note in the amount of $2,963,842 (secured by 261, 434 shares of Bancshares common stock), and purchased an additional 56,682 shares of Bancshares stock. Although Patterson was a member of the ESOP Committee in 1997 and 1998, he did not disclose his fraudulent billings and other misconduct to the ESOP or to the ESOP Committee before the ESOP purchased additional Bancshares stock in 1998.

In June 2000, Bancshares began an investigation of its expenditures regarding the construction of a new bank office. By July of 2000, Bancshares directors were told that subcontractors may have overcharged the company and a joint committee of independent directors began to investigate. On July 21, 2000, a second shareholder derivative action ("the Benson litigation") was filed, this one relating to the alleged construction overcharges. More suits against Bancshares followed.

Patterson's criminal acts and other wrongdoing negatively affected both the book value and market value of Bancshares stock. The money that Patterson diverted through the construction billings impacted the book value of Bancshares stock by reducing the company's net assets. Patterson's general mismanagement of the Bank's loan portfolio also decreased the book value of the stock as a result of the increasingly higher amounts that the Bank had to reserve for loan losses. The allegations regarding Patterson's construction billings and other aspects of his mismanagement prompted substantial negative publicity, causing uncertainty among the investing public and drying up the market for Bancshares stock for an extended period of time.

On January 20, 2003, Patterson filed for personal bankruptcy. On or about January 21, 2003, Patterson obtained the release of the Bank's second mortgage on his private real estate property. On January 27, 2003, Bancshares and the Bank terminated Patterson from his positions. The stated reasons for his termination in the Joint Board Resolution of Bancshares and the Bank, dated January 27, 2003, included an alleged failure to report his personal bankruptcy to the Board when he sought and received a release of a second mortgage on collateral held by Bancshares. It also included a statement that Patterson "preferred his self interest over that of the Bank, the Company, and its shareholders and by doing so has breached his fiduciary duties to the Bank...

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  • Laufenberg v. Ne. Carpenters Pension Fund, Civil Action No. 17-1200 (MAH)
    • United States
    • U.S. District Court — District of New Jersey
    • December 18, 2019
    ...the defendant breached his fiduciary duties to the plan. See Pension & Employee Stock Ownership Plan Admin. Comm. of Cmty. Bancshares, Inc., o/b/o Cmty. Bancshares, Inc. v. Patterson, 547 F. Supp. 2d 1230, 1253 (N.D. Ala. 2008).IV. CONCLUSION For the foregoing reasons, the Court grants in p......

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