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

An ESOP Fable with a Drafting Tip discusses 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, a case that permitted a plan to Use an Account Balance to Offset Damages Resulting from a Fiduciary Breach. We further expanded on this case in Criminal Sentences and Bad Boy Clauses – When ERISA Account Balances Can Be Recovered by the Plan.

The case is centered on Kennon Patterson, who at the time was the Chairman, CEO, and President of Community Bancshares, Inc., as well as a member of the ESOP administrative committee. After Patterson was convicted of "fifteen counts of conspiracy, bank fraud, causing false entries in bank records, and filing false tax returns", the ESOP Committee and Trustee sued:

As early as 1998 and continuing at least through the mid 2000s, Patterson had been defrauding the bank by having contractors bill the bank for construction on his personal farm. He was indicted for bank fraud in 2003 and convicted in 2005. In 1998, during a time that a shareholder derivative suit was pending but before these criminal charges had come to light, the ESOP refinanced its note and purchased an additional 56,682 shares of Bancshares stock. Patterson was a member of the ESOP committee during this period, but did not disclose his fraudulent activity to the committee. Later, a second shareholder derivative suit was filed that did allege the personal construction charges. Other suits followed, and not surprisingly, the value of the stock held by the ESOP declined.

The article notes that the plan document included language permitting the offset of a participant's benefits as allowed by IRC Section 401(a)(13)(C) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Assignment and alienation - Special rule for certain judgments and settlements and suggests that the "decision serves as good reminder to include such language in ESOP documents":

The plan document recited the general rule providing that no assignment or attachment can occur against a participant's benefit, but immediately followed that with the following statement: Notwithstanding any provisions of the Section to the contrary, an offset of a Participant's accrued benefit against an amount the participant is ordered or required to pay the Plan with respect to a judgment, order or decree issued, or a settlement entered into, on or after August 5, 1997, shall be permitted in accordance with Code Section 401(a)(13)(C) and (D).

The article also discusses how the opinion differentiated between fiduciary and company officer acts and that a fiduciary "has an affirmative duty to disclose to plan participants facts that would have an "extreme impact" on the plan as a whole."