DOL Wins ESOP Mismanagement Lawsuit Against California Bank

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

Oct. 25 — California Pacific Bank, its chief executive officer and three directors must pay more than $874,705 to participants in the bank’s employee stock ownership plan over accusations of mismanagement ( Perez v. Cal. Pac. Bank , 2016 BL 353435, N.D. Cal., No. 13-CV-03792-JD, 10/24/16 ).

Judge James Donato Oct. 24 set the damages that California Pacific—a small, privately held commercial bank in San Francisco—and its directors, as plan trustees, owed for their failure to liquidate and distribute bank shares held by the ESOP as cash in accordance with the plan terms in violation of ERISA. The trustees also breached their duties under the Employee Retirement Income Security Act by diverting to the bank funds that belonged to the plan, Donato said.

The judgment is another win for the Department of Labor in its litigation efforts against companies and officers that mismanage ESOPs. Last year, the court granted summary judgment to the DOL and the only issues remaining for trial were related to damages.

After a one-day trial, Donato held that the bank and trustees were jointly and severally liable for $715,687 in principal, plus interest, to at least 18 ESOP participants. In addition, California Pacific and the trustees were held liable for $159,018, plus interest, for improper plan assets transferred to the bank.

The court rejected the trustees’ arguments that the participants didn’t lose money because they were “happy” to sell their bank shares for less that the appraised value. “Happiness is not a recognized exception to the plain terms of an ERISA plan,” the court said.

The court imposed joint and several liability on all the four trustees. The bank’s CEO sent a letter to participants that was “replete with misinformation” and showed “an utter disregard for the rights and interest of participants,” the court said. As for the other three trustees, their testimony showed that “they did not understand or appreciate their responsibilities as fiduciaries of the Plan, and they provided little or no oversight” of the CEO.

The Office of the Solicitor represented the DOL. Wilke Fleury Hoffelt Gould & Birney LLP represented the bank and the trustees.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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