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Shepherd v. Community First Bank

United States District Court, D. South Carolina, Anderson/Greenwood Division

March 28, 2019

Frederick D. Shepherd, Jr., Plaintiff,
Community First Bank, Community First Bank SERP Plan, Richard D. Burleson, Gary V. Thrift, Dr. Larry S. Bowman, William M. Brown, John R. Hamrick, James E. Turner, Charles L. Winchester, and Robert H. Edwards, Defendant.


          Donald C. Coggins, Jr. United States District Judge

         Pending before this Court are the parties cross Memorandums in Support of Judgment. ECF Nos. 98, 99. Plaintiff, Frederick D. Shepherd, Jr. ("Shepherd") asserts entitlement to retirement benefits pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"). Specifically, Shepherd asserts a claim for benefits pursuant to 29 U.S.C. § 1132(a)(1)(B), an administrative penalty under 29 U.S.C. § 1132(c), and a claim for attorney's fees under 29 U.S.C. 1132(g).

         The dispute centers on Shepherd's former employment as Bank President at Defendant Community First Bank ("Bank"). In 2007, as Shepherd was approaching retirement age, the Bank entered into an Employment Agreement and Deferred Compensation SERP Plan ("Plan") to entice him to continue working at the Bank. In order to attain full benefits, the Plan required Shepherd to continue employment at the Bank until 2012, when he reached 71 years of age. After Shepherd completed working until age 71, the Plan Administrator determined him eligible for benefits in 2012, and began making benefit payments. However, in May 2015, new Bank management terminated his Plan benefits. The Plan Administrator stated it stopped benefits based on alleged misconduct the Bank discovered after Shepherd retired.

         In resolving the denial of benefits, the parties entered into a Joint Stipulation agreeing that Administrative Remedies were exhausted but disagreeing as to the appropriate Standard of Review and the substance of the Administrative Record ("AR"). ECF No. 88. The parties, do however, stipulate that the Court may resolve this matter based on the Joint Stipulation, memoranda in support of their cases, and attachments thereto.

         The principal issue before this Court, as in any ERISA case is: whether the Plan Administrator's decision should be upheld? After consideration of the parties' arguments and memoranda, the Court finds the Plan Administrator's decision should be reversed and grants the relief requested to Plaintiff Shepherd.


         The Court makes the following findings of fact in accord with the Administrative Record and the parties' stipulations:

         A. Plan Inception

         Plaintiff, Frederick D. Shepherd, Jr., was hired in 1990 to become President and CEO of Community First Bank (Bank). In 2007, the Bank wished to secure Shepherd's future employment. To accomplish this, the Bank adopted a Resolution on March 2, 2007 to execute an Employment Agreement and Deferred Compensation SERP Plan ("Plan") with Shepherd. The Bank approved the SERP Plan without Shepherd's direct or indirect participation, or vote.

         The Bank set the Plan up as a "top hat" by filing a "Top Hat Plan Exemption" with the Department of Labor ("DOL"). ECF 93-1. The legal effect of this filing exempted the Bank from ERISA's reporting, funding, and fiduciary requirements that are applicable to most ERISA plans. Id. The Bank funded the Plan through bank-owned life insurance, instead of funding it from the Bank's assets. Shepherd agreed to be paid as a general creditor out of the Bank assets. In addition, Shepherd substituted components of his annual compensation in exchange for the deferred compensation.

         B. The Plan Terms

         The Court finds the Plan terms are clear and unambiguous. The Bank and Shepherd, as Bank President, had equal bargaining power and negotiated at arm's length the terms acceptable to each.

         The "Whereas" clauses state the purpose of the Plan was to "encourage the Executive [Shepherd] to remain an employee of the Bank…" The "Whereas" clauses also show the parties contemplated the "Golden Parachute" regulations in the banking industry, and found them to be inapplicable.

         The accrual terms state that for each year Shepherd completed, the Plan would defer a set amount of earned compensation. If Shepherd completed employment until retirement age, defined by Section 1.10 as age 71, then Section 2.1 of the Plan provided Shepherd with the full benefit amount, $210, 000 per year for 20 years.

         The Plan also included four clear clauses that authorized termination of benefit payments, each found in Article 5. The Plan stated benefits could be stopped for: (1) a termination "for cause;" (2) FDIC removal of Shepherd as Bank President; (3) FDIC placing the Bank into Default; or (4) FDIC providing "open-bank assistance." The parties agree and the Court concurs that none of the four reasons for termination of benefits have occurred. Section 7.1 further provides that any terminations, "except those occurring under Article 5," can only be accomplished by a written agreement between the Bank and the Executive. The parties agree and the Court concurs there have been no changes to the Plan.

         Section 2.8 governs the timing of the eligibility determination. This section states eligibility must be determined "by the first event to occur that is dealt with by this agreement." Once the "first event" occurs, the Plan sets benefits. Again, the parties do not dispute, and the Court concurs, that the first event to occur was Shepherd's completion of employment until age 71.

         Section 8.1 of the Plan directs that the Bank's Board of Director's shall also serve as the Plan Administrator. The Plan grants the Administrator general discretion to make, amend, interpret, and enforce rules and regulations for the administration of the agreement, as well as decide or resolve questions and interpretations of the Plan.

         Reading the Plan as a whole, the Court finds this general grant of discretion is specifically limited by Sections 7.1 and 2.8. Plan Section 7.1 constrains the Administrator from using its discretion to amend or terminate the Plan for reasons outside of the Plan without a written agreement. Likewise, Section 2.8 places a deadline on the Administrators discretion to determine the eligibility at the "first event to occur."

         The final pertinent Plan provision is found at Section 1.14. This section defines "termination for cause" as having "the same meaning specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into . . . ." Since Shepherd entered into an Employment Agreement that defined "termination for cause," Section 1.14 is inapplicable and the Court must look to this Agreement to address "for cause" issues.

         Under the Employment Agreement, a "termination for cause" required a procedure akin to "due process" in which the Bank was required: (1) to hold a meeting of the Board of Directors; (2) at that meeting adopt a Resolution, via majority vote; containing findings of actions constituting cause; (4) deliver said resolution to Shepherd; and (5) notice another meeting to terminate Shepherd for cause where he is provided an opportunity to be heard.

         Importantly, under either Section 1.14 of the Plan or Section 3.2 of the Employment Agreement, the ability to terminate Shepherd "for cause" is reserved exclusively to the Bank. Neither section reserves the right to the Plan Administrator to determine if "cause" exists.

         C. Shepherd's Benefits and Retirement

         Shepherd completed employment at age 71 on December 31, 2011. (AR 797-98). At that time, the Plan Administrator determined him eligible for benefits and commenced payments in 2012. Also in 2012, the FDIC conducted an audit of the Bank which included criticisms of multiple loans, including loans to John Powell and James McCoy. Each Bank Board Member signed the Report acknowledging it had been received and read.

         On July 31, 2014 Shepherd attended a Bank Board meeting and gave notice of his intent to retire due to health concerns During the meeting, the Board questioned Shepherd extensively about issues surrounding loans made to John Powell and James McCoy. Id. at 1687-88. The Bank did not take action to terminate Shepherd "for cause" at this time.

         Before retiring six months later, Shepherd attended another Bank Board meeting. During this meeting, on December 31 2014, Shepherd told the Board he expected his benefits to be paid. The Board discussed future payments, as well as FDIC issues it discussed previously with its lawyer. Shepherd then retired as employee of the Bank on December 31, 2014.

         Thereafter, the Plan Administrator continued to pay benefits into Shepherd's retirement. The Bank admits that Shepherd was not "terminated for cause." It also concedes that it never conducted the Employment Agreement process required to terminate Shepherd "for cause."

         D. The Decision to Terminate Benefits

         In April 2015 at a Bank Board meeting, months after he retired, the new Bank President Richard Burleson initiated a discussion concerning stopping Shepherd's benefits for alleged misconduct. He acknowledged that there may be no merit to the allegations of Shepherd's misconduct, but pointed out that there was 2.5 million dollars of Bank shareholders' money sitting in a retirement fund for Shepherd. Other Board members noted the need to protect its shareholders. The Board discussed that if it stopped benefits, an investigation into the wrongdoing might retroactively justify the decision so the Board wouldn't have to prove anything.

         At the next meeting in May of 2015, the Bank Board unanimously voted to terminate benefit payments. The Bank minutes show the Board neither looked at the Plan to determine if its actions were authorized nor met in its capacity as Plan Administrator. The Board chose to keep this decision a secret until after the May Shareholder's meeting.

         On May 26, 2015, a law firm representing the Bank-not the Plan Administrator- wrote Shepherd notifying him he would no longer receive benefits. The letter mirrored the discussion of the Bank Board, stating discontinued payments was in the best interest of the Bank and its shareholders.

         The Bank's notice never referenced the Plan, the Plan Administrator, Plan remedies, or ERISA. The correspondence further failed to give specific reasons for the denial; merely claiming the Bank would reduce benefits due to "golden parachute" regulations, and, conversely, would stop benefits entirely while the Bank investigated possible loan misconduct involving Shepherd. Finally, the letter failed to advise Shepherd of his ERISA rights.

         E. The ERISA Administrative Process

         On June 19, 2015, Shepherd made a timely claim for benefits with the Plan Administrator. The Bank, not the Plan Administrator, responded acknowledging Shepherd's claim on June 23, 2015. (AR 805)

         On August 6, 2015, since Shepherd was dealing with the Bank and not the Plan Administrator, he submitted a document request to the Bank as a shareholder. However, he requested documents related to the Plan, the decision to limit or suspend payments, and investigations into matters upon which the suspension or denial of benefits was based. The Bank's litigation firm promptly responded denying the request for documents, and shortly thereafter, filed a state court lawsuit for the Bank against Shepherd. The Bank's lawsuit asserted claims for alleged loan misconduct by Shepherd, Powell, and McCoy, allegations previously discussed in the FDIC Report in 2012 and the Board meeting in July of 2014.

         On September 17, 2018, the 90-day time allotted under Plan Section 6.1.2 for the Plan Administrator to respond to Shepherd's claim expired without any response. Having received no response, Shepherd filed a lawsuit for benefits in state court. That lawsuit, the instant action, was removed to this Court pursuant to ERISA.

         After Shepherd amended his Complaint, the Defendants filed a Motion to Dismiss or Stay The Case that asserted Shepherd failed to exhaust administrative remedies. Shepherd argued that the failure to exhaust remedies was solely due to the Plan Administrator's noncompliance and that 29 C.F.R. § 2650.503 deemed administrative remedies exhausted in these situations.

         F. The Plan Administrator's Arrival

         During the pendency of the Motion to enforce plan remedies, the Plan Administrator submitted its first correspondence to Shepherd. On May 16, 2016, when Shepherd had been without benefits for almost a year due to the Bank's denial notice, the Plan Administrator sent a second denial notice. This denial letter differed substantially from the Bank's initial denial. First, the Administrator claimed "golden parachute" regulations required benefits to be terminated instead of reduced. Next, the notice failed to mention investigations, and now included conclusory allegations of misconduct relating to Bank loans. The letter instructed Shepherd he had 60 days to respond.

         During the 60-day period, this Court held the Administrator violated ERISA regulations by not timely responding, but noted the Fourth Circuit remedy for the violation was a remand to the Administrator to complete the plan remedy process. The Court ordered a 60-day stay in accord with Section 6.2.1 of the Plan to allow the parties to complete the "claims review procedures of the Plan."

         Upon remand, however, the Plan Administrator returned to the 90-day "claims procedure" found in 6.1.3 and sent a third denial letter on March 7, 2017. This denial letter differed from: (1) the Bank's initial denial of benefits in May of 2015; and (2) the Administrator's denial of benefits in May 2016. It asserted new conclusory allegations of misconduct.

         G. Shepherd's Appeal

         Due to the three differing denials, Shepherd submitted correspondence to the Plan Administrator that requested relevant documents to aid him in his appeal. Shepherd requested documents known to the Administrator that formed the basis for each denial and documents that illustrated compliance with ERISA.

         In response, the same litigation firm representing the Bank wrote on behalf of the Plan Administrator[1] and refused to produce documents or specify which documents were known at each denial. The law firm claimed Shepherd was in possession of the Administrator's documents, which were produced to him in the Bank's state court case.

         Notwithstanding this refusal, Shepherd noticed his appeal on April 7, 2017. Shepherd argued: (1) benefits were set once he worked until he was 71 years of age without having been terminated for cause; (2) the Bank admitted none of the four reasons in the Plan for terminating benefits had ever occurred; (3) that reliance by the Bank or Administrator on section 1.14 was not applicable due to the Employment Agreement and the termination "for cause" process contained therein; (4) the Bank failed to consider three legal opinions and FDIC emails showing the "golden parachute" applications were inapplicable; and (5) all allegations of misconduct claimed to be newly discovered had been discussed before he retired and therefore did not qualify as after-acquired evidence.

         On May 2, 2017, the Plan Administrator submitted its final denial of benefits on appeal. It claimed it used its discretion to interpret the Plan to deny benefits based on misconduct it found after Shepherd retired that would have caused the Bank to previously terminate him "for cause." In addition, the Administrator claimed authority to deny benefits based on factors outside of the Plan terms, citing common law doctrines and FDIC Regulations. In issuing the denial, the Administrator failed to address many of Shepherd's arguments and documents he submitted. The Administrator also claimed it relied on 41, 000 pages of information in the Bank's state court lawsuit.

         H. The Bank's State Court Lawsuit

         A discussion of the Bank's state court case is necessary to understand the Administrator's claims regarding the evidence it relied upon and the Administrative Record. The Bank's state court lawsuit allegations against Shepherd, Powell, and McCoy subsequently transformed into the Plan Administrators factual determinations claimed to justify the denial of benefits. In the Bank's initial denial letter to Shepherd, it justified the denial of benefits while it "investigated" wrongdoing. The Bank used its state court lawsuit as its "investigation" to search for reasons to justify its previous decision to terminate benefits. This ongoing "investigation" led to the multiple, changing denial notices.

         While pursuing plan remedies in this ERISA case, however, Shepherd explained to the Plan Administrator that if the documents in the state case are possibly related, then Shepherd was submitting documents related to the Bank's discovery misconduct because the document production in that case was incomplete. He further emphasized to the Administrator that the judge in the state court believed the Bank played discovery games, took liberties with the Rules, possibly used the criminal system to gain an unfair advantage in its civil case, and as a result made the Bank President sign an affidavit concerning the completeness of the Bank's document production under the penalty of perjury.

         The Administrative Record shows during the course of the state case, the Bank, Shepherd, Powell, and McCoy were engaged in a discovery dispute over the Bank's failure to produce documents. In April of 2016, the Bank had only produced 8, 602 documents. After a hearing on Shepherd's Motion to Compel further documents, the Court ordered the Bank to produce the documents Shepherd requested. Over the course of this ongoing discovery dispute, and pursuant to the court Order, the Bank produced an additional 32, 000 pages over the next 8 months. However, Shepherd contended discovery was still incomplete and alleged the Bank failed to comply with the Order. Therefore, Shepherd filed a Motion to Sanction the Bank.

         Ultimately, the state court issued scathing sanctions Orders against the Bank for discovery abuse and intentionally withholding documents, as well as ordered it to pay $64, 920.04 in fees and costs to Shepherd's attorneys. ECF 99-5. After Shepherd finally compelled the production of 49, 168 documents on October 30, 2017, the Bank decided to dismiss its lawsuit against Shepherd.

         Initially, Shepherd refused to agree to a dismissal; so the Bank filed a Motion arguing that Shepherd would not be prejudiced by a dismissal since the Bank sought no recovery from him. As a result, Shepherd finally agreed to let the Bank dismiss its state court case. This dismissed case contained allegations identical to many of the misconduct allegations asserted by the Plan Administrator.

         I. Administrative Record

         While the parties have stipulated that the administrative remedy process has been completed, Shepherd argues the Administrative Record is "in doubt." Principally, he asserts the Administrative Record should contain the information known to an administrator at the time each decision was made, information previously requested but never produced.

         In the Fourth Circuit, the administrative record consists of "the facts known to [the administrator] at the time" it rendered its decision. Sheppard v. Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., 32 F.3d 120, 125 (4th Cir. 1994). ERISA defines relevant documents as those which were generated, considered, and, ultimately, relied upon to make the benefit determination. 29 C.F.R. § 2560.503-1(i)(5). It also defines relevant documents as those evidencing compliance with ERISA's procedural and substantive regulations. Id.

         1. The Administrative Record Submitted

         At the outset, the Court notes that the Administrator has continually shifted its view of the composition of the Administrative Record. First, during the court ordered administrative remedy process, the law firm dually representing the Bank and Administrator claimed the documents that formed the basis for the Plan Administrator's determination to deny Mr. Shepherd's claim, were produced by the Bank in the state court lawsuit by April 2016. The law firm further contended "Mr. Shepherd has had the documents relied on by the Plan Administrator for nearly a year." As of April 2016, the Bank had produced 8, 062 documents. ECF 99-5. The law firm, on behalf of the Administrator, did not provide any documents as a Record, and further, refused to explain what documents were considered at each of the multiple denial decisions.

         However, at the end of the Appeal Process, the Administrator changed its position on the documents comprising the Record. The final denial stated "the Bank has provided in excess of 41, 000 pages of information." Similarly, the Defendants assert "the Plan Administrator . . . provided over 41, 000 pages of documents . . . ...

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