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A federal district court judge has granted summary judgement to participant-plaintiffs in a case where plan fiduciaries failed to comply with their diversification elections in an Employee Stock Ownership Plan (ESOP) prior to the company stock collapsing.

In the case (Bryant v. Community Bankshares, Inc., M.D. Ala., No. 2:14-CV-01074-WKW WO, 9/12/17) before the U.S. District Court for the Middle District of Alabama, Judge Keith Watkins ruled that the plan administrator's decisions disallowing the plaintiffs' elections to diversify their investments in their individual ESOP accounts do not survive review under an "arbitrary-and-capricious standard."

The plaintiffs first filed suit in 2012, but that action was dismissed in 2014, without prejudice, for failure to exhaust administrative remedies. After exhausting their administrative remedies with unsuccessful results, the plaintiffs sued under ERISA § 1132(a)(1)(B) seeking enforcement of the terms of the plan.


Plaintiffs Dave and Vikki Bryant were participants in an ESOP maintained by Community Bankshares, which was invested primarily in Bankshares' stock. In April 2009, having met the age and participation requirements, the Bryants were eligible to diversify a percentage of the employer stock in their individual ESOP accounts, which they elected to do.

After they timely submitted their diversification requests, Bankshares informed the participants that it would implement their diversification elections by June 30, 2009, the close of the annual election period. Instead, Bankshares suspended implementation of the diversification elections until after an interim valuation revealed that, in September 2009, the stock's worth had dropped to $2.30 per share from the preceding year's valuation of $11.00 per share. In addition, Bankshares had entered into a written agreement with the Federal Reserve Bank and Georgia Bank Commissioner prohibiting Bankshares from redeeming put options.

In November 2009, Bankshares offered to issue stock in satisfaction of the diversification elections, but informed participants that it would not honor the put options. Bankshares also gave participants the option to change their 2009 diversification elections in light of this new information. The Bryants contended, however, that this offer to receive the illiquid stock of a failing bank and the resultant tax liability presented a "Hobson's Choice," a choice that really wasn't a choice.

Plan Administrator Defends Decision

The plan fiduciary contended that, given Bankshares' deteriorating financial condition, it acted in the best interests of all plan participants by refusing to honor the diversification elections. The administrator further contended that, in November 2009, the Bryants voluntarily submitted new diversification elections to keep their stock in the plan and that these new elections voided their April 2009 diversification elections.

Judge Watkins did not buy those arguments. Rather, he held that the plan provided no provision that permitted an interim valuation or that gave the plan administrator discretion to fail to implement a diversification election upon a proper election.

"The Plan administrator's construction of the Plan to permit a special valuation in times of Bankshares' financial crisis clearly conflicts with the Plan language. Notably, the Plan could have made an exception for an alternative valuation date or other contingency plan in unexpected times of financial stress, but it did not," Watkins wrote.

Moreover, he held that the plan administrator's decision to deny plaintiffs the plan's right-to-diversify election based upon the November 2009 forms was arbitrary and capricious. "There is not a reasonable basis to support the Plan administrator's conclusion that the November 2009 elections was, in essence, a waiver of benefits promised to plaintiffs under the Plan," Watkins wrote.

Judge Watkins wrote that, "The decisions conflict with the clear, specific, and mandatory terms of the Plan governing stock valuation, a participant's right to make a diversification election, and a participant's right to exercise a put option on distributed shares and, at the same time, render those mandatory terms nugatory."

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