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Buster v. Compensation Committee of Board of Directors of Mechanics Bank

United States District Court, N.D. California

July 14, 2017

STEVEN K. BUSTER, Plaintiff,
v.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF MECHANICS BANK; MECHANICS BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN; and MECHANICS BANK, a California Corporation, Defendants.

          ORDER DENYING MOTION FOR JUDGMENT AS A MATTER OF LAW AND SETTING FORTH FINDINGS OF FACT AND CONCLUSIONS OF LAW

          WILLIAM ALSUP UNITED STATES DISTRICT JUDGE.

         INTRODUCTION

         Plaintiff, a former bank executive, brought this ERISA action for benefits and equitable relief against his former employer bank, the bank's top-hat plan, and its plan administrator. After a three-day bench trial, defendants moved for judgment as a matter of law on plaintiff's claim for benefits. This order Denies defendants' motion and Grants plaintiff relief based on the trial record and the findings of fact and conclusions of law set forth below.

         PROCEDURAL HISTORY

         Plaintiff Steven Buster brought this action against his former employer, Mechanics Bank; its ERISA top-hat plan, the Supplemental Executive Retirement Plan (SERP); and the plan administrator, the compensation committee of the bank's board of directors (collectively, “the bank”). After a prior order denied its motion to dismiss (Dkt. No. 67), the bank answered and counterclaimed for declaratory relief and breach of contract (Dkt. No. 76). The bank's counterclaims remained inert until trial. Another prior order also denied the bank's motion for summary judgment on all of Buster's claims and Buster's cross-motion for summary judgment on his claim for benefits (Dkt. No. 93).

         This action then proceeded to a three-day bench trial, during which the Court heard testimony from Buster; Dianne Felton, a director of the bank and former chairman of its board of directors; Daniel Albert, another director of the bank and former chairman of its compensation committee; Judith Ditchey, former director of human resources at the bank and ex officio member of its compensation committee; Thomas Leong, former finance manager at the bank; Clinton Chew, former chief financial officer at the bank; and Nathan Duda, current chief financial officer at the bank. In addition to live witness testimony, the trial record includes a jointly-submitted pretrial statement with stipulated facts, separately-submitted trial briefs, separately-submitted proposed findings of fact and conclusions of law, and closing arguments from both sides.

         Stipulated facts and any proposed finding of fact expressly agreed to by the opposing side at least in part shall be deemed adopted to the extent agreed upon, even if not expressly stated herein. Citations to the record herein are provided only as to particulars that may assist the court of appeals. All declarative statements herein are factual findings.

         FINDINGS OF FACT

         1. The essence of this case is that both sides to this dispute understood the retirement agreement and release in question to preserve Buster's entitlement to his accrued SERP benefits once he reached the age of 65. No one involved believed to the contrary. Two years after the execution of the retirement agreement and release, however, the bank reversed field. In order to save itself over a million dollars, the bank took the new and opposite position that the retirement agreement and release had extinguished Buster's entitlement to those benefits. This order will hold both sides to their original intent.

         2. Buster worked as president and chief executive officer at the bank from 2004 to 2012. An offer letter dated June 4, 2004, set forth his terms of employment. In relevant part, the offer letter provided for an annual bonus targeted at one hundred percent of Buster's base salary, dependent on performance (except the bonus for Buster's first year, which the offer letter guaranteed). The offer letter also provided for severance pay in the event of Buster's termination (other than for cause) “equal to twelve months of base salary and bonus, ” to be calculated using his then-current base salary and most recently-received bonus. In addition, the offer letter provided for Buster's participation in the SERP.

         3. On December 31, 2008, the bank “froze” the SERP and adopted the Executive Retirement Plan (ERP), in which Buster alone participated. The freeze stopped Buster from accruing further SERP benefits but did not wipe out his already-accrued SERP benefits, which by then amounted to approximately $1.3 million.

         4. Fast forward to the autumn of 2012. The bank's board of directors decided to terminate Buster's employment. Over the remainder of 2012, Buster and the bank had several communications, both in-person and via email, regarding the terms of his departure. To understand the context of these communications - and thus whether the parties intended that Buster remain entitled to his accrued SERP benefits - it is useful to understand what benefits Buster could reasonably have expected (and the bank could reasonably have had in mind) as background to any severance package.

         5. At that time, Buster's base salary was $530, 000, and his most recently-received bonus (for 2011) amounted to just over half a million dollars. He had received bonuses averaging around approximately ninety percent of his base salary for each year of his tenure at the bank. He had already worked for most of 2012, and both sides wanted him to work through the end of 2012. He also participated in both the bank's pension and 401(k) plans and had earned retirement benefits thereunder in addition to his accrued SERP and ERP benefits. In short, both sides could reasonably have expected the following to factor into negotiations over Buster's severance package:

ITEM

AMOUNT

Severance pay (per 2004 offer letter)

Approximately one million dollars

2012 bonus (expected)

Approximately half a million dollars

Accrued SERP benefits

Approximately $1.3 million

Accrued ERP benefits

Approximately $1.8 million

Accrued pension and 401(k) benefits

Unknown (subsequently paid by the bank and not in dispute here)

         6. Felton, who served as chairman of the bank's board of directors at the time, discussed with Buster its decision to terminate him during an in-person meeting on November 1. During that meeting, Buster asked Felton about his SERP benefits. Felton merely responded that the bank's compensation committee was in charge of those benefits. At the time, Felton also served as a member of the bank's compensation committee and counted Albert, who served as chairman of the bank's compensation committee at the time, as a longtime personal friend.

         7. During November 2012, members of the bank's board of directors continued to debate the terms of Buster's severance package among themselves (and without Buster's participation). The record does not show that the bank's board of directors ever decided to offer Buster anything in exchange for waiving accrued SERP benefits, even as it tapped Attorney Judith Keyes, outside counsel for the bank, to draft his final retirement agreement and release.

         8. On November 18, 2012, while Attorney Keyes was drafting Buster's final retirement agreement and release, Felton emailed Albert about its key terms. She specifically said the bank was “obligated to pay by contract” $530, 000 plus $503, 000, referring to Buster's severance pay pursuant to his 2004 offer letter, as well as $1, 799, 855.69 for his accrued ERP benefits. She also mentioned that the bank intended to offer Buster one million dollars “to accept the terms of his early retirement, ” adding that “[t]his amount represents his Bonus for [2012] and an amount roughly equal to the [ERP] contribution that would have been made had he stayed until [December 2013].”[1]

         9. The next day, on November 19, 2012, Albert also met with Buster in-person to discuss his impending termination. During that meeting, Albert presented Buster with a “discussion points” document that had been approved by the bank's board of directors. That document indicated, consistent with Felton's November 18 email, that Buster would receive (1) the severance pay required by his 2004 offer letter, (2) his ERP benefits, and (3) one million dollars in “retirement pay” to ensure “an amicable and smooth transition.” The document did not mention Buster's SERP, pension, or 401(k) benefits. Buster has since received both his pension and 401(k) benefits - but, inconsistently, not his SERP benefits (see Tr. 65:11-65:16, 259:16-259:22).

         10. This order finds that - as reflected in Felton's November 18 email - the bank offered Buster one million dollars of “retirement pay” representing a rough estimate of the value of his expected 2012 bonus plus the ERP benefits that would have further accrued for him had he stayed through 2013. The bank offered this not necessarily because it thought Buster had any legal entitlement to either a bonus for 2012 or ERP benefits through 2013, but because it wanted him to accept his termination amicably. The bank's contrary litigation position (that it offered Buster the one million dollars to secure his waiver of approximately $1.3 million in vested and accrued SERP benefits with no 2012 bonus on the table) is not credible.

         11. For his part, Albert testified in deposition (as read into the record at trial) that he could not recall how the bank's board of directors arrived at the one million dollar figure for Buster's “retirement pay.” Later, however, he testified at trial that the bank's board of directors specifically considered the value of Buster's SERP benefits in coming up with the one million dollar figure. He further testified at trial that he believed the bank “was honoring its SERP obligation to Mr. Buster by paying him the $1 million.” In light of his earlier “don't recall” testimony on this very subject, Albert's sudden burst of “recollection” at trial was not credible.

         12. For her part, Felton testified at trial that the bank's compensation committee specifically considered Buster's SERP benefits during its internal debate over his termination and factored the value of those benefits into the one million dollars of “retirement pay” (Tr. 228:9-228:21). This testimony was not credible because it contradicted Felton's own November 18 email to Albert, which, as stated, had characterized the one million dollars of “retirement pay” as representing a rough estimate of the value of Buster's expected 2012 bonus plus the ERP benefits that would have further accrued for him had he stayed through 2013.

         13. Aside from being more credible, Buster's version of events also better comports with the objective financial circumstances surrounding his termination. According to the bank's position in this litigation, Buster would have received one million dollars of “retirement pay” instead of the 2012 bonus and accrued SERP benefits that he expected. The bank's position would have been a harsh compromise against Buster since, from his point of view, he would have lost nearly two million dollars of expected value (approximately $1.3 million in SERP benefits plus an expectancy of approximately half a million dollars in bonus pay) in exchange for only one million dollars of “retirement pay” - not counting substantial tax penalties he would have expected to incur as a result of an early payout of accrued SERP benefits (see Tr. 71:9-71:20, 80:19-80:22). On this record, the bank could not reasonably have expected Buster to accept such a harsh compromise. The bank's position is therefore inconsistent with its own representation that it offered Buster one million dollars of “retirement pay” to ensure “an amicable and smooth transition.”[2]

         14. In contrast, according to Buster's position in this litigation, he would have received one million dollars of “retirement pay” that, per Felton's November 18 email, represented the value of his expected 2012 bonus plus the ERP benefits that would have further accrued for him had he stayed through 2013. Buster's position would perhaps have been a mildly generous compromise in his favor. This is consistent, however, with the bank's stated purpose of ensuring “an amicable and smooth transition.” And, as explained, it is consistent with objective evidence in the record that the bank never intended the one million dollars of “retirement pay” to replace Buster's accrued SERP benefits.

         15. Albert also informed Buster during their November 19 meeting that the bank's board of directors had approved his retirement agreement and release, which were non-negotiable. The retirement agreement had to be signed by noon that Friday, November 23. Albert mentioned that Buster could seek legal advice but did not consider it his responsibility to make sure Buster understood the terms presented to him. Indeed, to Albert, the retirement agreement and release read like “Greek” (Tr. 257:4-257:17). Albert and Buster did not discuss the SERP during their November 19 meeting.

         16. At some point after his November 19 meeting with Albert but still in November 2012, Buster handwrote a reference to the SERP and the amount of $8, 540 under the November 20 date in his Day-Timer. This reference reflected his contemporaneous expectation that he remained entitled to receive monthly SERP benefits upon reaching the age of 65.

         17. On November 21, 2012, Felton again met with Buster in-person and gave him the formal retirement agreement and release. No one else was present at that meeting. The retirement agreement provided in part (TX 1 at 2):

[T]his Agreement extends to and fully releases the Bank and any and all Releasees from all claims of every nature and kind, known or unknown, suspected or unsuspected, vested or contingent, past or present, arising from or attributable to the Bank or any Releasee including but not limited to claims arising under . . . the Employee Retirement Income Security Act . . . any other civil rights law, attorney fee law, or Executive benefits law, and any other law or tort. The only exceptions to this release are claims for workers' compensation, claims for unemployment compensation, and claims for indemnification.

         The appended release included substantially identical release provisions. The retirement agreement also provided that, regardless of whether Buster signed the appended release, the bank would pay the severance pay required by his 2004 offer letter and his accrued ERP benefits. Moreover, the bank would pay Buster one million dollars of “retirement pay” if he signed the appended release by the official end of his employment on December 31, 2012 (id. at 1, 3). The agreement did not mention Buster's SERP, pension, or 401(k) benefits.

         18. Buster read and signed the retirement agreement during his November 21 meeting with Felton. During that meeting, Felton and Buster also discussed the reason behind the November 23 signing deadline for the retirement agreement, i.e., the bank intended to issue a press release about Buster's departure that day because it fell on ...


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