Final arbitration award documents obtained by Credit Union Times reveal a legal dispute between Ken Burns and the billion-dollar Tech CU, where he formerly served in the corner office.
The $1.7 billion Tech Credit Union filed the complaint against Burns over the circumstances surrounding his 2009 transition to the CEO position at the $3.9 billion Patelco Credit Union of Pleasanton, Calif. Patelco and Burns announced mid-March that Burns would be leaving Patelco this summer to seek new challenges.
According to arbitration documents filed with the American Arbitration Association Employment Arbitration Tribunal from 2011, Burns was ordered to pay more than $466,000 in damages and an additional $28,000 in legal fees to Tech CU to settle the San Jose, Calif. credit union’s claims against him, which include breach of fiduciary duty and fraudulent concealment.
The arbitration documents revealed that Burns applied for the Patelco job, which he got in 2009, while simultaneously and unbeknownst to the Tech CU board, spearheading an effort to merge the two credit unions. That bid ultimately failed.
Tech CU, a San Jose, Calif.-based institution that last year failed in its bid to convert to a bank, also accused Burns of taking confidential strategic documents with him to Patelco.
However Arbitrator Dana Welch did not award Tech CU any punitive damages, saying in the June 15, 2011 decision, that “while Burns’ breaches were egregious, they do not rise to the level of malice necessary to award punitive damages.”
The dispute began in 2008, when executive search firm O’Rourke, Mitchell contacted Burns to see if he would be interested in the Patelco CEO job. According to the arbitration documents, during discussions about the Patelco position, Gene O’Rourke, managing director at the firm, and Burns discussed the possibility of merging the two institutions.
In October 2008, Burns submitted to the search firm a written exercise that essentially served as an employment application for Patelco and, for the first time, officially suggested a merger between the two credit unions.
“With capital in excess of 13%, Tech CU can afford to dilute capital somewhat when pursuing mergers,” Burns wrote in the document.
Comparatively, as of Dec. 31, 2008, Patelco reported 8.49% net worth, which had dropped from 9.85% one year prior after the credit union assumed the assets of two failed credit unions that year, Cal State 9 and Sterlent.
Burns approached Tech CU Chairman Mical Brenzel in November 2008 regarding the merger but did not mention he had applied for Patelco’s CEO position, according to the arbitration documents.
Burns signed an agreement with Patelco that permitted the two credit unions to share confidential documents to explore the feasibility of a merger. However, Burns did not tell anyone at Tech CU about the agreement, the arbitration documents said. Further, email communications between Burns and O’Rourke indicate the two discussed keeping the employment negotiations from the Tech CU board.
O’Rourke told Credit Union Times on April 10 that Burns made the decision to keep the information from his board, because when the two discussed it in December, Burns had only completed the first round of interviews, and wasn’t guaranteed the position. Further, O’Rourke said he thinks Patelco had initially made the merger a priority over hiring Burns.
However, Patelco was struggling financially in late 2008 after assuming the assets of Cal State 9 and Sterlent, and O’Rourke said the NCUA was pressuring Patelco to select a CEO quickly.
“So where the merger was the horse pulling the cart, in late January  the regulatory pressure got intense, and I think this turned Patelco’s thinking, saying,
‘Maybe what we should do is pin down the leadership transition problem that is causing all this angst with the regulator,’” O’Rourke said. “‘Let’s reverse course, grab Ken, and then continue with the merger.’”
The arbitration documents said that during the investigation into the matter, evidence revealed that Burns was aware in early 2009 that his dual-track approach to the merger and employment might jeopardize the merger.
“For his part, Burns testified that he felt the need to keep his Patelco employment pursuit secret from TCU for fear that the TCU’s board would fire him immediately if it knew the truth,” Welch wrote in the award document.
Formal merger discussions kicked off in February 2009, after Burns had received a job offer from Patelco in late January, the arbitration documents said. The merger negotiations included an agreement that Burns would be the CEO of the combined credit union.
However, at the time, Brenzel had no idea Patelco had already made Burns an offer, which included a $100,000 bonus for the successful completion of the merger and a 2.8% mortgage, the documents said.
It wasn’t until April 13, 2009, when Burns submitted his resignation that the Tech CU board would learn about the offer. Although Burns requested to remain at Tech CU through May 31, the board met on April 22 and decided to make Burns’ resignation effective April 24. Burns asked Brenzel to make April 27 his last day because he said he was moving that weekend. She agreed.
The board later discovered that Burns participated in Patelco’s spring planning day meeting on Saturday, April 25, helping to facilitate a session regarding the merger. The Patelco planning event included the distribution of several Tech CU documents, including March 2009 financial highlights, a delinquency report, information about Tech CU’s investment portfolio, an asset liability management summary and a list of Tech CU branches. According to the arbitration documents, the Tech CU board was unaware of the documents would be utilized at the event.
After conducting additional due diligence without Burns, who left TCU April 27, TCU terminated merger discussions. Brenzel cited the potential erosion of Tech CU member capital, the failure of Patelco to adequately recognize loan losses and the situation with Burns.
“Our board has found that the recent action of you and Patelco’s board in making an offer of employment to our president and CEO while we were in the midst of good-faith merger discussions is an indication of a fundamental lack of compatibility between our two boards, one that we believe would be impossible to bridge in the event of a combination,” Brenzel wrote in the letter to the Patelco board, terminating the merger.
The arbitrator determined that Burns violated his fiduciary duty by breaching the duty of loyalty, duty of confidence and engaging in self-dealing. Burns was also found to be liable for unfair competition as well as fraudulent concealment for failing to disclose that he was seeking the Patelco CEO position during merger negotiations.
Finally, Burns was also determined to have misappropriated TCU’s three-year strategic plan, considered a trade secret, when he took the document with him to Patelco.
The award requires Burns to return the strategic plan and pay $466,277 in damages to compensate Tech CU for the costs of the aborted merger ($50,775), the cost of an executive compensation survey initiated by TCU that Burns used to negotiate his Patelco salary ($752), costs to recruit and compensate new CEO Barbara Kamm ($146,927), disgorgement of Burn’s salary and bonus from October 2008 through April 2009 ($230,432) and disgorgement of Burns’ 2009 paid time off ($37,390).
Tech CU filed a suit in San Francisco County Superior Court in July 2011 to enforce the award but filed to dismiss the case in August, indicating it no longer needed the court’s help in seeking payment of the claim against Burns.
Tech CU, Patelco CU and Burns declined to comment for this article prior to press time.