Capital Bank Faces Lawsuit from Acquired Bank's Managers

The former managers of Southern Community Financial have filed a lawsuit against Capital Bank Financial (CBF) in Coral Gables, Fla., claiming that the companies' merger agreement violated their employment contracts.

The lawsuit, filed Friday in the U.S. District Court for the Middle District of North Carolina, also claims that Scott Bauer, Southern Community's former chief executive, and Jeffrey Clark, its former president, were practically shut out of negotiations for the Winston-Salem, N.C., company's sale last year.

Bauer and Clark claim in their lawsuit that Southern Community's employees were told to sign amended agreements drawn up by Capital Bank's lawyers. The executives, who are seeking unspecified damages, were "unceremoniously fired without cause" when they refused to agree to the new terms, the lawsuit claims.

The proposed changes were designed to alter so-called "change in control" benefits that Capital Bank would have been required to provide Bauer and Clark if they left following the deal's completion, the lawsuit claims. Bauer would have been entitled to a $4.9 million payout under his change of control agreement, according the Southern Community's 2011 proxy statement. Clark was due $2.6 million.

A spokesman for the former executives, who have since established a consulting firm in Winston-Salem, said they would not discuss matters further. A call to the $7.1 billion-asset Capital Bank, wasn't immediately returned.

The lawsuit also sheds light on the unusual courtship between Capital Bank, led by Eugene Taylor and backed by private equity, and Southern Community, a $1.5 billion-asset company that struggled in the aftermath of the financial crisis. Capital Bank's initial discussions involved Bauer and Clark. The executives claim that William Ward, Southern Community's chairman, kept them out of the loop following a dinner meeting.

After that meeting, Ward "directed and controlled all future discussions and negotiations," the lawsuit claims. Ward "told Bauer and Clark that they were not to be involved with those discussions and negotiations."

Ward, who became Southern Community's chairman in 2011 when it took the title away from Bauer, is a medical professor and orthopedic surgeon. "He has no experience in banking aside from being a member of the board," the lawsuit claims.

The lawsuit also indicates a frosty relationship between Ward and the company's top executives. "For at least a year prior to Ward's assumption of the negotiations, Ward rarely or ever spoke with plaintiffs," the lawsuit claims. "During the negotiations, Ward continued to rarely, if ever, speak with plaintiffs."

Graebe Hanna & Sullivan in Raleigh, N.C., is representing Bauer and Clark in their lawsuit.