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Kelly v. Retirement Plan Committee

United States District Court, D. Connecticut

May 19, 2016

WILLIAM KELLY, Plaintiff,
v.
RETIREMENT PLAN COMMITTEE a/k/a S.C. PENSION PLAN COMMITTEE a/k/a STANADYNE PENSION COMMITTEE a/k/a STANADYNE RETIREMENT BENEFITS COMMITTEE, Defendant.

          FINDINGS OF FACT, RULINGS OF LAW, AND ORDER FOR JUDGMENT

          WILLIAM G. YOUNG, District Judge.[1]

         I. INTRODUCTION

         William Kelly ("Kelly") retired from his position as Senior Vice President and Chief Technical Officer at Stanadyne Corporation ("Stanadyne" or the "Company") in 2009. Am. Compl. ¶ 5, ECF No. 74-2. Based on his compensation at Stanadyne, Kelly qualified for retirement benefits distributed under the Company's Benefit Equalization Plan ("BEP") and Supplemental Retirement Plan ("SERP") (collectively, the "Non-Qualified Plans"), in addition to the retirement benefits payable under the Company's pension plan (the "Pension Plan"). Id . ¶¶ 4-9; R., Ex. P1(cont'd), Stanadyne Corporation Pension Plan ("Pension Plan"), ECF No. 32-44; R., Ex. P2, Stanadyne Benefit Equalization Plan ("BEP"), ECF No. 32-48; R., Ex. P3, Stanadyne Supplemental Retirement Plan ("SERP"), ECF No. 32-49. In 2004, following the acquisition of Stanadyne by Kohlberg & Company ("Kohlberg"), Kelly received cash distributions (the "Option Proceeds") related to his participation in Stanadyne's Management Stock Option Plan (the "Option Plan") as well as a sale bonus (the "AIP Bonus") from American Industrial Partners ("AIP") - Stanadyne's former owner. Am. Compl. ¶¶ 11-12; R., Ex. 31, William Kelly Earnings Statement, ECF No. 32-32.

         In 2007, Kelly complained to Stanadyne management about the exclusion of the Option Proceeds and the AIP Bonus from the computation of his retirement benefits under the Non-Qualified Plans. R., Ex. 23, ECF 32-23. In April 2008, Kelly submitted his official claim for benefits to the Stanadyne Pension Committee (the "Pension Committee" or the "Committee"). R., Ex. 25, RE: William Kelly-Retirement Benefits ("Claim Letter"), ECF No. 32-25. The Committee denied Kelly's claim both in the first instance and following an internal appeal. Kelly then filed suit against Stanadyne in 2011 in the United States District Court for the District of Connecticut. Compl., ECF No. 1. The complaint was brought under Section 502 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461, against the Committee. It contains three counts, but Count II was dropped. See Mot. Withdraw Count II Compl., ECF No. 24; Elec. Order, ECF No. 25. Count I is a claim for pension benefits pursuant to ERISA, 29 U.S.C. § 1132(a)(1)(B), in which Kelly alleged that the Committee was arbitrary and capricious in interpreting one of the key terms employed in the computation of the Non-Qualified Plans' benefits, and amending the Non-Qualified Plans in a manner that violated the Non-Qualified Plans' internal "anti-cutback provision." See Compl. ¶¶ 49-51. Kelly also alleged that these actions by the Committee, which effectively excluded the value of the Option Proceeds from the calculation of his benefits under the Non-Qualified Plans, violated ERISA's anti-cutback provision, 29 U.S.C. § 1054(g)(1), as well as ERISA's notice provision, 29 U.S.C. § 1054(h). In Count III, Kelly requested attorneys' fees pursuant to ERISA, 29 U.S.C. § 1132(g)(1). See Compl. ¶¶ 52-55.

         In late 2012, the parties made cross motions for summary judgment supported by memoranda and opposed each other's motions. Pl.'s Mem. Supp. His Mot. Summ. J. ("Pl.'s SJ Mem. 2012"), ECF No. 31; Mem. Law Opp'n Pl.'s Mot. Summ. J. ("Def.'s Opp'n 2012"), ECF No. 44; Mem. Law Supp. Def.'s Mot. Summ. J. ("Def.'s SJ 2012"), ECF No. 35-1; Pl.'s Reply Mem. ("Pl.'s Opp'n 2012"), ECF No. 42; Mem. Law Reply Pl.'s Reply Mem. Opp'n Def.'s Mot. Summ. J. ("Def.'s Reply 2012"), ECF No. 46. On January 10, 2013, the case was transferred to this session. Order Transfer, ECF No. 52. At a case-stated hearing held on July 25, 2013, [2] the Court blundered, ruling that Stanadyne was a proper party to this ERISA action, and that SERP was an ERISA plan; the Court "reject[ed] the [defendant's] argument that the funds in question were not paid by the defendant... [and] that the funds were not paid for personal services." Elec. Clerk's Notes, ECF No. 67.

         Following an agreement by the parties to again proceed on a case-stated basis (for the remaining issues), October 2, 2013 Order, ECF No. 69, the Court issued an order on June 16, 2014, in which it held that BEP was an unfunded benefit plan not subject to ERISA. Order ("Order"), ECF No. 70. The Court also invited both parties to submit briefing on the state law applicable to Kelly's BEP-related claims. Id . On July 16, 2014, in response to the Court's Order, both parties submitted supplemental memoranda of law briefing the relevant issues of Connecticut state law. Suppl. Mem. Law Supp. Def.'s Mot. Summ. J., ECF No. 71; Pl.'s William Kelly Suppl. Mem. ("Kelly's Suppl. Mem."), ECF No. 72.

         On February 18, 2015, the Court revised its July 25, 2013 ruling, holding this time that Stanadyne was not a proper party to an action alleging violations of ERISA and, as a result, dismissed Kelly's complaint with leave to amend within thirty days to join the proper party or parties. Order ("Second Order") 2, 8, ECF No. 73.

         On March 10, 2015, Kelly filed an Amended Complaint, naming the Committee as defendant in this ERISA action. Am. Compl., ECF No. 74-2; Mem. Supp. Mot. Am., ECF No. 74-1. In the Amended Complaint, Kelly realleges Count I of his initial Complaint as well as Count III (renumbered Count II after Kelly withdrew his claim for breach of fiduciary duty). Am. Compl. ¶¶ 49-55. On July 31, 2015, the Committee filed a motion for summary judgment, a District of Connecticut Local Rule 56(a)(1) statement and a supporting memorandum of law. Def.'s Mot. Summ. J., ECF 82; Local Rule 56(a)(1) Statement, ECF No. 82-1; Mem. Law Supp. Mot. Summ. J. ("Def.'s Mot."), ECF No. 82-2. Kelly filed his opposition to the Committee's motion for summary judgment on September 3, 2015. Pl.'s William Kelly's Opp'n Def.'s Mot. Summ. J. ("Pl.'s Opp'n"), ECF No. 83. Two weeks later, the Committee filed a memorandum replying to Kelly's opposition. Mem. Law Reply Pl.'s Opp'n Def.'s Mot. Summ. J., ECF No. 85. Following the October 7, 2015 case stated hearing, Minute Entry, ECF No. 88, the Court now makes its findings of fact and rulings of law.

         II. FINDINGS OF FACT

         The Court first discusses the terms of the Stanadyne pension plans, followed by a chronological discussion of the relevant facts preceding Kelly's claim and of Kelly's claim and his internal appeal. The Court also makes a separate finding of fact regarding the Committee's past inclusion of the Option Proceeds in its computation of pension benefits for other employees.

         A. The Terms of the Non-Qualified Plans and the Pension Plan

         The Non-Qualified Plans in question are designed to provide benefits that bypass limitations imposed by two provisions of the Internal Revenue Code, Sections 415 and 401(a)(17), with which a qualified plan such as the Pension Plan need otherwise comply. 26 U.S.C. §§ 415, 401(a)(17); Aramony v. United Way of Am., 254 F.3d 403, 407 (2d Cir. 2001).

         The BEP is "intended to be an excess benefit plan in excess of the limitations imposed by Section 415 of the Internal Revenue Code of 198 6, as amended, upon benefits of employees" of Stanadyne participating in the Pension Plan.[3] BEP Background. The BEP benefit is calculated as "the benefit the Participant would have received under the Pension Plan if there had been no Section 415 Limitation, but taking into account the limitations of Section 401(a)(17) of the Internal Revenue Code as amended." BEP § 2.1.

         Meanwhile, the SERP "provide[s] retirement income benefits in excess of those permitted from time to time under Code Section 401(a) for qualified retirement plans" for "a select group of management or highly compensated employees[.]" SERP §§ 2.1, 2.2. The benefit under SERP is computed as the difference between "the benefit... under the applicable provisions of the Pension Plan... without regard to any limitation on such benefit imposed under said Pension Plan on account of the limitations of [Internal Revenue] Code Sections 401(a) or 415" and the sum of the benefit under the Pension Plan and the benefit under the BEP. SERP § 4.1.

         For salaried Stanadyne employees such as Kelly, the formula for computing benefits under the Pension Plan resides in Appendix D-l. Pension Plan, Appendix D-l, ECF No. 32-4 6. The Pension Plan benefit is a function of an employee's "Average Monthly Earnings, " which is, in turn, a function of an employee's total "Earnings" over a period of time. See id. Under the Pension Plan, "Earnings" is defined as the sum of "the total compensation paid.... for personal services" including some pre-tax contributions, excluding some "compensation received... through an insured program" and, most relevantly, under Section 2(b)(iv) in Appendix D-l (the "exclusion clause"), excluding "the amount of any payments made.... under a management incentive program or agreement with [Stanadyne] which by its own terms excludes payments therefrom from the definition of Earnings under the [Pension] Plan." Id. at Section 2(b)(ii)-(iv) (emphasis supplied).

         As administrator of the Pension Plan, the Committee has "the exclusive right to interpret the [Pension] Plan in its sole discretion." Pension Plan § 9.5. The Committee's powers with respect to the administration of the Non-Qualified Plans are even more expansive, as laid out in both the SERP and BEP:

The Benefits Committee shall have the power and duty to do all things necessary or convenient to effect the intent and purposes of the Plan and not inconsistent with any of the provisions hereof, whether or not such powers and duties are specifically set herein, and, by way of amplification and not limitation of the foregoing, the Benefits Committee shall have the power to:
(A) provide rules and regulations for the management, operation and administration of the Plan, and, from time to time, to amend or supplement such rules and regulations;
(B) construe the Plan, which construction, as long as made in good faith, shall be final and conclusive upon all parties hereto; and
(C) correct any defect, supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as it shall deem expedient to carry the same into effect, and it shall be the sole and final judge of when such action shall be appropriate.

         SERP § 5.3; BEP § 5.3.

         These powers are subject to the following limitations:

The Plan may be amended, modified, suspended, or terminated by the Board of Directors if and when it deems such action necessary, provided, however, that notwithstanding the foregoing, no such amendment, modification, suspension or termination shall reduce the benefit to which the Participant or spouse was entitled immediately prior to such amendment, modification, suspension, or termination.

         SERP § 6.3; BEP § 6.4 (henceforth the "SERP anti-cutback provision").

         B. Kelly's Employment with Stanadyne[4]

         Kelly was employed by Stanadyne for approximately 27 years before retiring in 2009 from his position as Senior Vice President and Chief Technical Officer. Local Rule 56(a)(1) Statement ¶¶ 1-2. Kelly is a participant in Stanadyne's Pension Plan as well as its Non-Qualified Plans, which were adopted in 1992. Id . ¶ 6; Pension Plan; BEP; SERP. The pension plans were frozen as of March 31, 2007, ceasing benefit accrual. R., Ex. PI, Stanadyne Corporation Pension Plan 1, ECF 32-47; R., Ex. 22, Estimate SERP Benefit March 31 email Rodgers to Kelly, 2007 ("Kelly Estimate"), ECF No. 32-22.

         Kelly is currently retired and is receiving benefits under all three plans. Local Rule 56(a) (1) Statement ¶ 5. Kelly was also a participant in Stanadyne's Management Stock Option Plan ("Option Plan"), a program that was amended in 1998 to allow for immediate vesting upon a change of control event. R., Ex. 31, Amendment Stanadyne Automotive Holding Corp. Management Stock Option Plan ("Option Plan Amendment"), ECF No. 32-32.

         In 1997, Stanadyne was acquired by American Industrial Partners ("AIP"). R., Ex. 34, Re: Appeal Benefit Claim Behalf William Kelly ("Appeal Response") 4, ECF No. 32-40. In connection with that acquisition, Kelly received payments reported on his W-2 under the 1997 Equity Participation Plan ("1997 Equity Plan"). Id .; R., Ex. 32, Amended and Restated Equity Participation Promotion Agreement ("Equity Participation Agreement"), ECF No. 32-37; R., Ex. 38, 1997 Kelly W-2, ECF No. 32-38. These payments were excluded from the computation of pension benefits under all three plans. Appeal Response 4. Importantly, the Equity Participation Agreement contained no clause related to pension benefits (i.e., it contained no exclusionary language).

         In 2004, the private equity firm Kohlberg & Company ("Kohlberg") acquired Stanadyne from AIP. Local Rule 56(a)(1) Statement ¶ 13. In August 2004, in relation to this acquisition, Kelly received a cash payout of stock options under the Option Plan, the Option Proceeds, and a sale bonus from AIP (again, the "AIP Bonus") for a total of $2, 517, 140. R., Ex. 31, Re: Stanadyne Automotive Holding Corp. ¶ Outstanding Stock Options ("Option Pay-Out Letter"); R., Ex. 31, William Kelly Earnings Statement. These payments were reported as ordinary income on Kelly's 2004 W-2. R., Ex. 31 (cont'd), 2004 Kelly 2, ECF No. 32-32. These payments were in addition to Kelly's salary for 2004, which exceeded $250, 000. R., Ex. 31 (cont'd), William W. Kelly Earning Statement ("2004 Earning Statement"), ECF No. 32-32.

         C. Committee Proceedings Prior to Kelly's Claim The events that are at the core of Kelly's challenge to the Committee's treatment of the Non-Qualified Plans' benefits precede the filing of his claim. In June 2005, in a series of emails, Jean McCarthy ("McCarthy"), then Stanadyne's Vice President for Human Resources, inquired of Louis Stevens ("Stevens"), Stanadyne's Treasurer, and afterwards of Steve Langin ("Langin"), Stanadyne's Chief Financial Officer, and William Gurley ("Gurley"), Stanadyne's President and CEO, about the definition of "total compensation" and whether the Option Proceeds, which were classified as ordinary income, were included in "total compensation" and, thus, in "Earnings, " under the Pension Plan. R., Exs. 1-4, 6, 7, ECF Nos. 32-1, 32-2, 32-3, 32-4, 32-6, 32-7.

         On September 1, 2015, the Committee, composed of Gurley, Langin, McCarthy, and Stevens, met to discuss the issues raised by McCarthy. R., Ex. PP1, Minutes S.C. Pension Committee Meeting mdash; September 1, 2005 ("September 2005 Minutes"), ECF No. 32-50. According to the minutes, the Committee concluded that the Option Proceeds and the AIP Bonus, although distributed to select employees as ordinary income, were not classified as "Earnings, " "[i]n accordance with the intent of senior management[.]" Id . The Committee so concluded even though none of the documents relating to these payments contained language excluding them from "Earnings" under the Pension Plan. This absence is significant, because though the Committee's understanding at the time was that Appendix D-l of the Pension Plan required "a specific exclusion for any form of compensation to a participant; otherwise the compensation [was] considered as Eligible Earnings for Pension." Id.

         Following instructions from the Committee to reach out to external counsel for advice on "a course of action to ensure that the [Option Proceeds and AIP Bonus] may properly be excluded from Eligible Earnings for Pension[, ]" id., Stevens contacted Natalie Welsh ("Welsh") from Shipman & Goodwin, explaining that

[t]he intent of the management is to exclude the [AIP] Sale Bonus and the Option [Proceeds] from earnings considered from pension. Due to an oversight, the documents related to these payments do not exclude them from Earnings under the Stanadyne Pension Plan as specified in Appendix D-l Section (b) (iv) of the Plan Document[, ]

         and asking Welsh to

... advise [] on a course of action to remedy the deficiency in the documentation to ensure these sale-related payments may properly be excluded from Earnings considered for pension.

         R., Ex. 8 ("Stevens Email Welsh"), ECF No. 32-8 (emphasis added).

         In a subsequent email to the other members of the Committee, McCarthy expressed concern about Stevens' mandate to Welsh, which she characterized as one of improperly asking the attorney to "find a way" to insure that the Option Proceeds and the AIP Bonus were not categorized as "Earnings, " instead of making a more direct inquiry as to whether, based on the language of the relevant documents, the payments should be included in "Earnings." R., Ex. 12 ("McCarthy Sept. 21, 2005 email"), ECF No. 32-12. The record in this case (the "Record") contains no information on whether McCarthy's email received a response.

         The next chronological entry in the Record is an October 2005 meeting of the full Committee: the meeting minutes again reiterate senior management's intent to exclude the Option Proceeds and AIP Bonus from "Earnings" while adding that the absence of exclusionary language in the payments documentation is "clearly an oversight, an omission, resulting from the substantial number of events occurring during the period when the payouts occurred" and that Shipman & Goodwin was to advise the Committee "on how to remedy the deficiency." R., ...


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