United States District Court, D. Connecticut
FINDINGS OF FACT, RULINGS OF LAW, AND ORDER FOR
WILLIAM G. YOUNG, District Judge.
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
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.
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,  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.
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
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.
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
FINDINGS OF FACT
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.
Terms of the Non-Qualified Plans and the Pension Plan
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).
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. 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.
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.
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
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
(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.
5.3; BEP § 5.3.
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.
6.3; BEP § 6.4 (henceforth the "SERP anti-cutback
Kelly's Employment with Stanadyne
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.
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.
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).
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.
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.
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.
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[, ]
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
8 ("Stevens Email Welsh"), ECF No. 32-8 (emphasis
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.
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., ...