Cvelbar v. CBI Illinois Inc.

• Decision Date: 14 February 1997
• Docket Number: No. 96-1669,96-1669
• Citation: 106 F.3d 1368
• Parties: -1307, 97-1 USTC P 50,267, Pens. Plan Guide (CCH) P 23931T Anthony W. CVELBAR, Plaintiff-Appellant, v. CBI ILLINOIS INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1368

106 F.3d 1368

79 A.F.T.R.2d 97-1307, 97-1 USTC P 50,267,

Pens. Plan Guide (CCH) P 23931T

Anthony W. CVELBAR, Plaintiff-Appellant, v. CBI ILLINOIS INCORPORATED, Defendant-Appellee.

No. 96-1669.

United States Court of Appeals Seventh Circuit.

Argued Sept. 11, 1996.

Decided Feb. 14, 1997.

Julian E. Cannell (argued), David A. Koperski (argued), Kavanagh, Scully, Sudow, White & Frederick, Peoria, IL, for Plaintiff-Appellant.

Stephen D. Gay, Jeffrey A. Ryva, Angela Kay Garrett (argued), Husch & Eppenberger, Peoria, IL, for Defendant-Appellee.

Ellen L. Beard, Department of Labor, Office of the Solicitor, Washington, DC, for Amicus Curiae Robert B. Reich.

Before COFFEY, RIPPLE and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

Anthony W. Cvelbar signed an agreement with his employer that extended benefits to him in the event of his termination. His employer later merged with the appellee, CBI Illinois Incorporated ("CBI"), which agreed, as part of the merger agreement, to honor the contract. Mr. Cvelbar subsequently was terminated. After paying benefits for some time, CBI invoked the limitation provision of the contract and discontinued the benefits. Mr. Cvelbar brought suit in state court alleging that he was entitled to continued payments under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq. After removal, the district court held that the decision to terminate the benefits was not arbitrary or capricious and entered summary judgment in CBI's favor. Mr. Cvelbar now appeals that decision. We conclude that the district court had subject matter jurisdiction and affirm its judgment.

I BACKGROUND

A. Facts

Anthony W. Cvelbar was employed as the Executive Vice President of The First National Bank of Peoria. In March 1990, he entered into an Employer-Employee Agreement ("Agreement") with the bank. That Agreement provided that the bank would pay Mr. Cvelbar severance benefits in the event he was terminated, voluntarily or involuntarily, for any reason other than death, retirement, or the commission of a felony or fraud. The Agreement further provided that Mr. Cvelbar would not compete with First Peoria by accepting employment with a competitor institution for three years following termination. First Peoria entered into similar agreements with four other employees.

Central to this appeal is the interpretation of several provisions of the Agreement. We therefore shall set forth those provisions in more detail. The Agreement stated that its purpose is "to encourage the continued dedication of the management of the Company and its subsidiaries, including [Mr. Cvelbar], to the business of the Company and to discourage [Mr. Cvelbar] from seeking employment with a competitor." R.7, Ex. A at 1. Encouraging loyalty from managers such as Mr. Cvelbar was deemed essential because of such managers' "intimate knowledge of the products, operating procedures and customers" of First Peoria. Id.

The three benefits that would be provided to Mr. Cvelbar should he be terminated are (i) The Company shall make available to the Employee and his dependents coverage under the group medical plan on the same terms and conditions as are then available to a retiree of the First Peoria Corp. Retirement Plan in effect at that time.

enumerated in the third paragraph of the contract:

(ii) The Company shall pay the Employee a lump sum severance payment equal to the lesser of (a) 200% of the Employee's last five-year average annual compensation including any bonuses and director's fees, or (b) 50% of the number of years, or fraction thereof, remaining until the Employee's normal retirement date under the First Peoria Corp. Retirement Plan times the Employee's last five-year average annual compensation including any bonuses and director's fees.

(iii) The Company shall pay the Employee a monthly payment of an amount equal to the deferred pension amount payable under the First Peoria Corp. Retirement Plan at age 65, assuming a life only option, from the date of termination of the Employee's employment until he attains the age of 65 or until he begins receiving benefits under the First Peoria Corp. Retirement Plan, whichever occurs first.

R.7, Ex. A at 3 para. 3. Paragraph four placed a limitation on the payment of any benefits that may become due under the Agreement. The provision, entitled "Limitation on Amounts Payable," provided:

Notwithstanding anything contained in this Agreement to the contrary, in the event any payment to be made or benefit to be provided to the Employee pursuant to this Agreement is deemed, in the sole opinion of Company's counsel, to be contingent on a "change in ownership or control" or otherwise would be subject to the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the Code), then the total amount of payments or benefits to be provided to the Employee pursuant to this Agreement shall be reduced so that the aggregate present value of all said payments does not exceed 299% of the Employee's Average Annual Compensation as defined in the Code.

R.7, Ex. A at 3-4 para. 4.A. In addition, First Peoria promised to use its best efforts to require any successor to assume expressly the obligations of the Agreement. Mr. Cvelbar's right to payments was to vest at the time of his termination, and Judith A. Cvelbar was to receive the benefits in the event that Mr. Cvelbar died after termination with benefits remaining.

On June 1, 1992, the bank merged with CBI Illinois, Inc. As a result of the merger, CBI assumed the bank's duties under the Employer-Employee Agreement. ¹ CBI terminated Mr. Cvelbar in October 1992. In his affidavit, Peter W. Callow, the President of CBI, testified that he made the decision to terminate because Mr. Cvelbar "exhibited a negative attitude toward the new ownership at Commerce Bank after the merger which took place on June 1, 1992." R.19 at 2. After Mr. Cvelbar's termination, CBI made payments under the Agreement until December 1994. At that time, CBI's counsel, James L. Swarts, determined that, because some of the payments made to Mr. Cvelbar were "contingent on a 'change in ownership or control' or otherwise ... subject to the provisions of Section 280G," the limitation provision contained in paragraph four applied. ² Therefore, counsel decided, Mr. Cvelbar

no longer deserved benefits because he already had been paid more than 299% of his Average Annual Compensation.

B. Proceedings in the District Court

Mr. Cvelbar filed an action in state court alleging that, under ERISA and state contract law, he was due continued benefits. After removal, the district court granted partial summary judgment to CBI and denied partial summary judgment to Mr. Cvelbar. Prior to the district court's grant of partial summary judgment, a magistrate judge, in a report and recommendation to the district court, had concluded that, under the four-part test of Diak v. Dwyer, Costello & Knox, P.C., 33 F.3d 809 (7th Cir.1994), the Agreement is an ERISA plan, the rights under which can be litigated in federal court. The magistrate judge reasoned that a reasonable person reading the Agreement " 'could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving the benefits.' " R.5 at 3 (quoting Diak, 33 F.3d at 812). Before the district court, neither party objected to the magistrate judge's determination, and the district court did not address independently the issue of subject matter jurisdiction.

With respect to the merits, the parties contested whether the benefit payments qualify as "parachute payments" under 26 U.S.C. § 280G. Mr. Cvelbar urged that, because the payments did not constitute such payments, the limitation provision of the Agreement did not apply, and he was entitled to continued payments. However, the district court agreed with CBI that whether the payments to Mr. Cvelbar were actually parachute payments is irrelevant because the Agreement gives discretion to CBI's counsel to resolve that matter. Therefore, the controlling issue, according to the court, was whether CBI's counsel's determination that the payments were contingent on a change in ownership or control was arbitrary or capricious. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 956-57, 103 L.Ed.2d 80 (1989). The court held that CBI's interpretation was reasonable in light of the IRS's Proposed Regulations.

In its order rendering partial summary judgment, the district court ordered the parties to submit status reports detailing the issues, if any, that remained to be litigated. In his status report, Mr. Cvelbar submitted that the court ought to determine "what part of the payments [Mr. Cvelbar] received are 'parachute payments.' " R.41. Referring to its earlier order, the district court concluded that this assertion failed to raise issues that were relevant to Mr. Cvelbar's ERISA claim because he had not established that the action of the administrator in terminating payments was arbitrary or capricious. The court then determined that its earlier grant of partial summary judgment had resolved all of the issues between the parties and entered final judgment in favor of CBI.

II DISCUSSION

On appeal, Mr. Cvelbar suggests for the first time that his Agreement is not a "plan" within the meaning of ERISA. He contends that individual contracts between individual employees and employers providing for post-termination benefits do not qualify as "plans" under ERISA. He also maintains that the Agreement does not satisfy our Diak test because a reasonable person reading the three benefits-providing clauses could not ascertain the source of funding or the procedures for receiving the benefits. CBI responds that the Agreement is a "top-hat" plan, an ERISA plan that provides benefits for a select group of highly-paid managers.

After studying the briefs of the parties and hearing oral argument, the court invited the...