Krumme v. WestPoint Stevens Inc.

• Decision Date: 01 May 1998
• Docket Number: Docket Nos. 97-7312,97-7384
• Citation: 143 F.3d 71
• Parties: 22 Employee Benefits Cas. 1208, Pens. Plan Guide (CCH) P 23942Y Robert D. KRUMME, Plaintiff-Appellee, Gordon E. Allen; John Currier; Nicholas Pallotta; James J. Dunne; Leo Fornero; Gerard P. Mandry; Norman K. Matheson; Cochran P. Supplee and Bruce E. Moore, Plaintiffs-Appellees, Cross-Appellants, v. WESTPOINT STEVENS INC., formerly known as West Point-Pepperell, Inc., Defendant-Appellant-Cross-Appellee, C. Powers Dorsett and D. Michael Roark, Defendants-Cross-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 71

143 F.3d 71

22 Employee Benefits Cas. 1208,

Pens. Plan Guide (CCH) P 23942Y

Robert D. KRUMME, Plaintiff-Appellee Gordon E. Allen; John Currier; Nicholas Pallotta; James J. Dunne; Leo Fornero; Gerard P. Mandry; Norman K. Matheson; Cochran P. Supplee and Bruce E. Moore, Plaintiffs-Appellees Cross-Appellants, v. WESTPOINT STEVENS INC., formerly known as West Point-Pepperell, Inc., Defendant-Appellant-Cross-Appellee C. Powers Dorsett and D. Michael Roark, Defendants-Cross-Appellees.

Docket Nos. 97-7312, 97-7384.

United States Court of Appeals Second Circuit.

Argued Oct. 20, 1997.

Decided May 1, 1998.

Francis Carling, New York City (Collazo Carling & Mish, New York City, Frederick A. Brodie, Daniel Z. Mollin, Lewis A. Polishook, Winthrop Stimson Putnam & Roberts, New York City, of counsel),for Defendant-Appellant-CrossAppellee WestPoint Stevens Inc. and Defendants-Cross-Appellees C. Powers Dorsett, D. Michael Roark and Appellant West PointPepperell, Inc. (now known as WestPoint Stevens Inc.).

Robert J. Hausen, New York City (Christine P. Searl, Chadbourne & Parke, New York City, of counsel), for Plaintiffs-Appellees-Cross-Appellants Gordon E. Allen, John Currier, Nicholas Pallotta, James J. Dunne, Leo Fornero, Gerard P. Mandry, Norman K. Matheson, Cochran P. Supplee and Bruce E. Moore.

James W. Harbison, Jr., New York City (Carolyn W. Jaffe, Morgan, Lewis & Bockius, New York City, of counsel), for Plaintiff-Appellee Robert D. Krumme.

Before: WINTER, Chief Judge, MESKILL, Circuit Judge, and MARTIN, District Judge. ^*

MESKILL, Circuit Judge:

This is a consolidated appeal from judgments rendered in the United States District Court for the Southern District of New York, Scheindlin, J., in connection with two lawsuits, Allen v. West Point-Pepperell, Inc., 90 Civ. 3841 (S.D.N.Y.), and Krumme v. West Point-Pepperell, 89 Civ. 2016 (S.D.N.Y.). At the heart of this appeal is a dispute among the parties over a pension plan committee's authority to adopt actuarial assumptions in connection with calculating an accelerated lump sum payment of future accrued retirement benefits. Due to their factual complexity and the numerous legal issues arising in these bitterly contested lawsuits, our discussion of the factual background is extensive.

BACKGROUND

Consolidated on appeal are judgments from two lawsuits, Allen and Krumme. In Allen, the plaintiffs are nine former senior executives of Cluett, Peabody & Company (Cluett). ¹ In Krumme, the plaintiff is Robert D. Krumme, Cluett's General Counsel until 1986 when he departed on West Point-Pepperell, Inc.'s (now know as WestPoint Stevens, Inc. and hereinafter referred to as "WestPoint") acquisition of Cluett. WestPoint is a Georgia textile and apparel manufacturer which acquired Cluett in 1986 and operated it as a wholly owned subsidiary until Cluett's merger into WestPoint on January 1, 1989. WestPoint eventually sold Cluett to Bidermann Industries U.S.A., Inc. in March 1990.

The sole defendant in Krumme is WestPoint. The Allen plaintiffs brought suit against WestPoint and D. Michael Roark, C.

Powers Dorsett and Barry F. Shea, three WestPoint executives. Roark was Vice President of Human Resources for Cluett until 1986, and then Vice President of Human Resources for WestPoint until May 1989. At all relevant times, Dorsett was WestPoint's General Counsel. Barry F. Shea, WestPoint's Treasurer, originally was named as a defendant and then was dropped from the complaint by stipulation on January 28, 1997.

1. The EPI Amendment

In 1975, Cluett established an employee benefit program for its senior executives, the Executive Permanent Insurance Program (EPI Program). Among other things, the EPI Program provided deferred compensation benefits to its participants. Upon reaching age 65, EPI Program participants would receive lifetime monthly payments equal to, on an annual basis, 30% of the participants' final base salary. Krumme and each of the Allen plaintiffs agreed to participate in the EPI Program.

On October 24, 1988, a wholly owned subsidiary of Farley, Inc. (Farley) initiated a tender offer for all outstanding shares of WestPoint common stock. By November 21, 1988, Farley controlled 35.17% of that stock. Threatened with a hostile takeover, WestPoint sought to protect the retirement benefits of EPI Program participants. See Allen v. WestPoint-Pepperell, 933 F.Supp. 261, 264 (S.D.N.Y.1996) (finding that WestPoint sought to "protect participants in the event the company experienced a change in control") (hereinafter "Allen I "). Specifically, on November 11, 1988, WestPoint offered EPI Program participants an amendment to the EPI Program (EPI Amendment) under which the participants in the event of a "Change in Control," ² could choose a lump sum payment in an amount that would be the "Actuarial Equivalent" of their future stream of retirement benefits. The "Actuarial Equivalent" represented an amount having the "same present value" as the stream of retirement benefits under the EPI Program. As an additional measure of protection for EPI Program participants, the EPI Amendment included a fee-shifting provision to reimburse EPI Program participants for their costs and attorney's fees incurred in connection with enforcing their rights under the EPI Program after a change in control, regardless of whether the participant is a prevailing party. ³

2. Calculating the Actuarial Equivalent

EPI Amendment § 4A. (1)(c) established the basis for computing the "Actuarial Equivalent" of accrued retirement benefits. It states, in pertinent part:

For the purpose of establishing whether a benefit is the Actuarial Equivalent of another benefit the actuarial assumptions contained in Cluett's Employee Retirement Plan ["Cluett Plan"] shall be employed for so long as that Plan remains in existence and if such Plan is no longer in existence, the actuarial assumptions last used by such Plan shall be used.

EPI Amendment § 4A. (1)(c) (emphasis added). Section 1.3 of the Cluett Plan sets forth the actuarial assumptions incorporated by section 4A. (1)(c). In November 1988, at the time the EPI Amendment was offered to EPI Program participants, section 1.3 provided:

"Actuarial Equivalent" means an amount of equal value when computed on the basis of interest, mortality and other tables as shall be adopted from time to time by the [Cluett Pension Plan] Committee on the

advice of the Actuary, the current factors being as specified below:

1. Mortality Table The 1978 GAM Table (which is the 1971 Group Annuity Mortality Table projected to 1978 with Scale E). An average of male and female rates will be used.

2. Interest rate 5% per annum, compounded annually.

3. Other factors None.

Cluett Plan § 1.3 (first emphasis added). ⁴ The "Interest Rate" (hereinafter the "discount rate") is the rate at which the future stream of retirement benefits under the EPI Program is discounted to present value before distribution to participants in a lump sum form. The relationship between the discount rate and the amount of the lump sum is inverse; the higher the discount rate, the less the EPI Program participant receives. See Allen v. WestPoint-Pepperell, 954 F.Supp. 682, 690 n. 9 (S.D.N.Y.1997) (explaining the relationship between the discount rate and size of lump sum payment). Notably, although the Cluett Pension Plan Committee (Cluett Committee) had the authority under section 1.3 to adopt new actuarial assumptions "from time to time," Cluett's Board of Directors (Cluett Board), under sections 11.1 and 9.1, reserved exclusive authority to amend the Cluett Plan. ⁵

Within a few weeks after the EPI Amendment was offered, all of the plaintiffs in Krumme and Allen agreed to the terms of the EPI Amendment and opted to receive a single lump sum payment upon a change in control. Krumme, in returning his executed EPI Amendment to WestPoint, appended a cover letter dated December 9, 1988. It stated, in pertinent part: "Finally, I understand that the discount rate applicable under the Cluett Employee Retirement Plan is 5% and that would be the basis on which our benefits would be calculated under this change of control payout " (emphasis added). We now discuss the specific factual events underlying the disputes in Allen and Krumme.

3. The Error Discovered in the EPI Amendment

In early February 1989, WestPoint discovered a drafting error in the EPI Amendment. Section 4A. (1)(c) mistakenly had incorporated the actuarial assumptions contained in the Cluett Plan, and in particular a 5% discount rate that was well below market rate. See Allen I, 933 F.Supp. at 266 (finding that EPI Amendment's incorporation of the Cluett Plan's 5% discount rate was an error and was " 'totally inappropriate' given the high interest rates that prevailed at the time"). WestPoint, with respect to the EPI Amendment, had intended to incorporate the floating Pension Benefit Guaranty Corporation (PBGC)-based discount rate contained in WestPoint 's Pension Plan. To correct this drafting error, WestPoint management determined that the Cluett Committee had the authority to change the discount rate in the Cluett Plan on advice of the Cluett Plan's actuary. See Cluett Plan § 1.3 (providing that the Cluett Committee was authorized to adopt new discount rates "from time to On February 16, 1989, TPF & C recommended that the Cluett Plan's discount rate be changed from a fixed 5% rate to a floating rate calculated at 120% of the PBGC immediate interest rate, yielding, at all relevant times, a 9.3% discount rate (hereinafter "9.3% discount rate"). Accordingly, the Cluett Committee, on that same day, adopted TPF & C's recommendation and formally recorded this action in its minutes. At no relevant time, however, did the Cluett Board, which ceased to exist in January 1989, or the WestPoint Board of Directors ever vote to amend the actuarial assumptions in the Cluett Plan to reflect this change in the discount rate to 9.3%.

                time ... on the advice of the

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