Hess v. Reg-Ellen Machine Tool Corp.

• Citation: 423 F.3d 653
• Decision Date: 06 September 2005
• Docket Number: No. 04-3415.,No. 04-3408.,04-3408.,04-3415.
• Parties: James HESS & John Hess, Plaintiffs-Appellants, v. REG-ELLEN MACHINE TOOL CORP. and Reg Ellen Machine Tool Corp. Employee Stock Ownership Plan, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

423 F.3d 653

James HESS & John Hess, Plaintiffs-Appellants, v. REG-ELLEN MACHINE TOOL CORP. and Reg Ellen Machine Tool Corp. Employee Stock Ownership Plan, Defendants-Appellees.

No. 04-3408.

No. 04-3415.

United States Court of Appeals, Seventh Circuit.

Argued May 6, 2005.

Decided September 6, 2005.

COPYRIGHT MATERIAL OMITTED

Michael K. Havrilesko (argued), Belvidere, IL, for Plaintiff-Appellant.

Thomas P. Craig (argued), Robert Fredrickson, Reno, Zahm, Folgate, Lindberg & Powell, Rockford, IL, for Defendant-Appellee.

Before KANNE, ROVNER, and WOOD, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

Reg-Ellen Machine Tool Corporation ("Reg-Ellen") administers an Employee Stock Ownership Plan ("ESOP") for its employees that is governed by the Employee Retirement and Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq. Plan participants John and James Hess, brothers and former employees of Reg-Ellen, each brought suit in federal district court against Reg-Ellen and the Reg-Ellen ESOP, claiming that the plan administrator had wrongfully denied their requests to move their retirement funds from Reg-Ellen stock into diversified investments. See 29 U.S.C. § 1132(a)(1)(B) (authorizing suits by participants in plans covered by ERISA to enforce rights under terms of plan). John Hess also sued to enforce his alleged right under the Illinois Business Corporation Act to inspect Reg-Ellen's books and records. See 805 ILCS 5/7.75 (requiring corporations to allow shareholders to examine corporate books and records for a proper purpose). On the parties' cross motions for summary judgment, the district court granted summary judgment to the defendants, and the Hesses appeal. For the reasons stated below, we affirm.

I.

John Hess began working at Reg-Ellen in 1987, and James Hess followed suit two years later in 1989. Both resigned in 1996, when they were either 51 or 52 years old (we assume from the fact that the Hesses have the same birth date that they are twins). At the time they resigned, the Hesses had pension benefits in Reg-Ellen's ESOP. ESOP's are "a type of pension plan intended to encourage employers to make their employees stockholders." Steinman v. Hicks, 352 F.3d 1101, 1102 (7th Cir.2003); see also 29 U.S.C. § 1107(d)(6); Summers v. State St. Bank and Trust Co., 104 F.3d 105, 106 (7th Cir.1997). As we explained in Steinman, in the typical ESOP, the employer contributes the stock to the retirement plan on behalf of its employees. Steinman, 352 F.3d at 1102. In Reg-Ellen's case, however, before 1994 employees were also allowed to contribute on their own behalf by withholding money from their pay-check — in plan terms, "salary reduction contributions."

In addition to Reg-Ellen stock, the ESOP allowed participants to channel salary reduction contributions into what the plan calls the "Other Investments Account," comprised of more diversified investments. Before 1994, Reg-Ellen also made contributions on behalf of plan participants to either the Reg-Ellen stock fund or the other investments account. The plan explains that plan participants had the right to "direct the Trustee to invest [their] contributions" or contributions made by Reg-Ellen on their behalf "in either (i) an Employer Stock Fund or (ii) the Other Investments Account." Reg-Ellen ESOP § 4.12(a). The plan further specifies that the trustee will invest assets in the stock fund primarily in Reg-Ellen stock and assets in the "Other Investments Account" in diversified securities and property (not including Reg-Ellen stock). Reg-Ellen ESOP § 4.12(b), (c).

In 1995, Reg-Ellen's Board of Directors amended the ESOP to eliminate employees' salary reduction contributions and the lion's share of Reg-Ellen's contributions to the ESOP. Previously Reg-Ellen had matched the total amount of all salary reduction contributions via what the plan calls the "Employer's Elective Contribution" and had also contributed a discretionary matching amount for certain eligible employees. Reg-Ellen ESOP § 4.1(a), (b). These contributions, together with participants' salary reduction contributions, were eliminated as of December 1, 1994, the retroactive effective date of the amendments. Reg-Ellen ESOP Amended § 4.1(a),(b). Thus, the only money going into the ESOP after December 1994 was in the form of a "discretionary amount" contributed by Reg-Ellen. Reg-Ellen ESOP § 4.1(c).

The board amended the Plan in this way in preparation for an upcoming change in ownership at Reg-Ellen. Specifically, in 1997 David Lewellen, who had been the president of Reg-Ellen and principal shareholder since 1978, sold his majority ownership interest to the ESOP. This sale coincided with Lewellen's retirement. Thus, in January 1998, Timothy Turner succeeded Lewellen as president of Reg-Ellen, and Lewellen's former assistant, Lorraine Morris, became secretary of Reg-Ellen.

Around this same time, John and James (who had left in 1996) began inquiring about their options under the pension plan. They wrote identical letters to Turner and Plan Trustee Richard Bennett, requesting a distribution of their "ESOP money to roll over into an IRA account of [their] choice." Craig Thomas, the attorney for the Reg-Ellen ESOP, replied to the Hesses' letters. He informed them that they would not be eligible for a distribution until they were 55 years old and enclosed a copy of the plan for their reference. The Hesses continued requesting a distribution over the next several months, but Reg-Ellen steadfastly maintained that they were not yet qualified.

In June 1998, John again wrote Bennett (the ESOP trustee), this time requesting to diversify his Reg-Ellen stock from the stock fund to the Other Investments Account. At some point James Hess made a similar request. In support of their request, the Hesses relied on amendment 4.12(i), which had been added to the plan with the 1995 amendments eliminating employees' salary reduction contributions. Although Bennett thought the amendment supported the Hesses' attempts to diversify their Reg-Ellen stock, Turner and Thomas (the plan's attorney) disagreed. Both maintained that the Hesses must first satisfy the diversification requirements located elsewhere in the plan, which included attaining 55 years of age.

The Hesses thus requested a hearing on their claim to diversify their contributions to Reg-Ellen stock. Although they had been represented by counsel while corresponding with Reg-Ellen, a different attorney represented them at the appeal hearing before Reg-Ellen's administrative committee. The committee was comprised of plan administrator and company president Turner, Morris, and four other corporate officers of Reg-Ellen. On September 30, 1999, the committee held a hearing on the Hesses' claim, which was framed as follows: "Whether [John and James are] entitled to diversify [their] pre-December, 1994 contributions into the Plan which are currently invested in Reg-Ellen Machine Tool Corp. stock." Although not relevant here, James Hess also appealed his claim to a distribution on account of an alleged disability. With the exception of a medical report relating to the disability claim, the Hesses presented no evidence at their hearing other than the plan document itself.

Just over a month later, the administrative committee denied the Hesses' claims, reasoning that they were not entitled to diversify their stock because they were not yet 55 years old. See Reg-Ellen ESOP § 4.12(g) (enumerating diversification requirements). Although the Hesses did not refer to it, the committee also considered section 4.12(i), the amendment that the Hesses' previous counsel had relied on to support their diversification claim. The committee concluded, however, that the amendment was intended to allow those participants who had contributed salary reduction contributions into the Other Investments Account to direct the investment of their pre-amendment contributions within that account. Thus, reasoned the committee, section 4.12(i) did not advance the Hesses' claim to diversify their Reg-Ellen stock.

John and James then each filed suit against Reg-Ellen and the Reg-Ellen ESOP (together "Reg-Ellen") under section 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B), which allows a participant in a plan governed by ERISA to bring a civil action to "recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." Each alleged that a decrease in the value of Reg-Ellen stock between 1997 and 2001 had caused him to lose money. In particular, the complaints alleged that John saw the value of his 48,564 shares decrease by more than $111,000, and James saw the value of his 9,702 shares drop by more than $50,000 (parenthetically, we note that we find these allegations puzzling, since James owned approximately 1/5 as many shares as John, yet is alleged to have lost nearly half as much money). John's complaint also included a state-law claim under the Illinois Business Corporation Act alleging that Reg-Ellen wrongfully denied him the opportunity to inspect its corporate books and records. See 805 ILCS 5/7.75. The district court consolidated the Hesses' suits for decision, and both the Hesses and Reg-Ellen moved for summary judgment. The district court granted Reg-Ellen's motion, concluding that the committee's denial of the Hesses' request to diversify was not arbitrary or capricious and that John's state-law claim failed because he was not a "shareholder" as that term is defined in the Illinois Business Corporation Act.

II.

A.

We review a district court's decision on cross-motions for summary judgment de novo. Tegtmeier v. Midwest Operating Eng'rs Pension Trust Fund, 390 F.3d 1040, 1045 (7th Cir.2004). Summary judgment is proper when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson...