Sly v. P.R. Mallory & Co., Inc.

• Decision Date: 29 July 1983
• Docket Number: No. 82-2997,82-2997
• Citation: 712 F.2d 1209
• Parties: James W. SLY and Schorling Schneider on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. P.R. MALLORY & COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1209

712 F.2d 1209

James W. SLY and Schorling Schneider on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. P.R. MALLORY & COMPANY, INC., Defendant-Appellee.

No. 82-2997.

United States Court of Appeals Seventh Circuit.

Argued April 6, 1983.

Decided July 29, 1983.

J. Bradley Schooley, Terry, Robinson & DePres, P.C., Shelbyville, Ind., H. William Irwin, Stewart, Irwin, Gilliom, Fuller & Meyer, Indianapolis, Ind., for plaintiffs-appellants.

James A. Strain, Barnes & Thornburg, Indianapolis, Ind., for defendant-appellee.

Before PELL and ESCHBACH, Circuit Judges, and JAMESON, Senior District Judge. ^*

JAMESON, Senior District Judge.

Plaintiffs-appellants, James W. Sly and Schorling Schneider, on behalf of themselves and others similarly situated, brought this action against defendant-appellee, P.R. Mallory, Inc. (Mallory) seeking recovery of severance pay and other benefits as a result of their terminations of employment by Mallory. They appeal from a judgment dismissing their complaint following cross-motions for summary judgment. We affirm.

I. Factual Background

On March 24, 1975, Mallory adopted a written "severance policy for salaried employees", which was applicable to all divisions of the Mallory Corporation. This policy was designated as "Standard Practice Instruction No. 17.04.01" (S.P.I.). According to officials of the Company, the S.P.I. was drafted in response to a severe economic recession in 1975 when Mallory anticipated that it would be forced to make large layoffs of salaried employees. ¹

On March 6, 1978, Mallory sold its Metallurgical Division to Contacts Metals Welding, Inc. (C.M.W.) As a result of the sale, approximately 167 salaried employees of the Metallurgical Division were terminated from their employment with Mallory. Thirteen of the terminated employees were not offered continued employment by C.M.W. and were paid full severance benefits under the terms of the S.P.I., without any qualification, limitation or provision for termination of such benefits upon obtaining other employment. Two employees were offered continued employment by C.M.W., but were to be paid on an hourly basis rather than as salaried employees. They refused the offer and were also paid full severance benefits under the terms of the S.P.I. The remaining 152 employees were offered continued employment by C.M.W. as salaried employees. They were denied payment of any severance benefits by C.M.W. regardless of whether they accepted or declined the offer of continued employment. All accepted employment with C.M.W.

James W. Sly was employed by Mallory as plant manager until Friday, March 3, 1978. The following Monday, March 6, he was employed by C.M.W. at the same rate of pay with the same basic job responsibilities. Schorling Schneider likewise left Mallory's employment on March 3, 1978 and began working for C.M.W. on March 6, in the same job at the same salary.

II. Proceedings in State and District Courts

Sly and Schneider brought this action in state court on behalf of themselves and other Mallory employees similarly situated, alleging breach of a contractual obligation to award them severance pay. The claim was certified by the state court as a class action. In an amended complaint a second count was added, alleging that Mallory had adopted a written severance pay policy which was an "employee welfare benefit plan" within the meaning of the Employee Retirement Income Security Act of 1974. (ERISA) 29 U.S.C. §§ 1001 et seq.

The action was then removed to the United States District Court, Southern District of Indiana, Indianapolis Division. The parties filed cross-motions for summary judgment. In its findings of fact and conclusions of law the court held that the state law breach of contract claim alleged in Count I had been preempted by ERISA, and that Count II, the ERISA claim, was without merit because Mallory's decision to deny benefits to plaintiffs was not arbitrary or capricious. The action was dismissed with prejudice.

III. Contentions on Appeal

Plaintiffs-appellants contend that the district court erred in overruling their motion for summary judgment, sustaining defendant's motion for summary judgment, and ordering dismissal of plaintiffs' complaint. They argue that the S.P.I. was an "employee welfare benefit plan" within the meaning of ERISA, 29 U.S.C. § 1002(1), that any uncertainty as to the interpretation of the S.P.I. must be construed in favor of the plaintiffs, and that in reaching its decision the district court misconstrued certain uncontradicted facts and misapplied certain recognized rules of law. Defendant-appellee contends that the district court was correct in finding, on undisputed facts, that Mallory's denial of severance pay to plaintiffs was not arbitrary and capricious, and the judgment of dismissal accordingly should be affirmed.

IV. Standard of Review

The parties agree that the S.P.I. is an "employee welfare benefit plan" within the meaning of ERISA, and that the courts have adopted an "arbitrary and capricious" standard of review for ERISA pension plans. Accordingly this court is bound by the decision of the pension administrator "unless [plaintiffs-appellants] can establish that it was 'arbitrary, fraudulent or in bad faith'." Martinez v. Swift & Co., 656 F.2d 262, 263 (7 Cir.1981), quoting Matthews v. Swift and Company, 465 F.2d 814, 821 (5 Cir.1972). See also Wardle v. Central States, etc., 627 F.2d 820, 823-24 (7 Cir.1980), cert. denied, 449 U.S. 1112, 101 S.Ct. 922, 66 L.Ed.2d 841 (1981), and Reiherzer v. Shannon, 581 F.2d 1266, 1272 (7 Cir.1978).

V. Was Mallory's Denial of Severance Benefits to Plaintiffs Arbitrary and Capricious?

In a well considered opinion the district court held that the employee benefit plan was administered in a rational and reasonable manner, in good faith, within the discretion of the administrators and in accordance with the plain wording of the documents and instruments governing the plan. The court stated:

The denial of severance pay to employees who accepted their old positions with the purchaser of the Metallurgical Division was not arbitrary or capricious. Severance pay is generally intended to tide an employee over while seeking a new job and should be considered an unemployment benefit. Read as a whole, the SPI clearly anticipates the recipient of the severance benefits to be without employment. For example, it provides for a leave of absence during which time certain benefits remain in force as though the employee were still employed. That approval must be had in advance as well as the provision that other separation arrangements than outlined in the SPI may be made indicates that the award of separation benefits is discretionary. Finally, the SPI provides that severance pay be awarded when the employee is involuntarily terminated due to a reduction in work force or position elimination. While it is true that the work force of Mallory was reduced and positions were eliminated within Mallory due to the sale of the Metallurgical Division, in fact the work force remained intact and the positions remained available to the employees. To award severance benefits under these facts would result in a windfall to the employees who retained their positions with the purchaser of the going concern, which was clearly not the intention or goal of either the SPI or of ERISA.

A. Provisions of ERISA

ERISA is a broad, remedial statute, designed to protect the rights of participants in employee benefit plans and their beneficiaries. Section 404(a)(1) of the Act, 29 U.S.C. § 1104(a)(1), provides:

(a)(1) ... a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-- (A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

* * *

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter or subchapter III of this chapter. (emphasis added).

Appellants contend that it was "precisely this responsibility" which Mallory breached by refusing to pay separation benefits to the plaintiffs.

B. Provisions of S.P.I.

The purpose and intent of the S.P.I. is set out in Part I, which reads in part:

I PURPOSE

To define the status and severance pay arrangements for salaried employees whose services are involuntarily terminated for the convenience of the company. This policy does not cover separation at time of normal retirement, discharge for unsatisfactory performance or discharge for cause. It is intended to cover separation caused by reduction in force of position elimination.

Relying primarily upon this language of the S.P.I., appellants argue that it is "clear and unambiguous" that upon their termination as employees of Mallory they had a "vested interest in and were entitled to payment of their accrued severance benefits." They urge that Mallory's decision was not made "in accordance with the documents governing the plan" nor made "solely in the interest of the participants and beneficiaries of the plan."

Mallory argues, and the district court properly recognized, that the S.P.I. must be read as a whole. Mallory urges that appellants' argument is inconsistent with other provisions of the S.P.I., and particularly Part IV relating to "Procedure" and Part V relating to "Approval".

Part IV provides:

Employees being terminated under the provisions of this policy will first be placed upon a leave of absence. A form F-1621 must...