McCarthy v. Commerce Grp., Inc.

• Citation: 53 Employee Benefits Cas. 1385,831 F.Supp.2d 459
• Decision Date: 16 December 2011
• Docket Number: Civil Action No. 09–CV–10161–PBS.
• Parties: Louise M. McCARTHY, Plaintiff, v. The COMMERCE GROUP, INC. and Mapfre, S.A., Defendants.
• Court: U.S. District Court — District of Massachusetts

831 F.Supp.2d 459

53 Employee Benefits Cas. 1385

Louise M. McCARTHY, Plaintiff,

v.The COMMERCE GROUP, INC. and Mapfre, S.A., Defendants.

Civil Action No. 09–CV–10161–PBS.

United States District Court, D. Massachusetts.

Dec. 16, 2011.

Anne L. Josephson, Marie F. Mercier, Michelle A. Moor, Kotin, Crabtree & Strong, Boston, MA, for Plaintiff.

John D. Hanify, Michael Thomas Marcucci, Karen A. Whitley, Jones Day, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. INTRODUCTION

Plaintiff, Louise M. McCarthy, was formerly the Senior Vice President, Senior Counsel, and Assistant Secretary of defendant, The Commerce Group, Inc. (“CGI”), and General Counsel of several of CGI's subsidiaries. Prior to June 2008, CGI was a publicly-traded Massachusetts-based holding company operating entirely through its insurance subsidiaries. On June 4, 2008, CGI merged with defendant Mapfre, S.A. (“Mapfre”) and became a private, wholly-owned subsidiary of a publicly-traded foreign corporation—a Madrid-based global conglomerate of insurance subsidiaries. On June 5, 2008, one day after the closing of the merger, McCarthy submitted a Notice of Intent to Resign for Good Reason pursuant to the terms of her 2007 Employment Agreement and her 2006 and 2007 Incentive Award Agreements. Her “Good Reason” claim was denied. As a result, McCarthy claims that CGI's denial violated the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001, et seq., and that Mapfre intentionally interfered with her rights under the 2007 Employment Agreement. ¹

After a seven day trial, I make the following findings of fact and conclusions of law, and order that the case be remanded to the plan administrator because of significant procedural flaws that rendered the decision to deny Plaintiff benefits under the top-hat plan unreasonable.

II. FINDINGS OF FACT

1. Rising Through the Ranks

CGI hired McCarthy as Senior Counsel in September 2001. Prior to her employment at CGI, McCarthy practiced insurance regulatory law after graduating from University of Maine Law School in 1992. She served as Assistant General Counsel of the Massachusetts Division of Insurance from 1993 to 1995 and then as in-house corporate counsel at Commercial Union Insurance Company from 1995 to 2001. McCarthy is a member of the Massachusetts bar. McCarthy took no classes and had no experience or job training in SEC or corporate compliance matters. At the time McCarthy joined CGI in 2001, the Massachusetts-based company was just beginning to expand as a public company by acquiring subsidiaries outside New England. As such, her strong background in insurance regulation was valuable.

During her tenure at CGI, McCarthy steadily rose through the ranks. In 2003, McCarthy was elected Assistant Vice President of CGI, making her one of a small group of officers. This position made her eligible for officer perks such as special compensation packages, and it also allowed her to build an important relationship with CGI's Board of Directors. In May 2006, McCarthy was appointed Vice President and Senior Counsel of CGI. Three months later, McCarthy was made a Senior Vice President, Senior Counsel, and Assistant Secretary of CGI. As a result of her promotion to Senior Vice President at CGI, McCarthy was named a Section 16 officer, which meant she had a significant policy-making position within the company and was deemed to have material inside information at all times according to the Securities Exchange Act. See15 U.S.C. § 78p; 17 C.F.R. § 240.16a–1(f). As a Section 16 officer, McCarthy also attended the Annual Meeting of Shareholders, where she was publicly introduced as a member of the senior management team. In August 2006, she was appointed Senior Vice President and General Counsel of the insurance subsidiaries, the “Group.” The subsidiaries' legal affairs were consolidated under her management. Her positive job evaluations were reflected in the significant salary boost that followed. By the time McCarthy resigned, she was earning a $270,000 base salary and her 2007 Restricted Stock Unit Award amounted to $565,988, grossed up to account for tax and other consequences under the Internal Revenue Code.²

In 2006, McCarthy began reporting to two different supervisors in recognition of her dual role. In her capacity as Senior Vice President, Senior Counsel, and Assistant Secretary to the parent company, CGI, McCarthy reported to the General Counsel of CGI, James Ermilio. In her capacity as General Counsel, Senior Vice President, and Assistant Secretary to the subsidiaries, McCarthy reported directly to Gerald Fels, who held the position of CEO to each of CGI's subsidiaries.

2. Public Company Duties

In 2006, after Ermilio accepted a more business-oriented function within the company as newly-elected Executive Vice President,³ McCarthy assumed greater supervision of the day-to-day legal affairs as the highest-ranking lawyer in CGI with an exclusively legal function.

In fact, McCarthy's new role as Senior Counsel and Senior Vice President to CGI parent corporation carried specific public company responsibilities in addition to her corporate commercial law and insurance regulatory duties such as management of all multi-state insurance regulation matters, litigation, and contract disputes. Ermilio began assigning McCarthy public company-related duties as early as 2003, shortly after SarbanesOxley (“SOX”) went into effect. However, McCarthy assumed more responsibility after her promotion. At the time, McCarthy received one formal training on SEC matters from CGI's outside firm, Nutter McClennen & Fish LLP. Nutter was the outside counsel which handled SEC and SOX related matters for CGI.

In-house, McCarthy provided legal services to the audit, corporate compliance and nominating committees; participated in the Massachusetts Executive Committee, Countrywide Executive Committee, the Strategy Committee and the 8–K ⁴ Disclosure Committee; reviewed SEC filings prepared by the company accounting department, namely 10–Qs, 10–Ks; ⁵ contributed to the filing of § 302 Certifications by certifying the implementation of internal controls within her department; ⁶ developed director training programs and related-party transaction policy; and actively participated in the development of insider trading programs and § 16A/Form 3 filings.

McCarthy took particular pride in her title as a Section 16 officer and her membership on the Strategy Committee, which was in charge of establishing enterprise-wide strategy and making material transaction decisions. It supervised the growth of the company outside Massachusetts by recommending subsidiary acquisitions, hiring new employees, determining the sites of offices around the country, and overseeing the operations of CGI's insurance companies.

As for the other executive committees, McCarthy was responsible for updating the nominating and corporate governance committee charters, and she attended meetings of the nominating, corporate governance, and audit committees as necessary. For example, McCarthy drafted the summary report for the nominating committee meeting held on November 14, 2007. However, she did not attend the four compliance committee meetings between August 2006 and October 2007; a member of her staff attended in her stead. As for the Audit Committee, McCarthy was not a member but she attended part of each meeting to present on the status of significant legal matters. She also kept the Audit Committee charter current. For this, she relied heavily on Todd Peckham, a non-attorney legal analyst on her staff, to monitor SEC rule updates and alert her as necessary.

McCarthy implemented a director training program, continuing education program, and Board of Directors Manual for which she compiled important internal documents and company filings. The director training program was not utilized, however, because there were no new directors during McCarthy's tenure. Additionally, under McCarthy's supervision, Nutter worked with a member of her staff to create a conflict-of-interest policy.

According to McCarthy's supervisor, Ermilio, who had recommended McCarthy for the promotion, it is of “tremendous importance” for in-house counsel to advise the company on SOX matters and “very important” for CGI to implement policies and procedures ensuring SOX compliance. In his view, significant internal and external status and prestige accompanied her role advising committees of the Board of Directors and her title as a Section 16 officer.⁷ To his knowledge, Ermilio believed McCarthy's position would make it easier to get another job as a general counsel in another outfit. At the same time, Ermilio noted that such a promotion brought a “mixed blessing” of prestige and responsibility.

McCarthy's performance reviews from 2007 and 2008, however, indicate that her most significant and most time-intensive projects related to her role as General Counsel to the subsidiaries. For example, in 2007, McCarthy was the lead attorney in the acquisition of State–Wide Insurance Company, and she negotiated the 20–year AAA agreement. In comparison, Ermilio agreed that public company-related duties were a “relatively small” part of McCarthy's day-to-day tasks. Instead, CGI routinely retained outside counsel for such matters. When asked, McCarthy could not estimate the percentage of time she spent on SEC matters.

3. The Top Hat Agreements

At the start of CGI's merger discussions with Mapfre and other potential suitors, CGI's independent Board of Directors authorized the company to enter into Employment Agreements with eleven of its key Executive Officers. McCarthy was included in this group because of her role as Senior VP and Senior Counsel to CGI. The group was comprised of the “Section 16 officers” of CGI. The non-Section 16 officers also received Special Officer Separation Plans with similar benefits. As for the Section 16–officer Employment Agreements, they...