Allen v. WestPoint-Pepperell, Inc.

• Decision Date: 11 September 1991
• Docket Number: 1679,Nos. 1678,WESTPOINT-PEPPEREL,D,INCORPORATED,s. 1678
• Parties: Gordon E. ALLEN; John Currier; James J. Dunne; Leo Fornero; Gerard P. Mandry; Norman K. Matheson; Bruce E. Moore; Nicholas Pallota; Cochran B. Supplee, Plaintiffs-Appellants, v.; D. Michael Roark; C. Powers Dorsett; Barry F. Shea, Defendants-Appellees. ockets 91-7230, 91-7374.
• Court: U.S. Court of Appeals — Second Circuit

Page 40

945 F.2d 40

Gordon E. ALLEN; John Currier; James J. Dunne; Leo

Fornero; Gerard P. Mandry; Norman K. Matheson;

Bruce E. Moore; Nicholas Pallota;

Cochran B. Supplee, Plaintiffs-Appellants, v. WESTPOINT-PEPPERELL, INCORPORATED; D. Michael Roark; C.

Powers Dorsett; Barry F. Shea, Defendants-Appellees.

Nos. 1678, 1679, Dockets 91-7230, 91-7374.

United States Court of Appeals, Second Circuit.

Argued June 25, 1991.

Decided Sept. 11, 1991.

Robert J. Hausen, New York City (Stanley S. Arkin, Chadbourne & Parke, of counsel), for plaintiffs-appellants.

Francis Carling, New York City (Michael A. Kalish, Frederick A. Brodie, Winthrop, Stimson, Putnam & Roberts, of counsel), for defendants-appellees.

Before CARDAMONE, MINER and MAHONEY, Circuit Judges.

MINER, Circuit Judge:

Plaintiffs-appellants Gordon E. Allen, John Currier, James J. Dunne, Leo Fornero, Gerard P. Mandry, Norman K. Matheson, Bruce E. Moore, Nicholas Pallotta and Cochran B. Supplee (collectively, "appellants") appeal from a judgment entered in the United States District Court for the Southern District of New York (Conboy, J.) granting the motion of defendants-appellees WestPoint-Pepperell, Inc., D. Michael Roark, C. Powers Dorsett and Barry F. Shea (collectively, "WestPoint") to dismiss appellants' complaint pursuant to Fed.R.Civ.P. 12(b)(6).

We hold that appellants state in their complaint an adequate claim for rescission of an agreement releasing WestPoint from certain contractual obligations. Accordingly, we reverse the judgment dismissing the complaint and remand the case for further proceedings.

BACKGROUND

Appellants are nine former senior executives of Cluett Peabody & Co., the manufacturer of Arrow shirts and other wearing apparel. WestPoint-Pepperell, Inc. is a Georgia textile and apparel manufacturer, which was Cluett's parent company from January 1986, when it first acquired Cluett, until March 1990, when it sold the company to Bidermann Industries U.S.A., Inc. All appellants are domiciled in states other than Georgia. It appears undisputed, for all purposes related to the captioned action, that Westpoint-Pepperell is the successor obligor of Cluett Peabody.

On June 6, 1990, appellants filed the complaint initiating this action. In their complaint, appellants alleged the following:

In the mid-1970's, Cluett agreed with its senior executives to institute an Executive Permanent Insurance Program ("EPI Program" or "Program"), under which deferred compensation benefits would be paid to the senior executives. Under the EPI Program, a participant, upon reaching age 65, would be entitled to receive 30% of his final base salary for life, with payments of half that amount being made to a designated beneficiary upon the participant's death. Each participant, including appellants, signed a separate, identical contract On October 24, 1988, Farley, Inc. ("Farley") commenced a hostile tender offer for all outstanding shares of WestPoint common stock. At that time, Farley controlled approximately 9.8% of WestPoint's outstanding common stock, and, by November 21, 1988, it controlled 35.17%. In anticipation of a takeover, WestPoint offered the EPI Program participants the opportunity to subscribe to a favorable change in the terms of the agreement, sending each participant on or about November 11, 1988 an amendment form ("EPI Amendment") dated that date. A copy of the EPI Amendment was attached to appellants' complaint. By signing and returning to WestPoint the form, the participant would agree to the amended program. Each of the appellants signed and returned the form.

known as an EPI Program Agreement ("EPI Agreement").

Under the EPI Amendment, in the event of a "Change of Control" of the company, a participant would be entitled to receive from WestPoint lump sum payments in an amount equal to the "Actuarial Equivalent" of the participant's retirement benefit under the Program. A "Change in Control" occurred if, among other things, "any individual, corporation, ... or other person ... is or becomes the Beneficial Owner of Securities of WestPoint representing twenty percent (20%) or more of the combined voting power of WestPoint's then outstanding securities." The EPI Amendment defined "Actuarial Equivalent" as an amount having "the same present value as the Accrued Benefit." To calculate the Actuarial Equivalent, the EPI Amendment referred to "the actuarial assumptions contained in Cluett's Employee Retirement Plan," the pertinent provisions of which were quoted in the complaint. That Plan 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] Committee on the advice of the Actuary, the current factors being as specified below:

1. Mortality table. The ... 1971 Group Annuity Mortality Table projected to 1978....

2. Interest rate ¹. 5% per annum, compounded annually.

3. Other factors. None.

On February 3, 1989, WestPoint's Board of Directors announced that the company would be sold to the highest bidder. Company management considered a leveraged-buyout, and, according to the complaint, entered into discussions with Merrill Lynch Capital Partners to explore methods of enhancing the company's value in order to justify a higher bid. Appellants alleged that the conduct for which WestPoint was liable was part of a scheme to resist a takeover and, once a takeover became inevitable, "to extract higher benefits" for the individual defendants.

At approximately the same time as the announcement of sale, WestPoint's actuary sent to the Cluett Pension Committee a letter in which he recommended that the discount rate in the Cluett Employee Retirement Plan be changed from 5% to a floating rate of 120% of the Pension Benefits Guaranty Corporation (PBGC) discount rate. On February 16, 1989, the Cluett Pension Committee, of which Dorsett and Shea were members, met and adopted the recommended floating rate. Appellants alleged that the management determined it could enhance the company's value by $4 million if the discount rate to be applied in calculating the lump sum payments were increased to 9.3%.

On February 22, 1989, Roark, WestPoint's Vice-President for Human Resources, sent each EPI Program participant a letter, a copy of which was attached to the complaint. The letter stated,

There has apparently been some confusion as to the method of calculation to be employed in determining the lump sum benefit under the [amended EPI Agreements]. Some participants have told us Roark wrote that, "during February 1989," the floating rate equaled 9.3%. The letter went on to state,

                that they were led to believe that a 5% discount rate would be used to determine lump sum values.   This is incorrect.   The formula under the Cluett Employee Retirement Plan which is referenced in the November 11, 1988, amendment calls for converting monthly annuities to lump sum amounts as follows:  120% of the [PBGC] immediate interest rate
                

Because of the confusion regarding the discount rate, we are giving you an opportunity to revoke the amendment and are enclosing an election form which is to be used to affirm or revoke the November amendment.... In the event of a change in control, no lump sum payment of your deferred compensation benefit will be made until we have received the enclosed election form.

A copy of the election form also was attached to the complaint. Each appellant signed and returned the form, checking the box next to a provision that "I understand that the lump sum payment of the actuarial equivalent of my deferred compensation benefit will be in full satisfaction of all obligations of [WestPoint], as successor to [Cluett], ... and that in accepting a lump sum payment I shall thereby release [WestPoint] ... from all obligations under the [EPI] Agreement."

On February 23, 1989, WestPoint publicly announced that it had entered into a definitive merger agreement with Farley. On April 5, 1989, Farley's tender offer was consummated, and, that same day, WestPoint sent to each plaintiff a check representing the lump sum amount due them, calculated on the basis of a 9.3% discount rate. The enclosed cover letter provided, "By cashing this check you acknowledge that the Company's obligation to make informal [periodic] payments has been fully satisfied." A copy of the cover letter was attached to the complaint. Each of the appellants cashed his check, alleging in the complaint that they did so in reliance on WestPoint's "represent[ation] that the Change in Control did not occur until April 5, 1989 and that [their] lump sum payments were properly calculated on the basis of a 9.3% discount rate."

Appellants filed this action on June 6, 1990, based on diversity jurisdiction, claiming breach of contract, breach of fiduciary duty, fraud and violation of New York Labor Law. Appellants also sought a declaratory judgment that the release and cashing of the checks "in no way constitute[d] a release," arguing that the releases were based on fraud and mistake. On August 3, defendants moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6), contending that, as a matter of law, plaintiffs had released their claims. The district court granted the motion to dismiss in an order dated January 25, 1991 (later amended to correct a clerical error). Judge Conboy held that the releases barred recovery, finding that the February 22 letter was not deceptive and withheld no material information, that the adoption of the floating rate was not a proper basis for a claim of fraud, that no fiduciary relationship existed, and that the clear language of the releases did not allow for mutual mistake. The district court also held that the Labor Law claims were groundless.

In his Memorandum and Order, Judge Conboy referred to a related case over which he presided, Krumme v. WestPoint-Pepperell, Inc., 735 F.Supp. 575 (S.D.N.Y.1990). Robert Krumme, the...