Healy v. Rich Products Corp.

• Decision Date: 07 December 1992
• Docket Number: D,No. 86,86
• Citation: 981 F.2d 68
• Parties: 16 Employee Benefits Cas. 1112 Thomas B. HEALY, Jr., Plaintiff-Appellant, v. RICH PRODUCTS CORP., Defendant-Appellee. ocket 92-7398.
• Court: U.S. Court of Appeals — Second Circuit

Page 68

981 F.2d 68

16 Employee Benefits Cas. 1112

Thomas B. HEALY, Jr., Plaintiff-Appellant, v. RICH PRODUCTS CORP., Defendant-Appellee.

No. 86, Docket 92-7398.

United States Court of Appeals, Second Circuit.

Argued Sept. 14, 1992.

Decided Dec. 7, 1992.

Bettina B. Plevan, New York City (Myron D. Rumeld, Roberta K. Chevlowe, Proskauer Rose Goetz & Mendelsohn, New York City, of counsel), for plaintiff-appellant.

Paul B. Zuydhoek, Buffalo, N.Y. (Hugh M. Jones, Mark E. Brand, David R. Hayes, Phillips, Lytle, Hitchcock, Blaine & Huber, of counsel), for defendant-appellee.

Before MINER, ALTIMARI and WALKER, Circuit Judges.

MINER, Circuit Judge:

Plaintiff-appellant Thomas B. Healy, Jr. appeals from a judgment entered on March 5, 1992 in the United States District Court for the Western District of New York (Elfvin, J.) rejecting on summary judgment motion plaintiff's claim that certain pension plan benefits were preserved by the terms of an exception to a general release executed in connection with a stock purchase agreement, and rejecting after trial plaintiff's claim to reform the release exception for mutual mistake and fraud. In an order entered on April 1, 1991, 1991 WL 46514, Judge Elfvin partially granted defendant's cross-motion for summary judgment, ruling, as a matter of law, that the meaning of the exception language found in the general release clause of the stock purchase agreement (the "Purchase Agreement") entered into between Healy and defendant Rich Products Corp. ("Rich Products") was governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (1988), ("ERISA"), and that the language did not preserve Healy's right to receive certain pension plan benefits. Judge Elfvin denied both parties' cross-motions for summary judgment on the issue of reformation of the release exception and scheduled a bench trial. After the bench trial, on March 5, 1992, 1992 WL 50924, Judge Elfvin rejected the reformation claim and directed the entry of judgment dismissing Healy's complaint.

BACKGROUND

From 1961 until 1987 Healy was an employee and officer of Rich Products. He, his wife Joanne, and their children held thirty-six percent of the common stock of Rich Products as a result of gifts of stock made over the years by Joanne's father, Robert Rich, Sr. ("Rich"), Chairman and Chief Executive Officer of Rich Products. Rich at all times held voting control of the company. In the Fall of 1987, Joanne Healy, on the advice of her counsel, Francis J. McConnell, refused to sign a Buy-Sell Agreement and a Shareholder Agreement submitted to her by her father. The agreement contained voting and transfer restrictions on her Rich Products stock that were designed to insure that the company would remain under the control of the Rich family. Joanne Healy's refusal to sign these agreements resulted in a rift between Rich and the Healy family, culminating in Thomas Healy's resignation in December 1987.

At the time of his resignation and since 1978, Healy was a participant in two benefit plans provided by Rich Products: a Deferred Compensation Agreement (the "DCA") and an Incentive Compensation Plan (the "ICP") (collectively the "Plans"). He also was a participant in a 401(k) pension plan, which is not at issue here. Pursuant to the terms of the DCA, Healy was entitled to certain annual benefits for fifteen years following his retirement, disability, death or other termination of employment. The ICP, also known as the phantom stock plan, provided that Healy would periodically be awarded "units," each of which entitled him to future payments based on the company's book value, divided In the Spring of 1988, after his resignation, Healy received the first installment of benefits due under the DCA--$44,615, and the first installment due under the ICP--$30,564. After these initial payments, $624,610 under the DCA and $275,076 under the ICP remained to be paid. Healy was paid $281,053 from the 401(k) pension plan in a lump sum upon his resignation.

                by 1,000,000.   Healy was to receive payments upon his retirement, disability, death or other termination of employment.   The ICP benefits were to be paid annually for ten years, and an administrative committee was formed to oversee the distribution of payments.   Both Plans contained "no-competition" provisions, the violation of which could result in forfeiture or suspension of benefits.   Under the DCA, participants agreed not to compete with Rich Products for two years following the termination of employment.   The ICP prohibited competition for an unlimited period of time.   Both Plans also provided that the benefits were not subject to assignment, alienation or encumbrance
                

In May 1988, Jonathan Golden, Rich Products' attorney, contacted McConnell to propose an immediate buy-out of the Healys' Rich Products stock and related interests. After extended negotiations, the parties ultimately agreed that Rich would pay twenty-five million dollars for the Healys' interests. Prior to the drafting of the agreement, a question arose concerning the earnings of certain Subchapter-S corporations in which the Healys owned shares of stock. The shares were scheduled to be transferred as part of the agreement. The earnings of these corporations had not been distributed to any of the stockholders, and the Healys' share of undistributed earnings amounted to $134,821.43. Although Rich was adamant about paying "twenty-five million dollars and not one cent more," Healy inquired as to whether his family's share of such earnings would be paid despite the Purchase Agreement. Rich initially refused. However, Golden explained that even if Rich refused to pay the Healys their shares of the distributions, the Healys' pro rata share of the distributions would be imputed to them as taxable income. Thus, the Healys would incur a tax liability of twenty-eight percent of the earnings, effectively reducing the twenty-five million dollar purchase price. Considering these facts, Rich agreed to pay an additional amount equal to the tax liability of the Subchapter-S corporations attributable to the Healys.

Golden prepared the first draft of the Purchase Agreement and transmitted it by facsimile to McConnell on August 9, 1988. The draft included a provision for the execution of a General Release, releasing Rich Products from any and all liabilities and claims. Healy testified that after he reviewed the first draft, he specifically told McConnell that he wanted to make it very clear that he did not want to release his benefits under the Plans. McConnell testified that he advised Golden that Healy did not want to release his remaining benefits or continuing benefits under the Rich Products pension and profit-sharing plans. McConnell testified that when Golden asked which plans McConnell was referring to, he replied by describing in detail both plans and the specific amount of benefits available to Healy under each plan. He told Golden that Healy already had received the first installment under each plan. McConnell's testimony is supported by the contemporaneous notes he wrote in the margin of the draft: "not waiving continuing pension benefits, 15 years and profit-sharing, early retirement." McConnell further testified that although he did not specify the Plans by name when he first proposed an exception to the General Release, he identified both plans by name to Golden in a later conversation relating to the second draft of the agreement. Golden testified that, as part of the conversation about the first draft, "in general terms, [McConnell] said that he wanted an exclusion or an exception from the general release that was provided in the agreement for Tom for vested pension and profit-sharing benefits, or some such language as that." Golden, however, testified that he did not even know of the Plans' existence and denied that McConnell ever informed him of the Plans. Golden believed McConnell's Pursuant to McConnell's request, Golden revised the General Release to include the following exception:

                request for a release exception was "purely legal in nature" and related to ERISA plans that by law could not be forfeited, such as the 401(k) plan.   He said that he did not believe they were dealing with "a controversial subject."
                

except, with respect to Mr. Healy, any vested rights under any profit sharing or pension plans of Rich which are subject to the Employee Retirement Income Security Act of 1974, which benefits are not released....

McConnell had suggested the language "vested pension and profit sharing." Golden added the phrase "subject to" ERISA, since he believed McConnell was referring to ERISA-covered plans. McConnell was satisfied with the exception language because he "thought the exception was broader, in fact, than what I'd asked for, because it said any Rich[ ] vested benefits under any Rich pension or profit-sharing plan, subject to ERISA."

The Purchase Agreement was executed on August 15, 1988. The agreement outlined the stock and other interests being acquired and included Schedule I, which listed each of these interests and their aggregate prices, totalling twenty-five million dollars. Schedule I did not list Healy's pension benefits and their value in the asset breakdown.

After the closing date in August 1988, Healy sent to a Rich Products administrator executed change-in-beneficiary forms for the Plans but received no reply. In March and April 1989, Healy's benefits due under the ICP and the DCA were not paid as they had been paid in the prior year. On June 2, 1989, McConnell wrote to Golden, advising him that Healy had not received his pension benefits and requesting that the payments be made. Golden responded by informing McConnell that, by the terms of the Purchase Agreement and the General Release, Healy's benefits had been released and his pension rights extinguished.

In November 1989, Healy filed a complaint in an action to declare that Rich Products had...