Adams v. Avondale Industries, Inc.

• Decision Date: 15 June 1990
• Docket Number: No. 89-3634,89-3634
• Citation: 905 F.2d 943
• Parties: 12 Employee Benefits Ca 1911 Norman S. ADAMS, et al., Plaintiffs-Appellants, v. AVONDALE INDUSTRIES, INC.; Connell Industries, Inc.; Connell Limited Partnership, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 943

905 F.2d 943

12 Employee Benefits Ca 1911

Norman S. ADAMS, et al., Plaintiffs-Appellants, v. AVONDALE INDUSTRIES, INC.; Connell Industries, Inc. Connell Limited Partnership, Defendants-Appellees.

No. 89-3634.

United States Court of Appeals, Sixth Circuit.

Argued March 19, 1990.

Decided June 15, 1990.

David S. Mann (argued), Douglas M. Morehart, Taliaferro & Mann, Cincinnati, Ohio, for plaintiffs-appellants.

James A. Rydzel (argued), James O. Perrin, Jones, Day, Reavis & Pogue, Cleveland, Ohio, for defendants-appellees.

Before GUY and BOGGS, Circuit Judges; and COHN, District Judge. ^*

RALPH B. GUY, Jr., Circuit Judge.

Plaintiffs, 40 salaried employees of the Ortner Freight Car Facility in Mount Orab, Ohio, appeal the district court's grant of summary judgment on their claim against Avondale Industries, Inc., ¹ the former owner of the Ortner facility. The claim arose from Avondale's sale of Ortner to a third party, Trinity Industries, Inc., and Avondale's subsequent refusal to pay either accrued vacation pay or severance benefits to the employees who remained at the facility. Finding that before the sale Avondale had amended its severance plan to deprive the plaintiffs of benefits, we affirm the district court's refusal to award severance benefits. Because we find that the defendant's obligation to pay vacation pay had vested before the sale and has not been subsequently discharged, however, we reverse on the second claim of error.

I.

From the time of its formation in September 1985, Avondale Industries maintained an unwritten policy of providing salaried employees at its Ortner Freight Car Division with severance benefits upon the involuntary termination of their employment. In January of 1987, Avondale sold all assets of the Ortner division to Trinity Industries, a wholly unrelated entity. Shortly before the sale, Avondale promulgated a Limited Severance Plan, amending its unwritten plan so as to deny severance pay to salaried employees who remained employed at the Ortner division after the sale of assets. Avondale then refused to pay severance benefits to Ortner's salaried employees who joined Trinity, contending that the sale did not trigger such payment according to the terms of either the original or the amended plan. Avondale also refused to pay plaintiffs vacation benefits that had vested according to the terms of Avondale's vacation plan on the grounds that Trinity had already assumed and discharged this obligation at Avondale's request.

The plaintiffs brought an action in the United States District Court for the Southern District of Ohio under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C Sec. 1132(a)(1)(B) (1982), to recover benefits allegedly due under the unwritten severance plan and the vacation pay plan. Upon the close of discovery, the parties filed cross-motions for summary judgment. Plaintiffs argued that they were entitled to payment under the terms of the unwritten severance plan because they were "involuntarily terminated" within the meaning of the plan. They contended that the Limited Severance Plan was ineffective as an amendment of the unwritten plan because it was promulgated in a bad-faith attempt to avoid paying promised benefits. Avondale countered by arguing, inter alia, that the Limited Severance Plan was a valid amendment, and that in any case the sale did not constitute a termination within the meaning of the unwritten plan.

In an opinion reported at 712 F.Supp. 1291 (S.D.Ohio 1989), the district court granted the defendant's motion for summary judgment on the severance pay claim. After correctly announcing that an administrator's interpretation of an employee benefits plan under 29 U.S.C. Sec. 1132(a)(1)(B) must be reviewed de novo, Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 956, 103 L.Ed.2d 80 (1989), the court determined that Avondale's Limited Severance Plan withstood "judicial scrutiny as a valid interpretation of the unwritten severance plan." Avondale, 712 F.Supp. at 1295. In light of this holding, the court declined to address defendant's argument that the Limited Severance Plan effected a valid amendment of the unwritten plan.

The district court then reviewed Avondale's refusal to pay the plaintiffs accrued vacation benefits, applying state law in reliance upon the Supreme Court's recent decision in Massachusetts v. Morash, --- U.S. ----, 109 S.Ct. 1668, 1672-73, 104 L.Ed.2d 98 (1989) (ERISA does not govern disbursement of unfunded vacation payments from a single employer's general assets). Finding that Trinity had already provided the plaintiffs with all vacation benefits earned during their employment at Ortner in 1986 and early 1987, the district court found that the plaintiffs had "not sustained any damages," 712 F.Supp. at 1298, due to Avondale's refusal to pay. The court reasoned that to allow recovery against Avondale under these circumstances would be to award the plaintiffs a double recovery amounting to a "windfall" and, accordingly, granted the defendant summary judgment on the vacation pay claim.

Plaintiffs appeal, claiming that while the district court correctly identified the appropriate standard of review as de novo, it nevertheless subjected Avondale's interpretation of the unwritten severance plan to the more deferential "arbitrary and capricious" standard applied in this circuit before Bruch. See Adcock v. Firestone Tire and Rubber Co., 822 F.2d 623, 626 (6th Cir.1987). With regard to the vacation pay plan, plaintiffs claim that Ohio law precludes the district court's finding that Trinity had discharged Avondale's obligation to pay accrued benefits, and that the court misread the stipulated facts when it found that awarding vacation pay would result in a windfall to the plaintiffs. We address the plaintiffs' claims of error with regard to each plan separately below.

II.

A. The Avondale Severance Benefits Plan

Until it adopted the Limited Severance Plan shortly before Ortner was sold, Avondale never had a written severance benefits plan. ² The parties agree, however, that such a plan did exist and they have stipulated to its terms in the following language:

Eligible salaried employees were entitled to one week of current salary for each year of service with Ortner with a minimum of two weeks and a maximum of eight weeks. Eligible salaried employees were those who were involuntarily terminated from service with Defendant Avondale. Persons who resigned, retired or were fired for gross misconduct were not eligible for severance benefits.

The parties also agree that a period of unemployment following termination was never a prerequisite for obtaining severance pay under the unwritten plan. In fact, defendant acknowledges that prior to the sale of Ortner it had not denied severance benefits to any employee simply because he or she had immediately secured new employment upon termination.

On November 19, 1986, Avondale agreed to sell the assets of the Ortner division to Trinity Industries. Shortly thereafter, Avondale officials estimated the cost of providing severance and vacation benefits to all salaried Ortner employees taking positions with Trinity at $170,000. Avondale then composed the Limited Severance Plan, which purported to deny severance benefits to all salaried Ortner employees who accepted positions with Trinity, but to allow benefits to those who were either not offered such employment or who were offered but refused a position. Less than two weeks prior to the closing of the assets sale, the Limited Severance Plan was reduced to writing and distributed to some, but not all, of Ortner's salaried employees. The sale was closed on January 16, 1987, with the signing of a Purchase and Sale Agreement.

Trinity made a separate decision to rehire each one of the plaintiffs in this action. Of the 40 plaintiffs, none missed even one day of work as a result of the change of ownership, most retained identical job responsibility, and all but two were hired by Trinity at the salary they received while with Avondale. Trinity has no severance pay policy of its own and has declined to assume any severance obligations that may be owed to Ortner employees by Avondale. Nine former Ortner employees hired by Trinity at the time of the sale have since been involuntarily terminated and have received no severance pay.

B. The Validity of the Limited Severance Plan

The plaintiffs have brought this action pursuant to 29 U.S.C. Sec. 1132(a) which provides, inter alia, that a "civil action may be brought ... by a participant or beneficiary ... to recover benefits due to him under the terms of his plan...." It would seem elementary, therefore, that before determining what benefits are due, we must ascertain the terms of the plan in effect at the time of the assets sale. In order to do so, we are required to resolve a dispute between the parties as to whether the Limited Severance Plan constitutes a valid amendment of the unwritten plan. For guidance on this question, we turn to ERISA and the substantial body of case law applying its terms to benefit plan amendments.

Plaintiffs maintain that, by requiring plan administrators to satisfy fiduciary duties of care and loyalty when administering a benefits plan, Congress intended to foreclose amendment or termination of all benefit plans except where such action would be in the interests of plan participants. ERISA sets forth the fiduciary responsibility attaching to employee benefit plans in Subchapter I, Subtitle B, Part 4 of the Act, 29 U.S.C. Secs. 1101-1114. Avondale, as the administrator and fiduciary of its severance plan, 29 U.S.C. Sec. 1102(a), was required to conform to the following standard of care:

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;...