Administrative Committee of the Sea Ray Employees' Stock Ownership and Profit Sharing Plan v. Robinson

• Decision Date: 14 January 1999
• Docket Number: No. 97-5958,97-5958
• Citation: 164 F.3d 981
• Parties: 22 Employee Benefits Cas. 2513, Pens. Plan Guide (CCH) P 23,950X ADMINISTRATIVE COMMITTEE OF THE SEA RAY EMPLOYEES' STOCK OWNERSHIP AND PROFIT SHARING PLAN, et al., Plaintiffs-Appellees, v. Daniel ROBINSON, et al. (Class I), Defendants-Appellants, Sharon Baldock, et al. (Class II), Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 981

164 F.3d 981

22 Employee Benefits Cas. 2513,

Pens. Plan Guide (CCH) P 23,950X

ADMINISTRATIVE COMMITTEE OF THE SEA RAY EMPLOYEES' STOCK

OWNERSHIP AND PROFIT SHARING PLAN, et al., Plaintiffs-Appellees, v. Daniel ROBINSON, et al. (Class I), Defendants-Appellants, Sharon Baldock, et al. (Class II), Defendants-Appellees.

No. 97-5958.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 22, 1998.

Decided Jan. 14, 1999.

Dan D. Rhea, Arnett, Draper & Hagood, Knoxville, TN, Herbert W. Krueger, James D. Holzhauer (argued and briefed), Mayer, Brown & Platt, Chicago, IL, for Plaintiffs-Appellees.

E.H. Rayson (argued and briefed), John C. Burgin, Jr. (briefed), William P. Snyder (briefed), Kramer, Rayson, Leake, Rodgers & Morgan, Knoxville, TN, for Daniel Robinson.

E.H. Rayson (argued and briefed), William P. Snyder (briefed), for Mike Dominquez, William Skinner, Lisa Moore, Cheryl Elliott, Ricky Taylor, Jerry Massey, James Barnes, Sue Cooke, Ralph Jones, Scott Lyons, Vicki Hardenburg, Tim Carroll, Benny Householder, Randy Garner, Benjamin Williams, Steven Blair, Robert Markwalter, Lisa Boyer, Samuel Adams and Jerry Hancock.

Jonathan D. Reed (argued and briefed), Michael T. McClamroch (briefed), Joe Mont McAfee (briefed), Egerton, McAfee, Armistead & Davis, Knoxville, TN, for Defendants-Appellees.

Before: KENNEDY and COLE, Circuit Judges; RUSSELL, District Judge. ^*

COLE, Circuit Judge.

At issue in this appeal is whether the layoffs at Sea Ray Boats, Inc. between 1989 and 1991 constituted a partial termination of the company's stock ownership and profit sharing plan ("Plan"), governed by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461. Sea Ray's administrative committee ("Committee") concluded that the company had not terminated the Plan. Upon review, the district court granted summary judgment in favor of the Committee and a class of Sea Ray employees ("Class II") who are current or fully vested participants in the Plan and their beneficiaries. Another class of former Sea Ray employees ("Class I"), non-vested former participants in the Plan and their beneficiaries, contends that the district court erred in applying an arbitrary and capricious rather than a de novo standard of review of the Committee's decision. Class I also contends that the Committee erred in determining that a partial termination of the Plan had not occurred. For the reasons that follow, we affirm the judgment of the district court.

I.

Sea Ray manufactures sport boats, sport cruisers, and yachts--a particular line of boats known as pleasure crafts. Founded in the late 1950s by C.N. Ray in Oxford, Michigan, the company enjoyed steady growth from the late 1960s through the 1970s. During this time, it systematically opened new plants and renovated existing ones. During the 1980s, the company experienced unprecedented growth, enjoying an average annual growth of 35 percent from 1983 to 1986 and record sales from 1986 to 1988. In 1986, Brunswick Corporation purchased Sea Ray, but allowed it to operate as a separate entity.

As part of its employee benefits, Sea Ray offers employees membership in the Plan, a defined contribution stock bonus and profit-sharing plan established under the provisions of ERISA. The Committee, as a fiduciary under ERISA, acts as the administrator for the Plan. Sea Ray funds the Plan in its entirety; participating employees do not contribute to the Plan. The Plan's assets are allocated to the individual accounts of its participants, with the benefits of each participant based solely upon the amount contributed to the participant's account and any income, expenses, gains and losses, or forfeitures of accounts of other participants which may be allocated to such participant's account. Although membership in the Plan is voluntary, a majority of Sea Ray's employees participate.

Sea Ray begins contributing to the Plan on behalf of an employee after he or she has completed one full year of service. As permitted under ERISA, 29 U.S.C. § 1053(a)(1)(B), the Plan adopts a gradual vesting formula:

Vested (or Non"Forfeitable)

Credited Service Percentage

fewer than 3 years 0%

3 years 20%

4 years 40%

5 years 60%

6 years 80%

more than 7 years 100%

Employees become fully vested in their account balances after they have worked at Sea Ray for seven full years. Under normal circumstances, if an employee leaves Sea Ray before completing seven years of service, the non-vested (or forfeitable) portion of his or her account balance is reallocated among the employees who remain at Sea Ray and are currently participating in the Plan.

The one exception to reallocation for non-fully vested employees, stated in § 19 of the Plan and codified in ERISA, 26 U.S.C. § 411(d)(3), occurs if Sea Ray engages in a partial termination of the Plan. In this event, the terminated employees become fully vested and are entitled to retain their full account balances irrespective of the years they have actually served.

During Sea Ray's period of unprecedented growth, membership in the Plan grew from 1,501 employees in July 1985 to 3,832 employees in July 1989. Beginning in March 1989, however, Sea Ray began to experience serious declines in sales, affecting all boats except yachts. During many of the months during 1989 through 1991, Sea Ray laid off part of its work force; some layoffs began as temporary, but almost all became permanent. By June 1990, as the company reduced its number of employees, the number of participants in the Plan declined to 3,060 employees. In 1990, Congress passed a federal luxury tax targeting five high-priced consumer goods--private boats, private planes, cars, jewelry, and furs--as part of its annual budget agreement: effective January 1991, any boat was subject to a 10 percent tax for the amount above $100,000. In the aftermath of the luxury tax, sales of all boats continued to decline as did the number of participants in the Plan. By June 1991, membership in the Plan had shrunk to 1,968 participants and twelve of the thirteen plants had either reduced their workforce or closed altogether.

Between 1989 and 1991, decisions regarding hiring, firing, and dismissal of employees were not vested in any one centralized figure or manager but left to the discretion of each plant. Since each plant at Sea Ray was operated separately as a profit center, each plant's manager determined the plant's criteria for laying off employees at his or her plant. ¹ During the downsizing, however, Sea Ray's corporate headquarters issued written directions to affected plant managers on how to handle the layoffs.

In June 1992, prior to any litigation leading to the present case, the Committee convened to discuss the partial termination question and the governing legal standards, and made the following determinations:

1. The reductions in employees was motivated by unfavorable changes in the economy and not by targeted employment numbers.

2. Partial determinations were defined by the Internal Revenue Code and determined on the basis of all facts and circumstances.

3. The historic application of the partial termination rule focused primarily on whether the termination resulted in funds reverted to the employer or discrimination in favor of highly compensated employees; recently, however, the emphasis had shifted to percentage decline in employment.

4. Case law was unsettled on what constitutes a significant decline and the level of deference, if any, owed to employer or IRS determinations.

5. Lastly, the courts' determinations regarding partial terminations were binding on the IRS only if it joined the suit or the suit was an appeal of a final administrative determination by the IRS.

Later that month, the Committee reconvened and concluded that for the period between 1989 and 1991, "there were no facts or circumstances other than the layoff due to the cyclical business which would dictate a finding of a Partial Termination." In making that determination, the Committee decided to calculate the percentage of layoffs for each year separately. The Committee also decided that the company would retain legal counsel to commence a lawsuit on behalf of the plan to seek a judicial ruling upholding the Committee's determination that a partial termination did not occur. The Committee filed an action before the district court in August. Following pre-trial matters, Class I filed a motion for summary judgment on December 1995. The Committee and Class II each filed a cross-motion for summary judgment in March 1996. The district court referred the motion and cross-motions to a magistrate judge, who recommended that the district court grant the cross-motions by the Committee and Class II and deny the motion by Class I. Specifically, it recommended holding that 1) the Committee's determination that a partial termination had not occurred was subject to the arbitrary and capricious standard of review; 2) the layoffs, calculated as caused by two separate corporate events, were not at a level generally considered determinative of a partial termination; and 3) the Committee's determinations regarding partial termination were neither arbitrary nor capricious. Although Class I filed an objection to the magistrate judge's report and recommendation, the district court accepted it in its entirety. Class I filed a timely notice of appeal.

II.

We review a district court's order granting summary judgment de novo. See Roush v. Weastec, Inc., 96 F.3d 840, 843 (6th Cir.1996). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). This court draws all reasonable inferences in favor of the non-moving party. See Terry Barr Sales Agency, Inc. v. All-Lock Co., 96 F.3d 174, 178 (...