Diakoff v. American Re-Insurance Co., 78 CIV 5910 (LBS).

• Decision Date: 28 January 1980
• Docket Number: No. 78 CIV 5910 (LBS).,78 CIV 5910 (LBS).
• Parties: Eugene G. DIAKOFF, Plaintiff, v. AMERICAN RE-INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

492 F. Supp. 1115

Eugene G. DIAKOFF, Plaintiff, v. AMERICAN RE-INSURANCE COMPANY, Defendant.

No. 78 CIV 5910 (LBS).

United States District Court, S. D. New York.

January 28, 1980.

Weingold, Berman & Koerner, Carl S. Koerner, Margaret B. Hannigan, New York City, for plaintiff.

Sullivan & Cromwell, Paul P. Colborn, New York City, for defendant.

OPINION

SAND, District Judge.

This is a diversity action¹ in which Eugene G. Diakoff, a participant in an Incentive Compensation Plan (the "Plan") maintained by his former employer, the American Re-Insurance Company ("American Re"), seeks recovery of benefits under the Plan. Plaintiff alleges two causes of action. The first is for the payment of deferred compensation allocated to plaintiff under the terms of the Plan. The second is for an accounting of an allocation of the contribution to plaintiff for the profit sharing year 1973. With respect to the first cause of action, defendant American Re contends that pursuant to a Forfeiture for Competition Clause in the Plan, plaintiff forfeited his deferred compensation when he resigned from its employ to enter the service of a competitor. In response to the second cause of action, defendant argues that the decision whether plaintiff was to receive any profit sharing benefits for 1973 was in the absolute discretion of American Re's committee in charge of the administration of the Plan.

The parties to this action have filed cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff and defendant have executed and submitted a Stipulation of Facts and Contentions, and there is no dispute as to the material facts.²

For the reasons hereinafter discussed, this Court grants defendant's motion for summary judgment.

DISCUSSION

In his amended complaint, plaintiff puts forth four claims for relief: first, the Forfeiture for Competition Clause was not in the Plan on the date that he resigned from American Re; second, Section 19 of the Plan required the consent of the participants in order for the re-amendment of the forfeiture clause to become effective; third, plaintiff is entitled to an accounting for the profit sharing year 1973; and fourth, even if the forfeiture for competition provision was validly reinstated, it should not be enforced because it is an unreasonable restraint of trade. The Court will address each of these contentions in turn.

A. The Status of the Forfeiture for Competition Clause on January 25, 1974

Plaintiff became a salaried employee of defendant American Re on or about January 23, 1956. (Stip. ¶ 22).³ On August 15, 1967, plaintiff was an officer of American Re and became a senior participant in the Plan which, as amended from time to time, American Re has maintained for officers and "key employees" (as defined in the Plan) since December 15, 1953. (Stip. ¶¶ 6, 23).

As an officer and "key employee" and senior participant in the Plan, plaintiff was entitled to receive, at the end of each "profit sharing year" as therein defined, an allotment of a portion of American Re's "profit" for that year as computed by a formula set forth in the Plan. Pursuant to the provisions of the Plan, and in accordance with a schedule of "senior participant" ages therein set out, a certain percentage of plaintiff's allotment was to be immediately distributed to him in cash, with the balance credited to his "account" at American Re and held, together with accrued interest, as "deferred compensation". From 1967 to 1973 pursuant to the Plan, plaintiff was allotted and credited with interest in certain sums, of which $15,665.61 was withheld by American Re as credits to his account. As a "senior participant" in the Plan, plaintiff was entitled to a distribution of his "deferred" allotments and accrued interest upon the occurrence of an "Event of Distribution", one of which was defined as "the termination of the employment of the participant". (Section 13(a) of the Plan).

As of November 26, 1969, the Plan included as Section 15 the following provisions on the forfeiture of a participant's benefits:

"Section 15. Conditions. Anything in the Plan to the contrary notwithstanding, all benefits of any participant hereunder, except to the extent of any prior distributions under the Plan, shall be forfeited and no part thereof shall thereafter be paid if the Committee shall determine that such participant (a) has been dishonest while in the employ of any corporation within the Group, (b) has acted in a manner detrimental to the interests of any such corporation, (c) has entered the employ of any other corporation engaged to a substantial extent in business as a reinsurance carrier, or (d) has retired and thereafter, in time of war or other national emergency, has refused the request of the Parent Company or any of its subsidiaries to render services, whether of a regular nature or otherwise, to it on terms of employment comparable to the terms of his employment prior to his retirement, unless his refusal shall be based on ill health." (Emphasis added) (Ex. 3).

Clause (c) of Section 15 is what is referred to herein as the forfeiture clause.

On November 26, 1969, as part of an overall plan of amendment which made some but not all amendments subject to stockholder and IRS approval, the Board deleted the forfeiture clause, effective January 1, 1970 (Ex. 4, p. 8, top). In place of the forfeiture clause, the following Forfeiture for Crime Clause was substituted:

"Section 15. Conditions. Anything in the Plan to the contrary notwithstanding, all benefits of any participant hereunder, except to the extent of any prior distributions under the Plan, shall be forfeited and no part thereof shall thereafter be paid if the Committee shall determine that such participant has been convicted, under a judgment which has become final, by a court of competent jurisdiction of, or has pleaded guilty to, a crime involving embezzlement, theft or other acts of dishonesty involving any corporation within the Group while in the employ of any such corporation."

At the November 26, 1969 Board meeting, it was:

"RESOLVED that the officers be, and they hereby are, authorized to do or cause to be done any or all things which in their judgment are necessary or desirable to carry out such amendments substantially in the form adopted, with such changes therein, subject to approval by the Internal Revenue Service, as may be made by the officers of the Company, upon the advice of counsel, as the officers of the Company in their discretion may approve and as may be evidenced by their incorporation in the Plan."

Thus, the Resolutions authorized the officers to do anything which in their judgment was necessary or desirable to carry out the amendments and explicitly contemplated that "changes" to the amendments "may be made by the officers ... and incorporated in the Plan"; in other words, amending the Plan was a contemplated action.

On December 19, 1969 Sullivan & Cromwell, counsel for American Re, requested rulings from the IRS relating to certain of the amendments to the Plan. (Ex. 5). On or about December 30, 1969 American Re sent to its stockholders a Notice of Special Meeting of Stockholders and Proxy Statement (the "Notice"; Ex. 6) seeking stockholder approval of certain of the amendments, not including the modification of the forfeiture clause; the Board had not conditioned the effectiveness of such amendment on stockholder approval.

The participants in the Plan were not informed of any of the amendments referred to in the Resolutions or the Notice; but plaintiff as a stockholder received a copy of the Notice. (Stip. ¶ 20).

At the Special Meeting of Stockholders on February 3, 1970 the stockholders approved the amendments proposed in the Notice. (See Ex. 8).

On June 22, 1970, the IRS advised American Re, through its counsel, that the amendment of the forfeiture clause would be a barrier to the granting of a favorable ruling on the other substantive aspects of the amendments. (See Ex. 9). (It appears that the IRS took the position that the more lenient forfeiture clause raised a question of constructive receipt). Accordingly, on June 23, 1970 T. Darrington Semple, Jr., Secretary of American Re, sent a telegram to Merl L. Rouse, Chairman of the Board of American Re, requesting Rouse's decision on whether the amendment of the forfeiture clause should be withdrawn pursuant to the "power" of the officers to "so amend". (Ex. 10). In his responding telegram, Rouse agreed that the old forfeiture clause should be reinstated. (Ex. 11). That act of amending the Plan in order to reinstate a provision that the IRS said was necessary, and without which the participants might be taxed on their deferred compensation before receiving it, was clearly within the authority delegated to the officers by the Board and was thus effective. No subsequent act amended the forfeiture clause of the Plan before plaintiff resigned.

The IRS was informed on June 26, 1970 of American Re's withdrawal of the amendment and the Board was informed on August 26, 1970. (Ex. 12, 13).

On March 19, 1971 the IRS informed the Company that it would not issue a ruling until new IRS regulations were adopted. As a result, the officers decided (in May 1971) not to make any of the 1969 amendments effective, and only then printed and circulated to plan participants (in June 1971) a revised edition of the Plan (Ex. 17) that reflected only a December 1970 amendment on the method of distribution of benefits, and otherwise was the same as the prior edition of the Plan (Ex. 3), including the forfeiture clause. In short, since the Board's deletion of the forfeiture clause was never incorporated in a printed edition of the Plan (Stip. ¶ 20), Section 15 of the next edition that was circulated after Rouse's amendment (Ex. 17) was the same as Section 15 of the 1967 edition (Ex. 3), the immediately preceding edition.

On January 25, 1974 plaintiff resigned from the employ...