Ellis v. Lionikis

• Decision Date: 13 July 1977
• Parties: Robert L. ELLIS, Plaintiff, v. George LIONIKIS, Trustee; and State Insulation Corporation Profit SharingTrust, Defendants.
• Court: New Jersey Superior Court

Page 321

152 N.J.Super. 321

377 A.2d 1208

Robert L. ELLIS, Plaintiff, v. George LIONIKIS, Trustee; and State Insulation Corporation

Profit SharingTrust, Defendants.

Superior Court of New Jersey, Chancery Division.

July 13, 1977.

Birger M. Sween, Hackensack, for plaintiff.

Bruce S. Edington, Newark, for defendants (Kraft & Hughes, Newark, attorneys).

GELMAN, J. S. C.

The issue presented in this action is whether an employee's vested interest in a profit-sharing trust is subject to forfeiture solely because he engages in competitive employment following a discharge by his employer.

Robert Ellis was employed as a salesman by State Insulation Corporation (State) from September 9, 1966 until April 29, 1975. State is a New Jersey corporation, wholly owned by defendant George Lionikis, engaged in the distribution and sale of insulation materials and accessories. In 1962 State established the State Insulation Corporation Profit Sharing Trust (Plan)

* * * to share a portion of its profits with certain of its employees, to promote in them the strongest interest in the successful operation of the business, and increased efficiency in their work, to assure them that they will share in the prosperity of the business, and to provide an opportunity for accumulation of funds for their retirement and financial emergencies.

Defendant Lionikis has been a trustee of the Plan since its inception, and at all times relevant here he and his wife have been the sole trustees of the Plan. The Plan consists solely of contributions made from time to time by State and contains the following provision:

If the Trustees find that any separated participant during the first two (2) years of his separation, is engaged in conduct prejudicial to the Company's interest or is engaged, directly or indirectly, or in any manner takes part in any business profession or other endeavor, either as an employee, agent, independent contractor, owner or otherwise, in the entire State of New Jersey excluding Cumberland and Cape May Counties in New Jersey, and including, Staten Island, New York, (which) shall, in the opinion of the Directors of the company, be in competition with the business of the Company, which opinion of the Directors shall be final and conclusive for the purposes hereof and if after due notice, such separated participant continues to be so engaged, the Trustees shall suspend the payment of any further separation benefits to the separated participant.

In the event a participant is charged with forfeiture of all benefits the Company shall be called upon to produce affirmative evidence to prove such charge beyond a reasonable doubt. The participant so charged shall be accorded the right to be heard, and to produce witnesses to deny such charge the Trustees' decision shall be final.

The Plan further provides that in the event of separation from employment an employee forfeits a specified percentage of his accrued interest in the Plan, the percentage of forfeiture diminishing with the length of service. In the case of Ellis it has been stipulated that as an employee with eight full years of service his vested interest at the time of his discharge was equal to 60% of his accrued interest in the Plan. Since the latter amount was $29,592.09 at December 31, 1974, the dollar value of his vested interest was $17,755.74, the recovery of which he seeks in this action.

The proofs at the trial disclosed that Ellis sold State's products to insulation contractors and industrial accounts primarily in northern New Jersey and to a limited extent in New York City and Long Island. He received a base salary against sales commissions, and in every year of his employment his commission income exceeded his base salary. During the last full year of his employment Ellis accounted for sales of $1,102,742, while the total sales of State in that year were $2,622,544.

Both Ellis and Lionikis described the insulation materials business as a highly competitive one. There are at least four major competitors of State in the geographic area in which it sells, as well as several smaller companies selling the same or similar products. Price and service to the customer are the most important factors in effecting a sale. State has enjoyed an excellent reputation for service, and its sales have increased each year since it was organized.

On April 29, 1975 Lionikis handed Ellis a letter notifying him that he was discharged effective as of that date because of dissatisfaction with his performance. The letter noted that Ellis would have a claim in the future to retirement benefits under the Plan, provided he did not violate the terms of the restrictive covenant set forth in the Plan. According to Ellis, Lionikis told him on this occasion that if "he (Ellis) even came close to competing" with State, he would lose his benefits under the Plan.

After his discharge Ellis sought other employment as a salesman outside of the insulation products field. He was unsuccessful in doing so, however, and on June 15, 1975 he began working as a sales representative in the New Jersey area for companies engaged in the distribution of insulation materials who were competitors of State. Since November 1 1976 he has been working full-time for a company known as Clecon, Inc., which manufactures and distributes fibreglass laminated insulating materials similar to those sold by State. His sales territory for Clecon, Inc. consists of northern New Jersey, metropolitan New York City, all of Connecticut and northeastern Pennsylvania.

In July 1975 Lionikis received information that Ellis was working for State's competitors, and on July 24, 1975 he requested written confirmation from Ellis as to his employment. On September 22, 1975 he sent a letter to Ellis informing him that the trustees of the Plan would conduct a hearing on October 3, 1975 to determine whether Ellis had forfeited his interest in the Plan. In the meantime, Ellis' attorney made demand upon Lionikis for the payment of Ellis' vested interest. The hearing originally scheduled for October 3 was eventually held on December 29, 1975, at which Lionikis and his wife were the only persons present. At the hearing Lionikis related information he had gathered from third persons to the effect that Ellis was calling on State's customers on behalf of competitors and had made sales to State's customers. The minutes of the hearing then recite:

Based upon the foregoing, the Trustees conferred and deemed that Mr. Robert L. Ellis was working for a competitor during the first two (2) years of his separation from State Insulation corporation in a manner prejudicial to the Company's interest and is engaged directly or indirectly and takes part in a business, profession or other endeavor in the State of New Jersey in competition with the business of State Insulation Corporation.

Accordingly, it was resolved that any and all benefits of Mr. Bob Ellis under the Trust, be and the same, are hereby denied.

Lionikis testified at the trial that total sales of State, as well as its sales in Ellis' territory, increased after Ellis' discharge. Lionikis could only identify one specific sale of $3,000 to $4,000 as having been lost because of Ellis' competition, and stated that one customer, who had purchased approximately $6,000 in 1974, had stopped doing business with State after Ellis' discharge.

As previously indicated, Ellis' interest in the Plan as of December 31, 1974 was $29,592.09. The total assets of the Plan at that time amounted to $131,125.88, and Lionikis' accrued interest was $71,822.02. Besides Ellis and Lionikis, there were four other eligible employees in the Plan whose total accrued interest amounted to $29,711.77. Thus, by reason of the forfeiture of Ellis' vested interest, slightly in excess of 70% of the forfeited sum would accrue to the benefit of Lionikis.

For present purposes we may assume that the action of the Plan's trustees in declaring a forfeiture of Ellis's interest was not so tainted by their own economic self-interest as to occasion judicial review and disapproval. See Russell v. Princeton Laboratories, Inc., 50 N.J. 30, 37, 231 A.2d 800 (1967). However slight the prejudice to State, the fact of the matter was that Ellis did accept employment with competitors of State within the two-year period proscribed in the Plan. The trustees complied literally with all procedural requirements prior to declaring a forfeiture; Ellis was given notice and an opportunity to be heard but chose not to attend the hearing. Evidence, even if not admissible in a court of law, was presented of his competitive employment, and this was sufficient to support the trustees' action.

It has been stated that pension plans must be liberally construed in favor of the employee, and forfeitures of pension rights are disfavored. Russell v. Princeton Laboratories, Inc., supra at 35, 231 A.2d 800. However, the issue here is not one of construing the terms of the Plan; its language is unmistakably clear as is its application to the facts of this case. Rather, plaintiff contends that the inclusion of a condition in the Plan restricting his future employment on pain of forfeiture of his pension benefits offends public policy and should not be permitted.

Were this an action by State to enjoin Ellis from competing in violation of a post-employment covenant, it is clear State would not be entitled to such relief under the standards laid down in Solari Industries, Inc. v. Malady, 55 N.J. 571, 576, 264 A.2d 53 (1970), and Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 32-33, 274 A.2d 577 (1971). Ellis did not carry over into his new employment any trade secrets or confidential information, nor were his prior relationships with State's customers of any particular significance in gaining business on behalf of his new employers. In fact, State's sales in his territory increased after his departure. Ellis was simply one more salesman seeking orders in an industry which...