Elmore v. Cone Mills Corp.

• Decision Date: 13 December 1993
• Docket Number: Nos. 92-1362,92-1404 and 92-1482,92-1363,s. 92-1362
• Citation: 6 F.3d 1028
• Parties: , 17 Employee Benefits Cas. 1201 William J. ELMORE; Wayne Comer, Individually and as representatives of a class of Plaintiffs similarly situated, Plaintiffs-Appellees, v. CONE MILLS CORPORATION; Cone Mills Acquisition Corporation; Dewey L. Trogdon; Lacy G. Baynes, Defendants-Appellants, and Paul W. Stephanz; Wachovia Bank and Trust Company, N.A., Defendants (Three Cases). William J. ELMORE; Wayne Comer, Individually and as representatives of a class of Plaintiffs similarly situated, Plaintiffs-Appellants, v. CONE MILLS CORPORATION; Cone Mills Acquisition Corporation; Dewey L. Trogdon; Lacy G. Baynes, Defendants-Appellees, and Paul W. Stephanz; Wachovia Bank and Trust Company, N.A., Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1028

6 F.3d 1028

62 USLW 2195, 17 Employee Benefits Cas. 1201

William J. ELMORE; Wayne Comer, Individually and as

representatives of a class of Plaintiffs similarly

situated, Plaintiffs-Appellees, v. CONE MILLS CORPORATION; Cone Mills Acquisition Corporation;

Dewey L. Trogdon; Lacy G. Baynes, Defendants-Appellants,

and

Paul W. Stephanz; Wachovia Bank and Trust Company, N.A.,

Defendants (Three Cases).

William J. ELMORE; Wayne Comer, Individually and as

representatives of a class of Plaintiffs similarly

situated, Plaintiffs-Appellants, v. CONE MILLS CORPORATION; Cone Mills Acquisition Corporation;

Dewey L. Trogdon; Lacy G. Baynes, Defendants-Appellees,

and

Paul W. Stephanz; Wachovia Bank and Trust Company, N.A., Defendants.

Nos. 92-1362, 92-1363, 92-1404 and 92-1482.

United States Court of Appeals Fourth Circuit.

Argued Sept. 29, 1992.

Decided Sept. 22, 1993.

Rehearing In Banc Granted, Opinion Vacated Dec. 13, 1993.

John Robbins Wester, Robinson, Bradshaw & Hinson, P.A., Charlotte, NC, argued (David C. Wright, III, Robinson, Bradshaw John P. Freeman, Columbia, SC, argued (James R. Gilreath, J. Kendall Few, Greenville, SC, on brief), for plaintiffs-appellees.

& Hinson, P.A., Charlotte, NC, Robert O. King, Kristofer K. Strasser, Ogletree, Deakins, Nash, Smoak & Stewart, Greenville, SC, Robert J. Lawing, Jane C. Jackson, Robinson, Maready, Lawing & Comerford, Winston-Salem, NC, on brief), for defendants-appellants.

Before MURNAGHAN and WILLIAMS, Circuit Judges, and SPROUSE, Senior Circuit Judge.

OPINION

WILLIAMS, Circuit Judge:

In these cross-appeals the primary issue we must decide is whether representations by an employer made prior to the adoption of an Employee Stock Ownership Plan, but not incorporated into the formal plan documents, are enforceable against the employer. We conclude that such representations are not enforceable under the Employee Retirement Income Security Act (ERISA), 29 U.S.C.A. Secs. 1001-1461 (West 1985 & Supp.1993), and reverse the district court's findings and conclusions to the contrary. We affirm, however, the district court's conclusions that the employer was not liable for any delay in appointing a plan fiduciary, that the employer did not make an enforceable promise to maintain a certain level of pension benefits, that the employer did not overvalue the stock contributed to its pension plans, and that ERISA preempted the employees' state law contract and tort claims against the employer.

I. INTRODUCTION

A. Factual Background

In response to a hostile takeover bid announced on October 31, 1983, a group of senior management employees at Cone Mills Corporation decided to gain control of the company through a leveraged buy-out (LBO), which became final on March 27, 1984. While planning and implementing the LBO, Dewey Trogdon, Cone Mills's Chairman of the Board and Chief Executive Officer, communicated regularly with Cone Mills's employees through various letters, office memoranda, and video presentations. Many of these communications were addressed to concerns expressed by employees regarding the impact the LBO would have on their jobs, including the impact on their pension benefits. The recurring themes of these communications were that management would protect the interests of Cone Mills's employees and shareholders and would keep the employees informed of any changes occurring because of the LBO.

Prior to the LBO, Cone Mills maintained one employee pension plan for its hourly employees and three plans for its salaried employees: an Employees' Retirement Plan (ERP); a Supplemental Retirement Plan (SRP); and an Employee Stock Ownership Plan (PAYSOP). ¹ Management proposed significant changes in these pension plans, primarily through the adoption of an Employee Stock Ownership Plan (the 1983 ESOP). ² As proposed, the 1983 ESOP would provide Cone Mills's salaried and hourly employees with pension benefits through stock contributions.

In a December 12, 1983, letter to all Cone Mills employees, Trogdon stated that their "pension plans [would] be left in place with [their] existing benefits guaranteed by the Company," and that, through the coordination of the 1983 ESOP and the ERP, the employees could "receive no less than the full amount" of their pension benefits. (J.A. at 3695 (emphasis omitted).) This letter also noted that "[t]ogether, the ESOP and your pension plan are expected to provide greater financial security than your present retirement benefits." ³ (Id.) Trogdon estimated that over $50 million in stock could be contributed to the 1983 ESOP in the first two years but expressly noted that he could not legally guarantee that amount.

On December 15th, Trogdon sent a letter to Cone Mills's salaried employees. This letter explained that Cone Mills would keep in place the ERP, which would work in tandem with the 1983 ESOP. This letter also explained that the Company had over-funded the ERP, resulting in more funds being in the ERP accounts than were necessary to pay for accrued benefits (the pension reversion surplus), ⁴ and that

[i]f the management and bank proposal to buy the Company is successful, there is agreement among management and the banks that we will contribute the surplus, or its equivalent in Company stock, to the ESOP. When the transaction is executed and the contribution is made, you, I, and all other Cone employees will "take title" to a substantial asset in which we currently have no rights or ownership.

(J.A. at 3700.) ⁵ On page two of the letter, under the heading "General Comments," Trogdon specifically stated: "As we get more time, we will answer your questions and publish information to the extent that it can be done on a legal and factual basis. We are, however, giving you information now based on our present plans which are subject to revision to meet changing situations." (J.A. at 3701.) Based on this letter and the December 12th letter, Plaintiffs claim they are entitled to the pension reversion surplus (the surplus claim).

In video presentations and question-and-answer booklets distributed prior to finalization of the LBO, management reiterated that employees would receive retirement benefits at least comparable to their current pension plans. Management explained, however, that it was unable to guarantee the future value of each employee's 1983 ESOP account, that the plan could be amended at any time, and that the written plan documents, rather than other communications, would control the terms of the employees' actual benefits. The question-and-answer booklet further notified the employees in bold-faced type that "[t]he legal documents control, and if this material differs in any way from the legal documents, the correct source of the information is the legal documents." (J.A. at 3911.) In addition, a March 15, 1984, memorandum to salaried employees referred to the profit sharing potential of the 1983 ESOP, but made no guarantees of its success. Instead, management only guaranteed that "no employee would lose any of his retirement benefits" from the ERP and that the employees' pension benefits would not change because of the LBO. (J.A. at 4034.)

The LBO was approved by a nearly unanimous vote of the shareholders on March 26, 1984, and all shares of common stock, including the shares held by the PAYSOP, were purchased for $70 per share.

The 1983 ESOP plan documents were not executed by Lacy Baynes ⁶ until April 2, 1984. The plan documents required the company to contribute stock worth ten percent of each covered employee's compensation for each of the first two years of the 1983 ESOP's operation and one percent of each employee's compensation for each year thereafter (the 10/10/1 formula). The executed documents, however, did not mention the surplus claim.

Between May and December of 1985, Cone Mills received the pension reversion surplus, which had increased in value to $69 million. ⁷ The district court found that from March 1984 through September 1985 Cone Mills contributed junior preferred stock valued at $54,796,638 ⁸ to the 1983 ESOP. Consequently, the district court concluded that Defendants did not contribute the entire pension reversion surplus to the 1983 ESOP. ⁹ The district court found that "[f]or a majority of salaried employees, however, after 1984 the 1983 ESOP did not provide additional pension benefits at retirement." (J.A. at 363.) The failure to receive additional benefits and Cone Mills's failure to contribute the entire pension reversion surplus prompted this lawsuit.

B. Procedural History

Initially, two former Cone Mills salaried employees filed suit against Cone Mills, Trogdon, and Baynes in South Carolina state court, alleging various state law causes of action relating to the surplus claim. ¹⁰ Defendants removed the case to federal district court because the pension plans at the heart of this dispute are controlled by ERISA, and Plaintiffs amended their complaint to assert causes of action under ERISA, Rules 10b-5 and 14a-9 of the Securities and Exchange Commission, 17 C.F.R. Secs. 240.10b-5 & 240.14a-9 (1992); Sec. 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78n (1988); and Sec. 1962 of the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1962 (1988). Upon Plaintiffs' motion, the district court certified a class of 1800 salaried employees who were participants in the SRP and employed by Cone Mills on February 23, 1984, the date Cone Mills distributed its proxy statement in connection with the LBO.

Defendants moved for summary judgment, arguing that Plaintiffs' state law claims were preempted under ERISA, that ERISA did not provide a remedy for representations made outside formal plan documents, and that Plaintiffs' claims were insufficient as a matter of law. The district court held that ERISA preempted Plaintiffs' state law claims with the exception of the state law securities claim and granted summary judgment for Defendants on Plaintiffs' Rule...