Fasco Industries, Inc. v. Mack

• Decision Date: 28 January 1994
• Docket Number: No. 93 C 2324.,93 C 2324.
• Parties: FASCO INDUSTRIES, INC., on behalf, of itself, as administrator of the Supplemental Executive Retirement Plan of Fasco Industries, Inc., and as successor of H.S. Atlantic, Inc., Plaintiff, v. Frank W. MACK, Dale L. Bennett, Roderic B. Karpen, David Graham Wilson, John A. Negovetich, John F. Golen, Jean-Marie Menzer, John R. Watson, and Continental Bank, N.A., Defendants.
• Court: U.S. District Court — Northern District of Illinois

843 F. Supp. 1252

FASCO INDUSTRIES, INC., on behalf, of itself, as administrator of the Supplemental Executive Retirement Plan of Fasco Industries, Inc., and as successor of H.S. Atlantic, Inc., Plaintiff, v. Frank W. MACK, Dale L. Bennett, Roderic B. Karpen, David Graham Wilson, John A. Negovetich, John F. Golen, Jean-Marie Menzer, John R. Watson, and Continental Bank, N.A., Defendants.

No. 93 C 2324.

United States District Court, N.D. Illinois, E.D.

January 28, 1994.

Michael J. Dell, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, New York City, and David I. Herbst and Stephen J. Landes, Holleb & Coff, Chicago, IL, for plaintiff.

Henry deVos Lawrie, Jr., Glen H. Kanwit, David B. Goroff, Mark S. Weisberg, Hopkins & Sutter, and John M. Heaphy, Mayer, Brown & Platt, Chicago, IL, for defendants.

MEMORANDUM, OPINION AND ORDER

ANDERSEN, District Judge.

This case is before the court on the motion of defendants Frank Mack, Dale Bennett, Roderic Karpen, David Wilson, John Negovetich, John Golen, Jean-Marie Menzer, John Watson and Continental Bank to dismiss plaintiff's complaint pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction. For the reasons stated below, we deny the motions to dismiss.

BACKGROUND

Plaintiff Fasco Industries, Inc. ("Fasco") has brought this suit against Continental Bank and former officers and directors of Fasco (hereinafter referred to as "executives"), contending that these executives committed wrongdoing in connection with a deferred compensation scheme created for their benefit known as a Supplemental Executive Retirement Plan ("SERP"). This action arises from the alleged fraud and self-dealing of the executives. The executives, anticipating a takeover of Fasco's parent, allegedly created the SERP, a bonanza retirement plan of which they are the sole participants. Fasco claims that this was done without obtaining any approval from Fasco's disinterested directors (because there were none) or shareholders.

Fasco claims that the executives camouflaged the plan's true purposes by creating a trust to fund the SERP. Fasco claims that the executives amended the SERP to strip Fasco of its rights to amend the plan or direct its investments. On the day Fasco's parent was acquired, the executives funded the trust with nearly $10 million dollars — more than twice what was necessary to pay their benefits in full. Within two months after the takeover, Mack resigned from Fasco. Most of the other executives followed shortly thereafter. None is presently employed at Fasco.

The SERP at issue was executed in November, 1990. The SERP was designed to benefit the executives, all of whom were employed by Fasco at the time the SERP was executed. The SERP was prepared with the assistance of an outside financial consultant, James Cleary of the John O. Todd Organization ("Todd"). Todd prepared a report for Fasco describing purposes of the SERP, which Fasco claims incorrectly noted that it was designed to attract, retain, motivate and reward senior management of Fasco. Fasco claims that, in fact, the SERP provided exceedingly high benefits and deterred executives' continued tenure with Fasco. The report explained that the plan would provide a target retirement benefit to the officers and directors of a percentage of each executive's final income. This percentage ranged from 42-47%, with the percentage being greater the greater the executive's salary.

According to the complaint, the plan was to be funded by corporate owned life insurance ("COLI"). Under a COLI-financed plan, according to the complaint, the corporation would insure the lives of the plan participants, i.e., the defendant executives. As these participants died, the corporation would receive a tax-free death benefit. According to the Todd report, the sum of these death benefits was intended to exceed (on a present value basis) Fasco's outlays for insurance premiums and benefit payments under the plan. The complaint notes that COLI was in fact purchased for the plan, from Northwestern Mutual Life. These COLI policies are held in trust by defendant Continental Bank as trustee.

Fasco's complaint contains two counts. Count I, which arises under state law, seeks damages for the executives' alleged breaches of their fiduciary duties and wrongful conversion of funds. Fasco alleges that Count II arises under the federal common law of restitution under the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq. Defendants argue that this court lacks subject matter jurisdiction.

DISCUSSION

In considering a motion to dismiss, the court must accept as true all the well-pleaded material facts in the complaint and must draw all reasonable inferences from those facts in the light most favorable to the plaintiff. Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir.1991). Further, the complaint should not be dismissed unless it appears, beyond a doubt, that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

I. The SERP is an Employee Benefit Plan Under ERISA

An employee pension benefit plan is defined as:

any plan ... maintained by an employer ... that ... (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond ...

29 U.S.C. § 1002(2)(A). Because the SERP at issue in this case "provides retirement income to employees" and "results in a deferral of income" to the executives "to the termination of covered employment or beyond", it satisfies this definition.

Within the category of employee pension benefit plans, the SERP is of the type commonly referred to as a "top hat plan" because it is "unfunded" and exists primarily to provide benefits to a "select group of management or highly compensated employees." See, 29 U.S.C. § 1101(a); Grantham v. Beatrice Co., 776 F.Supp. 391, 394 n. 3 (N.D.Ill.1991). Top hat plans are exempted from the substantive provisions of parts 2, 3 and 4 of Title I regarding participation, vesting, funding and fiduciary responsibility because Congress contemplated that highly paid executives did not need the same protections as low-level employees. 29 U.S.C. §§ 1051(2), 1081(a)(3) and 1101(a)(1). See also Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 930-31 (3d Cir.1985). Nevertheless, top hat plans remain subject to ERISA's enforcement provisions. Barrow-clough, 752 F.2d at 930-31.

II. ERISA's Federal Common Law of Restitution Provides a Basis for Subject Matter Jurisdiction

The essence of the executives' argument is that the civil enforcement provisions of ERISA contemplate suits by only four kinds of enumerated parties — the Secretary of Labor, a participant, a beneficiary, or a fiduciary of a plan. 29 U.S.C. §§ 1132(a), 1132(e)(1). The executives argue that because Fasco, an employer, is neither a participant, beneficiary, or fiduciary, it is not a proper party plaintiff and therefore this court has no federal question jurisdiction. The executives' argument, however, misses the point. Fasco does not assert that the court has subject matter jurisdiction under § 1132(e). Instead, Fasco is asserting that the court has federal question jurisdiction under 28 U.S.C. § 1331 because Count II arises under the federal common law of ERISA.

Congress enacted ERISA's broad preemption provisions with the intention that the federal courts would create a federal common law of ERISA to fill in the gaps where ERISA is silent. See, e.g., Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56, 107 S.Ct. 1549, 1557, 95 L.Ed.2d 39 (1987); Kwatcher v. Massachusetts Serv. Employees Pension Fund, 879 F.2d 957, 966 (1st Cir. 1989). The equitable claim for restitution and rescission pleaded by Fasco in Count II is "part and parcel" of ERISA's federal common law. Kwatcher, 879 F.2d at 966. Many courts have recognized a federal common law of restitution under ERISA which gives employers the right to recover funds wrongly placed in a fund or trust relating to an ERISA plan. See, e.g., UIU Severance Pay Trust Fund v. Local Union 18-U, United Steel Workers of America, 998 F.2d 509, 513 (7th Cir.1993); Kwatcher, 879 F.2d at 966; Plucinski v. I.A.M. Nat'l Pension Fund, 875 F.2d 1052, 1057 (3d Cir.1989); Jamail, Inc. v. Carpenters Dist. Council of Houston Pension & Welfare Trusts, 954 F.2d 299, 304-05 (5th Cir.1992); Kentucky Laborers Dist. Council Health and Welfare Fund v. Hope, 861 F.2d 1003, 1005 (6th Cir.1988).

Courts have allowed these federal common law restitution claims because giving employers a remedy for overpayments encourages the establishment of pension funds, thereby furthering ERISA's purposes. "Rather than undermining ERISA's remedial scheme, equity supplements it by providing a tool for courts to use when one party `has been unjustly enriched at the expense of another.'" Kwatcher, 879 F.2d at 967 (citations omitted). Moreover, Congress did not intend to permit parties to use ERISA as a shield to protect the fruits of their corporate theft and self-dealing. See, e.g., St. Paul Fire and Marine Ins. Co. v. Cox, 752 F.2d 550, 552 (11th Cir.1985).

The recent Seventh Circuit case of UIU Severance Pay Trust Fund v. Local Union No. 18-U, United Steelworkers of America, 998 F.2d 509 (7th Cir.1993) is dispositive on this issue. In that case, there was a dispute between contributions made to a fund on a beneficiary's behalf by his employer, the Union. Oliver, the employee, contended that the contributions were proper payments toward his deferred compensation, but the employer asserted that the contributions were made without proper authorization. Beginning in January, 1983, the employer, pursuant to Oliver's instruction increased the contribution made to the fund on his behalf from ten to twenty percent of his salary. Id. at 511. The General Executive Board...