Goodin v. Innovative Technical Solutions, Inc.
| Decision Date | 27 April 2007 |
| Docket Number | Civil No. 06-00344 JMS/BMK. |
| Citation | 489 F.Supp.2d 1157 |
| Parties | Kelli GOODIN, et al, Plaintiffs, v. INNOVATIVE TECHNICAL SOLUTIONS, INC., et al, Defendants. |
| Court | U.S. District Court — District of Hawaii |
John J. D'Amato, W. Anthony Aguinaldo, William Lee, D'Amato & Aguinaldo, LLLC, Honolulu, HI, for Plaintiffs.
Lindalee K. Farm, Randy L.M. Baldemor, Goodsill Anderson Quinn & Stifel LLLP, Honolulu, HI, for Defendants.
AMENDED ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
Cross-motions for summary judgment require the court to determine whether the Defendants' elimination of the Plaintiffs' right to receive put options for in-kind distributions of non-public stock distributed from a 401(k) and employee stock ownership plan constitutes a violation of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. The court finds that the termination of the plan participants' right to receive put options for in-kind distributions is a violation of 29 U.S.C. § 1054(g) ("Anti-Cutback Provision") which is not statutorily exempted by 29 U.S.C. § 1054(g)(3)(B) ("ESOP Exception"). The court therefore GRANTS Plaintiffs' Motion for Summary Judgment and DENIES Defendants' Motion for Summary Judgment.
Plaintiffs Kelli Goodin, Jim Cummings, Kristal Hernandez, Chris Hill (individually and as trustee of the Chris Hill IRA), Linda Karins (individually and as custodian for Cassidy Karins, Dylan Karins, and James Karins III), Mike Lukacs, William Robinson, Cathy Robinson, Russ Schaefer, David Sugimoto, and Tracy Yost (collectively "Plaintiffs") bring suit on behalf of themselves and derivatively on behalf of the Innovative Technical Solutions, Inc. 401(k) Stock Ownership Plan and Trust. Plaintiffs are former employees1 of Defendant Innovative Technical Solutions, Inc. ("ITS") and were all participants in the ITS 401(k) Stock Ownership Plan and Trust ("the Plan").2 ITS, a Hawaii corporation, was founded on September 30, 1998 and was capitalized primarily through employee purchases of ITS stock. ITS stock is not publicly traded.
The 1998 Plan became effective on November 1, 1998, shortly after the founding of ITS. The 1998 Plan contained both an employee stock ownership plan portion ("ESOP portion") and a 401(k) profit sharing plan portion ("401(k) portion"). The 1998 Plan provided that it was to be 1998 Plan § 10.1.
The ESOP portion of the 1998 Plan was "designed to be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code and Section 407(d)(6) of ERISA." Id. §§ 1, 2.28. The ESOP portion was to be funded by exempt loans and discretionary cash contributions from ITS which would be invested in ITS stock. See id. §§ 2.28, 4.1(d), 4.3(b), 4.4, 5.1(c)-(d), 5.1(f)(i). However, ITS never made any discretionary contributions to the ESOP portion of the Plan, nor arranged for any loans, and the ESOP portion of the 1998 Plan was apparently never funded.
Instead, ITS shares, including Plaintiffs' shares, were held in the 401(k) portion of the Plan. The 401(k) portion of the 1998 Plan is a profit sharing plan "separate and distinct from the ESOP Portion of the Plan." Id. § 2.32. Under the 401(k) portion, participants purchased ITS stock through salary deferrals; these shares were held in the Salary Deferral Accounts. See id. §§ 4.1(a), 4.8. ITS also matched the salary deferrals of certain employees by making cash contributions to the participants' Salary Deferral Accounts. See id. § 4.1(b); Pls'. Ex. N. Participants were also able to transfer assets from other qualified plans to Rollover Accounts. The Salary Deferral Accounts and Rollover Accounts were both held in the 401(k) portion.
Two events are required for distribution of benefits under the 1998 Plan: (1) a separation from ITS employment and (2) an election by the separated participant to receive a distribution. See id. §§ 8.1, 8.2(a), 8.3, 8.5(b)(3). Participants were entitled to benefit distributions at death, disability, or termination of service with ITS. See id. § 8.5(a). The schedule for the distribution of benefits applicable to ITS stock differed according to the instigating event. Distributions for retirement, death, or disability commenced on the allocation date of the plan year following the plan year in which the instigating event occurred and were made over a 5-year period. See id. § 8.5(e)(1). All other distributions, including termination, were subject to a 5-year waiting period before the distributions were made; when distributions commenced, they were spaced over a 5-year period ("5 and 5 Rule"). See id. §§ 8.5(e)(2), 8.5(e)(4).
The 1998 Plan provided that distributions of ITS stock would take the form of either in-kind stock distributions or cash; the form would be determined by an ITS committee designated to oversee and implement the functioning of the Plan ("Plan Administrator"). E the Plan Administrator elected to make a cash distribution, participants had the right, before the benefit distributions commenced, to demand that the distribution of the participants' vested interest attributable to ITS stock be in-kind. See id. § 8.6. In the event that the distributions were in-kind, whether by election of the Plan Administrator or by demand of participant, the 1998 Plan guaranteed a put option through which any participant could require ITS to repurchase the distributed in-kind stock:
Any Participant or Beneficiary who receives a distribution in the form of Employer Stock pursuant to Section 8.6 shall be entitled to put such Employer Stock to the Employer at any time within sixty (60) days after the date of' distribution and within the first sixty (60) days of the Plan Year next succeeding the Plan Year in which distribution was made by notifying the Employer in writing that the put option is being exercised. Id. 8.7. The 1998 Plan set the put option exercise price as "the fair market value of the Employer Stock determined as of the immediately preceding Allocation Date in accordance with the provisions of Article 5 and Treasury Regulation Section 54.4975-11 (d)(8)." Id.
On December 6, 2004, ITS's Board of Directors replaced the 1998 Plan with the 2004 Plan, retroactively effective as of January 1, 2004.3 See Minutes from the Meeting of the Board of Directors of ITS, December 6, 2004, attached as Defs'. Ex. C. The Defendants declared that the assets previously held by participants in the 1998 Plan were transferred to the 2004 Plan to be held and distributed thereunder. As with the 1998 Plan, the 2004 Plan included both 401(k) and ESOP portions. However, the ESOP portion continued to be unfunded and the participants' shares, including those of the Plaintiffs, were held in the 401(k) portion.
The termination of the 1998 Plan and adoption of the 2004 Plan eliminated the right of the plan participants — including the Plaintiffs — to receive put options for in-kind distributions of ITS stock from the 401(k) portion. In contrast to the 1998 Plan, which provided for put options for any participant who received any distribution of ITS stock from either the 401(k) or ESOP portions, the 2004 Plan provides for put options for distributions only from the ESOP portion of the plan:
Any Participant or Beneficiary who receives a distribution in the form of Employer Stock out of the ESOP Portion of the Plan pursuant to Section 8.6 shall be entitled to put such Employer Stock to the employer at any time within sixty (60) days after the date of distribution and within the first sixty (60) days of the Plan Year next succeeding the Plan Year in which distribution was made by notifying the Employer in writing that the put option is being exercised.
2004 Plan § 8.7. An ITS 401(k) Stock Ownership Plan Summary of Material Modifications Effective January 1, 2004 ("Summary of Material Modifications") explained the change regarding the availability of put options under the 2004 Plan:
Shares held in the new 401(k) Plan are no longer covered by the right to sell shares back to the Plan or the employer upon distribution following termination of service as was the case under the prior ESOP.
When you are eligible for benefits, your employer shares in the new Plan will be distributed to you in kind under the new Plan provisions and will not convertible [sic] to cash except under limited circumstances described under a new Shareholder Agreement[4] applicable to all shares of capital stock of the employer (a copy of that Agreement is available from the Company on request).
Summary of Material Modifications ¶¶ 3, 4, attached as Compl. Ex. V.5
The 2004 Plan also changed the schedule of distributions following an instigating event. While the 1998 Plan spaced distributions over 5 years for deceased, disabled, or retired employees and implemented the 5 and 5 Rule for terminated employees (a 5-year waiting period following termination from ITS and then distributions spaced in equal installments over the subsequent 5-year period), under the 2004 Plan, Plaintiffs' ITS stock is distributable only in a lump sum in-kind payout without a put option within 90 days of Plaintiffs' election after separation of service. See id. §§ 8.5(b)(3), 8.5(d)-(e), 8.6. The real life impact of the change is that instead of holding a security with a set strike price and guaranteed cash market, the Plaintiffs are left holding a stock certificate — a piece of paper — showing ownership of shares that cannot be exchanged for cash unless and until ITS becomes a publicly-traded entity or ITS, at its sole discretion, makes an...
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