Hagel v. United Land Co.

• Decision Date: 09 April 1991
• Docket Number: Civ. A. No. 90-1683-A.
• Parties: Robert E. HAGEL, Plaintiff, v. UNITED LAND COMPANY, The Hagel Deferred Compensation Plan, United Federal Savings Bank, Ron Falls, and Thomas Bandy, Defendants.
• Court: U.S. District Court — Eastern District of Virginia

759 F. Supp. 1199

Robert E. HAGEL, Plaintiff, v. UNITED LAND COMPANY, The Hagel Deferred Compensation Plan, United Federal Savings Bank, Ron Falls, and Thomas Bandy, Defendants.

Civ. A. No. 90-1683-A.

United States District Court, E.D. Virginia, Alexandria Division.

April 9, 1991.

Steven M. Levine, David Florin, Wilson, Elser, Moskowitz, Edelman & Dicker, Washington, D.C., for plaintiff.

John B. Raftery, Deckelbaum, Ogens & Fischer, Washington, D.C., for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

Introduction

This employment contract dispute raises the somewhat novel question whether an agreement providing for the payment of an employee's share of certain company profits in installments over a five-year period is an "employee pension benefit plan" or an "employee welfare benefit plan" subject to the provisions of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. ("ERISA"). At issue is whether an alleged breach of the agreement gives rise to federal ERISA claims or merely state common law claims. Because the Court concludes that the agreement is not covered by ERISA, plaintiff's complaint, which raises only claims purportedly based on ERISA, must be dismissed for lack of subject matter jurisdiction.

Facts

Defendant United Land Company ("ULC") is a Virginia corporation engaged in real estate development.¹ Robert E. Hagel, the plaintiff, was president of ULC and its predecessor, United Development Group, Inc., from October 1985 through August 30, 1990. During this period, plaintiff entered into an agreement with United Development prescribing his salary and bonuses.² The agreement stated that plaintiff would receive "an additional `override' bonsus," described as follows:

You are eligible for an additional "override" bonus based on the net profits resulting from the real estate projects developed by United Development Group, Inc. The amount of the override bonus is to be 20% of net profits from each project generated by your own efforts, and 10% of the net profits for each project generated by the efforts of others.... Net profits are determined after the project in question is closed, based on the company's normal accounting practices and will be calculated to include any project in which a net loss occurred. Except as outlined elsewhere in this letter, the payment of an over-ride bonus applicable to any given project will be paid in five equal annual installments. Payment of those installments will begin in the year in which the project is closed. While we do not guarantee the tax consequences of this override arrangement, it is intended that the installment payments will be deferred for tax purposes, until the year in which actually paid. Accordingly, no corporate assets will be set aside or segregated to secure the payment to you of the annual override bonuses and your right to receive those payments cannot be assigned, pledged, transferred, or alienated in any way.

Hence, the agreement provided that plaintiff would receive a bonus based on net profits derived from development deals. Payment of bonuses was spread over five years to reduce plaintiff's tax burden. The agreement further provided that if plaintiff voluntarily resigned or was terminated "for cause" before January 1, 1991, "any installments which have not been paid as of the date of termination would be forfeited." On the other hand, the occurrence of certain specific events would accelerate payment of outstanding installments.³ A subsequent letter between plaintiff and ULC, dated December 19, 1989, made minor changes to the agreement, but left the principal features of the override bonus scheme intact. The amended agreement described in greater detail how net profits and losses from development projects would offset each other with the result that plaintiff might not receive any bonus in a given year.⁴

Plaintiff alleges that he received several annual override bonus payments under the agreement beginning shortly after March 1987. He further alleges that during the summer of 1990, the composition of the Board of ULC changed, thus triggering accelerated payment of the override bonus installments he was owed. On August 30, 1990, plaintiff gave notice terminating his employment with ULC. He contends that at the time of termination ULC owed him $255,000 in outstanding override bonus installment payments, which it continues to refuse to pay.

Plaintiff's position is that his agreement with ULC is an "employee pension benefit plan" or an "employee welfare benefit plan" covered by ERISA.⁵ Plaintiff's complaint contains four counts, which charge the officers of ULC with numerous violations of ERISA, and seeks punitive damages, statutory fines set forth in ERISA, and other relief in addition to the $255,000 in unpaid bonuses. Defendants filed a Motion to Dismiss the complaint, pursuant to Rule 12(b)(6), Fed.R.Civ.P. Oral argument was held and the Court ordered three of the complaint's four counts dismissed with prejudice.⁶ Plaintiff submitted a motion for reconsideration of that ruling along with additional evidence. In that submission, the plaintiff made clear that all four counts of its complaint were based on ERISA and hence must be sustained or dismissed together. The Court now reviews seriatim plaintiff's claims that the agreement created an employee pension benefit plan or an employee welfare benefit plan subject to ERISA.⁷

Analysis

I. Employee Pension Benefit Plan

"By its terms, ERISA applies only to `an employee welfare benefit plan or an employee pension benefit plan or a plan which is both.'" Murphy v. Inexco Oil Co., 611 F.2d 570, 574 (5th Cir.1980), quoting 29 U.S.C. § 1002(3). ERISA defines an "employee pension benefit plan" or "pension plan" as

any plan, fund, or program ... to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program —

(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,

regardless of the method of calculating the contributions made to the plan, or the method of calculating the benefits under the plan....

29 U.S.C. § 1002(2)(A). The Department of Labor has issued regulations intended to "clarify the limits of the defined terms `employee pension benefit plan' and `pension plan'...." 29 C.F.R. § 2510.3-2(a) (1990). In terms pertinent to this case, the regulations distinguish between a mere bonus program and a pension plan:

Bonus program. For purposes of Title I of the Act and this chapter, the terms "employee pension benefit plan" and "pension plan" shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.

29 C.F.R. § 2510.3-2(c) (1990) (emphasis added).

Plaintiff's agreement with ULC is a mere incentive bonus program; it meets neither the statutory definition nor the regulatory clarification of "employee pension benefit plan." To begin with, the agreement was not intended to, and did not, "provide retirement income" to plaintiff. Nor did the agreement defer plaintiff's receipt of income "to the termination of covered employment or beyond." Instead, "the terms in question simply established a ... form of compensation for the business created by the plaintiff." Fraver v. North Carolina Farm Bureau Mutual Insurance Co., 801 F.2d 675, 678 (4th Cir.1986) (holding that contractual provisions creating certain termination benefits for insurance agents based on the amount of business an agent had developed were not an ERISA "pension plan"), cert. denied, 480 U.S. 919, 107 S.Ct. 1375, 94 L.Ed.2d 690 (1987). Put another way, the agreement provided plaintiff with income, in the form of a bonus, during the course of his employment. Its purpose was not retirement income, but deferral of profit sharing income for tax purposes. As such, the agreement is outside ERISA's scope. This is confirmed by the fact that payments under the agreement were not "systematically deferred to the termination of covered employment or beyond," 29 C.F.R. § 2510.3-2(c) (1990), as required by the Department of Labor's clarifying regulation.

Plaintiff contends the agreement meets the requirement that a plan result in the "deferral of income by employees for periods extending to the termination of covered employment or beyond," 29 U.S.C. § 1002(2)(A)(ii), because in this case some override bonus installment payments allegedly became due after plaintiff had terminated his employment with ULC. As further support for his position, plaintiff points out that the five-year bonus override installment provision made it likely, though not certain, that some bonus payments would be made to plaintiff after termination of his employment with ULC. Plaintiff thus interprets § 1002(2)(A)(ii) as requiring only that some portion of deferred income become due, under the particular facts of a case, after termination of employment. This argument is ultimately unpersuasive. A more natural reading of § 1002(2)(A)(ii)'s requirement that there be a "deferral of income ... to the termination of covered employment or beyond" is that the statute requires that a plan generally defer the receipt of income to the termination of employment. The statute is not satisfied when, under the facts of a particular case, a portion of withheld income happens to become due after termination. This reading comports not only with the language, but with the general purpose of ERISA to protect employees' expectations concerning the receipt of retirement income.⁸ Moreover, this reading also accords with the Department of Labor's interpretation of ERISA, reflected in the regulatory requirement that an "employee pension benefit plan" shall not include bonus payments made by an...