Hemelt v. U.S.

• Decision Date: 22 October 1996
• Docket Number: Civil No. AMD 95-3978.,Civil No. AMD 94-2490.
• Citation: 951 F.Supp. 562
• Parties: George J. HEMELT, et al., Plaintiffs, v. UNITED STATES of America, Defendant. William W. SCHELL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Maryland

951 F.Supp. 562

George J. HEMELT, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

William W. SCHELL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Civil No. AMD 94-2490.

Civil No. AMD 95-3978.

United States District Court, D. Maryland.

October 22, 1996.

Roslyn M. Litman, Pittsburgh, PA, John G. Jacobs, Chicago, IL, Stephen L. Hester, Washington, DC, for George J. Hemelt.

William J. Murphy, Baltimore, MD, for Theresa G. Hemelt.

Lynne A. Battaglia, Office of the U.S. Attorney, Baltimore, MD, Larry D. Adams, U.S. Attorney's Office, Greenbelt, MD, Michael J. Salem, U.S. Department of Justice, Washington, DC, for U.S.

MEMORANDUM

DAVIS, District Judge.

These tax refund actions arise out of the 1990 settlement of a nationwide class action lawsuit instituted against the Continental Can Company involving thousands of Continental's former employees. The plaintiffs in each case, respectively, are a former class member and his spouse who paid income taxes on amounts the former employee received in the settlement of the class actions. The government disputes plaintiffs' characterization of the settlement proceeds as excludable "personal injury" compensation under § 104(a)(2) of the Internal Revenue Code, 26 U.S.C. § 104(a)(2), and has denied the plaintiffs' requests for a refund.¹

These cases have been stayed pending the outcome of identical ligation in the Fifth Circuit in connection with a refund case filed by a former Continental employee in the United States District Court for the Southern District of Texas. In a 2-1 decision, a panel of the Fifth Circuit has recently reversed and remanded a summary judgment in favor of the government, Dotson v. United States, 87 F.3d 682 (5th Cir.1996), rev'g 876 F.Supp. 911 (S.D.Tex.1995), and the parties here have filed cross-motions for summary judgment, the familiar standards for which are undeniably present.² No hearing is necessary. Because I am constrained to the view that the dissenting judge in the Fifth Circuit has articulated the more persuasive analysis and resolution of the issues presented, I shall grant summary judgment in favor of the government and dismiss these cases.

Dotson sets forth the relevant procedural history of the Continental Can litigation out of which these cases arise as follows:

The case arises out of a settlement made in a consolidated class action lawsuit brought against Continental Can Company (Continental). Two separate classes of plaintiffs brought actions against Continental for violation of § 510 of ERISA, which makes [sic] provides that:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan ... or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan

. . . . .

29 U.S.C. § 1140. Plaintiffs claimed that defendants, through the implementation of a nation-wide scheme to avoid pension liabilities [by selectively and discriminatorily laying off employees whose pension rights were about to vest], prevented them from obtaining benefits under the pension plan in violation of § 510. Gavalik v. Continental Can Co., 812 F.2d 834, 838 (3rd Cir.), cert. denied, 484 U.S. 979, 108 S.Ct. 495, 98 L.Ed.2d 492 (1987); see also, McLendon v. Continental Group, Inc., 749 F.Supp. 582, 583 (D.N.J.1989). After two bifurcated trials, Continental was found liable for violating § 510. See Gavalik, supra (reversing trial court judgment for Continental); McLendon, supra.

In order to litigate the remaining issue of damages, the Gavalik case was consolidated with the second case under the name McLendon. McLendon v. Continental Group, Inc., 802 F.Supp. 1216 (D.N.J. 1992). The New Jersey district court appointed Yale Law Professor George Priest as Special Master in order to help the court fashion an appropriate remedy.

In December of 1990 the parties settled for $415 million to be distributed to the consolidated class by the Special Master. The court approved the settlement and Professor Priest's Plan for Distribution. The Dotsons received $89,754, of which $19,877 went directly to a qualified pension fund. Of the remaining $64,872.35, $15,361.93 was withheld for income taxes, and $4,381.65 was withheld for FICA. The Dotsons filed an amended income tax return in December of 1993 which excluded the $64,872.35 from wages. They seek the resulting refund of $19,485 from income taxes, and a $1,107.65 from FICA taxes for the year 1992. After the IRS denied these claims, the Dotsons brought this action in the federal district court for the Southern District of Texas.

87 F.3d at 684. The Dotson court succinctly framed the issues for decision:

The district court held that damages received pursuant to § 502(a) and § 510 of the Employee Retirement Income Security Act (29 U.S.C. § 1132(a) and § 1140) do not meet the "personal injury" exclusion from income under § 104(a)(2) of the Internal Revenue Code (26 U.S.C. § 104(a)(2)). While the Special Master and the parties to the 1990 settlement clearly intended a tort-like compensatory remedy, which appeared to be available under reasonable interpretations of extant jurisprudence, later judicial decisions interpreting ERISA have cast doubt on the availability of such excludable compensatory remedies. This appeal raises the question of whether subsequent legal decisions more narrowly interpreting the availability of personal injury damages as statutory remedies affect the classification for tax purposes of a good faith, arm's length settlement based upon the reasonable potential for recovery of such damages under the then extant jurisprudence.

Id. The "subsequent legal decisions more narrowly interpreting the availability of personal injury damages as statutory remedies" and the "later judicial decisions interpreting ERISA cast[ing] doubt on the availability of such excludable compensatory remedies" referred to above are three Supreme Court cases. U.S. v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992); Commissioner of Internal Revenue v. Schleier, ___ U.S. ___, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995); and, most importantly, Mertens v. Hewitt Assocs., 508 U.S. 248, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993).

In Burke, the Court held that Title VII of the Civil Rights Act of 1964 (prior to the 1991 amendments) did not authorize an award of compensatory or punitive damages but rather, authorized only equitable relief, including, where appropriate, back pay. 504 U.S. at 238, 112 S.Ct. at 1872-73. Thus, monetary awards (including amounts received in settlement of Title VII claims) under Title VII were not excludable from income under § 104(a)(2) of the Internal Revenue Code; such awards were not "on account of personal injuries." Id. at 242, 112 S.Ct. at 1874. In Schleier, the Court held that monetary relief awarded under the Age Discrimination in Employment Act of 1967 was similarly not excludable from the definition of income under § 104(a)(2) because, as a matter of statutory interpretation, and in light of the two-pronged test the Court fashioned in Burke for determination of § 104(a)(2) refund claims, the back pay and liquidated damages authorized by the ADEA were neither amounts received "on account of personal injuries or sickness" as required by § 104(a)(2), nor were such awards recoverable "based upon `tort or tort type rights'" consistent with IRS regulations interpreting § 104(a)(2). ___ U.S. at ___-___, 115 S.Ct. at 2165-66. Taken together, then, Burke and Schleier adopt a stringent analytic framework in respect to the tax treatment of monetary recoveries under some remedial federal statutory schemes which protect both pecuniary and non-pecuniary interests of individuals from discriminatory wrongdoing in the employment context. These decisions were vigorously opposed by dissenting members of the Court, inter alia, as taking too narrow a view of what constitutes "personal injuries." See id. at ___, 115 S.Ct. at 2169 ("[W]hether a remedy sounds in tort often depends on arbitrary characterizations.") (O'Connor, J., dissenting); see also Burke, 504 U.S. at 247, 112 S.Ct. at 1877 ("[T]here are good reasons to put a Title VII claim on the tort side of the line.") (Souter, J., concurring in the judgment.).

In Mertens, a case of first impression, the Court construed the language of ERISA § 502(a)(3) ("appropriate equitable relief") as it had construed, in Burke, similar language contained in Title VII ("any other equitable relief as the court deems appropriate") and held that § 502(a)(3) does not authorize an award of compensatory damages, i.e., recompense for personal injury. 508 U.S. at 255, 259-63, 113 S.Ct. at 2068, 2070-72. The Mertens holding was presaged by Mass. Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985). In Russell, the Court had held that a companion provision in ERISA to § 502(a)(3), § 502(a)(2), did not authorize compensatory or punitive damages (sometimes referred to as "extra-contractual" damages). Notwithstanding Russell, however, prior to Mertens, at least one federal appeals court had held that "extra-contractual" damages were recoverable in suits under ERISA § 502(a)(3), e.g., Warren v. Society National Bank, 905 F.2d 975 (6th Cir.1990), cert. denied, Medina v. Anthem Life Ins. Co., 510 U.S. 816, 114 S.Ct. 66, 126 L.Ed.2d 35 (1993); most courts of appeals, however, relying on Russell, had rejected such claims as not authorized by ERISA, e.g., Reinking v. Philadelphia American Life Ins. Co., 910 F.2d 1210, 1219-20 (4th Cir.1990). It is of particular interest that dicta in Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 145, 111 S.Ct. 478, 486, 112 L.Ed.2d 474 (1990), suggesting that "extra-contractual" damages might be available under § 502(a), provided specific impetus to the settlement...