Hurd v. Illinois Bell Telephone Company

• Decision Date: 27 September 1955
• Docket Number: No. 51 C 577.,51 C 577.
• Citation: 136 F. Supp. 125
• Parties: Freeman S. HURD v. ILLINOIS BELL TELEPHONE COMPANY et al. Harley A. SEYBOLD et al. v. WESTERN ELECTRIC COMPANY et al.
• Court: U.S. District Court — Northern District of Illinois

136 F. Supp. 125

Freeman S. HURD v. ILLINOIS BELL TELEPHONE COMPANY et al.

Harley A. SEYBOLD et al. v. WESTERN ELECTRIC COMPANY et al.

No. 51 C 577.

United States District Court N. D. Illinois.

September 27, 1955.

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Maurice Walk, Harry R. Booth, Chicago, Ill., for plaintiffs.

Kenneth F. Burgess, Douglas F. Smith, Arthur R. Seder, Jr., Chicago, Ill., and Sidley, Austin, Burgess & Smith, Chicago, Ill., for certain defendants.

Clyde E. Shorey, Clyde E. Shorey, Jr., Chicago, Ill., and Shorey, Gavin & Shorey, Chicago, Ill., for certain defendant.

HOFFMAN, District Judge.

In these consolidated causes the court is asked to determine the validity of the practice of certain Bell System companies in offsetting federal old-age insurance benefits,¹ (referred to hereafter as OASI or Social Security benefits) against the amount of the service pensions paid to retired employees of the Bell System companies. The case has been fully tried to the court without a jury and the parties have filed exhaustive briefs. The facts, for the most part, are undisputed, and the issues are largely legal.

In case No. 51 C 577 the plaintiff, Freeman S. Hurd, is a retired employee of Illinois Bell Telephone Company (Illinois Bell), a defendant together with American Telephone and Telegraph Company (AT & T) and The Bankers Trust Company of New York (Bankers Trust), the trustee of the several pension funds established by AT & T and the other associated and allied companies of the Bell System. The second action, No. 52 C 777, which was subsequently consolidated with the prior suit, was brought by the plaintiffs Harley A. Seybold and Charles E. Kluegel, retired employees of Western Electric Company, Incorporated (Western Electric), and by the plaintiffs Walter S. Young, Milo S. Buck, W. E. Oliver and Archie B. Callender, retired employees of AT & T, against Western Electric, AT & T and Bankers Trust.²

The pension plans of the three Bell System defendants were inaugurated at the same time, have been amended at approximately the same times and are in all material respects identical. They will be referred to collectively as the Bell Plan. While each of the plans — entitled "Plan for Employees' Pensions, Disability Benefits and Death Benefits" — contains, as the title indicates, provisions for other types of benefits, only the retirement pension is involved in this case.

The plaintiffs have acknowledged that Bankers Trust, with which each of the Bell System companies has entered into a trust agreement, has fully met its duties under the agreements; and no independent relief is sought against it. Bankers Trust was included as a party so that in the event that the plaintiffs prevail in their action against the Bell System defendants, a recovery might be had from the trust funds. For convenience, the term "defendants" will refer only to the three Bell System defendants unless otherwise indicated.

On January 1, 1913, the Bell System defendants first established a Plan for Employees' Pensions, Disability Benefits and Death Benefits. The Plan provides for the payment of a service pension to employees who retire upon reaching one of several combinations of age and years of service — e.g., 60 years of age and 20 years of service for male employees. The formula for determining the amount of the pension (Section 4) is 1 per cent of the average annual pay for 10 consecutive years multiplied by the number of years of employment. The formula has been the same throughout the history of the Plan. In addition, provision is made for a minimum pension which has been increased over the years and was, from 1949 to 1952, $100 per month after age 65 and $75 per month before 65, both including the amount of Social Security benefits received by the retired employee.³ From its inception the defendants have provided all the funds required by the pension agreement, and the employees have at no time contributed to the financing of the program. Since 1927 the amounts required to meet the defendants' obligations under the Plan have been determined by what is called an "actuarial accrual method" (Tr. 221-22). The amount so determined each year is set aside from operating expenses and placed in the trust funds maintained separately by Bankers Trust for each of the defendants.⁴ The sums placed in the Pension Fund may not, according to the terms of the trust agreements, be used for any purpose other than the discharge of the companies' pension obligations.

Administration of the Plan within each company is vested in the Employees' Benefit Committee, which is composed of five members appointed by the Board of Directors (Section 3). Representatives of the employees do not serve on the Committee.

Section 10 of the Plan⁵ provides that the Benefit Committee, with the consent of the President and subject to the approval of the Board of Directors, may make changes in the Plan, and the Company may terminate the Plan,

"but such changes or termination shall not affect the rights of any employee, without his consent, to any benefit or pension to which he may have previously become entitled hereunder."

It is this section which the defendants rely on as authority for the amendments of the Plan to which the plaintiffs object.

The provisions of the Plan which are at the heart of this controversy are those dealing with the adjustment of company pensions to reflect the receipt of government benefits. Since its inception the Plan has provided for such an adjustment. As amended in 1914,⁶ the provision read as follows (Section 9 (29) in the 1914 version; hereafter referred to as Section 8(27), the present designation):

"In case any benefit or pension shall be payable under the laws now in force or hereafter enacted of any State or Country to any employee of the Company or his beneficiaries under such laws, the excess only, if any, of the amount prescribed in these Regulations above the amount of such benefit or pension prescribed by law shall be the benefit or pension payable under these Regulations. * * * The amounts payable by the Company under any law as aforesaid, whether paid directly to the employee or his beneficiaries, or to any other persons, or to any company, commission or State, to provide for the payment of such benefits or pensions shall, on approval of the Committee, be chargeable to the Fund."

The term "Fund" as used in this provision referred to the reserve funds maintained by the defendants themselves and not to the trust funds. When the defendants entered into the agreements with Bankers Trust in 1927, establishing separate trust funds, the last sentence of this section was eliminated.

In November 1936, after the passage of the Social Security Act but before it became fully effective, the president of each of the defendant companies sent a written announcement to all employees of that company explaining the effect of the Social Security Act on the Bell Plan. The announcement read as follows:

"No change is contemplated in the Plan on account of the Federal Social Security Act of 1935 except that if the Act shall remain in effect unchanged until 1942, when payment of Government Pensions begins under the Act, it is expected that the provision now in the Plan that all of the pension paid by the Government shall be deducted from pension otherwise payable under the Plan will be changed to provide that only onehalf the pension paid by the Government under the Act shall be deducted. In other words, if the Act remains unchanged, the employee retiring on pension after 1941 will receive from the Government and the Company together the equivalent of his or her full pension from the Company plus one-half of the Government pension, which half represents, in effect, what the employee has contributed toward the Government pension through the tax on his or her salary or wages." (Def.Ex. 1, 6, 9).

The Social Security Act Amendments of 1939 advanced the effective date of OASI benefit payments to 1940, and the defendants then amended the Plan in accordance with the announcement of 1936. These were the amendments of January 1, 1940. Section 8(27) was revised only to the extent of adding a phrase at the end of the first sentence so that it read:

"In case any benefit or pension shall be payable under the laws now in force or hereafter enacted of any State or Country to any employee of the Company or his beneficiaries under such laws, the excess only, if any, of the amount prescribed in these Regulations above the amount of such benefit or pension prescribed by law shall be the benefit or pension payable under these Regulations, except as provided in Paragraph 28 of this Section." (Emphasis has been added by the court throughout unless otherwise indicated.)

A new Paragraph 28 was added, which had the effect of limiting the offset to one-half, instead of the full amount, of the Social Security payments to which the employee was entitled under the 1939 Act.

"From the time when a person retired on a service pension under this Plan is entitled to a `primary insurance benefit' under the `Social Security Act Amendments of 1939' the amount of his monthly service pension otherwise payable under this Plan shall be reduced by one-half of said `primary insurance benefit' subject to the following conditions:

"a) Such adjustment shall begin as soon as such person would become entitled to receive, upon application, said `primary insurance benefit' solely on the basis of employment included in his `term of employment' as defined in this Plan.

* * * * *

"* * * This Paragraph 28 shall be effective only while the Act entitled `Social Security Act Amendments of 1939' shall remain in effect unchanged."

In 1946 Section 8(27) was again amended to make it applicable to "any benefit or pension, which the Committee shall determine to be of the same general character as a payment provided by the Plan". This is substantially the approach that the defendants...