Izzarelli v. Rexene Products Co.

• Decision Date: 22 June 1994
• Docket Number: 92-8694,Nos. 92-8458,s. 92-8458
• Parties: 18 Employee Benefits Cas. 1480 Leonard N. IZZARELLI, on Behalf of Themselves and All 1986 Participants in the El Paso Products Company Stock Bonus Plan who are similarly situated, et al., Plaintiffs-Appellees Cross-Appellants, v. REXENE PRODUCTS COMPANY, A Delaware Corporation, Rexene Corporation, a Delaware Corporation and El Paso Products Company Stock Bonus Plan, Defendants-Appellants Cross-Appellees, and Texas Commerce Bank-Odessa, Defendant-Cross Appellee. Leonard N. IZZARELLI, etc., et al., Plaintiffs-Appellees, v. REXENE PRODUCTS COMPANY, a Delaware Corporation, et al., Defendants, Texas Commerce Bank--Odessa, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1506

24 F.3d 1506

18 Employee Benefits Cas. 1480

Leonard N. IZZARELLI, on Behalf of Themselves and All 1986

Participants in the El Paso Products Company Stock

Bonus Plan who are similarly situated,

et al., Plaintiffs-Appellees

Cross-Appellants, v. REXENE PRODUCTS COMPANY, A Delaware Corporation, Rexene

Corporation, a Delaware Corporation and El Paso

Products Company Stock Bonus Plan,

Defendants-Appellants Cross-Appellees,

and

Texas Commerce Bank-Odessa, Defendant-Cross Appellee.

Leonard N. IZZARELLI, etc., et al., Plaintiffs-Appellees, v. REXENE PRODUCTS COMPANY, a Delaware Corporation, et al., Defendants, Texas Commerce Bank--Odessa, Defendant-Appellant.

Nos. 92-8458, 92-8694.

United States Court of Appeals Fifth Circuit.

June 22, 1994.

W. Ted Minick, Benjamin C. Wilson, Winstead, Sechrest & Minick, Houston, TX, for El Paso Products Co. Stock Bonus Plan.

Joel Locke, Shafer, Davis, McCollum, Ashley, O'Leary & Stoker, P.C., Odessa, TX, for Rexene Products.

Jack C. Nickens, Bradley W. Hoover, and Barbara A. Clark, Mayer, Brown & Platt, Houston, TX, Mike Holmes, Odessa, TX, for Izzarelli.

J. Michael Dorman, Douglas R. Little, Russell W. Miller, Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Houston, TX, for TX Commerce Bank-Odessa.

Appeals from the United States District Court for the Western District of Texas.

Before WISDOM, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

The primary issue in this action under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1001-1461, concerns when benefits accrued for the participants in a defined contribution plan. Each of the several parties appeals. Rexene Products Company, Rexene Corporation, and Rexene's Stock Bonus Plan challenge the adverse judgment totalling approximately $7.2 million. Leonard N. Izzarelli and Donald J. Schelfhout (representing themselves and current and former Rexene Products Company employees who were Plan participants in 1986) contest both a credit the district court granted the Rexene defendants, and the judgment as a matter of law granted the Plan trustee, Texas Commerce Bank--Odessa, N.A. And, the Bank disputes the denial of its attorney's fees. We AFFIRM in part and REVERSE in part.

I.

At stake is Rexene Products Company's contribution, for Plan year 1986, to its Stock Bonus Plan (the Plan), an ERISA defined Rexene established the Plan in 1985. ² Texas Commerce Bank--Odessa was the Plan trustee; Rexene, the Plan's administrator and sponsor. ³ The Plan was administered by an Administrative Committee made up of Rexene officers. All Rexene employees, with the exception of a few officers and members of senior management, were eligible to participate in the Plan; and for Plan year 1986, there were approximately 1,050 participants. The Plan supplemented existing benefits plans, including the Savings Plan, discussed in note 2. Under the Plan, Rexene had the discretion to decide whether a contribution would be made for a given plan year, and, if so, in what amount.

contribution employee benefit plan, 29 U.S.C. Secs. 1001-1461. ¹ In 1983, Rexene Products Company (then The El Paso Products Company) was a division of The El Paso Company. Because the division was not profitable, El Paso sold it in 1984 to Rexene Corporation (the Corporation), a holding company formed and wholly owned by the division's senior management. The former division was renamed Rexene Products Company (Rexene).

The Plan specified that contributions would be made in the form of cash or stock in the Corporation. Rexene had set an informal goal of, over five years, contributing to the Plan approximately 22-25% of the Corporation's stock (approximately 543,000 shares). In accordance with this goal, in early 1986, Rexene contributed 135,725 shares for Plan year 1985. The shares were valued at $1.00 per share, using a valuation date of December 31, 1985--the last day of the tax year to which the 1985 contribution was attributed.

In early 1987, Rexene again voted a contribution: 101,794 shares for the Plan year 1986. The Corporation authorized it in February 1987; and Rexene informed Plan participants of this in a bulletin board notice. A stock certificate representing the shares was prepared on March 2, 1987, and was listed on the Corporation's books as being transferred on that date to the Bank as Plan trustee. But, the certificate was not delivered to the Bank until that May; under cover letter dated May 1, it was received by the Bank on May 13.

The 1986 contribution was authorized before the shares were appraised. The first appraisal, not ordered until May 1, 1987, used a valuation date of December 31, 1986, consistent with the procedure that had been followed for the 1985 contribution. The appraisal, delivered on June 15, 1987, reflected a marked increase in the value: $76.34 per share as of December 31, 1986. The day after the appraisal was delivered, Rexene notified the participants of the value, and the approximate amount that would be allocated to each participant's account. By means of a bulletin board notice, Rexene informed the participants that they would receive approximately one share for every $303 of 1986 straight-time earnings. ⁴ The notice stated that account statements would be prepared and mailed within the next two weeks.

Rexene's accountants then began to allocate the contribution among the participants. But, while the accountants were preparing the account statements, they realized that the contribution, at $76.34 per share (approximately $7.7 million total), was an "overcontribution". That is, it would cause many accounts to exceed the Internal Revenue Code Sec. 415 limit on excludable income contributed to qualified benefit plans. ⁵ Exceeding the Sec. 415 limits could have disqualified the Plan under ERISA. See 26 U.S.C. Sec. 415(a)(1)(B). Accordingly, Rexene began considering ways to deal with the problem. Regardless of what strategy Rexene chose, a Plan amendment was needed.

Outside counsel, who had helped to develop the Plan, first suggested that Rexene follow the terms of the Plan, specifically Sec. 4.3, as closely as possible. That section provided that, if a contribution would cause any account to exceed the Sec. 415 limit, the excess was to be "allocated and reallocated" to the other accounts, until all participants reached their Sec. 415 limits. If any excess still existed, it was, with the permission of the Internal Revenue Service, to be held in a "suspense account" for allocation in future years to the accounts of those who had been participants when the overcontribution occurred. Outside counsel advised, however, that it might take five to six months for the IRS to issue a determination letter with regard to the suspense account. Despite this anticipated delay, he advised Rexene that IRS approval of such an account was likely. ⁶

Rexene did not choose this alternative. The district court found that the determination letter delay made this alternative unattractive to Rexene, because it had begun, in April 1987, to investigate selling the company or taking it public. By late July 1987, Rexene--anticipating a sale--had prepared a draft Agreement of Merger. (The sale occurred in April 1988.)

The district court found also that Rexene was motivated by a desire to ensure that its employees had no reason to frustrate the sale. Many of the highly-paid employees--who had voting rights with respect to sales or mergers--were dissatisfied with the proposal to "allocate and reallocate" the 1986 overcontribution pursuant to Sec. 4.3. These employees (part of the group whom the parties classify as "heavy savers") had contributed large amounts to the Savings Plan in 1986. Thus, they were closer than others to reaching Sec. 415's limits. Therefore, under the Plan's "allocate-reallocate" strategy, the heavy savers would receive very little of the 1986 contribution, whereas the others would receive comparatively more through the reallocation process.

At trial, however, inside counsel emphasized repeatedly that the impending sale did not affect Rexene's Plan decisions. Consistent with this testimony, Rexene contends that its decision to amend the Plan in the manner it did was motivated primarily by its desire not to penalize the heavy savers. Members of Rexene's management testified that there "was a very, very strong feeling of management, that the people who had [invested in the Savings Plan] ... [had indicated] commitment to the company", because the Savings Plan's assets were used to purchase Rexene stock. And, outside counsel testified that, in addition to this concern, Rexene's interest was in maintaining the Plan's ERISA-qualified status. Similarly, inside counsel testified that Rexene did not follow Plan Sec. 4.3 because

it would not have achieved ... the equitable distribution that we wished to achieve. We had never foreseen the possibility of Although inside counsel testified that the value of the deduction allowed for shares in a suspense account would affect Rexene's value at the time of sale, he testified that Rexene was not concerned as much with its value, as with "trying to determine a solution to the over-contribution problem".

the problem that we had gotten into. And we did not want ... to penalize the savers and we felt [that] ... ultimately, everybody could receive the benefit of that 101,000 shares and ... we would continue to follow the equitable allocation based upon the ratio of their salary to the aggregate salary.

As an alternative to following Sec. 4.3's allocation-reallocation process (with its attendant determination letter delay), outside counsel suggested that the 1986 contribution be allocated to take all participants up to their Sec. 415 limits, with those who, but for Sec. 415, would have received more stock, being given an additional cash bonus outside the Plan, equivalent to the value of the stock they would have received. After this,...