James v. National Business Systems, Civ. No. F 88-116.

• Decision Date: 25 September 1989
• Docket Number: Civ. No. F 88-116.
• Citation: 721 F. Supp. 169
• Parties: Kenneth E. JAMES, Plaintiff, v. NATIONAL BUSINESS SYSTEMS and Timothy Casgrain, Defendants.
• Court: U.S. District Court — Northern District of Indiana

721 F. Supp. 169

Kenneth E. JAMES, Plaintiff, v. NATIONAL BUSINESS SYSTEMS and Timothy Casgrain, Defendants.

Civ. No. F 88-116.

United States District Court, N.D. Indiana, Fort Wayne Division.

September 25, 1989.

Alan VerPlanck, J. Michael O'Hara, Barrett & McNagny, Fort Wayne, Ind., for plaintiff.

William T. Hopkins, Jr., Gallucci, Hopkins & Theisen, Fort Wayne, Ind., for defendants.

ORDER

WILLIAM C. LEE, District Judge.

This matter is before the court for a decision on the merits following a bench trial. At the conclusion of that trial, this court ordered the parties to submit post-trial briefs. Final arguments were heard on June 26, 1989, and the parties submitted marked findings of fact on August 7, 1989. The following Findings of Fact and Conclusions of Law are entered pursuant to Federal Rule of Civil Procedure 52(a), after having examined the entire record and after having determined the credibility of witnesses.

FINDINGS OF FACT

The defendant, National Business Systems, Inc. (NBS), is a Canadian corporation. In March, 1985, NBS bought the MDS DEK Division of Mohawk Data Services, including its manufacturing facility in Fort Wayne, Indiana. Clive Raymond, Chief Executive Officer of NBS, hired Vincent Tofany, who had been president of MDS DEK Division of Mohawk, to be President of NBS Imaging Systems, Inc. (NBSI), the newly acquired manufacturing facility in Fort Wayne. During negotiations of Tofany's employment agreement, he and Raymond discussed an executive compensation plan because the sale of MDS DEK Division to NBS did not include assumption of Mohawk's pension plan for key executives. Tofany explained to Raymond that such a plan was necessary in the United States in order to hire or retain personnel because the United States did not have the social programs relied upon by retirees in Canada.

Tofany moved to Fort Wayne, Indiana in May 1985, to take over operation of NBSI. During the summer of 1986, Tofany hired the plaintiff, Kenneth E. James, as a consultant over personnel and human resources functions due to expanding operations at NBSI. James entered into a consulting agreement which covered the period from August 15, 1986 through July 31, 1987. Tofany hired James on a consultant basis because he was unsure whether NBSI needed a full time personnel officer. James' duties as a consultant included working with Donald Morrison, an independent insurance agent, in setting up employee benefits programs, including a retirement benefits plan for key executives of NBS and NBSI. James' work in formulating the plans was based in part on his prior experience in setting up similar plans at Mohawk Data Sciences where he had been vice-president of human resources.

Between July 1986 and November 1986, James, Morrison and Raymond had several meetings to discuss the creation of an executive compensation plan. The plan was developed as an enticement for new personnel and a benefit to retain present executives. Morrison and Raymond developed the specifics of the plan: the benefits to be provided, a vesting schedule, a change of control provision, the final list of initial executives who would participate, and a method for funding the plan. In November 1986, Raymond had chosen six key executives of NBSI in Fort Wayne, Indiana, as well as several NBS key executives in Canada to participate in the plan.¹ Raymond authorized Morrison to make an oral presentation of the plan to each of the chosen executives. Morrison accompanied his oral presentation with a written letter to each executive which indicated that the plan was "to come into effect January 1st 1987 or as soon thereafter as life insurance comes into effect."²

Although there were a few details of the plan which were not finalized at the time Morrison met with the chosen executives, the plan which went into effect on January 1, 1987 was definitely to provide the following:

At normal retirement, age 65, 100% of base earnings in effect on January 1, 1987 would be paid to the executive for each of the subsequent ten (10) years, or continued to his named beneficiary should he not live to age 75.

In the event of death, prior to retirement, the executive's beneficiary would receive 100% of base earnings in effect on January 1, 1987, for each ten subsequent years.

Upon change of control of the plan sponsor (NBS) a participant would immediately vest for those years or portions thereof following his designation as a paraticipant sic³ Mr. Raymond's departure from the company would constitute a change of control.

Executives age 55 and under at implementation would not acquire an interest in the full benefit until having been employed with NBS for 10 years.

Executives over the age of 55 at implementation would enjoy accelerated vesting, being entitled to the full benefit at age 65 regardless of the number of interim years.

Morrison, who had been a business associate of Raymond for more than 25 years, recommended the purchase of whole life insurance for each participating executive as a method for funding the plan. Raymond agreed to this method, and by January 1, 1987, insurance physicals had been scheduled for all of the participating executives. Raymond subsequently approved the payment, by NBS, of thousands of dollars in insurance premiums.⁴ As of January 1, 1987, the chosen six executives from NBSI were participants in the executive retirement plan as designed by Raymond and Morrison. Sometime after that date, but prior to January 26, 1988,⁵ whole life insurance was taken out on each executive to fund the plan.

After January 1, 1987, Tofany used the retirement plan as a benefit to entice new senior management personnal. In an employment offer letter dated July 1, 1987, Tofany informed R. M. McMahon that he would be "eligible for membership in the NBS Executive Insurance Plan" on the first anniversary date of his employment. In the letter, Tofany stated that "the primary purpose of this plan is to provide Senior Executives with a combination of a significant pension benefit, substantial LTD coverage, and additional Life Insurance Protection."⁶ The same language was used in an employment offer Tofany made to Harry Hoberman dated December 21, 1987.⁷

On August 1, 1987, James' consulting agreement was converted to an employment agreement⁸ under the following terms:

1. Your title will be Vice President of Administration reporting directly to me with current responsibility for the Human Resources, EDP, Facilities, Purchasing, and Customer Service functions and other Administrative duties as assigned.

2. You will participate in the normal company salary plans regarding performance and salary reviews. Initially your monthly salary will continue at the same consulting rate of $7,580 per month.

3. Effective October 1, 1987 you will participate in a bonus program designed for Senior Staff personnel to earn 20% of annual base salary at 100% performance against selected criteria. For the remainder of FY87, you will earn $1,420 bonus per month (same as in Consulting Agreement) subject to the completion of FY87 bonus objectives assigned to other members of the Senior Staff.

4. You will be immediately eligible for all benefits in effect for U.S. employees including the participation of Maryalice James under the Group Medical and Dental Insurance Programs.

5. You will continue to be provided the use of an automobile under the terms of the Executive Automobile Policy and will participate in the Executive Benefit Plan.

6. You will be recommended to the Corporate Compensation Committee for a stock option award in October 1987 in a number of shares commensurate with your Senior Staff position.

7. You shall be enrolled in the Executive Insurance Plan at a time selected by Mr. Raymond and you shall participate in all future compensation programs designed for Senior Management personnel.

Tofany conveyed the above terms along with the employment offer to James in a letter dated July 27, 1987. Upon acceptance of the offer, James moved his residence from New Jersey to Fort Wayne, Indiana. James began receiving a salary of $90,800 per year. An inducement to James' acceptance of the employment offer was participation in the retirement plan. Since one of the benefits in effect for selected United States employees at the time of the offer was the retirement plan designed by Raymond and Morrison, James became a participant in that plan as of August 1, 1987, pursuant to paragraph 4 of the terms and verbal assurances from Tofany.

Based on James' salary, he would have received a retirement benefit of $908,000 if he remained employed by NBS until he became age 65 on August 31, 1995. Francis C. Thissen, a consulting actuary, testified that, based on accepted accounting and actuarial principles, the present fair market value of James' full retirement benefit is $415,157.

It is clear that the "Executive Insurance Plan" referred to in paragraph 7 of the terms is not the retirement plan which went into effect on January 1, 1987. The "Executive Insurance Plan" can refer to nothing other than the whole life insurance which funded the retirement plan. Enrollment in the "Executive Insurance Plan" required Raymond's initiation because payment of the insurance premiums by NBS required Raymond's approval. James never received approval from Raymond to be enrolled in the "Executive Insurance Plan" nor was an insurance application or physical ever scheduled for James. The reason that James did not participate in the "Executive Insurance Plan" had nothing to do with his participation in the retirement plan. As James, Morrison and Tofany all testified, the timing was bad for James' enrollment for whole life insurance. James was busy traveling to all of the corporate divisions in the United States to communicate a flexible benefits plan to NBS employees and did not have time for a physical. Raymond had retreated into semi-seclusion over the developing financial problems of NBS and was unapproachable....