Kergosien v. Ocean Energy, Inc.

• Decision Date: 02 November 2004
• Docket Number: No. 03-20953.,03-20953.
• Citation: 390 F.3d 346
• Parties: Harold A. KERGOSIEN, Joseph J. Hlavinka; Rafael J. Colaco; Hank O. Austin; Vance W. Meischen; Samuel W. Baxter; Patrick E. Pryor; Jason K. Butler; Paul L. Scivally; Kevin W. Campbell; Bruce L. Siner; F. Dale Corbello; Terry L. Sowell; Alan G. Daniels; Daniel J. Thomas; Clay W. Edmonds; Kathy G. Thompson; John C. Juarez; Roy T. Van Vactor, Jr.; A. Robert May, Jr.; Steven C. Weaver; Daryl W. Morris; Kyle E. Witherspoon, Plaintiffs-Appellants, v. OCEAN ENERGY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

390 F.3d 346

Harold A. KERGOSIEN, Joseph J. Hlavinka; Rafael J. Colaco; Hank O. Austin; Vance W. Meischen; Samuel W. Baxter; Patrick E. Pryor; Jason K. Butler; Paul L. Scivally; Kevin W. Campbell; Bruce L. Siner; F. Dale Corbello; Terry L. Sowell; Alan G. Daniels; Daniel J. Thomas; Clay W. Edmonds; Kathy G. Thompson; John C. Juarez; Roy T. Van Vactor, Jr.; A. Robert May, Jr.; Steven C. Weaver; Daryl W. Morris; Kyle E. Witherspoon, Plaintiffs-Appellants, v. OCEAN ENERGY, INC., Defendant-Appellee.

No. 03-20953.

United States Court of Appeals, Fifth Circuit.

November 2, 2004.

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C. Henry Kollenberg (argued), Crain, Caton & James, Houston, TX, for Plaintiffs-Appellants.

Douglas E. Hamel, D. Gibson Walton (argued), Vinson & Elkins, Houston, TX, for Defendant-Appellee.

Appeal from United States District Court for the Southern District of Texas.

Before KING, Chief Judge, and BARKSDALE and PICKERING, Circuit Judges.

PICKERING, Circuit Judge:

This is an appeal from the district court's vacatur of an arbitration award. Finding that the district court improperly vacated the award, we reverse and remand with instructions to reinstate the arbitration award in favor of the Plaintiffs-Appellants.

FACTUAL BACKGROUND

Plaintiffs-Appellants are twenty-three individuals who were employees of Seagull Energy. The Plaintiffs comprised virtually all of the employees of the Operations and Construction Group ("O&C Group"), a division of Seagull. This division provided maintenance, repair, regulatory support and other services connected with operating pipelines for various client chemical companies of Seagull. Seagull had adopted a Management Stability Plan (the "Plan") in 1995 which provided that employees involuntarily terminated within two years after a "change in control," such as a merger, would receive specified severance benefits. All parties agree that the Plan is an ERISA plan. However, this ERISA plan had a somewhat different twist. It provided that disputes under the Plan should be submitted to arbitration, but the arbitrator's standard of review of the Committee's decision on benefits would be "the standard of review which would be used by a Federal court in reviewing such decision under the provisions of ERISA."

Federal law on arbitration is firmly and clearly established. ERISA, a newer federal law, that preempts much state law, is likewise firmly established in a number of areas. Both the plan administrator under ERISA and the arbitrator under the Federal Arbitration Act ("FAA") are generally entitled to considerable deference in their decision making. By electing to send this case to arbitration, and then appealing the arbitrator's decision to federal court, defendant has presented this Court with the responsibility of reviewing, under firmly established arbitration law, a decision of an arbitrator who had the responsibility of interpreting an ERISA plan under federal ERISA law.

In the Fall of 1998, Seagull officials began talking openly to its employees (including Plaintiffs) about the possibility of layoffs in connection with a company downsizing as well as possible mergers. Then, on November 24, 1998, Seagull announced a merger with Ocean Energy, Inc., with Ocean being the surviving entity. Shortly after this announcement, Seagull principals began meeting with Buckeye Pipeline ("Buckeye") to discuss the possibility of a separate acquisition of the O&C Group by Buckeye rather than to take the O&C business into the merger with Ocean. Seagull ultimately made the decision to sell the O&C Group to Buckeye.

Plaintiffs argue that the O&C employees were an important consideration in the sale because the assignment of any O&C contracts to Buckeye required the consent of the customers. Plaintiffs assert that the customers were interested in and had purchased the services that O&C personnel could provide with little concern for the hard assets utilized in completing the work. Therefore, ensuring that the O&C employees were "on board" for any sale of the O&C Group was critical in completing the sale.

In an effort to reassure O&C personnel as to their job security, and to keep these employees working for Seagull while Seagull obtained the necessary consents from its customers, on January 5, 1999, Seagull's CFO, William L. Transier, sent a memo to the O&C personnel stating that as to any employee terminated prior to the merger in a reduction in force and any employee terminated after the merger, Plan benefits would be available. The memo also stated that the merger would constitute a "change in control" which would trigger the payment of Plan severance benefits. The memo concluded, "we will continue to communicate with you regarding decisions affecting you and the future of your position at Seagull." (Emphasis added.) There was a Summary Plan Description attached to the memo which further provided:

... if you obtain new employment while you are receiving benefit payments under the Plan, your severance benefits will not be reduced by your compensation or benefits earned with your new employer.

(Emphasis added.)

The January 5 Transier memo was followed up by a Fourth Amendment to the Plan.¹ This Amendment provided for payment of severance benefits in the event the Seagull/Ocean merger was consummated. It was enacted on January 29, 1999, retroactive to January 1 and provided, in pertinent part:

Other than with respect to the transactions contemplated by the Agreement and Plan of Merger between Seagull Energy Corporation and Ocean Energy, Inc. (dated as of November 24, 1998), which if consummated, shall constitute a "Change in Control" for all purposes under the Plan, following which severance benefits shall be payable as provided herein, the Plan shall be, and is hereby, terminated.

On or about February 22, 1999, Seagull and Buckeye signed the Purchase and Sale Contract to sell the O&C Group to Buckeye for $5.75 million. The Plaintiffs then spent the month of March securing the necessary customer consents to allow the assignment of the O&C contracts to Buckeye.

The Seagull/Ocean merger was set to close on March 30, 1999. On the evening of March 29, the Seagull Board adopted a Fifth Amendment to the Plan. It provided, in pertinent part:

... that the term "Involuntary Termination" shall not include a Termination for Cause, a termination of a Covered employee's employment occurring as a result of or in connection with the sale or other divestiture by the Employer of a division, subsidiary, or other business segment ... if such covered employee is offered continued employment by the acquirer of such business segment immediately upon such sale or divestiture....

Plaintiffs assert that in spite of the January 5 assurances of CFO Transier, Seagull had surreptitiously developed a scheme to keep the O&C personnel working for Seagull during the merger process, but to exclude them from severance benefits under the Plan. In order to accomplish this, they contend that the Company enacted the aforementioned Amendments Four and Five to the Plan, the Fourth Amendment to keep the employees working and affirm the benefits in question and the Fifth Amendment to take away the same benefits. Plaintiffs assert that the Fifth Amendment was specifically designed to prevent them from being entitled to Plan severance benefits by its redefinition of "involuntary termination." In fact, James Hackett, CEO of Seagull admitted that but for the Fifth Amendment, the Plaintiffs would have been entitled to severance benefits under the Plan. Seagull and Ocean officially merged on March 30. On March 31, the Plaintiffs were terminated from Seagull/Ocean and they went to work for Buckeye on April 1.

When the Plaintiffs did not timely receive severance benefits pursuant to the terms of the Plan, they each filed a claim with the Ocean Organization and Compensation Committee (the "Committee"). The primary task of the Committee was to decide executive pay. However, it was also the named fiduciary with the power to administer the Plan and to review claims. It was primarily composed of outside Directors and Senior Ocean executives.

This was the first time the Committee had been called upon to make a decision regarding Plan benefits. The arbitrator's opinion recites that testimony at the arbitration hearing indicated that a packet of information was provided to the members of the Committee, at a called meeting, at which the claims of the twenty-three Plaintiffs were considered. A part of the packet was a denial letter previously drafted by General Counsel, Richard Reeves, who was also the recording secretary for the Committee. The Committee met for one hour and considered twelve items. Plaintiffs' claims were the last item on the agenda and the Committee spent less than five minutes on that item. A denial letter was sent to each Plaintiff and thereafter each exercised his appeal rights under the Plan.

The Committee was also designated as the appeals forum. When the appeal of the denial of benefits was brought before the Committee, Reeves was again present and had a prepared response and denial letter which the Committee adopted with little consideration and no changes. Also present was Mr. Ivey, who was ultimately defendant's trial Counsel through the course of this litigation.

Feeling aggrieved, the Plaintiffs filed suit in Texas state district court. Ocean removed to federal court and then moved the district court to compel arbitration. The district court ordered "plaintiffs' claims" to be arbitrated. The parties agreed on an arbitrator and submitted the case. The arbitrator entered a forty-two page opinion awarding the Plaintiffs benefits under the Plan totaling some $1.5 million plus $75,000 attorney fees and 6% pre-award interest and 10% post-award interest.

Ocean then filed an Application to Vacate the award in the district court. Ocean did not file a transcript of the arbitration...