Krumme v. Westpoint Stevens Inc., POINT-PEPPEREL

• Citation: 238 F.3d 133
• Decision Date: 01 August 2000
• Docket Number: INC,99-9464,POINT-PEPPEREL,Docket Nos. 99-9442
• Parties: (2nd Cir. 2000) ROBERT D. KRUMME, Plaintiff-Appellee, v. WESTPOINT STEVENS INC., f/k/a West Point-Pepperell, Inc., Defendant-Appellant. GORDON E. ALLEN, JOHN CURRIER, JAMES J. DUNNE, LEO FORNERO, GERARD P. MANDRY, NORMAN K. MATHESON, BRUCE E. MOORE, NICHOLAS PALLOTTA and COCHRAN B. SUPPLEE, Plaintiffs-Appellees, v. WESTPOINT STEVENS INC., formerly known as WEST, Defendant-Appellant
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 133

238 F.3d 133 (2nd Cir. 2000)

ROBERT D. KRUMME, Plaintiff-Appellee, v. WESTPOINT STEVENS INC., f/k/a West Point-Pepperell, Inc., Defendant-Appellant.

GORDON E. ALLEN, JOHN CURRIER, JAMES J. DUNNE, LEO FORNERO, GERARD P. MANDRY, NORMAN K. MATHESON, BRUCE E. MOORE, NICHOLAS PALLOTTA and COCHRAN B. SUPPLEE, Plaintiffs-Appellees, v. WESTPOINT STEVENS INC., formerly known as WEST POINT-PEPPERELL, INC., Defendant-Appellant.

Docket Nos. 99-9442, 99-9464

August Term, 2000

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: October 17, 2000

Decided: December 28, 2000

Appeal from two judgments of the United States District Court for the Southern District of New York, Scheindlin, J., awarding attorney's fees, costs and interest to plaintiffs.

Reversed.

[Copyrighted Material Omitted] JAMES W. HARBISON, JR., New York City ROBERT D. KRUMME, Concord, MA (Carolyn W. Jaffe, Morgan, Lewis & Bockius, New York City, of counsel), for Appellee Krumme.

ROBERT A. SCHWINGER, New York City (Robert J. Hausen, Chadbourne & Parke, New York City, Robert D. Krumme, Concord, MA, of counsel), for Appellees Allen, et al.

FRANCIS CARLING, New York City (Collazo Carling & Mish, Frederick A. Brodie, Winthrop, Stimson, Putnam & Roberts, New York City, of counsel), for Appellant Westpoint Stevens.

Before: MESKILL, NEWMAN and CABRANES, Circuit Judges.

MESKILL, Circuit Judge:

Appellant WestPoint Stevens Inc. (WestPoint) appeals from two judgments of the United States District Court for the Southern District of New York, Scheindlin, J., ordering WestPoint to pay attorney's fees, costs and interest in the amount of $4,800,460 -- $1,778,991 to plaintiff-appellee Robert D. Krumme (Krumme) and $3,021,469 to plaintiffs-appellees Gordon E. Allen, John E. Currier, James J. Dunne, Leo Fornero, Gerard P. Mandry, Norman K. Matheson, Bruce E. Moore, Nicholas Pallotta and Cochran B. Supplee (collectively the "Allen plaintiffs").

To resolve this appeal, we must determine (1) when a "dispute arises" to trigger a party's rights under a fee-shifting provision, and (2) whether a general release of a party's obligations under a contract relieves that party of the obligation to pay attorney's fees pursuant to a provision in the same contract. The district court held that a dispute under the relevant provision can arise only when a party's rights vest under the contract and that a broad release does not relieve the releasee of the obligation to pay attorney's fees pursuant to the released contract. See Allen v. WestPoint-Pepperell, 933 F.Supp. 261, 269-70 (S.D.N.Y. 1996). For the reasons that follow, we reverse.

BACKGROUND

This appeal presents another chapter in a litigation that has spanned three decades. It involves dozens of plaintiffs in three separate actions before four district court judges, three panels of this Court and a New York state court. The full background is presented thoroughly in numerous district court opinions, as well as two prior opinions of this Court. See Krumme v. WestPoint Stevens, 143 F.3d 71 (2d Cir. 1998); Krumme v. WestPoint-Pepperell, 22 F.Supp.2d 177 (S.D.N.Y. 1998); Allen, 933 F.Supp. at 261. We assume familiarity with those opinions and recount only the facts necessary to understand and resolve the present appeal.

1. The EPI Program and the EPI Amendment

The plaintiffs are ten former, senior executives of Cluett, Peabody & Company, Inc. (Cluett). Each participated in Cluett's Executive Permanent Insurance (EPI) Program. In 1986, WestPoint acquired Cluett and began administering the EPI Program. The EPI Program includes a deferred compensation agreement, under which participants who reach the age of 65 are entitled to receive lifetime monthly payments, on an annual basis, equal to 30 percent of their final base salary. Upon acquiring Cluett, WestPoint became the obligor with respect to plaintiffs' benefits under this agreement.

Confronted with the prospect of a hostile takeover, WestPoint drafted an amendment to the deferred compensation agreement (the "EPI Amendment"). The proposed EPI Amendment would allow participants to opt for a lump sum payment in the event of a change of control, rather than await monthly payments at age 65. ¹ The board designed the EPI Amendment to protect the benefits of EPI Program participants from the potential actions of a hostile acquiror.

To further deter an acquiror from depriving the participants of their lump-sum payments, the EPI Amendment contained a broad fee-shifting provision. The fee-shifting provision required WestPoint to reimburse participants for their investigative costs and attorney's fees "[i]f at any time upon or after a Change of Control there should arise any dispute as to the validity, interpretation or application of any term [or] condition of this Agreement." (emphasis added). In the event that such a dispute arose, WestPoint agreed to reimburse the participants on a current basis whether or not they ultimately prevailed.

2. The Start of Litigation and the Change of Control

On October 24, 1988, Farley, Inc. (Farley) commenced a hostile tender offer for all outstanding shares of WestPoint's common stock. On or about November 11, 1988, WestPoint offered the EPI Amendment to the program participants. Krumme and each Allen plaintiff accepted.

Shortly thereafter, WestPoint discovered that the EPI Amendment mistakenly provided that a 5 percent discount rate be used in the calculation of the participants' lump sum payment. WestPoint had intended to use a floating rate calculated at 120 percent of the Pension Benefit Guaranty Corporation (PBGC) immediate interest rate. At all relevant times, this floating rate was 9.3 percent. The relationship between the discount rate and the lump sum payment is inverse; the higher the discount rate, the less the EPI participant receives. As a result of the drafting error, the plaintiffs' lump sum payments would have been nearly twice the market-based present value of their EPI benefits and significantly higher than payments to participants in WestPoint's other benefit plans.

On February 16, 1989, the Board changed the 5 percent discount rate to the 9.3 percent discount rate. We subsequently determined that WestPoint acted properly in making this adjustment. See Krumme, 143 F.3d at 82-86.

By letters dated February 22, 1989, WestPoint notified Krumme and the Allen plaintiffs that it had adopted a new discount rate and requested that they execute an election form. The election form provided that Krumme and the Allen plaintiffs could either (1) execute a broad release of WestPoint and remain eligible for the lump sum payment at the 9.3 percent discount rate, or (2) rescind the EPI Amendment and return to the original deferred compensation agreement, providing for monthly payments at age 65. The releases stated, in pertinent part:

I elect to have my deferred compensation benefit paid as a lump sum in the event of a change in control. I understand that the lump sum payment of the actuarial equivalent of my deferred compensation benefit will be in full satisfaction of all obligations of [WestPoint], as successor to Cluett, Peabody & Co., Inc., under the terms of my Deferred Compensation Agreement, and that in accepting a lump sum payment I shall thereby release [WestPoint] from all obligations under the Agreement.

The Allen plaintiffs executed the releases and remained eligible for a lump sum payment calculated with the 9.3 percent discount rate. Krumme did not return the election form.

In two letters dated February 21, 1989, and March 1, 1989, Krumme asserted that he and the other participants were entitled to lump sum payments calculated with the 5 percent discount rate. Krumme charged that WestPoint's change to the rate constituted gross self-dealing and manipulation. By letter dated March 8, 1989, Krumme claimed that a change of control from WestPoint to Farley had already taken place. He reasserted his claim to a lump sum payment calculated with the 5 percent discount rate, threatened legal action and demanded attorney's fees pursuant to the EPI Amendment. WestPoint disputed each of Krumme's claims and denied each of his demands.

On March 24, 1989, Krumme commenced a lawsuit charging WestPoint with breach of contract, fraudulent misrepresentation and gross negligence. He sought a money judgment against WestPoint for the lump sum payment, plus interest, a declaratory judgment that the 5 percent discount rate applied, punitive damages and costs and fees pursuant to the EPI Amendment.

On April 5, 1989, WestPoint sold 95 percent of its stock to Farley, consummating the October 24, 1988 tender offer. That day, WestPoint mailed lump sum payments to various employees who were entitled to benefits upon a change of control. The checks were accompanied by a form letter, which stated that by cashing the check, the recipients "acknowledge that the Company's obligation to make informal payments has been fully satisfied." Each of the Allen plaintiffs received payments calculated with the 9.3 percent discount rate and each cashed their checks without protest.

At the behest of Krumme, however, the Allen plaintiffs filed suit against WestPoint on June 6, 1990, alleging breach of contract, breach of fiduciary duty and fraud. Like Krumme, who represented and continues to represent them, the Allen plaintiffs' claims arose out of WestPoint's change of the discount rate and its failure to pay upon an alleged, earlier change of control to Farley. In addition, the Allen plaintiffs sought equitable rescission of the releases on the bases of fraud and mutual mistake regarding the appropriate discount rate.

On August 3, 1990, WestPoint moved to dismiss the complaint in the Allen action, arguing that the Allen plaintiffs had released WestPoint from liability on all of their claims. On January 25, 1991, the district court, Conboy, J., dismissed the complaint in its entirety. On September 11, 1991, we held that the complaint sufficiently...