Levy v. Young Adult Inst., Inc.
| Decision Date | 18 October 2016 |
| Docket Number | 13-CV-2861 (JPO) (SN) |
| Parties | JOEL M. LEVY, et al., Plaintiffs, v. YOUNG ADULT INSTITUTE, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
In2011, Young Adult Institute, Inc. ("YAI") stopped paying retirement benefits to its former CEO Joel Levy and his wife Judith Lynn. They sued under the Employment Retirement Income Security Act ("ERISA"), demanding that YAI immediately resume payment and reimburse them for the missed payments. They also alleged that certain reductions to Levy's retirement benefits and Lynn's surviving spouse benefit were unlawful and sued YAI's former board chair Eliot Green for breach of fiduciary duty for his role in convincing them to sign a contract agreeing to the reductions.
This case has already seen one partial summary judgment motion. The Court decided that YAI could not be excused from paying Levy's benefits because of its own retrospective determination that those benefits were excessive in violation of state and federal law. The parties now ask the Court to return to that question and to address whether certain directives of a state regulator made performance of the contract impossible. Green, in turn, asks for summary judgment on the question of his liability for breach of fiduciary duty.
The Court concludes that YAI has no excuse for failing to pay Levy's retirement benefits. As the Court has already held, YAI's belated regret about the reasonableness of Levy's compensation does not justify reneging on its contract. Neither do backroom negotiations with a state regulator that failed to conclude explicitly that paying Levy his retirement benefits would violate the law. Levy undoubtedly agreed to reductions in his SERP benefits, but questions of fact remain regarding the enforceability of those agreements after YAI's default.
The plaintiffs' claims against Green are time-barred and further barred by a release of liability clause or, in the alternative, not cognizable because the contract is unenforceable.
The following facts are taken from the parties' Rule 56.1 statements and from the summary judgment record. They are undisputed except where noted.
Levy worked at YAI for more than forty years. He joined as an executive director and soon became CEO. In 1985, YAI's Board of Trustees established a supplemental executive retirement plan ("SERP") for Levy and other YAI executives. The Original SERP entitled Levy to a retirement annuity of up to 99.9% of his highest annual salary, less certain offsets from payments made through other retirement programs. It also entitled Levy's spouse to collect the same pension benefit for her lifetime if she survives him. Section 10.2.1 of the Original SERP provided that Levy's benefits would be 100% "[n]onforfeitable" after nineteen years of service. Dkt. No. 264-5 at 33. Levy reached nineteen years of service in 1989.
The Original SERP gave YAI the right to amend the terms of its trust by resolution of the Board or a duly appointed committee. But it prohibited any amendment that reduced any vested benefits or gave YAI any interest in the SERP Trust's assets. Id. at 22. The SERP stipulated thatthe "certified copy of the resolution" authorizing amendment "shall constitute the instrument of amendment." Id. at 22-23.
In 2003, YAI established a Life Insurance Plan and Trust ("LIPT") for Levy and other senior management. The LIPT provides a death benefit to Levy's survivors and is deemed fully vested. Section 12 of the LIPT provides that "no amendment shall conflict with the terms of the Plan or make the Trust revocable" and that the plan "shall not terminate until the date on which Plan participants and beneficiaries are no longer entitled to benefits pursuant to the plan." Dkt. No. 272-1 at 13.
In 2005, YAI's compensation committee recommended reductions to the SERP's annuity in order to "better align" YAI "with industry practice." Dkt. No. 264-5 at 47. The reductions reflected the recommendations of a private consulting firm that found YAI's compensation levels to be unusually high. The committee recommended reducing Levy's annuity benefit from approximately 100% of his highest total earnings to 89% of his 2005 salary and bonus. Id. The committee recommended similar reductions for YAI's other executives. On March 22, 2005, the YAI Board of Trustees adopted the recommendations by vote. Dkt. No. 264-5 at 50. Levy was present at the meeting but denied being present when the Board discussed his benefits. See Dkt. No. 460-4 at 5-6. The amendments purported to cap Levy's SERP annuity at $625,813, less offsets. Levy testified that the Board presented this reduction to him as "a fait accompli" and that he could not challenge it. Id. at 31.
In 2008, YAI sought to replace Levy as CEO with his brother Phil Levy. As a part of the transition, the Board negotiated new employment contracts with the Levys. The negotiationslasted approximately five months, and Levy was represented at the Board's expense by Cadwalader, Wickersham & Taft. The negotiations yielded a September 2008 Employment Agreement, which set the terms for Levy's employment during the transition period and promised him work as a consultant after Phil Levy took over as CEO. The Employment Agreement entitled Levy to an annual base salary of $680,000 and an annual bonus of at least $120,000. It also governed Levy's other benefits, including his retirement benefits.
Under Section 4(e) of the Employment Agreement, Levy agreed to reduce the SERP annuity to $625,813. Dkt. No. 461-4 at 4. Section 4(e) also purported to amend the SERP to incorporate the benefit reduction and directed YAI to buy a commercial annuity by June 30, 2010, that would mimic the SERP's annuity payments. The YAI Board approved the agreement at a special meeting, and Board Chair Marci Fava and Levy signed it on September 23, 2008.
In December 2008, the YAI Board adopted a recommendation of its Executive Compensation Committee to amend the SERP to reduce Levy's annual benefit to $625,813. The amendment also reduced the SERP benefit due to Phil Levy and two other executives.
The Original SERP entitled a surviving spouse to 100% of the participant's annuity for the spouse's lifetime. In 2007, YAI's Board amended the SERP to alter the spousal benefit. Under the 2007 amendment, if a participant remarried a younger spouse after September 27, 2007, the younger spouse's annuity "shall be adjusted to reflect a smaller annual payment which is actuarially equivalent to the normal payment" based on the age of the participant's older spouse. Dkt. No. 264-5 at 67. Before the reduction took effect, Levy divorced his first wife and married Lynn, who was seven years younger than Levy's first wife.
As Levy's retirement neared, YAI hired an independent actuary to calculate his SERP benefits. After the calculations were made, the board discovered that the cost of funding Levy's spousal benefit had increased dramatically as a result of his marriage to Lynn—by as much as $1.8 million. Members of the board believed that Levy had misled them about the increased cost associated with his marriage to Lynn, and Phil Levy began negotiating with his brother to reduce Lynn's survivor benefit. YAI decided to withhold payment of Levy's SERP benefits until he agreed to sign an Acknowledgement and Release ("A&R") that both reduced the surviving spousal benefit and ratified the parties' shared understanding of the calculation of Levy's SERP benefits.
Levy retired on June 30, 2009, and YAI withheld his SERP payments. On September 9, Eliot Green, YAI's recently appointed board chair, met with Levy to discuss the spousal benefit. Levy showed Green hundreds of pages of documents to walk through the history of his compensation package. Levy argued that the Board had repeatedly reviewed and repeatedly approved the SERP and that the Board had specifically reviewed and approved the surviving spousal benefit. Levy insisted that he had no reason to forego any amount of that benefit.
Green testified that after his conversation with Levy, he researched the history of Levy's compensation package. He met again with Levy and reported that he did not believe that the SERP or the surviving spousal benefit had been reviewed for reasonableness. Without such a review, he told Levy, the increase in the value of the spousal benefit left both YAI and Levy vulnerable to intermediate sanctions by the IRS.
Levy disagreed with Green's assessment and thought he was "irrational, crazy" and "denying reality" when he claimed that the SERP had never been reviewed for reasonableness.Dkt. No. 471-1 at 7 (Levy Dep. at 437:20-438:112). Levy relied on opinions issued by YAI's compensation consultants and lawyers establishing that the SERP was "grandfathered," immune from intermediate sanctions, and presumptively reasonable. But Green insisted that Levy was wrong.
According to Green's summary judgment submission, Phil Levy later talked Joel Levy into foregoing half of the net present value of the spousal benefit. According to Green, Levy opted to sign the A&R because of financial pressure. Without it, YAI would have continued to withhold his retirement benefits. Green contends that he encouraged Levy to seek independent legal counsel. Levy denies these facts.
For his part, Levy claims that it was the financial strain and his trust in Green's legal advice that led him to accept the reduction in the spousal benefit. According to Levy, he trusted Green after twenty-five years of their shared professional and personal relationship, and he believed Green had given advice in Levy's best interest.
At a November 24, 2009 meeting of the YAI Executive Compensation Committee, Green described his negotiations with Levy:
Well, basically,...
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