Mayberry v. U.S., No. 4:95 CV 2463 DDN.

CourtUnited States District Courts. 8th Circuit. United States District Court (Eastern District of Missouri)
Writing for the CourtNoce
Citation977 F.Supp. 959
PartiesMichael A. MAYBERRY and Patricia J. Mayberry, Plaintiffs, v. UNITED STATES of America, Defendant.
Decision Date11 September 1997
Docket NumberNo. 4:95 CV 2463 DDN.
977 F.Supp. 959
Michael A. MAYBERRY and Patricia J. Mayberry, Plaintiffs,
UNITED STATES of America, Defendant.
No. 4:95 CV 2463 DDN.
United States District Court, E.D. Missouri, Eastern Division.
September 11, 1997.

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S. Sheldon Weinhaus, Weinhaus and Dobson, St. Louis, MO, Stephen L. Hester, Washington, DC, for Plaintiffs.

Wesley D. Wedemeyer, Office of U.S. Atty., St. Louis, MO, Noreene C. Stehlik, U.S. Dept. of Justice, Office of Special Litigation, Washington, DC, for Defendant.


NOCE, United States Magistrate Judge.

This action is before the Court upon the cross-motions of the parties for summary judgment under Federal Rule of Civil Procedure 56. The parties have consented to the exercise of authority by a United States Magistrate Judge under 28 U.S.C. § 636(c). A hearing was held on the motions on February 6, 1997.

Plaintiffs Michael A. Mayberry and Patricia J. Mayberry1 have brought this action for the refund of income taxes and employment taxes which they paid on amounts received by Mr. Mayberry in the settlement of a class action lawsuit (the McLendon/Gavalik cases).2 In an effort to reduce its pension liabilities, Continental Can Company, Inc., wrongfully discharged plaintiff and thousands of other employees who are members of the combined litigation class. To settle the subsequent claims for damages, Continental Can created a $415 million settlement fund from which awards were paid to terminated employees. Although this particular case involves the tax liability of only one class member, the Internal Revenue Service has stated its intention to treat the instant case as one of six "test cases" for determining the proper tax treatment of the distributions to approximately five thousand class members from the $415 million settlement fund.

In this motion, plaintiffs contend that the amounts plaintiff Mayberry received from

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the settlement fund constitute personal injury damages and are excluded from income and taxation under the Internal Revenue Code (IRC) § 104(a)(2).3 Generally stated, the position of the defendant United States is that the settlement distributions are not excludable from taxable income as damages received on account of a personal injury and are wages subject to federal employment taxes.

This Court must grant summary judgment if the record demonstrates that there is no genuine issue of material fact for trial and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Board of Educ., Island Trees Union Free School Dist. No. 26 v. Pico, 457 U.S. 853, 863, 102 S.Ct. 2799, 2806, 73 L.Ed.2d 435 (1982). The parties agree that the relevant facts are without dispute and have provided the Court a written factual stipulation. From the record of this action, including the Stipulation of Facts and Joint Exhibits filed by the parties, the Court has determined that the relevant facts are undisputed.

The plaintiffs in this tax refund action, Michael A. and Patricia J. Mayberry, are husband and wife residing in this judicial district. Michael Mayberry was employed by Continental Can Company from September 1970 to October 29, 1976, when he was laid off by that company.4 At that time he was married and had one child. Following his layoff, he felt a great deal of financial insecurity and was fearful that he would be unable to provide properly for his family. After three and a half months of unemployment, he found work with Crown Cork & Seal Company. However, in September 1977 he became employed by the U.S. Postal Service. His compensation by the Postal Service was greater than what he had earned at Continental Can before his discharge. The work with the Postal Service, however, was more stressful and physically demanding than his job at Continental Can. In his written affidavit, Mayberry has described how his quality of life suffered as a result of Continental Can's laying him off, i.e. he suffered substantial stress, humiliation, and emotional pain, in spite of the fact that his earnings increased following his layoff by Continental Can.5 As a consequence of the layoff by Continental Can, Mayberry suffered very little earnings loss.

Mayberry became a member of the class of former Continental Can employees which brought claims under § 510 of ERISA, 29 U.S.C. § 1140,6 to challenge the legality of Continental Can's program that resulted in

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the termination of the plaintiff employees. In those actions plaintiffs alleged that Continental Can violated ERISA § 510 by pursuing an illegal scheme to avoid pension benefits liability. See Gavalik v. Continental Can Co., 812 F.2d 834, 838 (3rd Cir.1987), cert. denied, 484 U.S. 979, 108 S.Ct. 495, 98 L.Ed.2d 492 (1987); McLendon v. Continental Group, Inc., 749 F.Supp. 582, 583 (D.N.J. 1989), aff'd sub nom., McLendon v. Continental Can Co., 908 F.2d 1171 (3rd Cir.1990). The district court described the program as "a complex, secret and deliberate scheme to deny its workers bargained-for pension benefits...." McLendon, 749 F.Supp. at 584. The court determined that Continental Can was liable under ERISA. Id. The determination of liability was affirmed on appeal. See McLendon v. Continental Can Co., 908 F.2d 1171 (3rd Cir.1990); Gavalik v. Continental Can Co., 812 F.2d 834 (3rd Cir.), cert. denied, 484 U.S. 979, 108 S.Ct. 495, 98 L.Ed.2d 492 (1987).

The court of appeals explained the basis of liability as follows:

We emphasize our holding that Continental's liability avoidance scheme constituted a violation of ERISA when, pursuant to that scheme, individual class members — whether currently at work or already on layoff status — were designated as permanently laid off for the purpose of defeating their pension eligibility. Upon such designation, each class member was entitled to some relief from the illegal scheme. At what point and in what amount actual damages, if any, began to accrue as to any particular class member, however, will be a determination to be made in the proceedings upon remand.

Gavalik, 812 F.2d at 865-66.

Following the affirmance of the determination of liability, the district court appointed a

Special Master for the specific purpose of assisting the parties in the settlement of the remaining issues in this matter and to expedite a determination of the amounts due to class members and the prompt payment of those amounts; or, absent a settlement, recommending a procedure to expedite the determination of those remaining issues and claims.

McLendon, 749 F.Supp. at 612; Joint Exhibit D.

Thereafter, the special master conducted hearings and heard evidence of

lives deeply affected by layoffs: lost opportunities, severe financial dislocation, the disruption of children's education, desperate travels around the country searching for equivalent work, consequent divorces and emotional problems, and bankruptcies....

Joint Exhibit F at 4. The special master determined that Continental Can aggravated damages through its deceptive behavior. This deception affected damages:

The Court's holding that Continental's behavior at St. Louis was deceptive, and the allegations of similar deception at other plants, compelled the consideration of non-pecuniary losses such as emotional distress.

Joint Exhibit E at 20. The special master further stated:

In a standard wrongful termination case, an accurate measure of loss may well be simply the difference between wages and benefits in one job and in its replacement. At the next level, where the motivation for the wrongful termination is discriminatory — say on grounds of age or race — damages are added for losses relating to the additional dignitary harm. In this litigation, the harm is more invidious yet, because the dignitary harm is no less and because of the additional harm caused by the concealment and deception that were alleged to have attended the discriminatory behavior.

Joint Exhibit E at 20-21.

The propriety of awarding such nonpecuniary damages was disputed by Continental Can. Continental Can argued that ERISA only provided equitable remedies and precluded compensatory damages. Joint Exhibit E at 10. The special master found, however, that the Supreme Court in Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990), had recently rejected that position:

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The Supreme Court's holding in Ingersoll-Rand possessed great significance for the range of remedies considered in this litigation and in its settlement. First, the holding provided authority for the Special Master's earlier ruling against the Defendants that the remedy in this case was not limited to contractual damages — pension benefits alone. Secondly, the holding provided authority for the Special Master's ruling admitting the introduction of testimony regarding mental anguish, emotional distress and other elements of non-pecuniary loss. Thirdly, the ruling made clear that punitive damages were available in ERISA § 510 cases .... he Supreme Court announced Ingersoll-Rand on December 3, 1990. Less than two weeks after the Supreme Court's decision, on December 16, 1990, serious settlement discussions began. These discussions ended successfully three days later, on December 19, 1990.

Joint Exhibit E at 24.

Continental Can's original position notwithstanding, the class action parties settled the litigation. Under the settlement agreement, Continental Can agreed to pay $415 million into a Settlement Fund which would, in turn, pay damages to the class members. In the settlement agreement the parties several times referred to "separate elements of damages." See Joint Exh. H at 3. The agreement provided that the actual distribution of monies to the claimants would occur as established in a plan of distribution to be approved by the court. Id. at 5.

Pursuant to the settlement agreement, on June 10, 1992, the special master initially submitted the...

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