McAdams v. Massachusetts Mut. Life Ins. Co.
| Decision Date | 01 December 2004 |
| Docket Number | No. 04-1567.,No. 04-1715.,04-1567.,04-1715. |
| Citation | 391 F.3d 287 |
| Parties | Michael Q. McADAMS and Farrell D. Odom, on behalf of themselves and all others similarly situated, and Berry Boyd et al., Plaintiffs, Appellants, v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY and MassMutual Benefits Management, Inc., Defendants, Appellees. |
| Court | U.S. Court of Appeals — First Circuit |
Brent J. Kaplan, with whom Thomas J. Gallo and Robins, Kaplan, Miller & Ciresi LLP, were on brief, for appellants.
Thomas J. Dougherty, with whom Kurt Wm. Hemr and Skadden, Arps, Slate, Meagher & Flom LLP, were on brief, for appellees.
Before LYNCH, Circuit Judge, CYR, Senior Circuit Judge, HOWARD, Circuit Judge.
Michael Q. McAdams and Farrell D. Odom, former general agents for the Massachusetts Mutual Life Insurance Company ("MassMutual"), filed suit against MassMutual on behalf of themselves and all other similarly situated MassMutual general agents. The claims are Massachusetts state law claims and jurisdiction is premised on diversity. Plaintiffs participated in a non-qualified deferred compensation plan; they allege that the plan was managed by MassMutual in violation of the contract underlying the plan, the implied covenant of good faith and fair dealing in the contract, and a fiduciary duty running from MassMutual to plan participants. They also allege violations of Massachusetts General Laws Chapter 93A, which prohibits unfair and deceptive trade practices.
Specifically, McAdams and Odom allege that MassMutual unlawfully assessed a tax charge against participants' deferred compensation earnings that was designed to fully offset the tax costs to MassMutual from running the plan. Under the contract, they argue, no such charge can be assessed, and even if such a charge could be assessed, the charge assessed by MassMutual was, in reality, far too high merely to offset MassMutual's tax costs. MassMutual admits that such a tax charge was assessed but argues that the contract allowed it and that the amount of the charge was reasonable.
After discovery, the district court dismissed all of McAdams's and Odom's claims on summary judgment and also, after denying a motion for class certification, dismissed all of the actions of thirty related plaintiffs. Because the undisputed record shows that MassMutual's actions remained well within the bounds of discretion permitted to MassMutual by the contract and by the underlying covenant of good faith and fair dealing, we now affirm the district court.
We recount all facts in the light most favorable to the party opposing summary judgment, McAdams and Odom in this case. Dwan v. City of Boston, 329 F.3d 275, 277 (1st Cir.2003).
McAdams and Odom worked as general agents for MassMutual in Texas; they ran and owned fairly large (forty- to eighty-person) agencies that sold insurance and other products for the company. Both of their general agencies sold deferred compensation plans to their customers. These general agents were not classified as employees of MassMutual and in fact were closer to independent contractors than to employees — for example, the general agents did not receive a salary from MassMutual and did not send profit and loss statements for their general agencies to MassMutual, although MassMutual did pick up certain expenses, such as rent.
MassMutual first established a deferred compensation plan for general agents in 1967; this first plan allowed for accumulation of deferred amounts of earned income at a fixed interest rate. The plan at issue here was created in 1970. The new plan, unlike the old, provided an option, should MassMutual wish to provide it, of investing deferred compensation in stocks (a higher-risk, higher-return option) rather than investing in a fixed income account. McAdams first began deferring compensation with the plan in 1983; Odom in 1986. All of the related plaintiffs (whose claims in the putative class have been joined in this consolidated appeal) were general agents who deferred compensation under this plan. At least 117 general agents were participants in this plan at some point.
The deferred compensation plan was created and advertised as a perk for the general agents. As one MassMutual employee noted in a communication with the general agents, Like most deferred compensation plans, the general purposes of this one were to provide a convenient "vehicle to save additional funds for retirement" and, most importantly, to "shelter current contributions from current income taxation ... and to allow assets to accumulate tax free." Personal income tax would only need to be paid by participants on this compensation when it was actually disbursed to the general agents (upon retirement or death); in the meantime the deferred compensation could accumulate income on the investment free and clear of the personal income tax.
Because the general agents are not "employees" as that term is used by the IRS, MassMutual could not create a "qualified" deferred compensation plan for the general agents but instead had to create a "non-qualified" plan. This had important tax consequences. Money can accumulate in qualified plans, which are considered separate entities from the employer, without any adverse tax consequences for the employer at any time, but the same is not true of non-qualified plans. The money invested in non-qualified plans is considered part of the employer's assets and thus the employer has to pay tax on the funds invested in the plan (although the employer may get a tax deduction later, when the deferred compensation is actually disbursed to the general agents).
Article V of the plan's standard contract, which was signed by MassMutual and by all the plan participants (including McAdams and Odom), provided that MassMutual could choose two different ways of dealing with compensation deferred under the plan: it could either invest such compensation separately from its general reserves and assets (say, in a trust or mutual fund) or it could commingle this compensation with its general reserves and assets.
Article V explains how investment earnings would be credited to general agents' accounts under each of these two choices. The first paragraph of the Article notes that if MassMutual invests the deferred compensation separately, then
it shall credit to the General Agent's account from time to time whatever net earnings the assets so invested have produced. Net earnings from separate investments for purposes of this Agreement shall mean gross earnings, including but not limited to, interest, dividends, realized and unrealized appreciation or loss in the value of such investments, less all expenses and taxes attributable to the making, carrying and liquidation of such investments, including but not limited to, an appropriate accrual of taxes for unrealized appreciation in the value of the investments. [MassMutual] alone shall determine the amount of net earnings that will be credited to the General Agent's account; and such determination of net earnings, including the determination as to charges for expenses and taxes, shall be final.
Thus, the Article explicitly indicates that when MassMutual invests money deferred under the plan in separate accounts, MassMutual is allowed to deduct any expenses, including taxes, that those investments cause. The purpose here seems to be to ensure that MassMutual does not lose money by administering any separate investments under the plan: if these investments lead to any expenses or taxes, these will be paid for by the plan participants and not by the plan administrator, MassMutual.
The third and last paragraph of Article V discusses the crediting of earnings to deferred compensation accounts when this compensation is not separately invested but instead is kept within the company's general reserves and assets. MassMutual will then The interpretation of this provision lies at the heart of the current dispute between McAdams, Odom, and MassMutual.
MassMutual chose to invest the deferred compensation separately for only a few years early on, from 1970 through 1975; during this period the money was invested in a separate trust administered by a bank. From 1976 onward, MassMutual ceased making separate investments of deferred money. Instead, participants were generally offered two options. First, they could "shadow" certain equity accounts (Oppenheimer funds, for example). In this shadow option, the rate of return on the participants' accounts for a given year would track whatever was the rate of return for the shadowed account. In other words, MassMutual would pretend the money had actually been invested in the shadowed account even though it had not been.
Second, participants could instead choose a fixed interest option, in which their accounts would be credited with a fixed rate of return every year. This fixed rate seems to have been designed to be equivalent with the return on long-term, money-based (low-risk) accounts (like bonds or certificates of deposit).
In 1983, MassMutual began imposing a tax charge on the earnings of deferred compensation that used the shadow account option. This tax charge varied from 1983 to 1993, but tended to hover around 30% (although it was much lower in a few years). From 1994 to 2001, the rate of the tax charge on this option remained constant at 34.16%. MassMutual began in 1983 taking into account tax charges on...
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