O'Neil v. Retirement Plan for Salaried Employees of RKO General, Inc.
| Decision Date | 26 September 1994 |
| Docket Number | No. 93-9038,93-9038 |
| Parties | Shane O'NEIL; Robert J. Johnson, on behalf of themselves and all those similarly situated, Plaintiffs-Appellants, v. RETIREMENT PLAN FOR SALARIED EMPLOYEES OF RKO GENERAL, INC. and Certain Subsidiary Companies, and RKO Bottlers, Inc. Retirement Plan for Non-Union Employees, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
T. Barry Kingham, New York City (Nancy E. Delaney, Curtis, Mallet-Prevost, Colt & Mosle, of counsel), for plaintiffs-appellants.
Charles M. Carberry, New York City (Kenneth R. Puhala, Jones, Day, Reavis & Pogue, of counsel), for defendants-appellees.
Before: OAKES, MESKILL and ALTIMARI, Circuit Judges.
Plaintiffs-appellants ("plaintiffs") appeal from a judgment of the United States District Court for the Southern District of New York (Martin, J.), dismissing their action following a bench trial. Plaintiffs are a certified class of former executives of RKO General, Inc. and RKO Bottlers, Inc. (collectively, "RKO") who were participants in either the defendant-appellee Retirement Plan for Salaried Employees of RKO General, Inc. and Certain Subsidiary Companies or defendant-appellee RKO Bottlers, Inc. Retirement Plan for Non-Union Employees (collectively, the "RKO Plans").
In 1988, the RKO Retirement and Benefits Committee (the "Committee"), which administered the RKO Plans, decided that certain payments received by plaintiffs under the Stock Incentive Compensation Plan ("SICP"), a plan operated by RKO's parent corporation GenCorp, Inc. ("GenCorp"), were not includible in plaintiffs' pensionable "Earnings" as defined under the RKO Plans. Plaintiffs brought this action challenging the Committee decision pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1001 et seq. to compel the RKO Plans to include in plaintiffs' pensionable "Earnings" the amount of SICP payments received during active employment. The district court denied plaintiffs' motion for summary judgment before trial and, following a bench trial, dismissed plaintiffs' action after conducting a de novo review of the Committee decision. Although we agree with its conclusion, we believe that the district court should have accorded more deference to the Committee decision. Because we find that the arbitrary and capricious standard of review is applicable to the Committee decision, and because that decision was not arbitrary or capricious, we affirm the judgment of the district court.
Pension benefits under the RKO Plans were calculated based on a participant's pensionable "Earnings." The RKO Plans defined such "Earnings" as follows:
"Earnings" means the regular salary paid to a Participant by the Employer during the calendar year, excluding severance pay or any special payments associated with termination of employment or retirement and contributions by the Employer The RKO Plans did not define "so-called Incentive or Additional Compensation," language that was added to the RKO Plans in 1963. The RKO Plans also provided that the Committee had the power "[t]o interpret the Plan, and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive."
to this or any other benefit plan and any imputed income due to any Employer provided group life insurance benefits, but including (A) overtime pay, (B) bonuses, so-called Incentive or Additional Compensation paid to the Employee during the calendar year, (C) amounts contributed by the Employer on behalf of a Participant to an employee pension plan pursuant to Section 401(k) of the Code, (D) in the case of Participants regularly employed outside of the United States of America, such Participant's regular salary paid by any subsidiary or affiliated company of RKO, whether or not an Employer, and (E) in the case of Participants regularly employed by the Employer who derive a substantial part or all of their total Earnings from commissions, the total amount of such commissions paid in the calendar year. (emphasis added.
In 1983, GenCorp adopted the SICP, a deferred compensation plan that tied the interests of its participants to the interests of GenCorp's shareholders. The purpose of the SICP was to reward key executives for contributing to the growth and profits of GenCorp. At the discretion of GenCorp's Board of Directors, certain executives of GenCorp and its subsidiaries, including RKO, would receive awards of "units" representing a quantity of GenCorp's publicly-traded stock. The awards had no value when conferred. Instead, their value was based on the difference between the fair market value of GenCorp's stock at the time of the award and when the award vested. As such, an award would have value only if GenCorp stock increased in value prior to vesting.
As originally enacted, the SICP provided for payment at retirement or termination, although participants could elect to receive 50 percent of the value of the award ten years after the date of the award. Vesting occurred within five to ten years after the date of the award. In 1985, the SICP was amended to provide for full vesting over a three year period and to allow participants to receive up to 50 percent of the value of the award three years from the date of the grant.
In 1987, in connection with a recapitalization in response to a hostile takeover attempt, the SICP was again amended to permit participants to elect to receive immediate payment of the value of all vested portions of their SICP awards, including payments of amounts that would have been deferred until after the participant's retirement or termination. The purpose of the 1987 amendment was to allow participants to realize a value consistent with that realized by tendering shareholders.
Prior to 1987, SICP payments were not included in "Earnings," although the Committee had never considered the issue. On September 24, 1987, the Committee, which at that point was composed entirely of RKO executives, addressed the issue for the first time and reached a consensus that SICP payments were incentive compensation includible in "Earnings." In reaching this conclusion, the Committee relied in part on advice from its outside ERISA counsel. The Committee, however, did not formally resolve the issue in the context of an actual claim; instead, the Committee decided to discuss the issue with GenCorp, which previously asserted that such payments were not "Earnings."
On November 30, 1987, shortly after the Committee expressed its view to GenCorp, the RKO Board of Directors replaced all of the members of the Committee with GenCorp personnel. According to the minutes of the November 30 meeting, the purpose of the change in Committee composition was to ensure oversight of employee benefits by GenCorp. Subsequently, Robert Johnson and Jeffrey Ruthizer, both RKO employees, formally requested that the Committee authorize the inclusion of SICP payments received during their employment in "Earnings."
The Committee denied Johnson's claim on June 30, 1988, and denied Ruthizer's claim on September 8, 1988. The minutes of the June 30 meeting set forth the factors upon which the Committee relied in making its determination, including the provisions of the RKO Plans and the intent, objective, history, and prior interpretations of the RKO Plans. On September 26, 1988, the Committee formally amended the definition of "Earnings" under the RKO Plans to expressly exclude payments received under the SICP.
In response to the Committee's actions, plaintiffs brought this class action on behalf of SICP participants who could not include SICP payments in "Earnings." Plaintiffs sought a declaratory judgment that SICP payments made during employment were properly considered "Earnings," and an order compelling the RKO Plans to include such payments in "Earnings" and to distribute pension benefits due. Following the completion of pretrial discovery, the district court denied both parties' motions for summary judgment by order of December 15, 1992.
After conducting a four-day bench trial, the district court entered judgment for the RKO Plans on April 6, 1993 and dismissed plaintiffs' action. The district court addressed de novo the question of whether SICP payments were "Earnings" under the RKO Plans, and concluded that they were not. Focusing on the term "regular salary" as used in the definition of "Earnings," the district court noted that SICP payments were not at all related to activity of the participants in the year paid, but instead turned on the market fluctuation of GenCorp stock in years after the initial award.
The district court noted that at the very least, the term regular salary was ambiguous. As such, the Committee was vested under the RKO Plans with the authority to interpret the term. The district court found that the Committee exercised this discretion in good faith, and that there was no showing that the decision by the Committee was arbitrary and capricious.
In finding that the Committee acted in good faith, the district court specifically noted that the Committee had not made a formal decision on September 23, 1987 when it first addressed the issue, but simply decided to communicate its consensus to GenCorp. Although recognizing that the communication by the Committee of its consensus to GenCorp may have accelerated the replacement of the Committee members, the district court found that such a change had been under consideration for several years. In addition, the district court recognized that GenCorp was concerned that the former members of the Committee all stood to benefit from an expansive interpretation of "Earnings."
Plaintiffs now appeal.
Plaintiffs make two basic arguments on appeal. First, they argue that the...
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