Shull v. State Machinery Co., Inc. Employees Profit Sharing Plan, 87-1228

• Decision Date: 18 December 1987
• Docket Number: No. 87-1228,87-1228
• Citation: 836 F.2d 306
• Parties: 9 Employee Benefits Ca 1464 O.W. SHULL, Plaintiff-Appellant, v. STATE MACHINERY COMPANY, INC. EMPLOYEES PROFIT SHARING PLAN, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 306

836 F.2d 306

9 Employee Benefits Ca 1464

O.W. SHULL, Plaintiff-Appellant,

v.

STATE MACHINERY COMPANY, INC. EMPLOYEES PROFIT SHARING PLAN,

et al., Defendants-Appellees.

No. 87-1228.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 3, 1987.

Decided Dec. 18, 1987.

Jerry Williams, Williams, Taylor & Schmits, Indianapolis, for plaintiff-appellant.

Jim A. O'Neal, Ice, Miller, Donadio & Ryan, Indianapolis, for defendants-appellees.

Before BAUER, Chief Judge, and POSNER and EASTERBROOK, Circuit Judges.

POSNER, Circuit Judge.

This suit under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Secs. 1001 et seq., charges that the trustees of a profit-sharing plan committed a breach of trust by deducting the principal of a loan that they had made to a participant in the plan from the participant's benefits when they distributed those benefits to him upon his departure from the company. The loan was not yet due; the trustees accelerated the due date of the loan even though the loan agreement contained no provision authorizing them to do that. The participant, O.W. ("Doc") Shull, claims that the trustees acted arbitrarily and capriciously in deducting the loan from his benefits and in refusing to accept substitute collateral. Shull would not accept the benefits minus the deduction, and this gives rise to his further complaint that as custodians of his assets the trustees have invested them imprudently, specifically by placing them in a bank account that does not pay interest. The district court granted summary judgment for the defendants.

Shull was a sales engineer employed by State Machinery Company and a participant in the company's Employees Profit Sharing Plan. He borrowed $50,000 from the plan on December 16, 1983. The loan agreement required him to pay interest semi-annually at an annual interest rate of 11 percent and to repay the principal at the end of five years, or earlier if he wished. The agreement makes no explicit reference to security, but it provides that in the event of a default the amount in default shall be deducted from the benefits that have accrued to Shull under the profit-sharing plan; and the plan itself limits the loan to 50 percent of the participant's accrued benefits or $50,000, whichever is less.

Six weeks after the loan was made to Shull, State Machinery Company fired him because of a dispute, which may have been acrimonious, over the company's transfer of some of his customers to another sales person in anticipation of Shull's planned retirement (he was 55 at the time). Shull's account with the plan showed a balance of $306,000 (we have rounded off all dollar figures to the nearest thousand). The trustees, taking the position that they were entitled to deduct the loan (plus accrued interest) from the account even though repayment was not due for almost five years, sent Shull checks totaling $253,000--which he refused to accept--in payment of the benefits due him under the plan. Shull authorized his attorney to offer substitute security for the loan (a mortgage on his house, a $50,000 certificate of deposit, or marketable securities), but the trustees refused, and he brought this suit for the full balance in his account plus "reasonable" interest.

The "arbitrary and capricious" standard is the canonical standard in this and most other circuits for reviewing actions by ERISA trustees. See, e.g., Pokratz v. Jones Dairy Farm, 771 F.2d 206, 208-09 (7th Cir.1985); Adcock v. Firestone Tire & Rubber Co., 822 F.2d 623, 626 (6th Cir.1987). But there is a growing restiveness in cases where the trustees seem not to be true neutrals in the disputes they are called on to resolve. See, e.g., Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 137-45 (3d Cir.1987). The trustees of State Machinery Company's profit-sharing plan are senior executives of the company. The company fired Shull. From remarks at oral argument we infer that he was an important executive of the company, not just a rank-and-file worker, and that there is bad blood between him and the remaining executives. These two facts cut in different directions, however, so far as the appropriateness of highly deferential judicial review is concerned. If there was bad blood the trustees may not have been impartial, but if Shull was himself an important executive he may in some significant sense have consented in advance to having disputes over the profit-sharing plan resolved by his fellow executives, subject to the severely limited judicial review that is traditional in cases involving the denial of employee benefits. He was one of the original participants in the profit-sharing plan (set up in 1963 and amended when ERISA was enacted, to conform to the statute); had he distrusted the other executives he could have pressed for inclusion of an arbitration clause, and then his claim would have been determined by persons not connected with the company.

We need not pursue these byways. The record is silent on the circumstances of Shull's dismissal and on his rank within the company. We have only speculations gleaned from oral argument. For all we know, Shull was just a salesman and there was no rancor in his dismissal. If he wanted to persuade us to review the trustees' action under a higher standard for cases where there is a serious conflict of interest (or some other circumstance that undermines the presumption of impartiality), he had to submit evidence of such circumstances; he did not. If the plan wanted to persuade us to review the trustees' action under a laxer than usual standard, based on Shull's consent to the decision-making arrangements (cf. Brown v. Retirement Committee of Briggs & Stratton Retirement Plan, 797 F.2d 521, 529 (7th Cir.1986)), the plan had to submit evidence from which such consent could be inferred; it did not. The state of the record constrains us to review the trustees' action under the arbitrary and capricious standard with no tilt toward either unusually careful or unusually deferential scrutiny.

Under this standard, as applied in ERISA cases, a court will not set aside the denial of a claim if the denial is based on a reasonable interpretation of the relevant plan documents, in this case primarily the loan agreement itself. See, e.g., Cook v. Pension Plan, 801 F.2d 865, 870-71 (6th Cir.1986); Jung v. FMC Corp., 755 F.2d 708, 713 (9th Cir.1985); Quinn v. Burlington Northern Inc. Pension Plan, 664 F.2d 675, 678 (8th Cir.1981). (This is a dramatic departure from the conventional judicial approach to contract disputes, which treats the interpretation of a contract as a matter of law unless extrinsic evidence is introduced. See, e.g., Western Industries, Inc. v. Newcor Canada Ltd., 739 F.2d 1198, 1205 (7th Cir.1984).) The trustees found, in effect, that the agreement implicitly provided for acceleration of the loan if the borrower withdrew his benefits under the plan. Equivalently they found that the borrower's accrued benefits were intended to collateralize the loan; if so, withdrawal of the benefits would be a default and make the loan come due. Either way, the trustees' interpretation was reasonable, for the following reasons:

1. The plan provided that if a participant borrowed an amount greater than 50 percent of his vested benefits, the "loan" would be treated as a distribution of benefits--that is, not as a loan at all. This provision gave the plan a ready...