Wells v. JC Penney Company

• Decision Date: 20 November 1957
• Docket Number: No. 15125.,15125.
• Citation: 250 F.2d 221
• Parties: Harvey L. WELLS and Harry J. Albertsen, on behalf of themselves, and others similarly situated, Appellants, v. J. C. PENNEY COMPANY, a corporation, and The Chase Manhattan Bank, a corporation, successor in interest to the Chase National Bank of the City of New York, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

250 F.2d 221 (1957)

Harvey L. WELLS and Harry J. Albertsen, on behalf of themselves, and others similarly situated, Appellants, v. J. C. PENNEY COMPANY, a corporation, and The Chase Manhattan Bank, a corporation, successor in interest to the Chase National Bank of the City of New York, Appellees.

No. 15125.

United States Court of Appeals Ninth Circuit.

November 20, 1957.

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King, Miller, Anderson, Nash & Yerke, Ralph H. King, Frederic A. Yerke, Jr., Paul R. Meyer, Portland, Or., for appellants.

Koerner, Young, McColloch & Dezendorf, Clarence J. Young, Wayne Hillard, Portland, Or., Pell, Butler, Curtis & LeViness, W. H. Dannant Pell, Henry Stone, C. Robert Roll, New York City, for appellees.

Before STEPHENS, Chief Judge, BARNES, Circuit Judge, and LINDBERG, District Judge.

LINDBERG, District Judge.

Appellants¹ brought this action against appellees attacking the J. C. Penney Company Profit-Sharing Retirement Plan (for Management Staff), hereinafter referred to as "Plan" on the ground that such Plan so far as it pertains to the awarding of capital stock of the J. C. Penney Company, hereinafter referred to as "Penney", is illegal and void and of no effect since it is, in effect a wagering contract, lottery or tontine contract prohibited by the constitution, statutes, laws and public policy of the state of New York. Jurisdiction is based upon diversity of citizenship.

The facts as to the Plan and the participation therein of appellants Wells and Albertsen were agreed upon as set forth in an extensive pretrial order.

Penney is a chain store operation. At the end of 1953 it had some 1634 stores located in all forty-eight states. Previous to the adoption of the Plan Penney had put into operation various stock participation plans, one of which was involved in the case of Hawke v. Commissioner of Internal Revenue, 9 Cir., 109 F.2d 946. Beginning in 1937 Penney made a study of various pension plans endeavoring to develop one suitable to Penney's needs. The Plan which we are called upon to consider herein was eventually adopted as of January 1, 1940. Pursuant thereto Penney sold 200,000 shares of its authorized unissued common stock to the designated trustee for the purpose of establishing a Trust Fund.² The Trustee borrowed the money for payment from the Continental Illinois National Bank & Trust Company of Chicago and paid Penney, pledging as security all stock and other assets of the Trustee except a sum not to exceed $150,000 which the Trustee retained for expenses.

The Plan provided that each participant³ shall contribute annually to the Trust Fund one-third of his compensation⁴ (later reduced to 20%).

Penney was required to contribute annually (a) an amount equal to 2% of the prior year's aggregate regular salary paid to all employees receiving compensation as defined in the Plan for all or any part of the respective years; (b) an amount equal to 6% of its consolidated net profits for the calendar year in excess of 15% of its common stock book value as of the beginning of such calendar year.

The Trust Fund also received all earnings, including dividends, on the Penney stock purchased by the Trustee, and after 1948 received rate credits from insurance companies.

Sixty years was fixed as the age of retirement. Between January 1, 1940 and January 1, 1945 retirement was optional at the discretion of the Board of Directors of Penney. Thereafter under an amendment to the Plan adopted in 1948 retirement became compulsory except in special cases the Board of Directors in its discretion might delay separation of any employee from the company's employment but such person must withdraw from participation in the Plan at the retirement age of sixty years. Effective January 1, 1945 optional retirement at age fifty-five was permitted in the discretion of the Board of Directors in exceptional circumstances. No participant had any right to continued employment by Penney but could be discharged by Penney without cause at any time prior to the time of acquiring retirement status. All participants so separating from the Plan before reaching retirement status were entitled to receive either in cash or in an annuity insurance contract an amount equal to the aggregate of his own contributions and in addition the other credits from the fund to which he was entitled under the Plan. In case of the death of any participant before reaching retirement status all monies due the deceased participant were payable to his proper beneficiary or legal representative. All participants upon reaching retirement status, in addition to cash or annuity covering contributions and credits from the fund, became entitled to receive shares of common stock of Penney computed according to a formula hereinafter discussed.

The foregoing is a brief outline of the background and principal features of the Plan so far as we are concerned with respect to the attack now being made upon it. As we proceed with the opinion further reference will be made to other pertinent facts as necessary.

The trial below having been by the district court without a jury findings of fact should not be set aside unless clearly erroneous. Fed.Rules Civ. Proc., rule 52(a), 28 U.S.C.A.; United States v. Foster, 9 Cir., 123 F.2d 32; Paramount Pest Control Service v. Brewer, 9 Cir., 177 F.2d 564; Puget Sound Pulp & Timber Co. v. O'Reilly, 9 Cir., 239 F.2d 607.

It is agreed that the Plan and trust agreement are to be construed in accordance with the laws of the state of New York. Appellants in this appeal are asking us to hold that the Plan so far as it pertains to the awarding of the capital stock sold to the Trustee by J. C. Penney Company to those reaching retirement status is a wagering contract or lottery or tontine contract, violative of the constitution, statutes, laws, or public policy of the state of New York. Our specific inquiry therefore is whether the highest court of New York would declare this Plan violative of the constitution, statutes, laws or public policy of the state of New York. We are not advised of any decision of the highest court of New York or any intermediate court of that state passing upon any plan by a private corporation for the retirement of its employees in any way comparable to the Plan herein. The excellent briefs of counsel for both sides show a great amount of research and many cases are discussed or cited, but they fail to disclose any case decided by the highest court in New York or of any intermediate court of that state which would appear to be controlling in passing upon the precise questions here involved. We are, therefore, called upon to determine, as best we may, what the courts in New York would hold if confronted with the controversy now presented to us. Hughes v. Mutual Life Ins. Co. of New York, 9 Cir., 180 F.2d 542; State of California, Dept. of Employment, etc. v. Fred S. Renauld & Co., 9 Cir., 179 F.2d 605; Compania Engraw Commercial E. Ind. v. Schenley Dist. Corp., 9 Cir., 181 F.2d 876.

In their Statement of Points filed pursuant to Rule 17(6) of the rules of this court, 28 U.S.C.A. appellants urged eight grounds for reversal.⁵ In presenting their arguments they departed somewhat from the Statement of Points and argued the case under two main headings: (1) the provision of the Plan and trust agreement for the award of stock is illegal and void; and (2) the Trustee holds the shares of stock under a resulting trust for those whose contributions and earnings were used in their purchase.⁶ We will consider first their contention that the provision of the Plan and trust agreement for the awarding of stock is illegal and void under New York constitution, statutes, laws and public policy. This contention includes, in substance, appellants' Points or Specifications of Error numbered 1, 2, 3, 6 and 7.

Appellants devote considerable of their argument under this contention to the proposition that "The stock scheme is a tontine contract involving wagers on the life of fellow participants in violation of New York law." They rely on Walker v. Walbridge, 151 Misc. 329, 271 N.Y.S. 473, which is a decision of an intermediate court in an action on a note given in connection with a life insurance contract involving "tontine" provisions; and on Colgrove v. Lowe, 343 Ill. 360, 175 N.E. 569, certiorari denied 284 U.S. 639, 52 S.Ct. 21, 76 L.Ed. 544; Knott v. State ex rel. Guaranty Income Life Ins. Co., 136 Fla. 184, 186 So. 176, 121 A.L.R. 715; Fuller v. Metropolitan Life Ins. Co., 70 Conn. 647, 41 A. 4; and United States Life Ins. Co. v. Spinks, 29 Ky.Law Rep. 960, 13 L.R.A.,N.S., 1053, rehearing denied 126 Ky. 405, 103 S.W. 335, appeal dismissed 209 U.S. 539, 28 S.Ct. 569, 52 L.Ed. 917. The last four of these cases directly involved insurance contracts containing some type of "tontine" provision.

The word "tontine" is defined in 1 Bouvier's Law Dict., Rawles Third Revision, page 1621:

"Tontine. A system of insurance which under various forms is based upon the idea of a loan or investment of property for the benefit of a number of persons, the income at first being divided among all and the shares of members who die passing not to their own legal representatives but to increase the interest of the surviving members, until, at last, after the number of members has gradually diminished by successive deaths, the last survivor takes the whole income, or, if such be the terms agreed upon, the whole principal. The system took its name from Lorenzo Tonti, an Italian of the seventeenth century, who first conceived the idea and put it in practice."

The word apparently is a word of art, and would seem to be properly used only in relation to insurance contracts.⁷

New York Law, 1906, c. 326 amended the insurance laws of New York so as to require annual apportionment of surplus, which had the effect of prohibiting the insertion of "tontine" provisions in life insurance policies written after the...