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Barrowclough v. Kidder

January 18, 1985


On Appeal from the United States District Court for the District of New Jersey (Newark).

Sloviter, and Becker, Circuit Judges, and Fullam, District Judge*fn*

Author: Sloviter


SLOVITER, Circuit Judge.

The issues before us on this appeal concern (1) the scope and extent of Congress' exemption from ERISA of unfunded deferred compensation plans that exist primarily for the benefit of select managerial and highly compensated employees and (2) the interrelationship of ERISA with the arbitration requirements of the New York and American Stock Exchanges. Some of the issues raised are before an appellate court for the first time, and hence require a detailed legal exposition.



William Barrowclough was hired in August, 1980 by the Morristown, New Jersey office of Kidder, Peabody & Co., Inc. (Kidder, Peabody) as a vice-president, account representative and investment advisor. Beginning in November, 1980, Barrowclough participated in a plan established by Kidder, Peabody by which its executives earning more than $75,000 per year could reduce their tax liability by deferring up to 25 percent of their income. These sums are maintained by Kidder, Peabody in an account credited to the participating employee which accumulates with interest and which is payable to the participant or beneficiary upon the earliest of the employee's retirement, death, disability, or termination.

By the terms of the plan, Kidder, Peabody's obligation to pay a participant "the amount credited his or her Account" was to be neither funded nor secured. The title to and beneficial interest in the accounts remained with Kidder, Peabody.*fn1 The Plan also provides that payments under the Plan shall not be subject to attachment for the debts of the participating employee.*fn2

Barrowclough was discharged from employment on November 30, 1982, Kidder, Peabody claims that he mishandled customer accounts, and the company was obliged to recredit the losses to two customers' accounts. On November 1, 1982, before his termination, Barrowclough signed an agreement to pay Kidder, Peabody the approximately $165,000 that was being credited to those customers.

On December 3, and again on December 15, 1982, Barrowclough wrote to the company asking when the sums in his deferred compensation account would be paid to him and requesting an accounting of his accumulated deferred compensation. The response written by Robert Krantz, Vice-President, Secretary and General Counsel of the office of Kidder, Peabody in New York, did not give the requested accounting, but stated that the company had settled several complaints brought by Barrowclough's former customers and had paid or credited them sums "already in excess of the amounts that might have become payable to you." App. at 99a. The letter continued,

We are of the opinion that you share or have primary liability to these customers and we shall accordingly set off the amounts that we have paid and/or credited to customers against such amounts as would otherwise be payable by us to you. In view of the amounts involved, this means that we do not anticipate that we shall be making any further payments to you.


Barrowclough wrote to Krantz again on February 1, 1983 and April 8, 1983, demanding an accounting and payment. On June 16, Barrowclough filed suit in the United States District Court for the District of New Jersey against Kidder, Peabody, its Board of Directors and Management Committee, the Kidder, Peabody & Co., Incorporated Deferred Compensation Plan (Plan), and Larry Brand, Mark F. Dalton, John Moran, Robert A. Krantz, Jr., Peter R. Catalano, Jr., Andrew J. Nopper, Bruce Adam, and "John Does", as members of the Deferred Compensation Committee charged with administration of the Plan.Judith, Bryson and Gerie Barrowclough were also named as plaintiffs as the beneficiaries of Barrowclough's account (hereafter jointly referred to as Barrowclough).

The complaint contained 19 counts. Count 1 sought to enforce the terms of the Plan and asked for damages and attorney's fees under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. (1982). Count 2 sought liquidated damages for failure to provide an accounting required under sections 105(a) and 502(c) of ERISA, 29 U.S.C. §§ 1025(a), 1132(c).Count 3 alleged a breach of fiduciary duty under ERISA and common law. Count 4 claimed that Kidder, Peabody's purported set-off of Barrowclough's potential or actual liabilities against the amount in his account diverted benefits to the use of non-participants and thereby violated § 403(c)(1) of ERISA, 29 U.S.C. § 1103(c)(1). The remaining counts presented various theories at state law, including breach of contract, conversion, and statutory violations. Jurisdiction over the federal claims was based on § 502 of ERISA, 29 U.S.C. § 1132. Pendent jurisdiction was asserted over the state law claims.

By letter of July 29, 1983, Krantz sent Barrowclough an "Annual Deferred Compensation Statement" showing the account balance to have been $89,072.70 as of December 31, 1982.

On August 9, 1983, Kidder, Peabody filed a demand in a New York state court for arbitration of the claims raised in Barrowclough's complaint. It relied on agreements that Barrowclough had signed with both the New York and American Stock Exchanges to arbitrate all disputes "arising out of my employment."*fn3 The Exchanges require such agreements to be signed by brokers for all member firms.

On August 11, 1983, Kidder, Peabody filed a motion in the district court to compel arbitration under 9 U.S.C. § 4; to stay the district court proceedings under 9 U.S.C. § 3; to dismiss or grant summary judgment on Barrowclough's claims under ERISA; and to strike the claims under Counts 1, 2 and 4 for punitive damages. Plaintiffs responded with a cross-motion to enjoin the arbitration in New York and to grant partial summary judgment for plaintiffs on Counts 1, 2 and 4. Plaintiffs contested the arbitration on the grounds that the arbitration agreements Barrowclough had signed did not cover the dispute at hand or all the parties thereto, and that as a matter of federal law and public policy the court should not compel the arbitration of their claims under ERISA.

The district court issued two oral opinions on the pending motions. In its opinion of September 26, 1983, the court found that the arbitration agreement was valid and binding and covered the dispute between the parties, that the joinder of the Barrowclough beneficiaries as plaintiffs did not preclude arbitration even though they were not parties to the arbitration agreement, and also that the joinder of defendants other than Kidder, Peabody did not preclude arbitration. The court stated that it would grant defendant's motion to compel arbitration and deny plaintiffs' motion to stay arbitration, subject to modification by any subsequent decision "on the ERISA claims."

On October 19, 1983, the court issued an opinion on the ERISA issues. It held that Count 4 of the complaint did not state a claim under ERISA because the Kidder, Peabody Deferred Compensation Plan was exempt from the ERISA provision that precludes diversion of funds to the employer. Similarly, the court held that the ERISA provision requiring an accounting upon request, which formed the basis of Count 2 of the complaint, was inapplicable because an administrative regulation had exempted the Plan from the required accounting. Finally, the court held that Count 1 also failed to state a claim because it invoked the administrative and enforcement provisions of ERISA which the court concluded did not grant any substantive rights. The court stated that it would grant summary judgment for defendants on Counts 1, 2 and 4.*fn4

Before the entry of any order encompassing the holdings of these opinions, the court, on October 21, sua sponte, issued an order to "administratively terminate the action . . . without prejudice to the right of the parties to reopen the proceedings. . . ." App. at 130a. on October 25, plaintiffs filed a notice of appeal, purportedly from final judgment as incorporated in the opinions of September 26 and October 19.

On November 3, the district court "supplemented" the order of October 21 by issuing an order granting summary judgment for defendants on Counts 1, 2 and 4; denying summary judgment for plaintiffs on those same Counts; granting summary judgment in favor of defendants Adams, Catalano and Nopper, and against plaintiff Judith Barrowclough on the entire complaint; granting leave to amend the complaint to add plaintiff Dondi Barrowclough; staying further proceedings pending arbitration; and compelling arbitration on "all of plaintiffs' remaining claims" before the New York Stock Exchange.*fn5

Following the appeal, the arbitrators issued an award, holding for Barrowclough on his claim for the amount in his deferred compensation account, $89,072.70 plus interest from December 31, 1982, and holding for Kidder, Peabody on its counterclaim in the amount of $100,000.*fn6



We consider first a question of our appellate jurisdiction, an issue raised by this court.It is apparent that plaintiffs' notice of appeal, filed before entry of the order of November 3, was premature. That order, however, was final under 28 U.S.C. § 1291. In Goodwin v. Elkins & Co., 730 F.2d 99, 101-02 n.2 (3d Cir.), cert. denied, 469 U.S. 831, 105 S. Ct. 118, 83 L. Ed. 2d 61 (1984), we held that an order dismissing all of plaintiff's federal securities claims and staying proceedings on the remaining state law claims, which could be construed to have in fact compelled arbitration on those remaining state law claims, was final. The present appeal is from an order on all fours with that in the Goodwin case.

The premature notice of appeal does not oust us of jurisdiction. We have repeatedly held that a premature notice of appeal may be considered as if taken from a subsequently entered final order, absent prejudice to appellees. See Presinzano v. Hoffman-LaRoche, Inc., 726 F.2d 105, 108 (3d Cir. 1984); Cape May Greene, Inc. v. Warren, 698 F.2d 179, 184-85 (3d Cir. 1983); Richerson v. Jones, 551 F.2d 918, 922 (3d Cir. 1977). No motion listed in Fed. R. App. P. 4(a)(4) was timely filed that would render plaintiffs' notice of appeal a nullity. See Cape May Greene, 698 F.2d at 185; compare Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 60-61, 74 L. Ed. 2d 225, 103 S. Ct. 400 (1982). There being no prejudice to appellees, we will hear the appeal.



Before we turn to Barrowclough's contention that the district court erred in concluding that the complaint filed to state a cause of action because the Plan was exempt from the relevant ERISA provisions, we will sketch the general structure of the statute.


Structure of ERISA Coverage

ERISA is landmark legislation that subject a wide variety of employee benefit plans to complex and far-reaching rules designed to protect the integrity of those plans and the expectations of their participants and beneficiaries. The Act contains three subchapters, of which on the first, entitled "Protection of Employee Benefits Rights," 29 U.S.C. §§ 1001-1145, is at issue in this case. This subchapter is in turn divided into Subtitle A, 29 U.S.C. §§ 1001-1003, which contains findings, definitions and the coverage provisions governing the entire Act, and Subtitle B, 29 U.S.C. §§ 1021-1145, which contains substantive regulatory provisions as well as specific limitations of coverage. Subtitle B is further divided into five parts. Part 1 governs reporting and disclosure, 29 U.S.C. §§ 1021-1031; Part 2 governs participation and vesting, 29 U.S.C. §§ 1051-1061; Part 3 governs funding, 29 U.S.C. §§ 1081-1086; Part 4 governs fiduciary responsibility, 29 U.S.C. §§ 1101-1104; and Part 5 governs administration and enforcement, 29 U.S.C. §§ 1131-1145.

Kidder, Peabody does not argue that its deferred compensation plan is not included within the broad range of employee benefits plans covered by Supchapter I of ERISA in 29 U.S.C. §§ 1002(2) and 1003(a). Under 29 U.S.C. § 1002(2)(B), covered "employee pension benefit plans" include any employee benefit plan that:

(B) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.

However, the statute exempts deferred compensation plans from certain substantive requirements. 29 U.S.C. § 1051, which defines the scope of Part 2, covering participation and vesting, states,

this part shall apply to any employee benefit plan described in section 1003(a) of this title (and not exempted under section 1003(b) of this title) other than -- . . . (2) a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred ...

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