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GALLAGHER v. CHEMETRON CORP. RETIREMENT PLAN

October 16, 1985

JOHN P. GALLAGHER, Plaintiff,
v.
CHEMETRON CORPORATION RETIREMENT PLAN FOR SALARIED AND NON-BARGAINING UNIT EMPLOYEES, CHEMETRON CORPORATION, AND ALLEGHENY INTERNATIONAL, INC., Defendants



The opinion of the court was delivered by: ZIEGLER

 The parties have stipulated as to the material facts and have submitted opposing motions for summary judgment. We find that the trustees of the Plan did not act in an arbitrary and capricious manner, and therefore defendants' motion for summary judgment must be granted.

 A. History of Case

 John P. Gallagher served as president and chairman of the board of Chemetron Corporation from 1968 until 1977, when the corporation entered into a merger with a newly-formed, wholly-owned subsidiary of Allegheny International, Inc. As a result of the merger, Allegheny acquired all of the outstanding capital stock of Chemetron. Allegheny, also a defendant in this action, became administrator of the Chemetron Retirement Plan.

 At the time of the merger, plaintiff and four officers of Chemetron held outstanding stock options under the Chemetron Stock Option Plan. However, under the terms of the merger, plaintiffs and the other officers with stock options executed an option cancellation agreement. This agreement required the option holders to surrender their option rights in return for a cash payment equal to the difference of the option price and the "market value" of the number of shares subject to option. "Market value" was defined as the average of the five highest of the last sale prices for common stock on each of the 15 full trading days immediately preceding the date of merger. Plaintiff was paid the sum of $423,250.

 After serving the merged corporation for three years as a consultant, plaintiff retired in October 1981. Shortly before retirement, he applied for pension benefits under the Chemetron Retirement Plan. Plaintiff was informed that the trustees of the Plan had determined to exclude the payment for the stock option buyout as part of plaintiff's "compensation." (Under the Plan, a monthly pension benefit is based upon the participant's average monthly compensation during the five consecutive calendar years within the last ten calendar years of service which yield the highest average.) According to plaintiff, the failure of the trustees to include the option cancellation payment from plaintiff's compensation resulted in a reduction of his pension benefits in the amount of $1,567.09 per month.

 After the Employee Benefits Appeal Committee denied the claim, plaintiff brought the instant civil action, contending that the trustees' decision to exclude the cancellation payment from the compensation figure for monthly pension benefit purposes was arbitrary and capricious. Subject matter jurisdiction is based on 29 U.S.C. § 1132.

 B. Discussion

 As the parties have noted, the standard of review is narrow in an action challenging an administrative decision in a pension plan governed by ERISA. We are limited to determining whether the trustees' act was arbitrary or capricious. Wolf v. National Shopmen Pension Fund, 728 F.2d 182, 187 (3d Cir. 1984). As a reviewing court, we must determine whether the challenged decision resulted from a "consideration of the relevant factors and whether there has been a clear error of judgment." Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285, 95 S. Ct. 438, 442, 42 L. Ed. 2d 447 (1974). In short, unless we find that the decision is irrational, we must uphold the decision of the trustees. Federal Communications Commission v. National Citizens Committee for Broadcasting, 436 U.S. 775, 803, 98 S. Ct. 2096, 2116, 56 L. Ed. 2d 697 (1978).

 In the instant case, the trustees interpreted the definition of "compensation" in the Plan and determined that the cash payment to cancel the stock option did not fall within the definition. Under the Plan, compensation is defined as follows:

 Plaintiff argues that the trustees violated the plain language and intent of this clause by excluding the stock option cancellation payment as compensation. Plaintiff maintains that the options were granted in 1973 and 1976 as "incentive compensation," designed to keep plaintiff in the employ of Chemetron and to encourage him to maintain or increase the profitability of the corporation. Plaintiff concludes that the payment marked the liquidation of this "compensation."

 Defendants view the payment in a different light. They argue that the payment was not compensation for personal services but a contractual settlement negotiated as part of the merger agreement. It is this interpretation of the stock option cancellation agreement that we must consider in ...


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