for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Id.
ERISA provides its maximum statutory protection to funded pension benefit plans by making them subject to elaborate accrual, vesting and funding requirements. Subchapter I of ERISA deals with "Protection of Employee Benefit Rights" and this is the subchapter that governs the plan in this case. 29 U.S.C. §§ 1001-1145. This subchapter is divided into Subtitle A and B. Subtitle B (Regulatory Provisions) is divided into five parts dealing with reporting and disclosure (Part 1 §§ 1021-31), participation and vesting (Part 2 §§ 1051-61), funding (Part 3 §§ 1081-86), fiduciary responsibility (Part 4 §§ 1101-14) and administration and enforcement (Part 5 §§ 1131-1145).
Executive deferred compensation plans are subject to none of the substantive requirements under ERISA in Parts 1-4 of Subtitle B, of Subchapter I. Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 930-31 (3d Cir. 1985); Miller, 886 F.2d at 34 n. 8. Nonetheless, these types of plans are subject to the enforcement provisions of ERISA in 29 U.S.C. § 1132(a).
In Barrowclough, which involved an unfunded executive deferred compensation plan similar to the one in this case, the court found that the plan participants could sue under ERISA to enforce the terms of their plan. 752 F.2d at 926-27. The plan gave certain executives an option to defer as much as 25% of their income to reduce their tax liability. The amount deferred was credited to an account and was to be paid after retirement, death, disability or termination of the executive. William Barrowclough sued the company under ERISA, 29 U.S.C. § 1132(a), for breaching the terms of his plan when the employer refused to pay plaintiff any of his deferred income. One of the central questions addressed by the court was whether plaintiff had a cause of action to enforce the terms of the unfunded deferred compensation plan even though the plan was exempt from the substantive provisions of ERISA.
After a detailed examination of the statutory language, structure and legislative history of ERISA, the court found that Mr. Barrowclough had a federal cause of action under ERISA's enforcement provisions, Part 5 of Subtitle B, of Subchapter I
, to enforce the terms of his unfunded deferred compensation plan despite the fact that the plan was not subject to the substantive provisions of Parts 1-4 of Subtitle B, of Subchapter I. Barrowclough, 752 F.2d at 929-30. Parts 2-4 of Subtitle B have explicit language exempting plans that are "unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees." 29 U.S.C. §§ 1051(2), 1081(a)(3) & 1101(a)(1). Regulations promulgated by the Secretary of Labor also make it clear that unfunded plans are not subject to the requirements of Part 1. Thus, Congress included explicit exemptions in the provisions it intended not to apply to unfunded plans.
The Barrowclough court concluded from the legislative history that Congress did not intend to exclude unfunded plans from ERISA entirely. 752 F.2d at 930. There is no exemption in Part 5, 29 U.S.C. 1132(a), for unfunded deferred compensation plans. Consequently, although a participant in an unfunded pension plan cannot bring claims for violations of the substantive provisions of ERISA, a participant can sue to enforce the terms of its unfunded plan.
Since the substantive law of ERISA is not applicable in cases involving unfunded deferred compensation plans, courts must look to another source of law as a basis for enforcing such plans. The Barrowclough court found that Congress intended that federal common law developed under ERISA would be the applicable law for actions enforcing these types of plans. 752 F.2d at 936-37. Thus, the court ruled that participants of unfunded deferred compensation plans have a federal cause of action under ERISA to enforce the terms of their plans based on federal common law. Id.
The Barrowclough court, however, did not reach the issue of whether federal common law principles of unilateral contract could apply to a Top Hat plan to enforce a repayment schedule in the plan. This is the issue now before this Court.
II. Top Hat Plans as Unilateral Contracts
This is a case of first impression in the Eastern District of Pennsylvania, but this exact issue was recently faced by the Northern District of California. See, Carr v. First Nationwide Bank, 816 F. Supp. 1476 (N.D. Cal. 1993). I find the Carr decision persuasive and this Court will follow the reasoning in that case.
Carr involved very similar facts to the present case. Plaintiffs in Carr were former executives of First Nationwide Bank and they sued to enforce contractual rights found in their deferred compensation plan pursuant to Section 502(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1132(a). Specifically, plaintiffs sought a declaration that defendant must repay their deferred compensation under the interest formulae in their plan and the payment schedule elected in plaintiffs' deferral notices under the plan. Plaintiffs' worked for the Bank until 1989. The Bank amended the compensation plan in 1992 and changed the repayment schedule that the plaintiffs had selected and it changed the interest formulae under the plan.
Defendant had been paying plaintiffs in accordance with their elected payout schedule until 1992 when defendant decided to pay the remainder in five lump sum installments. Plaintiffs' sought an injunction stopping defendant from violating the repayment schedule and a declaratory judgment ordering defendant to repay the money according to the terms of the plan. Alternatively, plaintiffs sought contract damages for violation of the plan. The court framed the issue as follows:
This is a case of first impression under ERISA. The question presented is whether the participants in an executive deferred compensation, or "Top Hat", plan may invoke a federal common law theory of unilateral contract to prevent the plan sponsor from amending the plan to the participants' detriment after the participants have become entitled to repayment under the terms of the plan.
The issue presented in this case is identical to the one addressed in Carr.
Plaintiffs in Carr argued that under the federal common law of contracts applicable to ERISA plans, the 1992 plan amendments violated their rights under a series of unilateral contracts formed when they filed deferral notices pursuant to the provisions of the plan. 816 F. Supp. at 1485. Moreover, they argued that the expressly reserved power to amend in the Plan did not include the power to change the interest and repayment terms as to income deferred prior to the amendment. Id at 1492-93.
Relying on Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923 (3d Cir. 1985), the court held that the principles of federal common law govern the enforcement of Top Hat plans. Carr, 816 F. Supp. at 1487. The court went on to decide that unilateral contract principles that have been applied to qualified or funded pension plans apply to Top Hat plans, which are unfunded and not qualified.
It is well settled that pension benefit plans are unilateral contracts which employees accept by performance and the plan may not be unilaterally amended or modified retroactively by the sponsor. Kay v. Thrift & Profit Sharing Plan, 780 F. Supp. 1447, 1457 (E.D. Pa. 1991); Hardy v. H.K. Porter Co., 417 F. Supp. 1175, 1183 (E.D. Pa. 1976); Pratt v. Petroleum Prod. Mngmt. Employee Savings Plan, 920 F.2d 651, 661 (10th Cir. 1990); Morales v. Plaxall, Inc., 541 F. Supp. 1387, 1391 (E.D.N.Y. 1982).
In Kay, the court explicitly followed the Tenth Circuit's holding in Pratt that a "pension plan is a unilateral contract which creates a vested right in the employees who accept the offer by continuing in employment the requisite number of years." Kay, 780 F. Supp. at 1458 (quoting, Pratt, 920 F.2d at 661). Although the above cases all involved funded pension plans and the substantive provisions of ERISA, it is clear from the Pratt case and reaffirmed by Carr that this conclusion was not based on any ERISA provisions. Carr, 816 F. Supp. at 1488; Pratt, 920 F.2d at 658-61.
The Pratt court decided first that the pension plan was a unilateral contract and therefore unilateral amendment of the plan to defeat plaintiff's fully vested rights was not allowed. 920 F.2d at 661. The court also found that such an amendment violated the substantive provisions of ERISA, but that finding was clearly not the basis for concluding that pension plans are unilateral contracts. Id.
The Carr court found that Top Hat plans resemble employee pension benefit plans as defined in 29 U.S.C. § 1002(2)(A)(ii). That section defines an employee pension benefit plan or a pension plan as:
"any plan, fund or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program (i) provides retirement income to employees, or (ii) 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 benefits under the plan or the method of distributing benefits from the plan.
It is clear that the DEC Plan (DCA and ESRP plans) in this case falls within the definition stated above. Both plans in this case provided for a deferral of income until termination and beyond. Moreover, these plans appear to provide retirement income to the plaintiffs. To the extent Top Hat plans resemble or can be considered pension benefit plans, they too should be considered unilateral contracts.
III. Federal Common Law of Contract Under ERISA
Federal common law of contract under ERISA mandates that the intended meaning of the parties should be determined, if possible, from the explicit language of the plan. Alexander v. Primerica Holdings, Inc., 967 F.2d 90, 93 (3d Cir. 1992). Moreover, if the plan language of the plan is unambiguous, its natural meaning is presumed to be conclusive of the parties' intent. Carr, 816 F. Supp. at 1493 (citing, Bellino v. Schlumberger Technologies, Inc., 944 F.2d 26, 29-30 (1st Cir. 1991). In light of the above principles, the Carr court stated:
"the policies embodied in ERISA do not prohibit Top Hat plan participants from enforcing their plans as a unilateral contracts which may not be amended without their consent, so long as the claimed contractual rights arise from the terms of the written top hat plan documents. "