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KEMMERER v. ICI AMERICAS INC.

January 4, 1994

JOHN L. KEMMERER and JAMES H. JORDAN, Plaintiffs,
v.
ICI AMERICAS INC., Defendant.



The opinion of the court was delivered by: BY THE COURT; RONALD L. BUCKWALTER

 BUCKWALTER, J.

 INTRODUCTION

 Plaintiffs John L. Kemmerer ("Kemmerer") and James H. Jordan ("Jordan") brought this claim against defendant ICI Americas, Inc. ("ICI") to enforce the terms of their unfunded executive deferred compensation plans. Specifically, plaintiffs seek to enforce the repayment schedule they selected under the plans. They also seek damages caused by defendant's failure to follow the payout schedule they selected under the plans. Currently before this Court are cross motions for summary judgment filed by both parties. Defendant moved for summary judgment on the issue of liability and on the issue of damages. Plaintiffs moved for summary judgment on the issue of liability. For the following reasons this Court grants summary judgment for the plaintiffs.

 STATEMENT OF FACTS

 The facts in this case are undisputed and thus, this case is ripe for summary judgment. *fn1" Plaintiffs in this case are former high level executives of ICI. During the 1970's ICI offered certain executives an opportunity to participate in two different deferred compensation plans.

 The first arrangement was called the Deferred Compensation Agreement ("DCA Plan"). This plan was adopted in connection with the merger and acquisition of Atlas Chemical Industries, Inc. by ICI. The participants in the plan, who were former managers and executives of Atlas, agreed to surrender their Atlas stock options in exchange for ICI's promise to maintain an unfunded deferred compensation account equalling the value of the surrendered stock options.

 The DCA was amended on February 1, 1985. Participants were given the option of electing a repayment method for their deferred compensation. The 1985 plan stated:

 
Amounts deferred under this agreement shall be paid to Optionee commencing January 15 of the year following the year of his separation from service in five percentage installments. . . unless, prior to separation from service the Optionee files a written notice with the Secretary of Company, ("Secretary") requesting a different form of distribution. Such notice shall be treated as an election by the Optionee to receive payment by the method requested. The method of distribution requested shall be irrevocable after the close of business on the date of Optionee's separation from service.

 DCA1985 P 7(a), Plaintiffs' Statement of Undisputed Facts, Exhibit 3.

 In December 1974, ICI offered certain employees another type of deferred compensation plan called the Executive Supplemental Retirement Plan ("ESRP"). The ESRP required participants to annually notify the company whether and in what amounts they wished to defer their compensation for the following year and it provided that each choice was irrevocable. ESRP 1974 P 1, Plaintiffs' Statement of Undisputed Facts, Exhibit 5.

 On December 31, 1984, the ESRP was amended and it included the same exact clause allowing participants to select a method of distribution for their deferred compensation as the DCA Plan of 1985. ESRP 1984 P 4, Plaintiffs' Statement of Undisputed Facts, Exhibit 7.

 Participants in the DCA and the ESRP plans, collectively referred to as the Deferred Executive Compensation Plan ("DEC Plan"),were permitted to defer income and accumulate investment returns on a tax deferred basis. *fn2" The DEC plan (ESRP and DCA) was unfunded and thus, investment returns were accomplished by allowing participants to "shadow" or "track" the investment portfolios that were available in a separate Deferred Compensation Plan (DCP).

 The separate DCP Plan, developed by Atlas in 1958, was a funded plan that permitted participants to defer portions of their income and it required ICI to make actual contributions to the plan equal to the amounts deferred by the participants. The money was then invested by the company based on the various investment options selected by participants. The accounts of DEC participants were credited with amounts they would have received had their deferred compensation actually been invested pursuant to their shadow instructions. Since the unfunded DEC investment returns merely shadowed the funded DCP investments and were only credited to the participants' accounts, the post-retirement distributions had to be paid from the general assets of ICI as opposed to an investment trust fund like the DCP.

 Prior to their retirement, both plaintiffs, in accordance with the DEC Plan provisions, selected a method for distribution of their deferred compensation after retirement. Jordan elected to have his DEC benefits paid in specific annual amounts until the year 2007. Kemmerer elected to have his plan balance distributed in fixed annual amounts until such time as his account balance would be exhausted. Plaintiffs Jordan and Kemmerer retired in 1986 and 1989 respectively. While ICI did begin to pay plaintiffs in accordance with the distribution methods selected, in 1991 ICI decided to cease payment by the methods selected and instead, advised plaintiffs that the remainder of their account balances would be paid in three lump sum installments in January 1992, January 1993 and January 1994.

 Defendant ICI has made the first two payments and plaintiffs brought this suit claiming they have lost benefits under the DEC Plan due to the increased tax liability resulting from distribution of the compensation in lump sums. Thus, plaintiffs ask this Court to enforce the repayment method for plaintiffs deferred compensation under the DEC Plan and to grant plaintiffs damages for defendant's breach of the terms of the plan.

 DISCUSSION

 I. Enforcement of Unfunded Pension Plans Under ERISA and the Applicability of Federal Common Law

 The DEC plan at issue in this case is an executive deferred compensation plan that is generally referred to as a Top Hat plan. Miller v. Eichleay Engineers, Inc., 886 F.2d 30, 34 n. 8 (3d Cir. 1989). Top Hat plans are "employee benefit plans" within the meaning of ERISA. Pane v. RCA Corp., 868 F.2d 631, 635 (3d Cir. 1989). These plans 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. 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 *fn3" , 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 ...


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