The opinion
In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2835
Reg G. Garratt,
Plaintiff-Appellant,
v.
James E. Knowles, Nancy Knowles,
Charles L. Knowles, Katherine Knowles
Strasburg, Margaret Knowles Schink,
E. Lawrence Keyes, R. Euguene Goodson,
Defrees & Fisk and John W. Hupp,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 764--David H. Coar, Judge.
Argued February 23, 2001--Decided March 28, 2001
Before Flaum, Chief Judge, and Ripple and Williams,
Circuit Judges.
Flaum, Chief Judge. Reg G. Garratt brought suit
in the Circuit Court of Cook County, Illinois,
alleging that the Board of Directors of Knowles
Electronics, Inc., as well as their attorneys,
had violated state law by amending a Supplemental
Executive Retirement Plan ("SERP") to escape from
paying Garratt approximately $1.85 million. The
defendants removed the case to the District Court
for the Northern District of Illinois on the
ground that Garratt’s action was of the type over
which the federal courts exercise exclusive
jurisdiction under 29 U.S.C. sec. 1132(e)(1).
Garratt filed a motion to remand the matter to
state court which the district court denied.
Thereafter, the district court dismissed
Garratt’s complaint, noting that under the
Employee Retirement Income and Security Act of
1974 ("ERISA"), 29 U.S.C. sec. 1001 et seq., a
suit to recover benefits is properly brought only
against the plan itself, and not against the
individuals who implement the plan. Garratt now
appeals the district court’s decision not to
remand this matter to the state court, arguing
that the plan at issue is an unfunded excess
benefit plan and thus exempt from the provisions
of ERISA in accordance with 29 U.S.C. sec.
1003(b)(5). Garratt further contends that the
district court compounded its error by finding
that, pursuant to the requirements of ERISA,
Garratt had failed to state a proper claim upon
which relief could be granted. For the reasons
stated herein, we affirm the decision of the
district court.
I. BACKGROUND
In 1993, Reg. G. Garratt was retained by
Knowles Electronics, Inc. ("Knowles") to be its
Chief Executive Officer ("CEO"). Four years
later, Garratt assumed the role of Chairman of
the Board in addition to his post as Knowles’
CEO. In his corporate capacities, one of
Garratt’s charges was to maximize the value and
assist in the sale of Knowles for the benefit of
the Knowles family. As an incentive for Garratt
to perform these duties, on March 15, 1998,
Garratt and Knowles mutually agreed to amend the
Employment Agreement. Pursuant to the amendment,
in consideration for his full cooperation and
assistance in furthering the corporation’s future
sale, Knowles agreed to make a special incentive
payment to Garratt in an amount equal to 0.33% of
the ultimate sale price./1 The special incentive
payment ("success bonus") was to be made to
Garratt no later than ten days after the closing.
On March 16, 1998, the Board of Directors of
Knowles adopted an unfunded SERP, which,
according to its language, was established
"solely for the purpose of providing benefits for
certain salaried employees and those of its
affiliates who participate in the Knowles
Electronics Pension Plan in excess of the
limitations imposed by the Internal Revenue Code
on the benefits available under the Knowles
Electronics, Inc. Pension Plan." The amount to be
paid to Garratt under the SERP was calculated to
be a lump sum payment of $1,349,000 upon Garratt
reaching his normal retirement age. However, that
figure did not include any portion of the success
bonus, as no sale of Knowles was pending.
Pursuant to Article 7.1 of the SERP, the Plan was
to terminate upon the sale of Knowles, with all
benefits to be paid out at that time.
More than one year later, it was decided that
Knowles would be sold to Doughty Hanson & Co.,
with the closing to take place on June 30, 1999.
As a result of the impending sale, Knowles had
the amount owed to Garratt recalculated,
computing the success bonus as earnings under the
Knowles Qualified Pension Plan. Thus it was
determined that Garratt was entitled to receive
$3,200,000. John Hupp, an attorney for Knowles,
informed the Board of Directors of the revised
amount Garratt would take in, an amount which
Hupp deemed to be excessive. At the behest of
Hupp the Board then approved a proposal to
exclude the success bonus from the SERP
calculations. Garratt abstained from the vote
where a resolution was passed amending the SERP
to provide "that for purposes of this
calculation, ’Earnings’ as defined in the
Qualified Plan shall not include any bonus or
incentive payments made by reason of the sale or
disposition of the Company under the 1989 Stock
Appreciation Plan for Key Employees."
On June 29, 1999, the day before Knowles was
sold, Garratt received $1,349,000 under the SERP,
prompting him to bring this lawsuit. Garratt’s
complaint, which was filed in the Circuit Court
of Cook County, Illinois, was brought directly
against (1) the members of the Knowles family who
received the difference between the benefits that
would have been paid to Garratt had the amendment
not been adopted and the amount Garratt received
because of the amendment, (2) the Board of
Directors who approved the amendment, and (3) the
lawyer and his firm who assisted in implementing
the amendment. The complaint alleged three state
law causes of action: tortious inference with a
prospective economic advantage, civil conspiracy,
and unjust enrichment. On February 7, 2000, the
defendants filed a notice of removal, grounded
under 29 U.S.C. sec. 1132(e)(1), which provides
in relevant part that "the district courts of the
United States shall have exclusive jurisdiction
of civil actions under this subchapter brought by
the Secretary or by a participant, beneficiary,
fiduciary, or any person referred to in section
1021(f)(1) of this title." Defendants further
noted at the time that under the complete
preemption doctrine, contained in 29 U.S.C. sec.
1144, all state common law claims falling within
the scope of sec. 1132(a)(1)(b) are displaced,
because a suit purporting to raise such state law
claims is necessarily federal in character. See
Metropolitan Life Ins. Co. v. Taylor, 481 U.S.
58, 60, 66 (1987).
After the case was removed to the District
Court for the Northern District of Illinois,
Garratt filed a motion to remand the matter to
state court, arguing that the SERP at issue was
an unfunded excess benefit plan which is exempt
from the provisions of ERISA under 29 U.S.C. sec.
1003(b)(5)./2 The district court did not agree
with Garratt’s characterization of the SERP, and
thus denied his motion to remand. Finding that a
dispute regarding benefits owed under Knowles’
SERP was guided by the provisions of ERISA, the
district court held that Garratt’s complaint did
not properly state a cause upon which relief
could be granted. Specifically, the court held
that "ERISA permits suits to recover benefits
only against a Plan as an entity," Jass v.
Prudential Health Care Plan, Inc., 88 F.3d 1482,
1490 (7th Cir. 1996), and Garratt’s complaint was
brought directly against the Board members and
attorneys of Knowles. Thus, on June 13, 2000, the
district court granted defendants’ motion to
dismiss, stating that "[t]his case is dismissed
without prejudice to the Plaintiff’s right to
bring an action against the proper entity under
ERISA." Garratt now appeals the district court’s
decision not to remand this matter to state
court. He contends that the court erroneously
determined that Knowles’ SERP was not an excess
benefit plan under sec. 1003(b)(5). As an excess
benefit plan, he posits, adjudication of a
dispute regarding money owed under this SERP need
not be guided by the jurisdictional and
procedural limitations of ERISA.
II. DISCUSSION
A. Garratt’s Motion to Remand
While Garratt’s overarching assertion on appeal
is that the district court erred in not remanding
this matter to state court, at its essence, the
parties dispute whether the SERP adopted by
Knowles should be considered an unfunded excess
benefit plan./3 Garratt contends that the Plan
should be construed as such, and that thus ERISA
does not apply. See 29 U.S.C. sec. 1003(b)(5).
Because ERISA is inapplicable, Garratt submits
that the district court did not have jurisdiction
over his complaint, which alleges only state law
causes of action. In response, the defendants
argue that the SERP does not fall within the
definition of an excess benefit plan. Rather,
they argue the SERP is a "top hat plan,"/4 and
that our case law holds that suits to recover
benefits owed under a top hat plan are governed
by ERISA. Therefore, defendants posit that the
district court correctly denied the motion to
remand.
We review a trial court’s ruling denying
plaintiff’s motion to remand a matter to state
court de novo. See Bastien v. AT&T Wireless
Serv., Inc., 205 F.3d 983, 987 (7th Cir. 2000).
As stated above, ERISA provides that "[e]xcept
for actions under subsection (a)(1)(B) of this
section, the district courts of the United States
shall have exclusive jurisdiction of civil
actions under this subchapter brought by the
Secretary or by a participant, beneficiary,
fiduciary, or any person referred to in section
1021(f)(1) of this title." 29 U.S.C. sec.
1132(e)(1). Yet, ERISA provides that its
provisions do not apply to all employee benefit
plans. Relevant for our purposes, 29 U.S.C. sec.
1003(b)(5) exempts unfunded excess benefit plans
from the reach of ERISA’s provisos./5
In determining whether the SERP at issue is an
excess benefit plan, we are guided by the
definition provided in the Act:
The term ’excess benefit plan’ means a plan
maintained by an employer solely for the purpose
of providing benefits for certain employees in
excess of the limitations on contributions and
benefits imposed by section 415 of Title 26 on
plans to which that section applies without
regard to whether the plan is funded. To the
extent that a separable part of a plan (as
determined by the Secretary of Labor) maintained
by an employer is maintained for such purpose,
that part shall be treated as a separate plan
which is an excess benefit plan. 29 U.S.C.
sec.1002(36) (emphasis added).
Consequently, our inquiry becomes one of whether
Knowles’ SERP was maintained solely to provide
benefits in excess of the limitations imposed by
sec. 415 of the Internal Revenue Code.
In Olander v. Bucyrus-Erie Co., 187 F.3d at
604, we recognized that "the statutory test for
whether a plan is an excess benefit plan [turns]
on the purposes of the plan in general rather
than on the specific way the plan applies to a
party." We stated that the decisive consideration
is whether avoiding the limitations of sec. 415
"was the sole purpose for which the employer
maintained the plan," such that even if a plan
with other purposes has only the effect of
avoiding the sec. 415 limitations in an
individual case, that plan is not an excess
benefit plan. Id. at 605.
Focusing on Knowles’ SERP, that Plan’s stated
purpose, as observed above, was to provide
benefits for certain salaried employees "in
excess of the limitations imposed by the Internal
Revenue Code." We further note that other
provisions within the SERP corroborate that
expressed design of avoiding any restrictions
imposed by the tax code. For example, Article II
of the SERP, entitled "Eligibility" specifically
states that "[a] participant who is eligible to
receive a Qualified Plan Retirement Benefit, the
amount of which is reduced by reason of the
application of the limitations on benefits
imposed by any provisions of the Code . . . shall
be eligible to receive a Supplemental Retirement
Benefit." Additionally, the sum payable under the
SERP is calculated as the difference between the
monthly amount of the Qualified Retirement Plan
to which the participant would have been entitled
to "under the Qualified Plan if such Benefit were
computed without giving effect to any limitations
on benefits imposed by any provisions of the
Code" less the monthly amount of the Qualified
Plan Retirement Benefit actually payable to the
participant under the Qualified Plan.
In Olander, we were faced with a plan which
stated three distinct purposes, one of which was
to avoid the limitations imposed by sec. 415 of
the Internal Revenue Code. See Olander, 187 F.3d
at 603. Despite the fact that Olander had claimed
that the plan applied to his particular case in
a manner such that the purpose of the plan was
only to avoid sec. 415, we determined that the
stated purpose, which was broader, could not be
ignored. Thus, we found the plan at issue in his
case not to be an unfunded excess benefit plan.
Here, our task appears to be more
straightforward. Knowles’ SERP does not reference
sec. 415 of the Internal Revenue Code, but rather
states as its purpose the intent to avoid
limitations on benefits imposed by any provisions
of the Code. While we believe that this broad
language is indicative of a desire to avoid all
possibly relevant provisions of the Internal
Revenue Code, nonetheless, Garratt argues, and we
agree, that Olander mandates that we inquire
beyond the plain language contained in a SERP to
determine whether the plan was enacted solely to
avoid the limitations imposed by sec. 415.
Garratt’s principal argument in support of his
position that Knowles’ SERP had the sole purpose
of avoiding sec. 415 of the Code is that the only
provision that the SERP could have operated to
avoid was sec. 415. We recognize that this
argument was rejected in Olander, as we stated
there that the decisive consideration was the
sole purpose of the plan and not its application
to a particular case. See id. at 605. Garratt
seeks to distinguish this case from that rule in
Olander by noting that there, the plan had a
stated purpose other than avoiding sec. 415.
Thus, he contends that the rule of Olander is
that though a plan may operate only to avoid sec.
415’s limitations, that cannot overcome the fact
that the plan does not have the stated purpose to
solely avoid sec. 415. However, Garratt suggests
that "[w]hether the SERP specifically enumerated
sec. 415 on its face is not necessarily a
condition precedent to discerning the sole
purpose of the plan was to avoid the limitations
imposed by that section." Rather, he contends
that so long as the plan does not specifically
enumerate a purpose other than avoiding sec. 415,
it is possible to consider that plan as having
the stated purpose of solely avoiding sec. 415.
Because the stated purpose of this Plan does not
rule out the possibility that this an excess
benefit plan, Garratt suggests that we may
examine how the Plan operates to determine the
purpose behind it.
We have already expressed our conviction that
the plain language of the SERP manifests a
purpose broader than that allowed for excess
benefit plans. Unfortunately for Garratt, our
further inspection confirms that the purpose of
the SERP was, as it states, to avoid any
provision of the Internal Revenue Code.
Specifically, Knowles’ SERP had the purpose of
avoiding not only the limitations contained in
sec. 415 of the Internal Revenue Code, but also
those limitations contained in sec. 401(a)(17) of
Title 26. At the time relevant to these
proceedings, sec. 401(a)(17) placed a $160,000
annual limit on the amount of compensation that
could be used to calculate pension benefits
payable from a qualified retirement plan. It is
undisputed that Garratt’s annual compensation for
the relevant period was greater than $160,000. If
avoidance of sec. 401(a)(17) were not a purpose
of the SERP, then Garratt would not have had any
of his compensation above $160,000 computed for
purposes of determining benefits under the
pension plan. While Garratt argues that sec.
401(a)(17) only has an indirect effect on
benefits paid out, we believe that the avoidance
of the limitations of sec. 401(a)(17) are
significant. Combining the stated language of the
SERP along with the significant monetary
advantage received by the avoidance of sec.
401(a)(17), we believe that the purpose of the
SERP was, as stated, to avoid the limitations on
benefits imposed by any provision of the Code.
Thus, the SERP is not an excess benefit plan, but
falls within the broader category of top hat
plans./6
Both the stated purpose of the SERP and the
nature of the benefits paid under the SERP
demonstrate that it is a top hat plan, rather
than an excess benefit plan. Because the SERP is
not an excess benefit plan, the claims presented
are exclusively within the federal courts’
jurisdiction under 29 U.S.C. sec. 1132(e). Thus,
the district court did not err in refusing to
grant Garratt’s motion to remand this matter to
state court.
B. Defendants’ Motion to Dismiss
Garratt’s second contention on appeal is that
the district court erred in granting defendants’
motion to dismiss. Specifically, he maintains
that the court incorrectly found ERISA
applicable, and thus determined that Garratt’s
complaint had been brought against the wrong
party. Garratt suggests that ERISA’s requirement
that a complaint to recover benefits under a plan
be brought against the plan as an entity is
irrelevant to these proceedings. We review the
district court’s decision to grant defendants’
motion to dismiss de novo. See McCormick v. City
of Chicago, 230 F.3d 319, 323 (7th Cir. 2000).
Having determined that Knowles’ SERP is not an
unfunded excess benefit plan, but rather a top
hat plan subject to ERISA, the resolution of this
matter becomes patent. While before the district
court Garratt had contended that even if ERISA
applied the district court erred in granting
defendants’ 12(b)(6) motion, he has since
abandoned that claim. Garratt had suggested that
despite preemption of his state law claims, ERISA
would permit his suit against the defendants for
breach of fiduciary duty. However, since a top
hat plan is exempt from ERISA’s fiduciary rules,
Garratt would have no basis to bring such a
claim. See Olander, 187 F.3d at 604. Thus,
Garratt cannot escape the rule, clearly
articulated in Jass, that "ERISA permits suits to
recover benefits only against a Plan as an
entity."/7 Jass, 88 F.3d at 1490 (emphasis
added). We therefore find that the district court
correctly dismissed Garratt’s complaint, leaving
open to him the option of bringing suit against
the SERP as an entity.
III. CONCLUSION
The district court correctly determined that
Knowles’ SERP was not an excess benefit plan and
that ERISA therefore applied. Hence, the court
rightly refused to remand the matter to state
court and appropriately granted defendants’
motion to dismiss.
For the foregoing reasons, we Affirm the decision
of the district court.
/1 On March 15, 1999, the Board of Directors
approved an amendment that provided that Garratt
would receive 0.42% of any future sale price
rather than 0.33%.
/2 29 U.S.C. sec. 1003(b)(5) states that "[t]he
provisions of this subchapter shall not apply to
any employee benefit plan if . . . such plan is
an excess benefit plan . . . and is unfunded."
/3 As a preliminary matter we must satisfy ourselves
that a final decision has been rendered in this
matter for purposes of appellate review under 28
U.S.C. sec. 1291. In granting defendants’ Fed.
R.Civ.P. 12(b)(6) motion, the district court
noted that its dismissal was without prejudice.
Yet, in ITOFCA, Inc. v. MegaTrans Logistics,
Inc., 235 F.3d 360, 363 (7th Cir. 2000), we
stated unequivocally that a dismissal without
prejudice "does not terminate the litigation in
the district court in any realistic sense and so
is not a final decision within the meaning of 28
U.S.C. sec. 1291, which authorizes the appeal of
such decisions." (internal citation omitted). In
this instance we find the district court’s
dismissal not to be a bar to our appellate
review. Though the district court did state that
the dismissal of the complaint was without
prejudice, it is clear that the court was
referring to Garratt’s right to bring his claim
against the Plan under ERISA. The finality
requirement of sec. 1291 should be applied
practically rather than technically. See id. at
364. Practically speaking, as the district court
noted, with its decision "[t]his action [was]
closed." Thus, we move on to address the merits
of Garratt’s appeal.
/4 A top hat plan is an unfunded plan the employer
maintains "primarily for the purpose of providing
deferred compensation to a select group of
management or highly compensated employees." 29
U.S.C. sec.sec. 1051(2), 1081(3), 1101(a); see
also Olander v. Bucyrus-Erie Co., 187 F.3d 599,
604 (7th Cir. 1999). Thus, it is subject to
ERISA’s enforcement provisions even though it is
exempted from ERISA’s vesting, participation,
funding, and fiduciary rules. See Olander, 187
F.3d at 604. As noted previously, the excess
benefit plan stands in contrast to the top hat
plan, in that the former is not subject to either
the enforcement or substantive provisions of
ERISA. See 29 U.S.C. sec. 1003(b)(5). In terms of
design, the difference between a top hat plan and
an excess benefit plan is, in most circumstances,
that the top hat plan can have multiple broad
purposes, while an excess benefit plan has the
sole purpose of avoiding the limitations imposed
by sec. 415 of the Internal Revenue Code.
/5 There is no dispute that the Knowles SERP was
unfunded.
/6 Garratt provides two additional arguments in
support of his position which we find
unpersuasive. First, he suggests the SERP here
was clearly intended to be an excess benefit
plan, as its stated purpose tracks the language
of ERISA’s definition of such a plan. While
Garratt’s position does evince a certain logic,
the Plan deviates from the language of 29 U.S.C.
sec. 1002(36) in the crucial aspect of which
limitations were to be avoided. As such, we
believe it equally plausible that the alteration
is a manifestation of an intentional desire to
avoid all provisions of the Code rather than
merely sec. 415. Thus, we find that the tracking
of the language of sec.1002(36) to be
inconclusive. Second, in support of his
proposition that the purpose of this Plan was to
avoid the limitations on benefits imposed by sec.
415, Garratt notes that sec. 7.6 of the SERP
requires that the Plan be construed under the
laws of Illinois. He argues that such a provision
in the SERP displays a desire on the part of the
drafters that the SERP be exempt from the
requirements of ERISA. We disagree. As we noted
above, as a top hat plan, the SERP is exempt from
ERISA’s vesting, participation, funding, and
fiduciary rules. See Olander, 187 F.3d at 604. As
such, the choice of law provision may have been
added to guide disputes in those matters other
than enforcement. Moreover, while such a
provision could be considered evidence of an
intent to avoid ERISA, we do not believe the
insertion of such a provision to overcome the
stated purpose and the nature of the benefits
paid under the SERP.
/7 Recently, in Mein v. Carus Corp., No. 00-2618,
2001 WL 167989, at *3 (7th Cir. Feb. 21, 2001),
we seized upon language contained in Riordan v.
Commonwealth Edison Co., 128 F.3d 549, 551 (7th
Cir. 1997), to clarify the holding of Jass. In
Mein, we again noted that "ERISA permits suits to
recover benefits only against the plan as an
entity," and that thus "it is silly not to name
the plan as a defendant in an ERISA suit." Mein,
2001 WL 167989 at *3. However, because often the
corporation and the plan are intertwined, with
the plan documents referring to the plan and the
company interchangeably, we noted that in certain
instances, the fact that the corporation is named
as a defendant in the suit is no barrier to
allowing the case to proceed. See id. at *3-4.
Yet, Mein does not suggest that it would be
proper for a plaintiff seeking benefits to
substitute individual corporate members as
defendants rather than the plan. Hence, we find
that Mein has no bearing on these proceedings.