Opposition Brief — Robinson v. Administrative Committee of the Sea Ray Employees' Stock Ownership & Profit Sharing Plan
Supreme Court brief2000
Ask Donna
What actually matters in this document.
Text
Sopra Mest,
RIES
No. 98-1971
ALC :
In The | OFFICE OF
Supreme Court of the United States
> ie
DANIEL ROBINSON, ET AL.,
Petitioners,
ADMINISTRATIVE COMMITTEE OF THE
SEA RAY EMPLOYEE’S STOCK OWNERSHIP
AND PROFIT SHARING PLAN, ET AL.,
Repondents,
and
SHARON BALDOCK, ET AL.,
Respondents.
— — a
On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The Sixth Circuit
—--@ —
BRIEF IN OPPOSITION FOR RESPONDENTS
SHARON BALDOCK, ET AL.
°
JONATHAN D. Reep
Counsel of Record
RONALD T. Hits
Joe Mont McAret
MicHaet T. McCLiAMRoOcH
EGerton, McArrre, ARMISTEAD
& Davis, P.C.
500 First American Center
507 South Gay Street
Knoxville, Tennessee 37902
(423) 546-0500
Counsel for Respondents
Sharon Baldock, et al.
Class II
COCKLE LAW BRIEF PRINTING CO, (800) 225-6964
OR CALL COLLECT (402) 42-2831
QUESTION PRESENTED
Whether the Magistrate Judge, district court, and
Sixth Circuit properly determined, on the basis of well-
settled law and uncontested facts established through the
parties’ cross-motions for summary judgment, that
respondents’ determination that no partial termination of
the Plan had occurred was not arbitrary and capricious
but reasonable and correct.
li
RULE 29.6 STATEMENT
Respondents are not corporations. Respondents are
present and former Sea Ray employees who are or were
participants in the Sea Ray Employees Stock Ownership
and Profit Sharing Plan.
TABLE OF CONTENTS
Page
STE CIEE c corcececccecenvsesecceses i
EE SY RUEREEET oc vccccecccccoseeesenceeces il
EE SE ENCE cdcccccccccovcesetéoveeeues iii
DE EE PRRFREUEEEUED 6 occ ccccecicovesescecsoes iv
TT vccceveeseye pneeectedecdveseeveens cone |
1. THE SEA RAY EMPLOYEES’ STOCK OWNER-
SHIP AND PROFIT SHARING PLAN ....... 2
2. RECENT HISTORY OF PLAN AND THE
SPONSORING EMPLOYER...............+.-- 5
3. ADMINISTRATIVE DETERMINATIONS OF
Mh fee | pg) | errr errr 8
4. PROCEEDINGS OF THE LOWER COURTS... 9
REASONS FOR DENYING THE PETITION......... 13
I. THE SIXTH CIRCUIT AND THE DISTRICT
COURT PROPERLY APPLIED THE STAN-
DARDS OF FIRESTONE TIRE & RUBBER CO.
Dy PEE Go bevtrscedscussccecoserevesecessse 14
Il. DID THE COURT OF APPEALS PROPERLY
APPLY THE CLEARLY ERRONEOUS STAN-
DARD OF REVIEW TO THOSE CONCLU-
SIONS CRUCIAL TO THE HOLDING OF THE
3) 6 @ Gee)» errr rer ee 25
ae a 2). | rere rr er err eee 30
iV
TABLE OF AUTHORITIES
Page
Cases Crrep:
Anderson v. Great West Life Assurance Co., 942 F.2d
ff Fo B , errrrer rer rT Trier 17, 18, 19
Baxter By and Through Baxter v. Lynn, 886 F.2d 182
See Gb WEES wo 64 dnb deeb ecedetaces aeevanecteunns 15
Cathey v. Dow Chem. Co. Med. Care Program, 907
Pee Ge Ge Ge HON hs cccccccsacésvcccenédess< 15
Collignon v. Reporting Serv. Co., 796 F. Supp. 1136
Cal A CEE a nedkpueseverrensetesbudanetetesuns ed 28
Davis v. Kentucky Fin. Co. Retirement Plan, 887 F.2d
are 20, 24, 25
Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101
SEU se rcascneuenrsdetsacececurs 1, 10, 14, 16, 19, 20
Gauer v. Connors, 953 F.2d 97 (4th Cir. 1991)......... 22
Halliburton Co. v. CIR, 100 T.C. 216 (1993), aff'd, 25
fo fF Ff f* % Serer rr rrrTe 27, 28
In re Gulf Pension Litig., 764 F. Supp. 1149 (S.D.
Tex. 1991, aff'd sub nom., Borst Chevron Corp., 36
F.3d 1308 (5th Cir. 1994), cert. den., 514 U.S. 1066
FUP ss Oe éuvacacdeowevawseceseduaveecsuunaeens 26, 27
Jordan v. Retirement Committee of Rensselaer Poly-
technic Institute, 46 F.3d 1264 (2nd Cir. 1995)...... 21
Kearney v. Standard Ins. Co., __ F.3d __, Nos.
96-16539, 96-16701, 1999 WL 246485 (9th Cir.
PUPS een deneuenednelwaheneuiin hen eeebacuhennere es 17
Kirwan v. Marriot Corp., 10 F.3d 784 (11th Cir. 1994) .... 16
Kreis v. Charles O. Townley, M.D. & Assoc., P.C., 833
ee Fe ee Wk MD osc cevkvascensevdetes 25, 26, 29
TABLE OF AUTHORITIES —- Continued
Page
Morales v. Pan Am. Life Ins. Co., 718 F. Supp. 1297
(E.D. La. 1989), aff'd, 914 F.2d 83 (Sth Cir. 1990) .... 28
Moon v. American Home Assurance Co., 888 F.2d 86
(11th Cir. 1989)....... Pe ee a a pe ae 15
Penn v. Howe-Baker Eng’rs, Inc., 898 F.2d 1096 (Sth
Cie. TSRGD ccc cccvecvccescesccesescvcsssecsescusees 21
Perez v. Aetna Life Ins. Co., 150 F.3d 550 (6th Cir.
fk f. - eerererrrrrrr rrr rrr rer 1S, i7
Pratt v. Petroleum Prod. Management, Inc. Employee
Sav. Plan & Trust, 920 F.2d 651 (10th Cir. 1990).... 21
Tipton & Kalmback, Inc., 83 T.C. 154 (1984). .......... 26
Weil v. Retirement Plan Admin. Comm'n, 913 F.2d
1045 (2nd Cir. 1990), rehearing, 933 F.2d 106 (2nd
te: SOOEE < vcéevevens dvd avnsveesavineeeaste 21
Wulf v. Quantum Chem. Corp., 26 F.3d 1368 (6th Cir.
Bec ccveseednds50tshobesansesvescdeesuewescuaeesss 18
Statutes CIrep:
20 U.S.C. §§ 1002(3), (34)... ceccrcccccccecceesccees 2
26 U.S.C. § 401 et Sseq...... ccc cece cc eres ceeessvees 2, 18
BG UBL... © GER oo vc cvccustcedesidsssitsesveccsacusess 3
y Bik Tot FT :) PPYPVITTTTERTITiT erie 3
26 U.S.C. § S11(GNMS). ccc ccccccccvccccccvcevess 4,5, 19
Re SE nui occucnsekueeeeseenane ees 5
vi
TABLE OF AUTHORITIES - Continued
Page
REGULATIONS CITED:
» OE ORY | MPPPOTTTTITITTITT ITT 3
BOGGS. TOR, B DATE COPS cc ccccccccvecccevceceeess 20
TOGRE. TGR, B EASE GSE) oc cccccccccvvsvevvsvese 28
STATEMENT
This action was initiated by Respondents, the Admin-
istrative Committee (the “Committee”) of the Sea Ray
Employees’ Stock Ownership and Profit Sharing Plan (the
“Plan”) and individually the members of said Committee,
William J. Barrington, Diane M. Yaconetti, and William R.
McManaman, by the filing of a class action complaint for
declaratory judgment in the United States District Court
for the Eastern District of Tennessee Northern Division.
The primary issue “involved a determination as to
whether the Committee was correct in its prior finding
that a partial termination of the Plan had not occurred
during Plan fiscal years 1989 and 1990 as a result of a
significant reduction in the workforce of the sponsoring
employer and the resulting reduction in the number of
participants in the Plan. Following the filing of cross-
motions for summary judgment by the parties the district
court adopted the extensive and comprehensive report of
the Magistrate Judge and entered a finding that a partial
termination had not occurred. Substantial deference was
given to the determination of the Committee pursuant to
the arbitrary and capricious standard of review applied
by the district court under the standards of Firestone Tire
& Rubber Co. v. Bruch, 489 U.S. 101 (1989). A panel of the
Sixth Circuit Court of Appeals unanimously affirmed the
lower court’s decision by finding that the proper stan-
dard of review had been applied. A subsequent request
for en banc hearing was denied. This Court is now asked
to reverse the consistent and comprehensive findings of
the lower courts. Such action is not justified.
It should be here noted that Respondent Class II has
a similarity of interest with Respondent Committee. As a
result Class II is familiar with the brief filed on behalf of
the Committee and in this response brief may make refer-
ence to the appendices contained therein.
1. The Sea Ray Employees’ Stock Ownership and
Profit Sharing Plan
The Plan is a combination Employee Stock Owner-
ship Plan (“ESOP”) and Profit Sharing Plan qualified
under the Employee Retirement Income Security Act
(“ERISA”), 20 U.S.C. §§ 1002(3), (34) and the Internal
Revenue Code (the “Code”), 26 U.S.C. § 401 et seq. As a
result of such qualification the sponsoring employer, Ray
Industries, Inc. (“Sea Ray”), may make annual contribu-
tions to the Plan on behalf of its participating employees
and deduct those contributions as salary expense for
federal income tax purposes. Employees are not permit-
ted to make elective deferrals of salary or compensation
into the Plan. All contributions are invested in either
qualifying employer securities (typically stock of the
sponsoring employer or its parent company) or diver-
sified investments. Pet. App. 3, 22.
An employee becomes a participant in the Plan after
one year of service with the sponsoring employer. Each
participant has an individual account that receives alloca-
tions of the annual contributions based upon a formula
contained in the Plan. Due to the qualified status of the
Plan under ERISA and the Code the employees are not
required to recognize income on these contributions until
the assets are distributed outright to the employee upon
termination of service with the sponsoring employer. Pet.
App. 3-4. The accounts are maintained in a trust which is
a tax-exempt entity under the Code. As a result any
income generated by the assets of the trust is not taxed
until distribution of the account to the individual plan
participant. 26 U.S.C. § 402. No additional benefits are
provided to the participants under the Plan. Upon termi-
nation of employment with the sponsoring employer a
participant is entitled only to the distribution of his/her
account. Pet. App. 3.
Participants are not automatically entitled to the
entire balance of their account upon termination of
employment. The Plan employs the following incremental
vesting schedule as permitted under the Code:
Years of Service Vested Percentage
Less than 3 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 or more years 100%
Plan § 10; Pet. App. 3-4; 26 U.S.C. § 411; Treas.
Reg. § 1.411.
If a participant terminates service with the sponsor-
ing employer prior to the completion of seven years of
service with the company, the nonvested portion of the
participant’s account is forfeited and reallocated among
the remaining participants in the Plan. Plan §§ 6, 10; C.A.
App. 52, 60; Pet. App. 4, 23.
Pursuant to the qualification requirements of the
Code, the Plan contains a provision addressing the effect
of a partial termination of the Plan. In such case each
participant would immediately become 100% vested in
his/her individual account balance regardless of the
years of service rendered to that date. 26 U.S.C.
§ 411(d)(3), Plan § 19, Pet. App. 4, 100.
The Plan is administered by the Committee which is
given a broad grant of administrative authority. In partic-
ular, Section 16(c) of the Plan provides:
The Committee shall have all powers neces-
sary to enable it to administer the Plan .. . in-
cluding without limitation the following:
(1) resolving all questions relating to the
eligibility of Employees to become Par-
ticipants;
(2) determining the appropriate alloca-
tions to Participants’ Accounts .. . ;
(3) determining the amount of benefits
payable to a Participant .. . , and the
time and manner such benefits are to
be paid;
(7) construing and interpreting the Plan
. . and adopting rules for administra-
tion of the Plan that are consistent with
the terms of the Plan documents and of
ERISA and the Code... .
Plan § 16(c).
The Committee has consistently consulted with legal
counsel to insure that all issues are properly and ade-
quately addressed and to determine the full scope of its
authority and discretion. Pet. App. 84-86.
The Plan is on a July 1 to June 30 fiscal year.
Section 19 of the Plan provides that if “the Plan is
terminated (or partially terminated) . . . the Accounts of
Employees affected by the termination will become non-
forfeitable as of the date of termination. . .. ” This
provision is required pursuant to the Code and to ERISA
for qualification as a tax-exempt trust and plan. Pet. App.
100; 26 U.S.C. § 411(d)(3); 29 U.S.C. §§ 1001-1461.
2. Recent History of Plan and the Sponsoring
Employer.
Sea Ray is a manufacturer and marketer of fiberglass
recreational boating craft producing a full line of product
from sport boats to luxury motor yachts. The recreational
nature of the product line results in consumer decisions
that are highly discretionary in nature and sensitive to
overall economic conditions. There are no other product
lines and no manufacturing capability in areas other than
boat manufacturing. Pet. App. 3, 28; C.A. App. 871.
During the 1980’s the boating industry in the United
States experienced an unprecedented growth cycle. From
1983 to 1986 annual sales grew at an average rate of 35%
per annum. This was reflected in Sea Ray’s own sales
performance. Pet. App. 27. This growth accelerated even
further in 1987 and 1988. However, in calendar year 1989
Sea Ray noticed a small drop in total sales followed by a
major and significant reduction in sales during calendar
years 1990 and 1991.
Year Units Sold
1985 12,456
1986 15,916
1987 22,355
1988 24,538
1989 23,214
1990 14,343
1991 10,542
Pet. App. 30.
The number of participants in the Plan naturally
followed the sales of the company as the workforce was
increased to meet the higher production requirements of
the mid to late 1980’s. At the beginning of the growth
cycle Sea Ray was operating production facilities at seven
locations. By July 1, 1989 the company had thirteen man-
ufacturing facilities in operation. On July 1, 1985 there
were 1,501 participants in the Plan. Pet. App. 27. By July
1, 1989 there were 3,832 plan participants. Id. at 27.
The drop in sales affected the entire product line
except for the luxury motor yachts, the sales of which
initially remained stable. However, in 1990 a federal “lux-
ury tax” was implemented which was designed to be
applied based upon the price and character of certain
consumer products. The luxury motor yachts were within
the price range characterizing these consumer products
and therefore were subject to the tax. This tax had an
immediate effect upon sales in this product line resulting
in decreased sales and production of these items. Id. at
4-5, 29, 65.
The drop in sales resulted in a reduction of produc-
tion and a corresponding decrease in employees and Plan
participants. An initial reduction was implemented in
March and April of 1989. Sea Ray initially attempted to
minimize the layoffs and stabilize the workforce, how-
ever, as sales figures for July, August and September were
analyzed additional layoffs were deemed necessary and
were announced in November 1989. One plant was closed
and operations were consolidated and streamlined at
other plants. The reduction in workforce was reflected in
the December 1989 and January 1990 employment statis-
tics. Id. at 31-34.
Employment was stabilized from February through
June of 1990 when the number of plan participants stood
at 3,060. Complt. { 52, Pet. App. 29. The total number of
plan participants for fiscal year 1990 was 4,084 computed
by reference to the number of participants as of the
beginning of the fiscal year (July 1, 1989), 3,832, plus the
number of participants added during the year, 252. Pet.
App. 38-39.
As a reaction to the continued slump in sales and
projected orders from dealers, terminations were once
again initiated in July, 1990 and continued on a periodic
basis though the remainder of calendar year 1990 with
the closing of two additional facilities. Pet. App. 34-37.
In the later portions of calendar year 1990 Congress
passed and the President signed into law the aforemen-
tioned luxury tax. As of the beginning of the 1991 fiscal
year (July 1, 1990) the Merritt Island, Florida and Palm
Coast, Florida manufacturing facilities had among their
employees 841 plan participants, only 30 fewer partici-
pants than were in the Plan on June 30, 1989. However,
on June 30, 1991 these two facilities had only 538 plan
participants remaining. Pet. App. 38. A disproportionate
percentage of the workforce reduction at these facilities
occurred in fiscal year 1991. This corresponded to the
passage and implementation of the luxury tax.
The total number of participants during fiscal year
1991 was 3,111 computed by reference to the number of
participants as of the beginning of the fiscal year (July 1,
1990), 3,060, plus the number of participants added dur-
ing the year, 51. Pet. App. 39. As of June 30, 1991, the end
of the time frame here in question, the number of plan
participants had declined to 1,968. Complt. J 53; Pet.
App. 29-30. For the two year time frame July 1, 1989
through June 30, 1991 the total number of plan partici-
pants had declined from 4,139 to 1,968. Id.
3. Administrative Determinations of Plan Com-
mittee.
As a result of the reductions in plan participation
associated with the contraction of the sponsoring
employer’s workforce, the Committee initiated a review
of the status of the Plan pursuant to the authority granted
the Committee under Section 16 of the Plan. The primary
purpose of these deliberations was to determine if a
partial termination of the Plan had occurred. Pet. App.
84-86. The review of the Committee extended over two
separate meetings in June 1992 during which the Com-
mittee sought the advice of legal counsel to insure that a
full and complete evaluation was performed. Id. A
number of factors were taken into account by the Com-
mittee including the percentage of participants termi-
nated, the causative events triggering the reduction in
force, and the absence of any financial benefit to the
sponsoring employer. Id. As a result of these delibera-
tions the Committee determined that a partial termina-
tion of the Plan had not taken piace.
4. Proceedings of the Lower Courts.
The Committee initiated this action by the filing of a
complaint for declaratory judgment in the United States
Federal Court for the Eastern District of Tennessee North-
ern Division. In that complaint the Committee asserted
the existence of two separate classes of defendants and
asked the court to certify each class. Under order of said
court dated April 13, 1993 the two classes were defined as
follows:
Class I: All former Sea-Ray employees who
were participants in the Plan and
whose service as employees ended
between July 1, 1989 and June 30,
1991, and who had an interest in the
plan that was not fully vested, as
well as the beneficiaries of those for-
mer Sea-Ray employees; and
Class Il: All present and former Sea-Ray
employees who are or were partici-
pants in the plan and who may be
entitled under the terms of the plan
to receive a portion of the forfeitures
resulting from the termination of
employment of members of Class I,
as well as the beneficiaries of those
present and former Sea-Ray
employees.
Pet App. 21-22.
10
The Committee seeks a declaration (i) that a partial
termination of the Plan has not occurred as the result of
the loss of plan participants; (ii) that the members of
Class I are not therefore entitled to the accelerated vest-
ing of their previously nonvested account balances; and
(iii) that the nonvested balances of the members of Class I
are to be deemed forfeited upon their termination of
employment and such balances are to be reallocated to
the continuing participants of the Plan pursuant to the
provisions of the Plan.
Class I is the petitioner in this action. Class II and the
Committee are the co-respondents. Following limited dis-
covery, as agreed in informal pre-trial conference, the
parties filed cross-motions for summary judgment. Said
motions and subsequent oral arguments were heard by
United States Magistrate Judge Thomas S. Phillips pur-
suant to order of reference entered by the district court.
Pet. App. 20. The Magistrate Judge issued an exhaustive
and comprehensive 79 page report which recommended
to the district court that the summary judgment motions
of the Committee and Class II be granted and that the
motion of Class I be denied. Id. at 19, 88.
In the first step of his review the Magistrate Judge set
forth the appropriate standard of review of the Commit-
tee’s action. Citing Firestone Tire & Rubber Co. v. Bruch, 489
U.S. 101 (1989) the Magistrate Judge determined that the
findings of the Committee would not be disturbed unless
it was determined that they had been arbitrary and capri-
cious. In applying the Bruch standard the Magistrate
Judge found that Section 16(c) of the Plan gave the Com-
mittee the discretion and authority to construe and inter-
pret the Plan and to determine the benefits payable to the
11
Plan participants. The Magistrate Judge reasoned that
such authority logically extends to the determination of
whether a partial termination has taken place pursuant to
Section 19 of the Plan. Pet. App. 44-45. As a result of the
discretion granted to the Committee in determining the
occurrence or nonoccurrence of a partial termination the
arbitrary and capricious standard was found to be appro-
priate. Id.
Upon setting the standard of review the Magistrate
Judge proceeded in a review and analysis of the facts and
circumstances surrounding the constriction of the Plan
and the application of these factors to the standard of
law. In doing so reference was made to both regulatory
and judicial authority including administrative and regu-
latory rulings issued by the Internal Revenue Service,
internal guidance provided by the Service to its agents,
and case law originating from both within and outside of
the Sixth Circuit. Id. at 47-79.
There were two areas of significant controversy
which were resolved by the Magistrate Judge in making
his decision. The first involved whether multiple trigger-
ing events had occurred which justified dividing the two
plan years constituting the 1989-1991 time frame into two
separate testing periods. The second involved the ques-
tion as to whether all terminations (voluntary, involun-
tary, retirement, disability and termination for cause)
should be used in computing the percentage of plan
participants terminated in relation to the triggering
events. Id.
12
The Magistrate Judge concluded that there were in
fact two separate triggering events (referred to as “corpo-
rate events”). The first was the initial falloff of sales in the
recreational boating line pursuant to a decline in the
overall economic environment. The second was the
advent of the luxury tax and its effect on the luxury
motor yacht sales. However, this finding was not solely
based upon the second triggering event. The Magistrate
Judge specifically cited judicial and regulatory authority
for segregating the time frame in question into multiple
years for the computation and analysis of the percentage
of terminated participants (the “significant percentage”)
when participant terminations are the result of industry
volatility and occur in a multi-year time frame. Id. at 65.
The Magistrate Judge further concluded that in com-
puting the significant percentage of employees termi-
nated in relation to the triggering event, the court would
not count those employees who retired, died, became
disabled, were terminated for cause or who left volun-
tarily as having been terminated in relation to the trigger-
ing event(s) and therefore were not to be included as
terminated employees. Id. at 65-76.
The Magistrate Judge determined that there were no
factors present other than the numerical contraction of
the Plan upon which a finding of partial termination
could be based. He further concluded that the percentage
of plan participants terminated pursuant to the triggering
events was insufficient to support such a finding. Id. at
87. Based upon these considerations the Magistrate Judge
made his finding as set forth above.
13
The district court accepted the report and recommen-
dation of the Magistrate Judge and found that the report
“was clearly correct” in applying the arbitrary and capri-
cious standard of review. The district court itself con-
ducted a de novo review of the record and agreed that the
percentage of plan participants terminated was insuffi-
cient to justify a finding that a partial termination had
occurred. Id. at 17. The motions of the Committee and
Class II for summary judgment were granted. Id. at 19.
The Sixth Circuit reviewed the district court’s grant
of summary judgment de novo. The district court’s deci-
sion was upheld by unanimous decision of a three judge
panel. Id. at 9. Specifically the court of appeals deter-
mined that the Plan did give the Committee the requisite
discretionary authority to determine whether a partial
termination had taken place thereby triggering the arbi-
trary and capricious standard of review. Id. at 9-10. The
court of appeals approved and adopted the percentages
and methodology applied by the district court and Magis-
trate Judge. Id. at 12-14. Finally, the Sixth Circuit found
that the Committee’s determination “was neither arbi-
trary nor capricious” and that a partial termination of the
Plan had not occurred as a result of the reduction in plan
participants during the time frame in question. Id. at 15.
Petitioners’ subsequent request for en banc rehearing
was denied. Id. at 94-95.
4
REASONS FOR DENYING THE PETITION
The petition for certiorari asserts that the issues pre-
sented are proper for consideration by this Court due in
14
part to errors by the lower courts in the interpretation
and consideration of various factual matters and due in
part to conflicts between the circuits on questions of law.
Petitioners’ position is not justified in either case. The
issues presented for review by this Court do not warrant
further consideration for the reasons set forth below.
I. THE SIXTH CIRCUIT AND THE DISTRICT COURT
PROPERLY APPLIED THE STANDARDS OF FIRE-
STONE TIRE & RUBBER CO. V. BRUCH.
A. Application of the Arbitrary and Capricious
Standard of Review.
Petitioners assert error in the Sixth Circuit’s finding
that the Plan grants the requisite discretionary authority
to support judicial deference to the determinations of the
Committee. Additionally, Petitioners claim that the stan-
dards as set forth by the Sixth Circuit are in conflict with
the holdings of other circuits. Pet. 9-11. However, the
attempts by Petitioners to demonstrate these conflicts
only show Petitioners’ own failure to fully comprehend
the holding of this Court in Firestone Tire & Rubber Co.,
489 U.S. at 115. In the Firestone decision this Court ruled
that “a denial of benefits . . . is to be reviewed under a de
novo standard unless the benefit plan gives the adminis-
trator or fiduciary discretionary authority to determine
eligibility for benefits or to construe the terms of the
plan.” Id. at 115.
The difficulty for Petitioners is that this Court did not
require that the grant of discretionary authority be
dependent on the incantation of the word “discretion” or
some other magic word. Instead this Court directed lower
15
courts to focus on the breadth of the administrators’
power and their “authority to determine eligibility for
benefits or to construe the terms of the plan.” Id.
Petitioners seek to demonstrate conflict between the
circuits by the citation of a series of cases with single
sentence summaries of the various holdings. Pet. 10. Such
an exercise is overly simplistic and the claimed conflict
disappears upon complete review of the cases and their
holdings. While space does not permit a full review of the
authority cited by Petitioners, any apparent conflict is
typically the result of factual differences rather than
interpretive decisions of law by the courts.
A majority of the cases in this arena deal with denial
of benefits by a plan to one or more participants. A
significant number of these cases involve health care,
disability or death benefits provided by an employer or
third party insurance provider. Perez v. Aetna Life Ins. Co.,
150 F.3d 550 (6th Cir. 1998) (en banc) (denial of long-term
disability benefits); Cathey v. Dow Chem. Co. Medical Care
Program, 907 F.2d 554 (5th Cir. 1990) (termination of long-
term nursing care benefits); Moon v. American Home Assur-
ance Co., 888 F.2d 86 (11th Cir. 1989) (denial of claim for
accidental death benefits); and Baxter By and Through
Baxter v. Lynn, 886 F.2d 182 (8th Cir. 1989) (subrogation
claim related to employee who had previously obtained
benefits from health plan). These cases rarely involve the
interpretation of a benefit plan that has the comprehen-
sive structure of the Plan which was drafted with the
intention of being employer sponsored and administered.
As a result the lower courts have labored in deter-
mining whether empowerment clauses tailored to narrow
16
claims issues provide discretionary authority to the plan
administrator sufficient to avoid de novo review and sup-
port the deferential capricious and arbitrary standard of
review. This has been especially true when the empower-
ment clause is examined within the context of the plan
instrument as is present in much of the authority cited by
Petitioners. For instance, in Kirwan v. Marriott Corp., 10
F.3d 784 (11th Cir. 1994) a discharged employee was
seeking long-term disability benefits under an employee
benefit plan. The plan fiduciary claimed that its decision
should be reviewed under the arbitrary and capricious
standard because the plan stated that the fiduciary had
“authority to control and manage the operation and
administration of the Plan.” The Eleventh Circuit noted
that
Marriott may ‘control and manage’ the Plan, but
it must do so in accordance with the terms of the
Plan and there is no grant of authority to construe
these terms. . . . The Plan contemplates that the
administrator will determine whether a benefit
is properly payable; however, there is no grant
of discretion to accompany this mandatory func-
Oem. ...
(Emphasis added.) Id. at 789. The Eleventh Circuit hold-
ing is a strict application of the Firestone standard but it is
consistent with the overall approach by the courts in
taking the grant of authority in the context of the plan
instrument. Despite Petitioners’ assertions to the con-
trary, the Sixth Circuit has applied the same sort of rea-
soning by stating that “discretion is not an all-or-nothing
proposition. A plan can give an administrator discretion
with respect to some decisions but not others. .. . A plan
17
administrator has exactly the amount and type of discre-
tion granted by the plan, no more, and no less.” Anderson
v. Great West Life Assurance Co., 942 F.2d 392, 395 (6th Cir.
1991).
Petitioners assert the existence of conflict between
the circuits by specific citation to two cases. The first is
the 6th Circuit’s en banc decision in Perez v. Aetna Life Ins.
Co.,150 F.3d 550 (6th Cir. 1998) (en banc). The second is the
Ninth Circuit’s en banc decision in Kearney v. Standard Ins.
Co., ____ F.3d ___, Nos. 96-16539, 96-16701, 1999 WL 246485
(9th Cir. 1999). Both cases involve the denial of disability
insurance claims by the insurance providers acting as
third party administrators of an employer’s disability
plan. While it is true that the circuits disagreed on the
construction of similar language contained in the plans
that disagreement can hardly provide justification for
review of this action. The conflict in opinion stemming
from the Perez and Kearney decisions involves the deter-
mination as to whether a requirement for “satisfactory
written proof” of a disability confers discretion upon the
plan administrator to determine if the disability exists.
Kearney, at __, 1999 WL 246485, at *5; Perez, 150 F.3d at
555-556.
Such disagreement can in no way be applicable to the
fact pattern presented in this case. As set forth above, the
Plan was a complete and comprehensive employee bene-
fit plan drafted so as to qualify under both ERISA and the
Internal Revenue Code. Such plans are highly technical in
nature and are subjected to Internal Revenue Service
approval through the filing of qualification applications
with the Service before they are granted tax qualified
18
status. 26 U.S.C. § 401. The scope of authority and discre-
tion necessary to properly administer such a plan must
and should be significant. This properly provides a con-
text for the analysis of a specific grant of authority and
the intended scope of such grant.
However, the most surprising aspect of Petitioners’
application is their assertion that by the circuit court’s
decision in this case the Sixth Circuit is in conflict with
itself. Pet. App. 13. To make this argument Petitioners are
once again attempting to draw broad conclusions from
judicial determinations that were intensely factual. The
case cited by Petitioners is Wulf v. Quantum Chem. Corp.,
26 F.3d 1368 (6th Cir. 1994).
The Wulf case involved the review of a determination
of a plan administrator as to the amount of plan benefits
to be distributed to the employees based upon their ter-
mination of employment resulting from the sale of the
plant where the employees worked. Pursuant to the origi-
nal provisions of the plan in question the terminated
employees were entitled to the vested portions of their
plan accounts. The sponsoring employer, however, retro-
actively amended the plan so as to reduce the value of the
employees’ vested benefit and the plan administrator
sought to value the accounts in accordance with the
amendment. Id. at 1370-1371. The administrator claimed
that the arbitrary and capricious standard of review was
appropriate due to the authority granted under the plan
whereby “the Committee from time to time shall establish
rules for the administration of the Plan and the transac-
tion of its business. The determination of the Committee
as to any disputed questions shall be conclusive.” Id. at
1373. Citing Anderson v. Great West Life Assurance Co. the
19
Court rejected the position of the plan administrator and
noted the absence of any discretionary language speci-
fically related to the issues attendant to the disputed
transaction. Id.
In this action the grant of authority under the Plan
specifically gave the Committee “all powers neces-
sary ... to administer the Plan,” but more importantly
also the authority to determine the eligibility of
“Employees to become Participants,” to determine “the
amount of benefits payable to a Participant,” and most
significantly the power to construe and interpret “the
Plan and the Trust Agreement .” Plan § 16(c). The court of
appeals found such language to be a sufficient grant of
discretionary authority not because of any individual
phrase or magic word but because of the context and
scope of the grant of power. Pet. App. 9-10. The deter-
mination of the Sixth Circuit was well-reasoned and well-
based in precedent both outside and within the circuit.
The finding of the court of appeals was solidly grounded
in the principles of Firestone. The arbitrary and capricious
standard of review was properly applied and should not
be the basis for review by this Court.
B. Does the Existence of Either a Question of Law
or a Question of Fact Require De Novo Review?
1. Question of Law
Petitioners contend that since a determination of par-
tial termination relies upon an interpretation of a federal
statute, specifically 26 U.S.C. § 411(d)(3), the courts
should not grant deference to such determinations. This
20
argument turns Firestone completely upon its head partic-
ularly with respect to judicial review of retirement plans
under ERISA and the Code. As noted above these types
of plans are highly regulated and are typically composed
of a series of provisions which are specifically required
under the Code. A qualified retirement plan, whether it
be a defined contribution plan, a defined benefit plan or a
401(k) deferral plan, is a statutory creation and heavily
dependent upon statutory interpretation. If Petitioners’
argument were to be adopted it would eviscerate the
concept of an arbitrary and capricious standard of review.
The foregoing notwithstanding, a determination of
whether a partial termination has occurred is primarily a
factual issue. As set forth by treasury regulations,
“Whether a partial termination of a qualified plan occurs
... Shall be determined ... by the facts and circumstances
in a particular case.” Treasury Regulations § 1.411(d)-2(b).
The Magistrate Judge noted that the primary factors for
consideration were the size of the contraction, the result-
ing effect on the Plan, and the motive of the employer
related to the reduction in employees. Pet. App. 82. In no
case does this require an interpretation of statute or regu-
latory authority since both the Code and Treasury Regu-
lations are silent as to the weight or priority to be given
any individual factor.
The court of appeals specifically considered the argu-
ments offered by Petitioner regarding the preclusionary
effect of a question of law on the standard of review to be
applied. The court clearly stated that such issue had been
resolved in the Sixth Circuit under the holding of Davis v.
Kentucky Fin. Co. Retirement Plan, 887 F.2d 689 (6th Cir.
1989). In adherence to that decision the court of appeals
21
here held that pursuant to the “grant of discretion” con-
tained in the Plan, “the Committee possessed the power
to interpret the language of terms in the plan.” Pet. App.
10.
Petitioners cite Weil v. Retirement Plan Admin.
Comm’n, 913 F.2d 1045 (2nd Cir. 1990), rehearing, 933 F.2d
106 (2nd Cir. 1991) (Weil II) and Penn v. Howe-Baker
Eng’rs, Inc., 898 F.2d 1096 (5th Cir. 1990) as evidence of
error on the part of the court of appeals and as evidence
of a split between the circuits. The series of decisions
referred to as Weil I, Weil II and Weil III can offer little
guidance. This series of appeals, all pertaining to the
same initial cause of action, are remarkable in their lack
of consistency and like Penn are considered to be more
out of the mainstream of authority with the passing of
each day and rarely cited in contemporary argument. For
a more accurate statement of the law in the Second Cir-
cuit Respondents cite Jordan v. Retirement Committee of
Rensselaer Polytechnic Institute, 46 F.3d 1264 (2nd Cir.
1995). The remaining cases cited by Petitioner are distin-
guishable from the basic premise for which they are
offered.
For instance, in Pratt v. Petroleum Prod. Management,
Inc. Employee Sav. Plan & Trust, 920 F.2d 651 (10th Cir.
1990) the Tenth Circuit examined the grant of discretion-
ary authority contained in a qualified retirement plan.
The court determined that the discretionary authority
given to the plan administrator in the plan instrument
was sufficient to justify a deferential standard of review.
In its analysis of the standards of review the court of
appeals stated that the decisions of a fiduciary are to be
upheld unless they are “(1) arbitrary and capricious, (2)
22
not supported by substantial evidence; or (3) erroneous
on a question of law.” Id. at 657, citing Sage v. Automation
Inc. Pension Plan & Trust, 845 F.2d 885, 895 (10th Cir. 1988)
(quoting Peckham v. Bd. of Trustees, 653 F.2d 424, 426 (10th
Cir. 1981)). By inference therefore, the mere presence of a
question of law is insufficient to justify de novo review.
Similarly, in Gauer v. Connors, 953 F.2d 97 (4th Cir. 1991)
the Fourth Circuit was concerned with a technical inter-
pretation of ERISA regulations and whether the plan
administrator had made a clear error of law. Id. at 100.
Contrary to the arguments of Petitioners the mere
existence of a question of law is insufficient to support de
novo review. Rather there must be some demonstrated
error in law committed by the fiduciary or plan adminis-
trator.
2. Question of Fact.
Respondent must admit to a level of fatigue with this
argument. Petitioners first say there’s not a sufficient
grant of discretionary authority, give us de novo review. If
there is discretion then there exists a question of law, give
us de novo review. If no question of law exists then there
is a question of fact, give us de novo review. Under Peti-
tioners’ systematic progression there is in fact no situa-
tion where the deferential standard would be applicable
since Respondents cannot imagine a situation where
there would not be either a question of law or a question
of fact.
Petitioners raise this argument for the first time in
these proceedings through their application. A review of
23
Section 16(c) of the Plan shows that the Committee is
given the power to (1) resolve “all questions relating to
the eligibility of the Employees to become Participants;”
(2) determine “the appropriate allocations to Participants’
Accounts;” and (3) determine “the amount of benefits
payable to a Participant.” Plan § 16(c). Each of these
powers and the authority granted are dependent upon
the accumulation and assimilation of information pertain-
ing to the participants in the Plan. These tasks could not
be performed unless the Committee was given the
authority to accumulate the appropriate information, con-
duct an analysis of that information and render a deter-
mination.
While it may appear that Petitioners are attempting
to assert that the facts of this matter are in controversy
they did file the initial cross-motion for summary judg-
ment thereby certifying that no factual dispute then exis-
ted and that the issues were proper for disposition by
summary judgment. Any factual issues now raised are
precluded by Petitioners’ prior actions and are not proper
for review by this Court.
C. Did the Sixth Circuit Improperly Consider
Facts Which Did Not Originally Form the Basis
of the Committee’s Finding That a Partial Ter-
mination Did Not Occur?
Petitioners assert that the lower courts acted incor-
rectly in considering information in their decisions not
available to the Committee at the time it made its deter-
mination that a partial termination had not occurred. This
24
argument is a result of the position advanced by Respon-
dents in the lower courts whereby the significant percent-
ages of terminations should be computed separately for
each of the Plan years encompassed by the time frame
July 1, 1989 through June 30, 1991. As noted above, the
lower courts accepted this argument and determined that
the terminations for each fiscal year of the Plan should be
computed individually in developing a significant per-
centage for such year. Each year was then examined
individually to determine if the significant percentage of
terminations for that year was large enough to support a
finding of partial termination in the absence of any addi-
tional enhancement factors. Pet. App. 12-13, 65. Petitioner
states that this is a finding based on facts not considered
by the Committee in its original determination. Pet. App.
18-20.
This is not totally accurate. The facts forming the
basis of Respondents’ argument were considered by the
Committee. They were aware of the overall level of par-
ticipant terminations and they were aware of the effect of
the luxury tax upon the participants employed at the
Merritt Island and Palm Coast facilities. Pet. App. 84-86.
There were no additional facts presented to the court of
appeals or the district court which were not available to
and received by the Committee. As such the authority
cited by Petitioners is inappropriate to the argument. The
Sixth Circuit did not consider improper factual argu-
ments and no basis exists for reviewing its decision under
this line of reasoning. Within the Sixth Circuit this hold-
ing is consistent with the prior precedent of Davis, 887
25
F.2d at 689, whereby a court may uphold an administra-
tor’s decision even on grounds not given by the adminis-
trator.
II. DID THE COURT OF APPEALS PROPERLY APPLY
THE CLEARLY ERRONEOUS STANDARD OF
REVIEW TO THOSE CONCLUSIONS CRUCIAL
TO THE HOLDING OF THE DISTRICT COURT?
Petitioners have essentially two arguments in advan-
cement of this position. The first is the use of the second
triggering event of the luxury tax as justification for
separating the two year time frame examined by the
lower courts into two separate testing periods and com-
puting the significant percentage for each of these years
separately. The second was the court of appeals’ approval
of the elimination of certain employee terminations from
the computation of the significant percentage. Pet. App.
21.
Both of these arguments come from the same per-
spective. All parties have agreed, and the lower courts
have ruled, that despite the multiple factors test
advanced by regulation, Internal Revenue Service admin-
istrative rulings and the common law, the significant
percentage can become so large as to be solely determina-
tive of the issue of partial termination. Id. at 76; Kreis v.
Charles O. Townley, M.D. & Assoc., P.C., 833 F.2d 74 (6th
Cir. 1987). As a result, Petitioners have consistently
sought any and all means to maximize the significant
percentage while Respondents have sought to minimize
the significant percentage. The bifurcation of the
1989-1991 time frame into two separate testing periods
26
did have a significant effect upon the computation of the
significant percentage. Pet. App. 80-81.
Petitioners have now argued for the first time that
the luxury tax could not have the effect claimed by
Respondents Class II since it was passed in late 1990 and
did not become effective until January, 1991. It is implied
that Class II misled both the Magistrate Judge and the
court of appeals by the advancement of this position.
However, an examination of the record will show that
Respondents Class II clearly stated in their Mernorandum
in Support of Their Cross-Motion For Summary Judgment
and in Opposition to the Class I Defendants’ Motion for
Summary Judgment that the luxury tax became effective
on January 1, 1991. App. 9.
As noted above, the determination of the Magistrate
Judge to bifurcete the testing period into two separate
years was not based solely upon the second corporate
event. Also cited was the recurring nature of such an
event as characteristic of normal industry volatility as
well as the multiple year nature of the contraction. The
court relied upon two decisions of other courts in deter-
mining that bifurcation was permissible, Tipton &
Kalmback, Inc., 83 T.C. 154 (1984) and Kreis. Pet. App. 65.
In contrast Petitioner continues to cite a single case, In re
Gulf Pension Litig., 764 F. Supp. 1149 (S.D. Tex. 1991) aff'd
sub nom., Borst Chevron Corp., 36 F.3d 1308 (5th Cir. 1994),
for its position that bifurcation is improper. Unfor-
tunately the precedential value of the In re Gulf Litigation
is limited since the Fifth Circuit stated that in affirming
the lower court the issue of partial termination had not
been decided and that the district court’s holding with
27
respect to that issue was not preclusive against the par-
ties. Id. at 1314, n. 11.
Therefore, Petitioners are left asserting that the Sixth
Circuit improperly affirmed the findings of the district
court without offering any valid authority to the contrary.
But more importantly even if this determination of the
court of appeals is in error it would be harmless error
since the aggregated significant percentage of partici-
pants terminated over the two year time frame would be
32.8%.
The second issue involves the court of appeals’ affir-
mation of the district court’s finding that certain
employee terminations occurring during the July 1, 1989
to June 30, 1991 time frame were excludable from the
computation of the significant percentage. These exclu-
sions represented employees terminated for cause,
employees terminated due to death or disability and
employees who voluntarily terminated employment with
the sponsoring employer but who failed to provide any
reason for such termination. Pet. App. 12. It is this last
group of terminated employees with which Petitioners
are concerned. At all levels of review Petitioners have
asserted that these voluntary terminations should be con-
sidered to have been constructively discharged as a result
of the contraction of the Plan. Pet 26.; Pet. App. 12, 71-76.
Petitioners cite extensively from the Tax Court's
opinion in Halliburton Co. v. CIR, 100 T.C. 216 (1993), aff'd,
25 F.3d 1043 (5th Cir.) which contains an extensive anal-
ysis of the issue of what employees make up the class of
terminated employees for purposes of the computation of
the significant percentage. However, neither regulatory
28
authority nor Halliburton supports the Petitioners to the
extent they claim. Treasury Regulations imply that only
employer-initiated terminations should be counted due to
the use of the term “severance by the employer” of plan
participants. Treas. Reg. §§ 1.411(d)-2(b)(1); Halliburton at
240. This would specifically exclude any employees
whose employment was terminated for any reason not
specifically attributable to employer action related to the
corporate event. Generally, the courts have found this too
stringent a standard and have acknowledged the possi-
bility that a constructive discharge may take place in
those circumstances where employees resigned either
where intolerable working conditions are created by the
employer or it is clear that there is no prospect for contin-
ued employment. Kreis, 833 F.2d at 81-82; Collignon v.
Reporting Serv. Co., 796 F. Supp. 1136, 1141-42 (C.D. Ill.
1992); Morales v. Pan Am. Life Ins. Co., 718 F. Supp. 1297,
1303 (E.D. La. 1989) aff'd, 914 F.2d 83 (5th Cir. 1990). The
Court in Halliburton concurred with these prior decisions
and excluded these employees in its analysis but it also
clarified the issue by stating
[S]ome employees might leave their jobs of
their own accord, even when economic situa-
tions are bad, because of dissatisfaction with
their situations or for personal reasons. The par-
tial terminations rule was not meant to protect
such persons - they do not have the same expec-
tation with respect to the vesting of their
accrued benefits that involuntarily separated
employees do. Moreover, vesting their benefits
would not necessarily deter abuse by em-
ployers.
Halliburton at 241.
29
The Tax Court concluded that simple concern over the
future was insufficient to sustain a claim of constructive
discharge. The empioyer must have overtly and pur-
posefully created a hostile and unbearable work environ-
ment or the employee must have actual notice that his
employment is about to be terminated such as an actual
closure notice.
The Sixth Circuit was even more stringent in Kreis
The employee’s perception of his situation
is judged objectively. “An employee may not be
unreasonably sensitive to his working environ-
ment. A constructive discharge occurs only
when a reasonable person would find condi-
tions intolerable.”
Kreis, 833 F.2d at 82 (quoting Henry v. Lennox Indus., 768
F.2d 746, 752 n. 3 (6th Cir. 1985) [quoting Johnson v. Bunny
Bread Co., 646 F.2d 1250, 1256 (8th Cir. 1981)]).
Petitioners seek to establish a judicial inference that
penalizes a sponsoring employer when that employer is
experiencing a cyclical downturn in economic perfor-
mance by having all employee departures be counted
against the employer under the theory that mere concern
for job stability is sufficient for a finding of constructive
discharge. This is a disincentive to employee loyalty in
times of employer stress. Petitioners have offered no
authority that would justify having the voluntarily termi-
nated employees included in the numbers of employees
terminated as a result of the significant corporate events.
Petitioners claim that the Sixth Circuit misapplied the
standard of review and seek reversal due to the court of
appeals’ failure to hold the district court action to a more
30
stringent standard. However, Petitioners have not dem-
onstrated where the Sixth Circuit was in error and have
no authority upon which to base their assertions. There
were no disputed facts as evidenced by the cross-motions
for summary judgment. No error exists in the court of
appeals’ affirmation of the methodology applied by the
district court. No conflicts exist between the circuits on
the issues presented. In the absence of a factual dispute
between the parties there was no basis for the court of
appeals to reverse the findings of the district court.
Ill. CONCLUSION
For the foregoing reasons, the petition for a writ of
certiorari should be denied.
Respectfully submitted,
JONATHAN D. REED
Counsel of Record
RONALD T. Hitt
Jot Mont McAFEE
MICHAEL T. McCLAMROCH
EGERTON, MCAFEE, ARMISTEAD
& Davis, P.C.
500 First American Center
507 South Gay Street
Knoxville, Tennessee 37902
(423) 546-0500
Counsel for Respondents
Sharon Baldock, et all.
Class II
App. 1
RESPONDENT'S EXHIBIT
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TENNESSEE
NORTHERN DIVISION
ADMINISTRATIVE COMMITTEE )
OF THE SEA RAY EMPLOYEES’ )
STOCK OWNERSHIP AND )
PROFIT SHARING PLAN, et al., Civ. # 3-92-0587
Plaintiffs (Filed
Mar. 4, 1996)
DANIEL ROBINSON, et al.
)
)
)
Vv. )
)
)
Defendants. )
CLASS II DEFENDANTS MEMORANDUM IN
SUPPORT OF THEIR CROSS-MOTION FOR
SUMMARY JUDGMENT AND IN OPPOSITION TO
THE CLASS I DEFENDANTS’ MOTION FOR
SUMMARY JUDGMENT
The Class II defendants, having filed a Cross-Motion
for Summary Judgment and in response to the motion for
summary judgment filed by the Class I defendants, sub-
mit this memorandum of law in support of their cross-
motion for summary judgment and in opposition to the
Class I defendants’ motion for summary judgment.
I. INTRODUCTION
This action was initiated by the plaintiffs, the Admin-
istrative Committee of the Sea Ray Employees’ Stock
Ownership and Profit Sharing Plan (the “Committee”)
and William J. Barrington, Dianne M. Yaconetti, and Wil-
liam R. McManaman as members of the Committee, by
App. 2
their Class Action Complaint as filed on August 25, 1992.
The complaint requested declaratory judgment as to
whether a “partial termination” had occurred with
respect to the Sea Ray Employees’ Stock Ownership Plan
(the “Plan”) within the meaning of the Internal Revenue
Code (“IRC”), the Employee Retirement Income Security
Act (“ERISA”), and the terms of the Plan.
The Plan is a combination Employee Stock Owner-
ship Plan (“ESOP”) and Profit Sharing Plan qualified
under the provisions of the Internal Revenue Code and
ERISA so as to allow the employer to make annual contri-
butions to the Plan for its participating employees’ bene-
fit while deducting the contributions as salary expense
for tax purposes. IRC § 404.
Under the terms of the Plan these contributions are
invested and held in either qualifying employer securities
or diversified investments and allocated to the individual
accounts of the plan participants based on a predeter-
mined allocation formula contained in the Plan’s govern-
ing agreement. See Treas. Reg. § 1.401-1(b)(1) (ii); Plan
Section 5. The participant is not required to recognize
these allocations on his individual income tax return until
the assets are distributed to him from the Plan. IRC § 402.
A participant does not necessarily own his account.
His right to the account assets is determined in accor-
dance with a vesting schedule as contained in the Plan’s
governing agreement. The vesting schedule attributes
percentage ownership of a participant’s account based on
years of service rendered by the participant to the spon-
soring employer.
App. 3
There are two alternative vesting requirements under
the Internal Revenue Code: (i) 5 year cliff vesting; and (ii)
3/7 vesting. See Temp. Reg. 1.411-3T. An employer may
have a more liberal schedule such as a three year cliff
(meaning that for three years the participant is 0% vested
but after three years the participant is 100% vested) but it
may not be more stringent.
The Plan used the 3/7 vesting schedule as follows:
Years of Service Vested Percentage
Less than 3 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
See Plan Section 10.
If an employee/participant terminates service prior
to becoming 100% vested then the participant receives
only the portion of his account that is vested. The remain-
ing amount is forfeited and reallocated to the remaining
participants accounts based on the allocation formulas of
the Plan. Id.
The complaint focused on corporate events of the
sponsoring employer, Ray Industries, Inc. (“Sea Ray”),
over a time frame that included all or parts of calendar
years 1989, 1990 and 1991. In this time frame Sea Ray
experienced a severe economic downturn that resulted in
significant lay-offs in the Sea Ray workforce and corre-
spondingly in the participants of the Plan. The central
issue in this action is a determination as to whether such
App. 4
constriction of the Plan’s participants resulted in a partial
termination of the Plan.
If a partial termination occurred, the account bal-
ances of all participants in the Plan became 100% vested
as of the time of termination. See Plan Section 19. If a
partial termination did not occur, then the non-vested
portions of the accounts of those participants who were
terminated as employees of Sea Ray during the economic
downturn will be forfeited by those participants and the
forfeited assets will be re-allocated among the remaining
participants.
Therefore, the final determination as to whether a
partial determination [sic] did occur will impact two
groups of current and former Plan participants. The defini-
tion of these two groups has been the subject of extensive
negotiation between legal counsel. The Order of this Court
dated April 13, 1993 delineated two classes of participants
for the purpose of initial examination, but reserved a final
determination of the classes and time frame to be exam-
ined pending offer of proof by the parties. Under said
Order Class I and Class II were defined as follows:
Class I: All former Sea-Ray employees who
were participants in the plan, and
whose service as employees ended
between July 1, 1989, and June 30,
1991, and who had an interest in the
plan that was not fully vested, as
well as the beneficiaries of those for-
mer Sea-Ray employees; and
Class II: All present and former Sea-Ray
employees who are or were partici-
pants in the plan and who may be
App. 5
entitled under the terms of the plan
to receive a portion of the forfeitures
resulting from the termination of
employment of members of Class I,
as well as the beneficiaries of those
present and former Sea-Ray
employees.
The time frame in question reflects two of the Plan’s
fiscal years based on the July 1 to June 30 fiscal year.
It should be noted that a mutuality of interest exists
between the plaintiffs and the Class II defendants. By the
plaintiffs’ determination that a partial termination took
place, Class II stands to receive the reallocation of the
forfeited assets.
II. Facts
A. Employer History.
Sea Ray is a manufacturer and marketer of fiberglass
recreational boating craft dating back to its inception in
the 1950’s. Since 1986, Sea Ray has been a wholly owned
subsidiary of Brunswick Corporation as part of its Marine
Group of manufacturing entities. The company has devel-
oped a full product line of pleasure craft from sport boats
to luxury motor yachts. Cmplt. § 49. There are no other
product lines. Since the entire manufacturing capacity is
dedicated to leisure products the company is particularly
sensitive to economic cycles. Plaintiff’s Ex. VI, Economic
Intelligence Company, Report to Brunswick Corpora-
tion 1.
During the 1980’s the U.S. boating industry experi-
enced a unprecedented growth cycle. From 1983 to 1986
App. 6
annual sales grew at an average rate of 35%. Id. at 5. Sea
Ray’s own sales figures reflected these increases.
On July 1, 1985 Sea Ray was operating seven facili-
ties: (i) Oxford Plant, Oxford, Michigan; (ii) Phoenix
Plant, Phoenix Arizona; (iii) Merritt Island Plant, Merritt
Island, Florida; (iv) Knoxville Plant, Knoxville, Tennessee;
(v) Tellico Plant, Vonore, Tennessee; (vi) Palm Coast
Plant, Palm Coast, Florida; and (vii) Ray Industries Cor-
porate Headquarters, Knoxville, Tennessee.
To meet the increased demand during the 1980’s Sea
Ray added significant plant capacity by building new
plants and purchasing already existing manufacturing
facilities. By July 1, 1989 Sea Ray had expanded to thir-
teen facilities, the previously listed seven plus: (viii)
Cherokee Cove Plant, Madisonville, Tennessee; (ix) Prod-
uct Development & Engineering, Merritt Island, Florida;
(x) Fort Mill Plant, Fort Mill, South Carolina; (xi) Trans-
portation Division, Knoxville, Tennessee; (xii) Riverview
Plant, Knoxville, Tennessee; and (xiii) Sykes Creek Plant,
Merritt Island, Florida. Additionally, the company
acquired a plant in Cork, Ireland which is not part of this
action. Deposition of William J. Barrington, President
and CEO, Ray Industries, Ex. 1, pp. 73-84; and Cmplt
§ 50 & 51.
In early 1989 a slight softening was detected in
industry sales figures followed by a precipitous fall in
late 1989. See Plaintiffs’ Ex. VI at 5. Sea Ray suffered a
significant drop in sales of all product lines except the
luxury yachts. In 1990, the federal government instituted
a luxury tax that targeted high ticket consumer goods
such as automobiles, aircraft and yachts. As a result the
App. 7
luxury yacht market suffered a drastic drop in sales.
Barrington Dep. pp. 39, 86.
Sea Ray total sales for this entire time frame are as
follows:
Year Units Sold
1985 12,456
1986 15,916
1987 22,355
1988 24,538
1989 23,214
1990 14,343
1991 10,542
See Cmplt. § 49.
Sea Ray uses a marketing and sales mechanism that
is based on input from dealers both on an annual projec-
tion and on quarterly updates. The annual projection was
divided into quarters and the dealers were expected to
purchase their quota in each quarter. Barrington Dep.
124. Sea Ray would then structure its manufacturing out-
put to match these projections. During the projected year
the dealers obtain their market product by a series of
orders made at designated times. Barrington Dep. 134.
The first indication that sales were underperforming
would be an accumulation of inventory at the dealers
level and a resultant drop in the quarterly orders.
Because of the continuous ordering structure, drops
in sales become immediately evident subject to analysis
of the data. Id. This allows Sea Ray to make rapid adjust-
ments to production. However, there is a built in delay
where production continues at the projected rather than
App. 8
actual need and results in an increased impact on the
workforce. Barrington Dep. pp. 135-137. The first notice-
able drop in sales (33%) occurred in the months of
March/April 1989 with the first announcement of layoffs
coming in May, 1989. Barrington Dep. 135.
B. Effect on Plan Participants.
Not all employees were participants of the Plan. An
employee becomes a participant of the Plan upon the
completion of one full year of service (defined as a year
in which the employee is credited as having 1000 hours of
service). Plan Section 3.
On July 1, 1985 total number of Plan participants was
1,501. See Cmplt. § 50. By July 1, 1989, at the end of the
expansion cycle, there were 3,832 Plan participants.
In reaction to the sudden drop in sales occurring in
March/April 1989, Sea Ray issued official notices of tem-
porary layoffs for 10% of the Tennessee workforce. Class
I Coll. Exh. 2.
This proved inadequate when May sales figures rein-
forced the downward trend and in July, 1989, manage-
ment announced the closure of the Cherokee Cove,
Riverview and Ft. Mill plants. Barrington Dep. 137. The
corporation attempted to stabilize the workforce and
determine the extent of the downturn. However, sales
figures for July, August and September confirmed the
continuing drop in the market and additional layoffs
were announced in November which were reflected in
December, 1989 and January, 1990 employment statistics.
Id. at 138; Weekly Plant Comparisons, Ex. 2.
App. 9
Employment did stabilize at that point with only
small reductions in workforce taking place for February
through June of 1990. Class I Ex. 7.
By June 30, 1990, the number of Plan participants
stood at 3,060. Cmplt. § 52.
The downward trend continued through 1990 into
1991 enhanced by the effect of the advent of the luxury
tax which was effective as of January 1, 1991. At the
beginning of the 1991 fiscal year (7/1/90), the Merritt
Island and Palm Coast facilities, which produced the high
end luxury yachts, were still employing 1037 employees,
only 1 less than the 1038 employed on July 14, 1989. Due
to the effects of the luxury tax, the June 30, 1991 employ-
ment at the two facilities had dropped to 583 persons. Ex.
2.
The number of Plan participants were similarly
affected. For fiscal year ending June 30, 1991 the number
of Plan participants dropped to 1,968. Cmplt. § 53.
C. Participant Statistics.
Counsel for the litigants have expended substantial
time and effort in attempting to construct a mutually
agreeable database of participant statistics. This has not
been universally successful. As noted above, Class II and
plaintiffs have a mutuality of interests in this action.
Therefore, Class II adopts the characterization of the data
as presented in plaintiffs’ brief at pages 37-38. By permis-
sion and for purposes of consistency, portions of that
brief are incorporated herein. Class II has not participated
App. 10
in the compilation of these statistics and relies upon the
representations of plaintiffs.
[From] [a] review of the briefs of Class I and plaintiffs
it is apparent that the parties do agree to the following:
1. The total number of plan participants
was 3,832 as of July 1, 1989, declined to 3,060 as
of June 30, 1990 and to 1,968 as of June 30, 1991.
Class I Brief at 21, 25, 50; Complaint {J 51-53;
Class I Exs. 12-14 (census lists).
2. According to the Class I Brief, an addi-
tional 307 plan participants were added after
July 1, 1989, including 252 additions in the
1989-1990 Plan year and 51 additions in the
1990-1991 Plan year. Class I Brief at 21, 27.}
3. The terminated participants include 396
who were fully vested, including 123 during the
1989-1990 Plan year and 273 during the
1990-1991 Plan year. Class I Brief at 26, 28, 50;
Class I Exs. 12-14 (census lists).
4. The total number of participants for the
1989-1990 Plan year is 4,084 (the number at the
beginning of the year, 3,832, plus the number
added during the year, 252). The total number of
participants for the 1990-1991 Plan year is 3,111
1 The 307 participant adjustment is a late revision by Class
I. See Ex. 3. The Class I Brief does not include a separate listing
or any other way of readily identifying those 307 new
participants but Class I is in the process of compiling the records
to support this assertion. Plaintiffs and Class II have tried to
replicate that number without success. Rather than delay the
briefing process, we assume for the purpose of this brief that the
307 count is correct. Class II reserves the right to chalienge that
calculation in our reply brief.
App. 11
(the number at the beginning of the year, 3,060,
plus the number added during the year, 51). For
the entire two-year period, the total number of
participants is 4,139 (the number at the begin-
ning of the period, 3,832, plus the number
added during the period, 307).
5. The total reduction in participation for
the 1989-1990 Plan year is 1,024 (the total
number of participants for the year, 4,084, minus
the number remaining at the end of the year,
3,060). The total reduction for the 1990-1991
Plan year is 1,143 (the total number of partici-
pants for the year, 3,111, minus the number
remaining at the end of the year, 1,968). The
total reduction for the two-year period is 2,171
(the total number of participants over the two-
year period, 4,139, minus the number remaining
at the end of the period, 1,968).
Class I has proposed a series of adjustments to these
numbers based on its review of certain underlying docu-
mentation provided by Sea Ray. Early in the discovery
process, Class I indicated a significant discomfort with
the statistical information provided by the employer.
These adjustments and their applicability are more appro-
priately discussed subsequent to the analysis of the law
contained hereunder.
D. Determination of Plan’s Administrative Com-
mittee.
Having noted the decline in employment and partici-
pation levels, the Plan’s Administrative Committee raised
the issue in its meeting of June 12, 1992. Plaintiff’s Ex. IV.
On June 26, 1992 the Committee made a determination
App. 12
that under the applicable facts and circumstances a par-
tial termination of the Plan had not taken place. Plain-
tiff’s Ex. V. As a result, the participants who experienced
a termination of their employment with Sea Ray from
1989 through 1991 and who were not 100% vested in their
account balances were entitled to a distribution of only
the vested portion of their accounts. The nonvested por-
tions would be considered to be forfeited and were to be
reallocated to the remaining participants. Id. The real-
location was suspended pending judicial determination
of whether there has been a partial termination. Cmplt.
§§ 61-62.
Ill. LEGAL ANALYSIS
As noted, the central issue in this action is the deter-
mination of whether or not a partial termination has
occurred as a result of the reduction in Plan participation.
A. History of Statute.
The concept of vesting through termination of a plan
was initiated by Treasury regulations before ever appear-
ing in statutory form. The termination of a plan as a
vesting event was codified in 1962 in 26 U.S.C.
§ 401(a)(7). In essence the statute stated that the termina-
tion or discontinuance of contributions to a plan would
act to render the employees accounts nonforfeitable. The
legislative history stated
[T]he bill precludes the possibility that contribu-
tions for employees which have been deducted
for income-tax purposes may revert back to the
employer. . . . This requirement should serve to
EE ——————————
App. 13
prevent abuses resulting from termination of
plans.
H.R.Rep. No. 378, 87th Cong., 1st Sess., reprinted 1962-3
C.B. 261, 269. The statute did not make mention of the
concept of partial termination. This was formulated by
Treasury Regulations in 1963 whereby termination was
defined to include “both a partial termination and a
complete termination of a plan.” Treas. Reg.
§ 1.401-6(b)(2) (1963).
At the time, the stringent vesting schedules now
required under law did not exist. Employers were
allowed to require that the employee maintain employ-
ment under specific terms as a condition to vesting. Ter-
minated employees often forfeited their entire account
balances. The concern, as stated in the legislative history,
was that “an employer could establish a forfeitable plan,
enjoying the tax benefits flowing therefrom, and then
terminate it, thus causing the assets to revert to the
employer with favorable tax consequences.” Halliburton
Co. v. Commissioner, 100 T.C. 216, 226 citing H.Rept.
87-378 at 16 (1961), 1962-3 C.B. 261. Clearly the concern of
the legislature was the prevention of abuse.
In 1974 a massive rewriting of the retirement plan
law occurred under the Employment Retirement Income
Security Act of 1974 (“ERISA”). 29 U.S.C. §§ 1001-1461.
As part of this legislation Congress enacted IRC
§ 411(d)(3) which provides that
[A] trust shall not constitute a qualified trust
under section 401(a) unless the plan of which
such trust is a part provides that -
App. 14
(A) upon its termination or partial termination,
the rights of all affected employees to bene-
fits accrued to the date of such termination,
partial termination, or discontinuance, to the
extent funded as of such date, or the amounts
credited to the employees’ accounts, are nonfor-
feitable.
In 1977, the Secretary of the Treasury promulgated regu-
lations that are stunning by their brevity and by the fact
that they continue unamended despite continued revision
of the statutory scheme under ERISA. Without the usual
guidance of examples the Treasury stated
(b) Partial Termination. (1) General Rule.
Whether or not a partial termination of a quali-
fied plan occurs (and the time of such event)
shall be determined by the Commissioner with
regard to all the facts and circumstances in a
particular case. Such facts and circumstances
include: the exclusion, by reason of a plan
amendment or severance by the employer, of a
group of employees who have previously been
covered by the plan; and plan amendments
which adversely affect the rights of employees
to vest in benefits under the plan.
Treas. Regs. § 1.411(d)-2(b). The exclusion by severance
of plan participants has become known as a “vertical
partial termination”. In re Gulf Pension Litigation, 764 F.
Supp. 1149, 1163 (S.D. Tex. 1991). It is this type of termi-
nation with which we are concerned.
App. 15
B. Interpretation of Statute.
Since passage of the statute and the implementation
of the regulations, a substantial body of case law and
administrative interpretation has been devoted to ascer-
taining what facts and circumstances are applicable in
making a determination of partial determination.
1. Internal Revenue Service.
Through a series of revenue rulings and technical
advice memoranda the Service traditionally took the
approach that the termination rules existed to prevent
abuse of the tax benefits of the law. See TAM
6512108240A (Dec. 10, 1965) and TAM 7312286880A (Dec.
28, 1973); See also Rev. Rul. 73-284, 1973-2 C.B. 139 and
Rev. Rul. 72-439, 1972-2 C.B. 223. The majority of these
rulings adhered to this anti-abuse character even in the
face of high termination percentages.
In the 1980’s the emphasis of the IRS changed to
where greater weight is given as to whether a “significant
percentage of employees were .. . excluded from partici-
pating in the plan.” IRS, Plan Termination Handbook
§ 252(6). In Revenue Ruling 81-27 the IRS stated there was
a point where the severance percentage could be so great
as to preclude other considerations.
However, the Plan Termination Handbook still states
that there are factors other than a reduction in participant
levels which must be considered: (i) Whether the poten-
tial for reversion has been created or increased as a result
of participant turnover; and (ii) Whether the possibility
App. 16
for prohibited discrimination has increased. Id.,
§§ 252(8)&(10).
2. Caselaw — Factors to be Considered.
Much of the litigation involving partial termination
has occurred in the 1980’s. The vast majority of this law
has acknowledged that the facts and circumstances test
mandates a review of all aspects of the reduction in
workforce. See Bruch v. Firestone Tire and Rubber Com-
pany, 828 F.2d 134 (3rd Cir. 1987); Kreis v. Charles O.
Townley, M.D. & Assoc., P.C., 833 F.2d 74 (6th Cir. 1987);
and Sage v. Automation, Incorporated Pension Plan and
Trust, 845 F.2d 885 (10th Cir. 1988).
a. Two Part Inquiry.
The opinion in Kreis, the controlling case in the Sixth
Circuit, states there are two basic inquiries that must be
made in applying the facts and circumstances test: (i) the
effect on the plan of the exclusion of employees from
participation; and (ii) the decision maker’s motives.
A significant factor in the first inquiry is the percent-
age of plan participants who are involuntarily excluded.
The Sixth Circuit acknowledged that the percentage of
termination may be so high as to be solely determinative.
Kreis v. Charles D. Townley, M.D., & Assoc., P.C., 833
F.2d at 80 citing Bruch v. Firestone and Ehm v. Phillips
Petroleum, 583 F.Supp. 1113 (D.Kan. 1984). However, the
court clearly stated “as a general matter we must look
beyond the mere percentages unless and until Congress
or the Treasury Department provides otherwise.” Id.
App. 17
As part of the first inquiry, a determination should be
made as to “the extent the Plan is affected financially by
the discharges.” Id. Terminations that represent a small
percentage of employees may be significant if they dis-
proportionately impact the financial viability of the plan.
The second inquiry focuses on the decision maker,
i.e., did the employer exclude the plan participants “in a
predatory effort to profit from subsequent forfeitures
and/or diminished contribution requirements?” Id. See
also Babb v. Olney Paint Co., 764 F.2d 240, 245 (4th Cir.
1985) and Bruch v. Firestone Tire and Rubber Company,
828 at 530.
b. Percentage Test — the Numbers.
(1) Percentages Sustaining Partial Termina-
tion. The Sixth Circuit in Kreis engaged in a substantial
review of the caselaw then in effect for the purpose of
determining what percentages had been considered to be
significant to the point of solely sustaining a finding of
partial termination. The Court noted that the lowest per-
centage sufficient to find a partial determination was the
34% of Tipton & Kalmbach, Inc. v. Commissioner, 83 T.C.
154 (1984). Tipton & Kalmbach involved a multi-year
time frame over which the workforce reduction occurred.
In year 1 the reduction was 34% followed by a 51%
reduction in year 2. The Tax Court determined that a
partial termination occurred in each year.
It should be noted that the Tax Court rejected the
argument that any factor other than percentage of partici-
pant terminations should be considered. Id. at 161.
App. 18
Acknowledging that the Tax Court was inferring a
broader purpose for the statutory provisions, the ruling
states that the Congressional intent was the protection of
employees from forfeiting their retirement benefits upon
termination of a plan. Id. This position has not been
supported by any other authority known to Class I and
was subsequently reinterpreted by the opinion of the Tax
Court in Halliburton v. Commissioner, supra, nine years
later. Therefore, this ceiling is of dubious authority.
The Tipton & Kalmbach numbers are the lowest per-
centages that have been found to sustain a finding of
partial termination. Normally, when a determination of
partial termination is based solely on the percentage of
participants terminated, those percentages exceed 50%.
See Peter M. Boruta, M.D., P.C. v. Commissioner, T.C.
Memo. 1988-172 (66.66%); and Revenue Ruling 1-27,
1981-1 C.B. 228 (57.6%). This would seem a logical anal-
ysis in that a percentage reduction greater than 50% in
any one year represents the loss of a majority of partici-
pants.
(2) Percentages Insufficient for Partial Termi-
nation. The Kreis court also reviewed the highest percent-
ages deemed to be insufficient to sustain a finding of
partial termination. The court cited three examples: (i)
16.7%, Wishner v. St. Lukes’s Hosp. Center, 550 F.Supp.
1016 (S.D.N.Y. 1982); 13%, Taylor v. Food Giant, Inc.
Salaried Employees Pension Plan, No. C84-253A
(N.D.Ga. Nov. 30, 1984); and 12.4%, Babb v. Olney Paint
Co., supra. Based on this analysis, Kreis found that multi-
year termination rates of 15% and 13.6% were not plan
terminations. This has been further supported by the Tax
Court in Halliburton Co. v. Commissioner, supra, 19.85%.
App. 19
There is no statutory basis for the cutoff of the 20%
floor. As noted by Halliburton the origin of the rule may
well be a pre-ERISA report which was required to be filed
with the IRS any time there was a drop of greater than
20% of plan participants. See Halliburton at 237, fn 8.
c. Anti-Abuse Factors.
The Third Circuit in Bruch stated the significance of
the presence of abuse factors in the strongest terms
We believe that the structure of the statute sug-
gests that a partial termination should be found
under § 411(d)(3) only if so many people have
been terminated that the plan appears to have
been created as a mechanism for deferring the
recognition of income, and thereby reducing
taxes, rather than as a mechanism for the provi-
sion of retirement benefits to employees.
Bruch at 151. This is consistent with the legislative history
of the statute and the concern that the liberal vesting
rules of the 50’s and 60’s allowed for the abuse of the
income tax system. The Third Circuit was firm on the
necessity of a finding of abuse on the part of the
employer. However, as noted above a substantial body of
case law and administrative rulings has mitigated this
opinion. The existence or nonexistence of employer abuse
serves to slide the percentage scale rather than prevent or
assure a finding of partial termination. See Kreis v.
Charles O. Townley, M.D. & Assoc., P.C., 833 F.2d at 80,
81; Halliburton Co. v. Commissioner, 100 T.C. at 232.
App. 20
The Tax Court has acknowledged the sliding scale:
Between the two extremes, where the percent-
age drop has not been sufficient in and of itself
to establish that a partial termination has
occurred, the surrounding facts and circum-
stances have been considered in conjunction
with the percentage drop in order to decide
whether the percentage drop is significant.
Halliburton Co. v. Commissioner, 100 T.C. at 237, citing
Kreis v. Charles O. Townley, M.D. & Assoc., P.C. 833 F.2d
at 79-80.
Therefore, absent a percentage of terminations of less
than 20%, which would mandate a finding that no partial
termination occurred, and a percentage of terminations
greater than 50%, which would mandate a finding that
partial termination had occurred, the body of law
requires that a balancing take place that determines the
presence or lack of an abusive intent on the part of the
employer. Where there is not a finding of abusive intent
the threshold percentages of termination must necessarily
be high to support a finding of partial termination. Where
there is evidence of an abusive intent the threshold per-
centages of termination may be lowered to prevent the
intended abuse.
d. Multi-year Terminations.
In those situations where terminations have occurred
over a substantial period of time the courts have been
willing to break the terminations down into separate
groups for the purpose of calculating the appropriate
percentages. The issue is whether the terminations occur
App. 21
as the result of a single corporate event. See Halliburton,
100 T.C. at 230; Weil V. Retirement Plan Administrative
Committee, 750 F.2d 10, 12 (2nd Cir. 1984) (“Weil I”). A
long-term corporate downturn associated with normal
industry volatility is not considered to be a single event
and may be measured in separate years. Tipton &
Kalmbach, Inc., 83 T.C. at 155; See also Kreis v. Charles
O. Townley, M.D. & Assoc., P.C., 833 F.2d at 83. The IRS
has also accepted the concept of segregating multiple
year terminations into separate percentage breakdowns
for analysis. See Plan Termination Handbook § 252(5)(c).
e. Inclusion of Participant Classes.
In computing the measuring percentages the most
difficult issue is the determination of the various classes
that the participants fall into and the usage of those
classes in the computations. The Tax Court in Halliburton
reviewed the various classes constituting the participants
in the plan there in question.
The first group of these were classes of separated
employees who would not be counted in the termination
percentages. These included deaths, normal retirements
and terminations for cause. The litigants had agreed prior
to trial that these participants would be excluded. The
Tax Court reviewed this agreement with approval stating
that the terminations were not “attributable to Hallibur-
ton’s reductions in force and so ... not affected by such
action.” Halliburton Co. v. Commissioner, 100 T.C. at 238,
citing with approval In re Gulf Pension Litigation, 764
F.Supp. at 1168 and Morales v. Pan Am. Life Insurance
Co., 718 FSupp. 1297, 1302 (E.D.La. 1989).
con
nay
App. 22
In making a determination as to partial termination,
the focus of the review is on the plan participants who
were excluded from the plan in connection with the cor-
porate event. See Kreis v. Charles O. Townley, M.D. &
Assoc., P.C., 833 F.2d at 79. Therefore, a question may
arise as to participants that left employment voluntarily
but who may be considered to have left because of their
concern over the financial health of the employer. The
regulations imply that only employer-initiated termina-
tions should be counted due to the term “severance by
the employer” of plan participants. See Treas. Reg.
§ 1.411(d)-2(b)(1); and Halliburton Co. v. Commissioner,
100 T.C. at 240. However, the courts have acknowledged
a possibility that a constructive discharge may take place
in those circumstances where the employee resigned due
to intolerable working conditions created by the
employer, Kreis v. Charles O. Townley, M.D. & Assoc.,
P.C., 833 F.2d at 81-82, or it is clear that there is no
prospect for continued employment. Collignon v. Report-
ing Services Co., 796 F.Supp. 1136, 1141-1142 (C.D.IIl.
1992); Morales v. Pan Am. Life Insurance Co., 718 F.Supp.
at 1303. The Court in Halliburton concurred with these
prior decisions and excluded these employees in its anal-
ysis and clarifying the issue by stating
[S]ome employees might leave their jobs of their
own accord, even when economic situations are
bad, because of dissatisfaction with their situa-
tions or for personal reasons. The partial termi-
nations rule was not meant to protect such
persons — they do not have the same expectation
with respect to the vesting of their accrued ben-
efits that involuntarily separated employees do.
iain caiman!
App. 23
Moreover, vesting their benefits would not nec-
essarily deter abuse by employers
Halliburton at 241. The Tax Court concluded that simple
concern over the future was insufficient to sustain a claim
of constructive discharge. The employer must have over-
tly and purposely created a hostile and unbearable work
environment or else the employee must have actual
notice that his employment is about to be terminated
such as an actual closure notice.
Any employer has a turnover rate that may be
derived from historical data. See Plan Termination Hand-
book § 252(6)-(7). This would be an appropriate adjust-
ment to the computations to be performed in this action.
Class II concurs with plaintiffs’ decision to infer a turn-
over rate at this time but reserves the right to do so on
the event the Court should deny the Class II motion.
f. Formula for Computation.
In determining the percentage of terminated partici-
pants, the Court must compute the significant percentage
fraction, the denominator of which is the total number of
plan participants at the beginning of the time frame in
question plus the number of participants added during
the time frame. The numerator is the number of plan
participants terminated from the plan during the time
frame minus those excludable employees. IRS Plan Ter-
mination Handbook, § 252(7). The fraction is as follows:
Total Reduction minus Excludable Employees
Total Number of Participants
App. 24
IV. APPLICATION OF LAW
A. CORPORATE EVENTS.
From the facts presented it is obvious that the overall
triggering event was a significant economic downturn in
the recreation boating industry that began in 1989. The
downturn was rapid and severe and was reflected by
substantial reductions in the workforce and the closing of
three manufacturing facilities. By January 1990, Sea Ray
had stabilized its workforce and had in fact initiated
some recalls of personnel. However, upon the imposition
of the luxury tax an additional drop of sales occurred
which resulted in significant terminations at the Merritt
Island and Palm Coast facilities and the closure of the
Oxford facility. These terminations are graphically pre-
sented in Ex. 4. The distinct peaks and valleys of the
graphs show the concentrated impact of two distinct
events occurring in two separate fiscal years.
Under the holding of Tipton & Kalmbach these events
should be segregated and the termination percentages
computed for the two separate fiscal years.
B. COMPUTATION OF PERCENTAGES.
As noted hereinabove the parties have agreed on the
following numbers:
Number of Participant
Plan Year Participants Terminations
1989-1990 4,084 1,024
1990-1991 3,111 1,143
App. 25
The question still to be resolved is the adjustments to the
statistics. As noted above Class II does not seek at this
time to imply a normal turnover percentage.
The dispute does center around individuals who vol-
untarily terminated employment during the time frame in
question. A great deal of effort has been expended in
reviewing source documents, particularly the Change of
Employee Status forms which were designed for use by
the personnel directors of each facility. As Class I indi-
cates, each facility manager was given a great deal of
autonomy in managing his/her personnel matters. Class
I brief at 18. As a result certain aspects of record keeping
were irregular at best. The Change of Status forms were
used in varying amounts of detail and did not prove to be
universally dispositive of the issue. Based on anecdotal
information received by counsel for Class I through per-
sonal contact with various members of the class, Class I
was concerned that the termination categories were not
accurate.
Much of Class I’s concern is generated by the incom-
pleteness of the Change of Status forms. However, one
fact remains clear. The Change of Status forms were
internal documents used by individual plant managers.
The Plan census forms on the other hand were the docu-
ments prepared company wide which formed the basis of
IRS reports and account allocations and which were
based on payroll information. There has not been any
allegation known to Class II that errors have been com-
mitted in the accounting for individual participant
accounts. As such these documents must be considered to
be the most accurate of the source materials.
App. 26
Based on its concern over discrepancies between the
Change of Status forms and the Plan census forms Class |
proposes a drastic resolution. All employees who volun-
tarily terminated employment from July 1, 1989-June 30,
1991 should be treated as terminated participants. This is
both drastic and insupportable. While Class I points out
that many employees would justifiably seek employment
elsewhere during the constriction of the workforce this
does not fit the definition of a constructive discharge as
set forth under the caselaw.
Therefore, Class II does adopt the adjustments pro-
posed by plaintiffs in plaintiffs’ Ex. I and referred to in
plaintiffs’ brief at 39. Because of the late adjustments
received from Class I, the computations of plaintiffs
result in greater percentages of termination than do the
computations of Class II.
1989-1990:
Total Reduction minus
Excludable Terminees = (1,024 - 373) = 15.94%
Total Number of Participants 4,084
1990-1991:
Total Reduction minus
Excludable Terminees = (1,143 - 275) = 27.9%
Total Number of Participants 3,111
1989-1991:
Total Reduction minus
Excludable Terminees = (2,167 - 648) = 36.7%
Total Number of Participants 4,139
Plaintiffs have provided computations of the termination
percentages based on the assumption of Class I that vol-
untary terminations should be included. While Class II
does not agree with that position for the purposes of
App. 27
clarity and in light of the changes reflected in Ex.3, Class
II provides the same alternative Calculation II.
1989-1990:
Total Reduction minus
Excludable Terminees = (1,024 - 102) = 22.6%
Total Number of Participants 4,084
1990-1991:
Total Reduction minus
Excludable Terminees = (1,143 - 109) = 33.2%
Total Number of Participants 3,111
1989-1991:
Total Reduction minus
Excludable Terminees = (2,167 - 211) = 47.3%
Total Number of Participants 4,139
C. ANALYSIS OF COMPUTATIONS.
The record is clear on the corporate history of Sea
Ray. The reductions in workforce were the result of out-
side economic factors. These factors were not a single
event rather they were a combination of events that
occurred sequentially. The initial downturn in the small
craft boating industry did not affect the luxury yacht
sales. The industry did remain in the doldrums during
the entire time frame in question, however, this was
enhanced by the drastic drop in luxury yacht sales. A
review of the sales figures show the initial drop of sales
from 1989 to 1990 was 70% of the overall decrease during
the 1990 and 1991 fiscal years. The drop in yacht produc-
tion was the most significant portion of the 1991 decrease
in light of the 40% manpower reduction that took place at
Merritt Island and Palm Coast. There were two signifi-
cant corporate events that must be measured separately.
App. 28
When the terminations are measured in two phases
the reductions in work force are 15.9% in 1989-1990 and
27.9% in 1990-1991. The 15.9% reduction is within the rule
of thumb that terminations below 20% cannot constitute a
partial termination. The 27.9% rate of terminations for
1990-1991 do exceed the 20% safe-harbor. However, there
is no evidence that the reduction in workforce was the
result of anything but a downturn in the economic cycle.
As such there is no evidence that the anti-abuse consider-
ations of the statutory, regulatory or case law would
apply. Therefore, the sliding scale of percentage should
be applied.
Since there is no abusive character to the termina-
tions the sliding scale approach would find the 27.9% rate
for 1990-1991 insufficient for a finding of partial termina-
tion, particularly in light of the previous low percentage
of 34% cited in Tipton & Kalmbach, Inc. v. Commissioner,
supra. It should also be noted that the 34% of Tipton was
sustained with a second year termination rate of 51%. In
this case the termination rates are a consecutive 15.9%
and 27.9%. The two year termination rate of 36.7% com-
pares favorably with the one year termination rate in
Tipton.
Therefore, Class II respectfully submits that a partial
termination of the Plan did not occur during the time
frame July 1, 1989 to June 30, 1991. As such the deter-
mination of the Committee that a partial termination had
not occurred was correct and within the standards of
applicable law.
App. 29
V. STANDARD OF REVIEW
Class II adopts the arguments and position of Plain-
tiffs with respect to the appropriate standard of review.
VI. CONCLUSION
Based on the conclusions of law and fact contained
herein, Class II defendants respectfully request that this
Court grant the cross-motions for summary judgment
filed by Class II and by Plaintiffs and deny the Class I
defendants motion for summary judgment.
Respectfully submitted,
/s/ Jonathan D. Reed
Joe Mont McAfee
Jonathan D. Reed
Egerton, McAfee, Armistead
& Davis, P.C.
Attorneys for Class II
Defendants
500 First American Center
Knoxville, Tennessee 37902
(423) 546-0500
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.