LAW FIRM'S 'TOP HAT' PLAN AMBIGUOUS ON POST-RESIGNATION CHANGES

January 30, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com


When a "top hat" deferred compensation plan expressly provides it can be changed "at any time," can a law firm change the plan to delay installments owed to a partner whose right to payment vested when he resigned?

Denying the law firm's motion for summary judgment, U.S. Magistrate Judge Nan R. Nolan ruled there are questions of fact about the meaning of the at-any-time provision. Barrett v. Fox and Grove, Chartered, 2002 WL 31761410 (Dec. 9).

William Henry Barrett resigned as a partner in the Chicago law firm of Fox & Grove in 2000.

"At the time of his resignation," Nolan recounted, "Barrett was an equity partner and a participant in Fox & Grove's deferred compensation plan. The plan is an unfunded [Employee Retirement Income Security Act] plan which Fox & Grove maintained as 'a vehicle for, among other things, repaying to its participants the amount of their respective "capital accounts" at Fox & Grove.' Under the terms of the plan, any participant that died, became disabled or left the employ of Fox & Grove would be paid his or her deferred compensation account, as well as consideration for Fox & Grove stock and any notes payable from Fox & Grove, over a five-year period in 60 equal monthly installments, without interest."
After Barrett left, Nolan continued, "Fox & Grove ceased its operations, terminated the employment of all of its attorneys and commenced liquidation."

The law firm's "directors were uncertain whether the firm would be able to pay all plan participants the entirety of their deferred compensation accounts after repaying all outstanding debts. Thus, the directors determined that no individual participant should receive any payments unless all other participants received a proportionate share. To accomplish this result, the directors amended the plan on May 21, 2002, retroactive to March 31, 2001, to provide that no participant would receive any payment of deferred compensation 'until such time as the [plan] committee, in its reasonable judgment, decides that all debts of the [firm] other than obligations under the plan have been paid or settled.' The plan committee consists of the three individuals with the largest deferred compensation accounts who are responsible for administering the plan."

Barrett sued for his deferred compensation payments.

Moving for summary judgment, Fox & Grove argued that "the retroactive amendment to the plan defeats Barrett's claim for any further payment until the liquidation process is complete; that is, 'he will now be treated on an equal basis with all other participants who are abiding the liquidation process.' "

In response, Barrett contended the plan was ambiguous on whether it could be changed to delay his compensation after he resigned.
Ruling on the law firm's motion, Nolan explained (with citations and internal quotation marks omitted):

"The plan at issue is an ERISA 'top hat plan' -- an unfunded plan that an employer maintains 'primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees.' 29 U.S.C. [sec][sec]1051(2), 1081(3), 1101(a). As such, it is exempted from ERISA's vesting, participation, funding and fiduciary rules but is subject to ERISA's enforcement provisions.

"Federal courts treat top hat plans as unilateral contracts, which create a vested right in those employees who fulfill the plan's requirements. Once performance is completed, an employer cannot terminate or modify the plan unless it has explicitly reserved the right to do so."

The key question was whether the plan was ambiguous, despite the language that provided it could be changed "at any time," since Barrett's right to payments vested before the change.

As Nolan explained: "At least one court has found that the seemingly clear phrase 'at any time' is not unambiguous in this context. In In re New Valley [89 F.3d 143, 151 (3d Cir. 1996)], the top hat plan at issue contained language that it could be terminated at any time. 89 F.3d at 151. The [3d U.S. Circuit Court of Appeals] found that allowing the employer to terminate the benefits even after an employee retired -- i.e., after the benefits vested -- would make the contract illusory. The court explained that

'Although parties are free to enter into illusory agreements, the unlikelihood that they will do so when significant benefits are at stake may render a term ambiguous. In this context, the unlikelihood that the [plaintiffs] agreed to allow [defendant] to terminate their retirement benefits at its whim, coupled with [plaintiffs'] reasonable alternative interpretation of "at any time" (until performance), supports the argument that the term is ambiguous.'

"The court noted," Nolan continued, "that the defendant had made oral representations that the plan could not be terminated after retirement and held that the plan was ambiguous. As a result, the court found that the plaintiffs should have been allowed to present extrinsic evidence to clarify its meaning.

"In this case, similarly," Nolan concluded, "the plan's language permitting amendment 'at any time' is ambiguous to the extent that it would allow Fox & Grove to take away Barrett's vested benefits despite language in the plan that each participant 'shall be entitled' to benefits which 'shall be paid' when the participant leaves the firm."

The defunct law firm's motion for summary judgment was therefore denied.

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