Termination of retirees’ monthly benefits under plan’s change of control provision violated ERISA

A company violated ERISA by intentionally misinterpreting a plan’s change in control provision as applying to retired participants, resulting in the termination of monthly benefits and lump-sum cash-out distributions of reduced benefits, according to U.S. Court of Appeals in New York (CA-2). In addition, the remedy preserved by the trial court, reinstating the monthly benefit payments, while allowing the retirees to retain the lump-sum payments, was within the court’s discretionary authority.

Change of control provision in SERP

A company (Bausch & Lomb (B&L)) maintained a Supplemental Retirement Income Plan (SERP) that covered three retired executive employees. The plan contained a change of control provision, pursuant to which, upon a change in control of the company, a “participant’s” benefit would be converted to a cash lump-sum and paid within 15 days following the change in control. The applicable provision not only expressly and exclusively referred to ” participants,” but further provided a separate definition of “retired participants.”

In May 2007, B&L announced its intention to sell its outstanding shares of common stock to a global private equity firm. Subsequent to the approval of the merger, the Compensation Committee of the company’s Board of Directors instructed the plan trustee to discontinue monthly benefits due the retirees under the plan. The lump-sum payments eventually made to the retirees were substantially less than the present value of the benefits to which the retirees claimed to be entitled.

The retired participants then brought suit, alleging that the termination of the monthly benefits and the payment of the reduced lump-sum violated ERISA. The trial court found for the retirees and ordered the reinstatement of the monthly benefits that had been unlawfully withheld. The order also allowed the retirees to retain the lump-sum payments, but extended a credit to the company for the payments that had been made.

Misinterpretation of clear plan terms

The appeals court initially affirmed the trial court’s ruling that the company misinterpreted the plan’s change of control provision. The company maintained that, given the structure and purpose of the plan, retired participants should be viewed as a “subset” of participants and thus, subject to the lump-sum cash-out provision. The court rejected this argument, noting that the plan separately defined participants (employees of the company) and retired participants (former participants).

Pursuant to the plan terms, the court explained, a retired participant could not be an employee participant and, as a former participant, could not be a current participant. Even reading the plan as to give effect to all of its provisions, the court could not ignore the plain text of the plan. As the retirees were not participants under the plan, the lump-sum cash-out condition of the plan’s change of control provision did not apply to them.

Remedy did not exceed court’s discretionary authority

The company alternatively argued that the trial court’s remedy exceeded its discretionary authority. Objecting to the retirees being allowed to retain the lump-sum payments, the company suggested that the appropriate remedy would be the return of the lump-sums followed by the reinstatement of the monthly benefit payment. The court, while conceding that the trial court’s remedy was not perfect, found it to be an appropriate exercise of judicial discretion and not an impermissible reformation of the plan.

Source: Gill v. Bausch & Lomb Supplemental Retirement Income Plan (CA-2).

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