Appeal from a judgment by the United States District Court for the Southern District of New York, Lee P. Gagliardi, Judge, that a former employee was entitled to retroactive benefits under appellant's employee stock ownership plan. Judgment reversed. Cross-appeal from the denial of plaintiff's claims against defendants for violation of the Employee Retirement Income Security Act, the common law of fraud, and New York Labor Law. Judgment affirmed.
Before Friendly, Oakes, and Pierce, Circuit Judges.
This case arose out of the termination of employment of an executive (David S. Allen) by a national advertising representative for radio and television stations, The Katz Agency, Inc. (Katz). Allen was the owner of 15,000 shares of Katz common stock purchased pursuant to written agreements incorporating a by-law restriction requiring that the shares be resold to Katz at book value upon his termination. He also had a vested interest in Katz's Employee Stock Ownership Plan (Plan), which at the time of his termination on February 17, 1978 included a company stock account consisting of 4,071 shares of Katz common stock and 655 shares of Katz preferred. The Plan contained a "put" provision providing that at the employee's option (which Allen exercised) either the trust or the company would repurchase his shares at book value as of the preceding December 31. Claiming that the values he received were inadequate and understated, Allen brought suit in the United States District Court for the Southern District of New York before Lee P. Gagliardi, Judge, against Katz, the Plan, and the Plan's trustees (actually members of the executive committee appointed to administer the Plan).
Allen sued the defendants under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., the federal securities laws, the common law of fraud, and New York labor law. The case was tried without a jury and the court after making extensive findings of fact rejected all claims except the claim that the Plan, by its express terms as amended in 1978, retroactively entitled Allen to the fair market rather than the book value of the stock in his company account. The court therefore awarded $123,473.43 plus interest and costs. The Plan appeals the judgment against it and we reverse. Allen cross-appeals the denial of his ERISA, common law fraud, and New York labor law claims and we affirm.
As the district court found, when Allen was terminated on February 17, 1978 he was a senior vice president, a member of the board of directors and its executive committee, and a Katz employee since 1959.
In 1971, pursuant to a recapitalization scheme, Katz amended its existing profit-sharing plan to become an employee stock ownership plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954. The 1971 Plan contained a "put" provision in section 16 which provided that at the employee's option either the company or the trust created under the Plan would purchase the employee's shares, for a period of up to six months after those shares were distributed, at their fair market value. Fair market value was defined as the book value as of the December 31 coinciding with or immediately preceding the date on which the put option was exercised. In 1971 Katz also adopted a by-law similarly providing that Katz common stock could be issued or transferred only to the Plan or Katz employees at the book value of Katz common stock as of the December 31 coinciding with or immediately preceding the transaction. The by-law further provided that upon termination of employment for any reason, the Katz employee-stockholder was required to resell to Katz directly held stock at book value. All sales of Katz common stock to its employees from 1971 through 1978 were made at book value pursuant to written agreements incorporating the by-law restrictions. On October 11, 1976, after the enactment of ERISA, Katz amended the Plan. Section 16 of the 1976 Plan, however, contained a put provision similar to that of the 1971 Plan.
ERISA creates a category of exempt loan transactions allowing an employee stock ownership plan (ESOP) or the trust created under that plan to acquire company stock with the proceeds of loans from the company, its officers or directors, or its major shareholders. Since the enactment of ERISA, however, neither Katz nor the trust created under its Plan engaged in any such loan transactions, so Allen never received any Katz stock acquired with the proceeds of such loans.
The district court also found that in October 1976 the Katz board of directors, with the exception of Allen, decided to terminate Allen but did not inform him of the decision. Allen continued to perform his duties though excluded from important management decisions. On February 17, 1978, Allen received notice that he was terminated as of April 30, 1978. With the advice of counsel he later executed a termination agreement. Upon his termination he exercised his put option, receiving approximately $9.67 (the book value as of December 31, 1977) for each of the 4,071 shares of Katz common stock in his company stock account, for a total of $39,366.76. Under the Plan he also received at the time of his termination the value of his preferred stock and his other investment account, neither of which is involved here. As provided in the written agreement incorporating the 1971 by-law and in the termination agreement, Allen sold the 15,000 shares he held directly at the $9.67 per share book value, for a total of $145,050.69. Allen received a severance allowance under the termination agreement of $140,839.00, and released Katz "from any and all obligations to him" beyond those set forth in the agreement. Before executing the agreement both Allen and his attorney, on questioning whether there was an alternate method of valuing Katz stock, were informed by Samuel Jones, Katz's senior vice president of finance and treasurer, that book value was the only method.
On June 23, 1978, about four months after Allen's notice of termination, Katz consulted Kelso & Co. (Kelso), an investment banking company, which was thereafter retained to conduct an operations audit of the Katz Plan and to appraise the value of Katz common stock. Kelso informed Katz that ERISA required a change from book value to market value. In July 1978, using Katz financials through June 1978, Kelso estimated that the market value of Katz stock on December 31, 1978 would be $38.13 per share. On November 20, 1978 the Katz board of directors approved an amended Plan subject to a determination that the Plan qualified under section 401(a) of the Internal Revenue Code. Unlike the prior versions of the Plan, the 1978 Plan contained in section 17(b) a put provision giving distributees of Katz stock under the Plan the right to have Katz and/or the trust purchase their stock at its fair market value as determined by the Plan's executive committee. The 1978 Plan was made effective as of January 1, 1978, i.e., before Allen's termination, and section 3(a) of the amended Plan provided that "(e)ach Employee who is employed by an Employer on January 1, 1978 is automatically a Participant in this Plan." Nevertheless, the district court found, the Katz board of directors "did not intend that the Plan include terminated employees such as Allen who had already fully exercised their put option(s)."
In April 1979 Katz received from Kelso a report appraising Katz common stock as of December 31, 1978 at $40.00 per share. On May 30, 1979 Katz amended its by-laws to provide that all purchases and sales of directly owned Katz common stock would be at the fair market value adopted for purposes of the Plan. The by-law amendments became effective on May 19, 1979 and were not intended, it was found, to affect 1978 transactions such as Allen's sale of his 15,000 shares.
A. Retroactivity of the 1978 Plan
The court below held with regard to Allen's 4,071 shares under the Plan that the defendants could not evade the "plain meaning of the (amended) Plan's January 1, 1978 effective date...." Since Allen was an employee on that date, the court held that the Plan retroactively provided for a put at fair market value and thereby gave Allen a vested interest in the $123,473.43 difference between the value of his stock at market and at book. We reverse, as we agree with the Plan defendant that the court's retroactive application of the Plan to Allen overlooks the fact ...