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MILLER v. HELLER

February 14, 1996

MARTIN H. MILLER, Plaintiff,
v.
RONALD G. HELLER; CLUETT PEABODY & CO., INC., HARRIS P. HESTER; WEST POINT-PEPPERELL; CLUETT PEABODY'S COMPENSATION COMMITTEE; and PATRICK WALSH, Defendants. STEVEN J. LOWENTHAL, Plaintiff, -v- RONALD G. HELLER; CLUETT PEABODY & CO., INC., HARRIS P. HESTER; WEST POINT-PEPPERELL; CLUETT PEABODY'S COMPENSATION COMMITTEE; and PATRICK WALSH, Defendants.



The opinion of the court was delivered by: COTE

 DENISE COTE, District Judge:

 Plaintiffs filed these actions in 1990 seeking to recover from defendants monies allegedly due under deferred compensation plans entered into by the plaintiffs during their employment at Cluett Peabody & Co, Inc. ("Cluett"). *fn1" The claims are based on the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1145, and common law. On March 13, 1995, the Court issued an Order granting in part defendants' motion for summary judgment, ruling that the plans at issue were ERISA plans, and dismissing plaintiffs' claims based on the common law, their claims for punitive damages, and their claims against the defendants other than Cluett and West Point-Pepperell, Inc. ("WPP"). Currently before the Court are cross motions for summary judgment that raise only the question of whether the deferred compensation plans at issue are funded or unfunded plans under ERISA, which in turn determines whether the plans qualify for certain exemptions from the requirements of ERISA. *fn2" In this case, the defendants had purchased life insurance policies to recover the costs of paying retirement benefits. For the reasons set forth below, the Court finds that the retirement plans at issue are unfunded.

 SUMMARY JUDGMENT STANDARD

 Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed. R. Civ. P. In making this judgment, the burden is on the moving party, and all facts must be viewed in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). This Rule does not, however, place a burden on the moving party to come forth with affirmative evidence. As stated in Lujan v. National Wildlife Federation,

 
Rule 56 does not require the moving party to negate the elements of the nonmoving party's case; to the contrary, "regardless of whether the moving party accompanies its summary judgment motion with affidavits, the motion may, and should, be granted so long as whatever is before the district court demonstrates that the standard for the entry of summary judgment, as set forth in Rule 56(c), is satisfied."

 497 U.S. 871, 885 110 S. Ct. 3177, 111 L. Ed. 2d 695 (1990) (quoting Celotex, 477 U.S. at 323). When the moving party has asserted facts which demonstrate that plaintiff's claim cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on "mere allegations or denials" of the facts asserted by the movant. Rule 56(e), Fed. R. Civ. P.; accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994). Thus, in determining whether to grant summary judgment, this Court must (i) determine whether a factual dispute exists based on evidence in the record, and (ii) determine, based on the substantive law at issue, whether the fact in dispute is material.

 BACKGROUND

 The sole issue before the Court is whether the Executive Permanent Insurance Program ("EPI") provided by Cluett to plaintiffs, each of whom is a former high-level executive with Cluett, constitutes a "top hat" plan under ERISA. Top hat plans are those plans that are "unfunded and . . . maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. See 29 U.S.C. §§ 1051(2), 1081(a)(3), 1101(a)(1). These plans are exempt from a number of ERISA's requirements, including the portions of the statute dealing with participation and vesting, funding, and fiduciary responsibilities. Instead, the plans are subject solely to the reporting, disclosure, administration, and enforcement portions of ERISA. See id. ; Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d 923, 930-31 (3d Cir. 1985), overruled on other grounds by Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir. 1993). *fn3"

 Under ERISA, there are two types of plans, employee welfare benefit plans and employee pension benefit plans. Section 1002(1) of ERISA defines welfare plans to include plans that are established for the purpose of providing, among other things, benefits in the event of death or disability. See 29 U.S.C. § 1002(1). In contrast, Section 1002(2)(A) defines pension plans as those programs that either (1) provide retirement income, or (2) result in a deferral of income for periods extending beyond the termination of employment. Id. § 1002(2)(A). Based on these definitions, the life insurance agreement would constitute a welfare plan while the deferred compensation agreement would constitute a pension plan. Because the plans are of different types and because the two agreements do not refer to each other in any manner, the agreements must be treated as two separate ERISA plans for the purpose of determining whether the deferred compensation plan is funded or unfunded.

 1. The Life Insurance Plan

 The basic goal of the life insurance plan is to provide the executive with life insurance equal to five times the executive's annual salary at no net cost to Cluett. Although the goal of the policy is simple, the plan itself is somewhat complex. First, although under the insurance agreement the executive is technically the owner of the policy, *fn4" the incidents of ownership do not lie solely with the plaintiffs. The policy's cumulative cash value, *fn5" being greater than the life insurance component, is split between plaintiffs and Cluett. Although the plan provides the executive with life insurance equal to five times the executive's salary, the plan's face value is significantly higher than this amount. Based on an actuarial analysis, it is the intention that the difference will provide sufficient funds to finance the executive's death benefit, repay Cluett for its investment in the policy (including interest) and permit Cluett to recoup the cost of providing the deferred compensation outlined below. Further, although Cluett is responsible for paying the premiums, plaintiffs are obligated to repay Cluett the premiums which Cluett has paid on behalf of the plaintiffs (except for that portion already withheld from plaintiffs by Cluett that is sufficient to offset all taxable income deemed received by the executive under the tax laws), *fn6" as well as Cluett's interest in the cash value of the policy. Repayment is secured by the collateral assignment discussed below.

 The split nature of the policy's ownership is also demonstrated by the fact that the policy provides for split beneficiaries. The executive has the right to designate a beneficiary for an amount equal to five times the executive's annual salary; Cluett has the right to designate a beneficiary for the remainder of the policy value. In addition to providing for life insurance, the policy provides that both Cluett and the executive may borrow against the policy amounts not in excess of their respective cash values in the policy.

 The life insurance agreement terminates upon the occurrence of one of five events: (1) termination of the agreement by either party oh thirty-days notice; (2) termination of the executive from employment with Cluett unless due to a disability that occurs prior to the executive's reaching 55 years of age or due to the executive's normal retirement; (3) the executive's reaching 65 years of age; (4) bankruptcy, receivership, or dissolution of Cluett; or (5) at the option of the non-breaching party, if the other party fails to pay premiums as required by the agreement. *fn7" Upon termination of the agreement, Cluett is entitled to receive ownership of that portion of the policy equal to Cluett's cash value as of the date of the termination. According to the agreement, Cluett's portion "may be the entire policy." In order to achieve this, Cluett may enter into such agreements with the insurance company as are necessary to partition the policy.

 In conjunction with the insurance agreement, and as a form of collateral security for any of plaintiffs' liabilities to Cluett under the agreement the plaintiffs executed assignments of the life insurance policies. These assignments expressly provide Cluett with the sole rights, inter alia, to surrender the policy and collect the net proceeds from the insurer. In addition, Cluett is assigned the "right to obtain one or more loans or advances on the policy." Cluett has the right to reassign its rights in the policy as security for the repayment of such loans. These rights are limited, however, such that Cluett

 
will not exercise either the right to surrender the Policy or (except for the purpose of paying premiums) the right to obtain policy loans from the Insurer, until there has been default in any of the Liabilities or a failure to pay any premium when due, nor until twenty days after the Assignee shall have mailed . . . to the undersigned . . . notice of intention to exercise such right.

 Finally, the assignment provides that

 
in the event of any conflict between the provisions of this assignment and the provisions of the note or other evidence of any Liability, with respect to the Policy or rights of collateral security therein, the provisions of this assignment shall prevail.

 2. The Deferred Compensation Plan

 The second agreement entered into between Cluett and the plaintiffs was the deferred compensation agreement. This agreement provides for receipt by the executives of benefits for the rest of their lives equal to, at a maximum, 30 percent of their highest annual salary, plus benefits to a designated beneficiary for the remainder of the beneficiary's life equal to 15 percent of the executive's maximum annual salary (as adjusted by various factors). In addition, the plan provides for a vesting period and provides no benefits if the executive dies prior to the date payments are to begin. The agreement also includes a no-compete clause that permits Cluett to ...


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