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United States District Court, Northern District of Illinois, E.D

October 28, 1983


The opinion of the court was delivered by: Shadur, District Judge.


Bruce D. Ovitz ("Ovitz") has filed a three-count Complaint against his former employer Jefferies & Company, Inc. ("Jefferies"), Jefferies' Employees' Profit Sharing Plan (the "Plan") and the Plan's administrators (the "Administrators"), challenging their refusal to pay Ovitz (1) "earnings" of his Profit Sharing Account (the "Account") under the Plan from January 1, 1981 to the date the Account was paid him*fn1 plus a pro rata share of Jefferies' 1981 profit sharing contributions to the Plan or (2) alternatively a share of Jefferies' profits in some manner other than through the Plan. This controversy stems from Ovitz having left his job with Jefferies shortly before the end of the Plan's accounting year (December 31, 1981). Had Ovitz remained with the company through the end of the year, it is undisputed he would have been entitled to participate in both the Plan asset revaluation and the 1981 contributions to the Plan. Because he left the Company in December rather than the following January, Jefferies and Administrators, allegedly pursuant to the terms of the Plan, have declined to award Ovitz any of that amount.

Complaint Count I alleges Jefferies' and Administrators' failure to pay the contested funds to Ovitz constitutes a violation of the Plan and thus is contrary to both the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1101-45, and the common law. Complaint Count II alleges Administrators' behavior is a breach of fiduciary duty, again contrary to both ERISA and the common law. Complaint Count III alleges a contract between Ovitz and Jefferies apart from the terms of the Plan, entitling Ovitz to profits of Jefferies whether or not they would be distributed pursuant to the Plan. Counts I and II are therefore based on the terms of the Plan, while Count III is not.

Defendants now move for summary judgment under Fed.R.Civ.P. ("Rule") 56. Whatever the relative plausibility of the positions respectively advanced by the parties as to the Plan's meaning, summary disposition of Ovitz' claims is not available to defendants.

Counts I and II — Common-Law Theories

Defendants' motion for summary judgment attacks the common-law theories of Counts I and II on the ground ERISA has preempted them. Defendants contend ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), provides a cause of action for breach of a contractual pension plan agreement while ERISA §§ 401-14, 29 U.S.C. § 1101-14, provide a remedy for breach of fiduciary duty pursuant to a pension plan. As a result defendants assert there is no longer any state cause of action for those claims. Because that argument is sound, this Court dismisses Ovitz' claims the Plan has been violated to the extent such claims rest on state common law.

When Congress passed ERISA its intent (with certain exceptions not relevant here) was to sweep aside all related state law, whether consistent or inconsistent. ERISA § 514, 29 U.S.C. § 1144, expresses that congressional intent to displace state law, including common law as well as legislation. Hewlett-Packard Co. v. Barnes, 425 F. Supp. 1294, 1298-1300 (N.D.Cal. 1977), aff'd per curiam on the District Court's opinion, 571 F.2d 502, 504 (9th Cir. 1978), exhaustively reviewed the legislative history of Section 514 and concluded (id. at 1300) "that Congress carefully considered the question of preemption, including the feasibility of enacting a more limited preemption provision, and that Congress ultimately enacted Section 514(a) with the express purpose of summarily preempting state regulation of ERISA-covered employee benefit plans." Thus in enacting ERISA Congress "meant to establish pension plan regulation as exclusively a federal concern." Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523, 101 S.Ct. 1895, 1906, 68 L.Ed.2d 402 (1981) (footnote omitted).

Ovitz poses two counter-arguments. Neither is persuasive here.

First, Ovitz claims there is no preemption if the cause of action at issue only indirectly affects the legislative scheme embodied in ERISA. In our Circuit, state law that purports to govern the "terms and conditions" of pension plans generally is preempted by ERISA unless it "relates to such plans `only in the most remote and peripheral manner.'" Bucyrus-Erie Co. v. Department of Industry, Labor & Human Relations, 599 F.2d 205, 209-10 (7th Cir. 1979), quoting AT & T v. Merry, 592 F.2d 118, 121 (2d Cir. 1979). But Illinois common law, to the extent it would attempt to remedy breaches of pension plan agreements or breaches of duty by pension plan administrators, would govern the terms and conditions of pension plans in more than a remote and peripheral manner. See Dependahl v. Falstaff Brewing Corp., 653 F.2d 1208, 1214-16 (8th Cir. 1981).

Second, Ovitz argues there is no preemption if state law promotes the goals of ERISA rather than hinders them. That view however has long been discredited. See id. at 1215, finding that such an argument "misses the point." Congress can choose to regulate a field by limiting the number of remedies as well as by expanding them, and that is precisely what it has done here.

Thus it is clear Complaint Counts I and II must be based entirely on federal law. This opinion turns then to that inquiry.

Counts I and II — ERISA Theory

In the federal law context, a preliminary question is the standard of conduct to which ERISA holds Administrators. Although Ovitz properly points out ERISA requires plan administrators to act with prudence and care, 29 U.S.C. § 1104(a)(1)(B), federal courts repeatedly have held they will not reverse a decision of pension plan administrators acting in good faith unless their decision is "arbitrary and capricious in light of the language of the Plan." Wardle v. Central States, Southeast & Southwest Areas Pension Fund, 627 F.2d 820, 824 (7th Cir. 1980).*fn2

Ovitz' principal contention as to the behavior of the Administrators is that in failing to award him a share of the Plan asset revaluation and the 1981 contribution, they have acted contrary to the clear provisions of the Plan. Ovitz must prove such behavior was "arbitrary and capricious" to be entitled to relief. Ovitz apparently concedes that had his departure from Jefferies before year-end been coupled with segregation of his profit sharing account, he would not be entitled to a share of either the revaluation or the current year's contribution. However he contends that because his funds were still commingled with the funds of current employees at year-end, Plan § 5.3 necessarily entitles him to the shares in question:

  5.3 Segregation of Participant's Accounts Upon
  Severance. Following a Participant's retirement,
  death, permanent disability, or other termination
  of employment, such Participant's account if not
  previously disbursed may be segregated from the
  Trust Fund in an interest bearing account and he
  will no longer share in the income or losses or
  increase or decrease in fair market value of the
  Trust Fund, or the allocations of Company
  contributions or the allocation of forfeitures

It might perhaps be argued that Section 5.3 (viewed in isolation) establishes the moment a Participant's funds are segregated as the moment at which his or her various rights terminate under the Plan. Defendants however cite Plan § 3.2, 5.1 and 5.2, which they say reflect an intent that the termination of employment and not the segregation of funds should constitute the moment at which a Participant's rights to further participation terminate. In the interests of simplicity, only the relevant portions of those Sections are quoted:

  3.2 Cessation of Participation. A Participant whose
  employment by the Company terminates shall cease to
  be a Participant in this Plan. . . .*fn3

  5.1 Profit Sharing Account. The Administrative
  Committee shall open and maintain a Profit Sharing
  Account for each Participant upon commencement of
  his participation in the Plan. Each Participant's
  Profit Sharing Account shall be credited (or
  charged) annually with the amount allocated to it
  pursuant to subsection 5.1(a) and (b) below, and
  the Administrative Committee shall notify each
  Participant accordingly:

    (a) The Company's annual contribution made
    under Article IV for each Fiscal Year ending on
    an Anniversary Date shall be allocated among
    the Profit Sharing Accounts of Participants who
    are in the employ of the Company on said
    Anniversary Date. . . .

    (b) Amounts forfeited under the provisions of
    Article VII shall be allocated, on the
    Anniversary Date coinciding with or next
    following the date on which such amounts are
    forfeited, among the Profit Sharing Accounts of
    Participants who are in the employ of the
    Company on such Anniversary Date, provided,
    however, that no allocation of a forfeited
    amount shall be made to the Profit Sharing
    Account of a Participant who was not employed
    by the Company on the date of termination of
    employment of the Participant with respect to
    whom such amount was forfeited. . . .

  5.2 Allocation of Plan Earnings or Losses. Not less
  frequently than annually (and not more frequently
  than monthly), as of a valuation date determined by
  the Administrative Committee, the Administrative
  Committee shall separately determine or cause to be
  determined, the fair market value of the net assets
  of each Investment Fund (and any unallocated funds)
  held under the Trust fund, excluding the Company's
  contributions to the Plan for the period since the
  last valuation date. Any increase or decrease in
  the fair market value of such assets since the most
  recent prior valuation date shall be allocated
  among the accounts of Participants who then have an
  interest in such Investment Fund (and any
  unallocated fund). Such allocation to any account
  of any such Participant shall be in the proportion
  that such Participant's account balance bears to
  all other account balances in said Investment Fund
  (or unallocated fund) after the allocation of
  forfeitures set forth in Section 5.1(b), but before
  the allocation of Company contributions with
  respect to the period since the most recent prior
  valuation date.

Defendants contend Section 5.3 deals with two events, one of which (the possible segregation of funds) "may" and the other of which (cessation of further Plan participation) "will" take place following termination of employment. In their view Section 5.3 does not condition the termination of Plan participation on prior segregation.

Admittedly it is conceivable Section 5.3 might be read differently, as describing a three-step sequence of events: termination of employment, segregation and finally cessation of participation rights under the Plan. To read Section 5.3 in that manner, however, would be to create an unnecessary ambiguity in the Plan. Without reference to Section 5.3 the other quoted sections (Plan §§ 3.2, 5.1 and 5.2) are entirely clear in providing an employee's Plan participation rights cease as soon as the employee ceases to be employed by Jefferies. If the Section 5.3 possibility of segregation of an employee's account is read literally — as something that "may" but need not occur after termination of his or her employment*fn4 — what Ovitz argues is the critical last clause of Section 5.3 is no worse than repetitive, conforming to the other Plan provisions under which employees' Plan participation rights cease upon termination of employment.

That appears to leave the issues in this posture at this point of the analysis, assuming the consistency of Plan administration referred to in Owens Aff. ¶ 12:

    1. Administrators could not possibly be said to
  be "arbitrary and capricious" if they decided
  Ovitz had no right to share in Jefferies' 1981
  Plan contribution or in 1981 forfeitures. Plan
  § 5.1(a) and 5.1(b) specifically and clearly limit
  such sharing to "Participants who are in the employ
  of the Company on [the] Anniversary Date [December
  31, 1981]. . . ." Ovitz was not. Nothing in Plan §
  5.3 would warrant this Court's flouting of such
  unambiguous language if the Administrators did not
  do so.

    2. Ovitz' claim to a share in the "increase or
  decrease in the fair market value of [the
  Investment Fund] assets since the most recent
  prior valuation date [December 30, 1980]" stands
  on a somewhat less plain footing, though here too
  defendants would appear to have the better of the
  argument. Plan § 5.2 accords such sharing to
  "Participants who then [i.e., December 31, 1981]
  have an interest in such Investment Fund."
  Literally Ovitz was not then a "Participant," for
  he was not then an employee. But the variations in
  usage adverted to at n. 3 preclude that fact from
  being wholly determinative. Thus it is necessary to
  examine whether a terminated employee continues to
  "have an interest in such Investment Fund" until
  his or her account is segregated as permitted under
  Plan § 5.3.

Only the last-mentioned question requires further scrutiny.

On that score the evidence adduced by the parties is not such as to permit summary judgment. Defendants point to Paragraph 5 of the Summary Plan Description given to all Jefferies employees (including Ovitz):

  Because a revaluation of accounts is made only
  periodically, an individual Participant's
  account, when distributed, generally will not
  reflect investment results since the last
  Valuation Date. In other words, the value of a
  Participant's account for distribution or other
  purposes generally will be the value of the
  account as of the last preceding Valuation Date.
  When a Participant's employment terminates, his
  account will not share in the investment results
  of the Trust Fund for the period since the last
  valuation. However, if such terminated
  Participant's account is not to be distributed
  upon termination, it may be placed in an interest
  bearing account in a bank or savings and loan
  association and in

  such case will earn the interest rate applicable
  to that bank or savings and loan association

That is surely persuasive, but it is not necessarily controlling, for a wrongful uniformity of plan interpretation may itself be "arbitrary and capricious." Dennard, 681 F.2d at 315; Morgan v. Mullins, 643 F.2d 1320, 1324 n. 4 (8th Cir. 1981). And Owens' statement as to the consistent administration of the Plan*fn5 may be undercut by Ovitz' Aff. ¶ 7, which says the other two Administrators were of the opinion he was entitled to the disputed Plan benefits. In sum defendants may well prevail on an expanded presentation of all the facts, but they are not now home free as a matter of law.

Because the parties will have the further opportunity to elaborate their proof (and their legal arguments as well), a few comments on other issues raised in their briefs may be in order. Though added facts may cast a different light on things, Ovitz' arguments about (1) the absence of Administrators' minutes and (2) the fact he was paid more interest than defendants' reading of the Plan would mandate seem no better than makeweight (if that). And his contention he had a right to have the Plan revaluation and allocation made monthly rather than annually (Pl. Mem. 15-16) is not even specious.

As for the issue of Plan administration, Ovitz may have difficulty in asserting both that two of the three Administrators supported his position and that an attempt to exhaust his administrative remedies under Plan § 11.3 would have been futile.*fn6 Even if Ovitz were to make that passage between Scylla and Charybdis, if the construction now advanced by defendants is not "arbitrary and capricious" Ovitz may be entitled only to a current determination of his rights by the Administrators — not necessarily to a money award conforming to Ovitz' own reading of Plan § 5.2 and 5.3.

Finally Ovitz argues Jefferies is liable for an ERISA violation because it demoted him in a deliberate attempt to escape its liabilities to him under the Plan. Defendants urge strongly this is a new theory of liability, and it may well be.*fn7 Complaint ¶ 11 alleges only that Ovitz was demoted and then as a result left the company. That was hardly enough, even under the liberal notice pleading approach of the Rules, to have put defendants on notice of Ovitz' "constructive discharge" theory — first advanced in his responsive memorandum.

Understandably, then, defendants' response to the constructive discharge assertion was to concede all facts upon which Ovitz relies and to argue it is therefore impossible for disputed issues of material fact to remain. They urge this Court to decide as a matter of law whether Ovitz was constructively discharged.

That would be premature on the limited evidence now before this Court. Whether a reasonable person in Ovitz' position would have resigned as a result of his demotion, and whether defendants deliberately put Ovitz in that position "for the purpose of interfering with the attainment of any right to which [he] may become entitled under the plan" (29 U.S.C. § 1140),*fn8 must be determined from the totality of the circumstances.

Count III

Ovitz' final theory is that he has a contractual right to receive a share of Jefferies' profits. That claim too withstands defendants' motion for summary judgment, though it is not at all clear it gives Ovitz anything more than Counts I and II would.

Defendants initially contend Count III has been preempted by ERISA. However, both cases they cite for that proposition dealt with alleged disruption of pension benefits. Dependahl, 653 F.2d at 1711-12; Witkowski v. St. Anne's Hospital, 113 Ill. App.3d 745, 69 Ill.Dec. 581, 447 N.E.2d 1016 (1st Dist. 1983) (constructive discharge). As Ovitz correctly points out, his third claim is for breach of an employment contract, not breach of a pension plan. And ERISA does not provide a statutory remedy for breach of employment contracts.

Defendants then urge the poverty of Ovitz' "contract" arguments, citing various admissions made by Ovitz during his deposition as well as his affidavit's lack of precision as to just what was promised him. It does seem very possible the only promise he can prove is one to receive a share of the profits pursuant to the Plan or, if not, one that may be too vague for enforcement.*fn9 But those and other questions are best left to await proof.


Complaint Counts I and II are dismissed insofar as they rely on state law. In all other respects defendants' summary judgment motion is denied.

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