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05/26/88 the Babcock & Wilcox v. the Babcock & Wilcox

May 26, 1988

SUPREME COURT OF ILLINOIS I. DEAN ARNOLD ET AL., APPELLANTS

v.

THE BABCOCK & WILCOX COMPANY, APPELLEE



525 N.E.2d 59, 123 Ill. 2d 67, 121 Ill. Dec. 253 1988.IL.828

Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Winnebago County, the Hon. David F. Smith, Judge, presiding.

APPELLATE Judges:

JUSTICE MILLER delivered the opinion of the court.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MILLER

The plaintiffs, who are 25 former salaried employees of the defendant, the Babcock & Wilcox Company , brought this action in the circuit court of Winnebago County to recover certain severance benefits from B&W under the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 through 1461 (1982)) . Following a bench trial, the circuit Judge entered judgment for the plaintiffs, awarding them a total of $181,590.01 in damages, plus attorney fees of $30,000. The appellate court reversed the trial court's judgment. (154 Ill. App. 3d 863.) We allowed the plaintiffs' petition for leave to appeal (see 107 Ill. 2d R. 315(a)), and we now affirm the judgment of the appellate court.

The plaintiffs were employed by B&W at its manufacturing plant in Rockford. The Rockford facility was a unit of the automated machine division of B&W, which itself is a wholly owned subsidiary of McDermott International, Inc. B&W's main line of business is the design, manufacture, and construction of power generation systems; the automated machine division manufactured machine tools and nuclear components. In 1981, B&W decided to leave the machine tool business and began searching for a buyer for the automated machine division, which included plants in Rochester, Michigan, and Greer, South Carolina, in addition to that in Rockford. B&W sold the division to Acme Precision Products, Inc., in 1982. In the transaction, Acme purchased the entire operations of the Rockford facility, including the plant, inventory, and equipment. The sale was announced by Acme to the employees in Rockford on June 17, 1982, and the transfer of assets occurred the next day, June 18. Acme's announcement of the sale said, "It is our intention to continue the operations of this facility in essentially the same manner as operated by The Babcock & Wilcox Company. Accordingly, effective June 18, 1982, all current salaried employees will report at their regular time and become ACME PRECISION PRODUCTS, INC. employees." The announcement also said, "Wages and benefits will be continued as presently in force, although we are considering the need to make changes in some of the benefits." Thus, at the time of the sale of the Rockford plant, the plaintiffs became employees of Acme, and there was no interruption in their work. Acme retained the plaintiffs in the same positions and pay levels they had occupied as employees of B&W. Acme initially maintained fringe benefits at the prior levels, but it later reduced them, eliminating the severance pay provisions and a thrift incentive plan. Acme closed the Rockford plant late in 1983; by that time, each of the plaintiffs either had quit his or her employment with Acme or had been laid off by Acme.

In the wake of the sale of the Rockford plant to Acme, the plaintiffs requested from B&W two severance benefits they believed they were entitled to under the company's written guidelines concerning terminations from employment. The first benefit was a termination allowance, which was computed on the basis of each salaried employee's weekly earnings, age, and length of employment with B&W. The second benefit provided for two weeks' pay in lieu of notice of termination of employment. It has been the plaintiffs' theory throughout these proceedings that B&W's sale of the Rockford plant, and the plaintiffs' subsequent employment by the new owner, Acme, terminated their employment with B&W and therefore made them eligible for, and entitled to, the severance benefits at issue here. In August 1982 a number of the plaintiffs wrote to B&W requesting the severance benefits. In response, B&W's retirement and pension board sent to the former salaried employees of the automated machine division a four-page reply to the severance-benefit requests as well as to a number of other questions that had arisen from the sale of the division to Acme. B&W explained that the employees who had been retained in their positions by the purchaser, Acme, were not eligible for the termination allowance because they had not been terminated by B&W and because they had been transferred to reasonably comparable positions. This action ensued.

The original basis for the plaintiffs' action was breach of contract. In a two-count complaint, the plaintiffs alleged that B&W's written policy regarding termination allowances and pay in lieu of notice of termination was a part of their employment contract with the company and that B&W breached the contract by refusing to make those payments. The plaintiffs later amended both counts of their complaint by alleging that B&W's refusal to pay the benefits was a violation of the Illinois Wage Payment and Collection Act (Ill. Rev. Stat. 1983, ch. 48, pars. 39m-1 through 39m-15). The plaintiffs eventually added a third count to their complaint; there they alleged that B&W's refusal to pay the severance benefits was a violation of the Employee Retirement Income Security Act of 1974 (29 U.S.C. §§ 1001 through 1461 (1982)) .

Following a bench trial, the trial Judge found in the plaintiffs' favor and awarded them a total of $152,413.77 in termination allowances and a total of $29,176.24 in pay in lieu of notice of termination; the damages were liquidated, there being no dispute concerning the calculation of those sums. The amounts awarded to the individual plaintiffs for the termination allowance ranged between $22,912.47 and $864, and for the two weeks' pay in lieu of notice of termination between $1,697.22 and $432. The plaintiffs also submitted a petition seeking an award of attorney fees, and, following a hearing on the matter, the trial Judge awarded the plaintiffs $30,000 in fees.

There is no dispute here that the severance provisions at issue are an "employee welfare benefit plan" within the meaning of section 3(1)of ERISA (29 U.S.C. § 1002(1)(1982)). (See Fort Halifax Packing Co. v. Coyne (1987), 482 U.S. 1, 7 & n.5, 18 & n.11, 96 L. Ed. 2d 1, 8 & n.5, 15-16 & n.11, 107 S. Ct. 2211, 2215 & n.5, 2221 & n.11.) A plan participant or beneficiary may bring a civil action "to recover benefits due to him under the terms of his plan, [or] to enforce his rights under the terms of the plan" (29 U.S.C. § 1132(a)(1)(1982)); the action authorized by that provision may be brought in either State or Federal court (29 U.S.C. § 1132(e)(1) (1982)). In this case, ERISA preempted the plaintiffs' State-law causes of action based on breach of contract and violation of the Illinois Wage Payment and Collection Act. Section 514(a) of ERISA broadly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" falling within ERISA's scope. (29 U.S.C. § 1144(a) (1982); see Shaw v. Delta Air Lines, Inc. (1983), 463 U.S. 85, 96-99, 77 L. Ed. 2d 490, 501-02, 103 S. Ct. 2890, 2899-2901 (discussing preemptive effect of ERISA).) In that context, "State law" includes "all laws, decisions, rules, regulations, or other State action having the effect of law." (29 U.S.C. § 1144(c) (1982).) Accordingly, in actions brought by employees to recover severance benefits, the preemption provision of ERISA has been construed as barring causes of action based on State common law and statutory law. (See, e.g., Holland v. Burlington Industries, Inc. (4th Cir. 1985), 772 F.2d 1140, 1146-48, aff'd mem. sub nom. Brooks v. Burlington Industries, Inc. (1986), 477 U.S. 901, 91 L. Ed. 2d 559, 106 S. Ct. 3267 (breach of contract, estoppel, and violation of State wage payment statute); Blau v. Del Monte Corp. (9th Cir. 1984), 748 F.2d 1348, 1356-57 (breach of contract, estoppel, and fraud); Mylstar Electronics, Inc. v. McNeil (N.D. Ill. June 2, 1986), No. 86 -- C -- 387 (violation of Illinois Wage Payment and Collection Act).) The only claim before us, then, is that alleging a violation of ERISA.

The plaintiffs originally agreed with B&W that the "arbitrary and capricious" standard was applicable here in determining whether the company's refusal to pay the contested benefits could stand. Until recently, courts applied that standard, without exception, in ERISA actions involving claims of improperly denied benefits. (See, e.g., Blakeman v. Mead Containers (6th Cir. 1985), 779 F.2d 1146, 1149-50; Anderson v. Ciba-Geigy Corp. (11th Cir. 1985), 759 F.2d 1518, 1522; Jung v. FMC Corp. (9th Cir. 1985), 755 F.2d 708, 711; Sly v. P. R. Mallory & Co. (7th Cir. 1983), 712 F.2d 1209, 1211; Dennard v. Richards Group, Inc. (5th Cir. 1982), 681 F.2d 306, 313.) Consistent with that authority, the circuit and appellate courts in this case applied the arbitrary and capricious standard in reviewing B&W's decision to deny the plaintiffs the severance benefits at issue here. And in the petition for leave to appeal and the brief filed in this court, the plaintiffs continued to adhere to the view that the arbitrary and capricious standard governed this case. At oral argument, however, the plaintiffs suggested that a standard of review less deferential to the interests of the employer would be appropriate (see Van Boxel v. Journal Co. Employees' Pension Trust (7th Cir. 1987), 836 F.2d 1048; Bruch v. Firestone Tire & Rubber Co. (3d Cir. 1987), 828 F.2d 134, cert. granted (U.S. April 4, 1988), No. 87 -- 1054, 56 U.S.L.W. 3682; Harris v. Pullman Standard, Inc. (11th Cir. 1987), 809 F.2d 1495), and we allowed the parties to submit supplemental briefs on that question.

We decline here to suggest a formulation different from the familiar and widely accepted "arbitrary and capricious" standard. In Van Boxel Judge Posner noted, "lexibility in the scope of judicial review need not require a proliferation of different standards of review; the arbitrary and capricious standard may be a range, not a point." That case involved the denial of a pension by a company's pension trust. The court went on to say:

"Flexibly interpreted, the arbitrary and capricious standard, though infelicitously -- perhaps even misleadingly -- worded, allows the reviewing court to make the necessary adjustments for possible bias in the trustees' decision. So there is no urgent need to throw it overboard and cast about for an alternative verbalization. Where . . . the claimant does not argue or is unable to show that the trustees had a significant conflict of interest, we reverse the denial of benefits only if the denial is completely unreasonable. The greater the conflict of interest of a majority of the trustees, the less we defer to a denial of benefits that appears to be wrong." (Van Boxel v. Journal Co. Employees' Pension Trust, 836 F.2d at 1053.)

In their supplemental brief, the plaintiffs in this case contend that B&W had no possible reason to grant the request for benefits, because any amounts paid would come from the company's general assets. The plaintiffs therefore believe that the decision to deny them the severance benefits should be viewed with special caution. For the reasons set out below, we conclude here that B&W's decision to deny the plaintiffs the requested severance benefits was warranted under the terms of the severance provisions and was not arbitrary and capricious, even under the more searching review proposed by the plaintiffs in their supplemental brief.

The dispute in this case centers on a written policy of B&W that was contained in the company's administrative manual and was identified there as Policy and Procedure No. 1414 -- A1. With respect to an employee's eligibility for the termination allowance, Policy No. 1414 -- A1 states:

"Full-time, salaried employees whose services are permanently terminated by the Company and who have either

a. One or more years of company service (if over 45 years of age), or

b. Five or more years of company service ...


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