On June 1, 2017, the United States Court of Appeals for the Fifth Circuit, in Langley v. Howard Hughes Mgmt. Co., L.L.C., 694 F. App’x 227 (5th Cir. 2017), held that William Langley, a former golf club executive, was entitled to receive approximately $255,000 in severance pay, plus attorney’s fees. The Court found that the administrator’s interpretation of a severance plan, which resulted in denying the former executive’s claim for severance pay, was an abuse of discretion because it directly contradicted the terms of the severance plan.

Background

In 2002, the Woodlands Operating Company, L.P. (“Company”) hired William Langley on an at-will basis to manage two golf clubs. In 2006, Mr. Langley was promoted to vice president of golf club operations. In connection with the promotion, the Company provided Mr. Langley an unsigned draft memorandum, which stated, in pertinent part, that Mr. Langley would receive (i) an annual “Cash Flow Participation Award” of 4% of an approved award pool, and (ii) a “Club Sale Incentive Award” of between 0.5% and 1% of the sales price if one of the golf clubs managed by Mr. Langley was sold. It was unclear if the Club Sale Incentive Award was made pursuant to an existing benefit plan, but the draft memorandum described the award as a “bonus.”

In 2007, one of the golf clubs managed by Mr. Langley was sold and he received a payment of 1% of the club’s sales price in accordance with the Club Sale Incentive Award. In 2011, the Howard Hughes Corporation (“Howard Hughes”) purchased the Company, and the Company became a wholly-owned subsidiary of Howard Hughes. Howard Hughes also adopted the Howard Hughes Management Company, L.L.C. Separation Benefits Plan (“Plan”). The Plan was an employee welfare benefit plan governed by ERISA and provided that if an “Employee” is involuntarily terminated, he or she would be entitled to certain severance benefits. The definition of “Employee” under the Plan excluded “[a]ny person whom the [Plan] Administrator determines is compensated by special fees or employed pursuant to a special contract or arrangement….” The Plan document also provided that the administrator had full discretion to interpret the Plan.

In 2013 Mr. Langley was involuntarily terminated. Following the termination Mr. Langley submitted a claim for severance benefits under the Plan. According to the Plan administrator, Mr. Langley was “compensated by special fees or employed pursuant to a special…arrangement”, on account of the Club Sale Incentive Award and accordingly, was not an eligible “Employee” under the terms of the Plan. The Plan administrator asserted that Mr. Langley’s employment likely would have terminated upon the sale of both golf clubs he managed, and that the Club Sale Incentive Award was effectively a substitute for severance benefits under the Plan. On August 10, 2014, the district court, on summary judgment, held in favor of the Plan administrator.

Holding

The Court in Langley held that the administrator’s interpretation of the Plan was an abuse of discretion as it directly contradicted the plain meaning of the Plan language.

In outlining its reasoning, the Court noted that where the language of a benefit plan grants discretion to an administrator to interpret the plan and determine eligibility for benefits, the Court’s role is “narrowly restricted to affirming the administrator’s decision unless the administrator has abused its discretion.” The Court noted that there is a two-step process to determine if there is an abuse of discretion by a plan administrator in interpreting a plan. The first step involves an inquiry into whether the administrator’s decision was legally correct. If such interpretation was legally correct, no further inquiry is needed because no abuse of discretion could have occurred. If such interpretation was legally incorrect, the Court then must review whether the decision was an abuse of discretion.

Following this two-step process, the Court determined that the Plan administrator’s interpretation to exclude Mr. Langley from the Plan on account of his participation in the Club Sale Incentive Award was not legally correct because the amount of such award was neither preset nor related to the accomplishment of any particular task by Mr. Langley, and any compensation Mr. Langley was receiving under such award at the time of his termination of employment cannot fairly be considered “special fees.” Once the Court determined that the Plan administrator’s interpretation was legally incorrect, the Court moved on to the second prong of its analysis and determined that the administrator’s interpretation of the Plan was an abuse of discretion because it directly contradicted the plain meaning of the Plan. The Court reasoned that the Plan’s “Employee” eligibility exclusion plainly did not bar Mr. Langley, an ordinary at-will employee compensated at the time of his termination by salary and bonus, from receiving severance benefits under the Plan.

Key Take Away

There is sometimes a tendency for plan administrators to rely on broad interpretation powers provided for under a severance plan in order to achieve a particular result (e.g., a denial or limitation of benefits). However, the decision in Langley is a helpful reminder that the eligibility provisions under severance plans should be carefully crafted to meet an employer’s intended goals. Ultimately, effective plan design and crafting clear administrative processes upfront can help employers avoid potential benefits denial litigation.