Three retired executives of Bausch & Lomb Inc. have won a district court battle to reinstate their supplemental executive retirement plan (SERP) benefits, which were terminated following a 2007 acquisition of the company by a private equity firm. As the only participants in the SERP, the three former executives were receiving monthly supplemental benefits for life at the time of the acquisition. The benefits were funded by irrevocable secular trusts established by the company. In connection with the pending acquisition, the executives were informed that the SERP’s change in control provisions required the termination of the plan and the conversion of their lifetime monthly benefits into lump-sum payments. Arguing that the projected lump-sum payments were significantly less than the present value of the annual after-tax benefits to which they were entitled under the SERP, the executives objected to the discontinuance of the monthly installments. They disputed the company’s right to terminate the SERP and pay out lump sums, pointing to plan provisions that required the plan and the trusts to continue in effect and survive any change of control and that arguably limited lump-sum payments on a change of control to participants who were still active employees. Subsequent claims appeals were denied by the company, resulting in a 2009 lawsuit challenging the termination of their monthly benefits and the calculation of their lump-sum payments. The executives claimed that the lump-sum payments were less than the present value of the benefits to which they were entitled, and the company’s right-of-reversion to amounts in the trusts created a conflict of interest that influenced the determination of their claims.
Ruling on competing motions for summary judgment, the district court sided with the executives, ruling that the company violated the Employee Retirement Income Security Act (ERISA) when it converted the benefits to lump-sum payments and terminated the SERP. Faulting the company for its procedural violations, the court found that the company employees who made the original decision to terminate the plan acted as unauthorized plan fiduciaries by engaging in actions that were discretionary in nature. The court found that the employees lacked the discretionary authority to interpret the “hotly disputed” plan terms, to determine the rights and benefits of participants, or to act as fiduciaries under the plan. Although the “adverse benefit determination” by unauthorized parties would normally require a de novo standard of review, the court found the company’s decisions could not withstand scrutiny even under the deferential “arbitrary and capricious” standard. The court pointed to the company’s “pervasive bad faith” in dealing with the executives, the “flagrant procedural violations,” and the evidence of a “structural conflict of interest” during the internal appeals process. Noting that the three directors on the appeals committee stood to benefit financially from trust provisions that required the return of any excess assets to the company after payment of the benefits, the court concluded that the potential for a multi-million dollar reversion biased the decision making. Granting summary judgment to the executives, the court vacated the company decisions terminating their benefits under the SERP. (Gill v. Bausch & Lomb Supplemental Ret. Income Plan I, W.D.N.Y., 2014)