Loffredo v. Daimler AG
In Loffredo v. Daimler AG, retired executives—whose supplemental executive retirement benefits did not survive Chrysler’s bankruptcy—learned they have no remedy available under state law because the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) governed their plan. As a result, executives age 62 or older will no longer receive supplemental retirement benefits. Take heed and, among other things, understand the legal framework of what you’re negotiating, be proactive early and formally obtain the Board’s/credit union’s position.
Understand the legal framework of what you’re negotiating. The executives participated in a supplemental executive retirement plan (“SERP”). A SERP is generally structured as a “top-hat plan”— an unfunded plan whose participation is limited to a select group of management or highly compensated employees—aimed at providing retirement security beyond the benefits of a tax-qualified pension plan.
Even though a SERP’s assets may be held in a rabbi trust, the assets remain unprotected from creditors of a credit union and vulnerable to the risk that the assets would be lost due to insolvency. It is this risk that allows credit union executives to avoid any present tax liability on the credit union’s contributions to the SERP.
In addition, although SERPs are governed by ERISA, they are exempt from many of ERISA’s provisions, including the fiduciary duty provisions. Under ERISA, fiduciaries are obligated to act prudently and solely in the interests of plan participants and beneficiaries. Congress exempted top-hat plans from ERISA’s fiduciary requirements because executives have the bargaining power to negotiate particular terms and monitor their interest under the plan, and therefore they do not need ERISA’s protections. Really?! Many executives do not realize they may be flying solo—i.e, without the protection of certain laws—in their dealings and negotiations surrounding SERPs.
Be proactive early, even respected tax counsel wouldn’t be hard pressed on the Hobson’s choice of whether to receive zero compensation or suffer the adverse tax consequences associated with receipt. In 1998, Chrysler agreed to a merger, and upon learning of this transaction, the executives became concerned that their benefits would be at risk if the post-merger entity became insolvent or filed for bankruptcy. At the time, the executives had the option of continuing to work or terminate their employment and immediately access certain of their benefits.
In deciding to continue their employment post-merger, the executives relied on a letter between the merging entities [not directed to them] which—according to the executives’ personal understanding—meant that the rabbi trust would have sufficient assets to cover the SERP’s obligations. The executives also assert that Chrysler securitized benefits for certain other active and retired executives by, among other things, purchasing annuities, but did not do so for them. There is no mention in the record that the executives attempted to negotiate for similar treatment.
In addition, the executives alleged that Chrysler intentionally failed to disclose the serious financial trouble of the company. On all of these grounds, the executives sued under state law for, among other things, breach of fiduciary duty, age discrimination and silent fraud.
Formally Obtain the Board’s/Credit Union’s position. The executives thought they understood Chrysler’s position, however, as often happens once litigation commences things quickly changed.
Chrysler affirmatively argued, in its motion to dismiss the lawsuit, that the claims of the executives are completely preempted and governed by ERISA. Chrysler argued that because ERISA excludes top-hat plans from its fiduciary duty provisions the executives cannot bring any state or federal breach of fiduciary duty claims. The executives proclaimed that their state law fiduciary breach claim is not preempted by ERISA because top-hat plans are exempt from ERISA’s provisions and, as such, state law governs their claim. The executives argued, in the alternative, that even if ERISA governs the court should consider their claims under ERISA.
In granting Chrysler’s motion to dismiss, the U.S. District Court for the Eastern District of Michigan found that the executives’ state law based fiduciary breach claim was completely preempted by ERISA and therefore could not be considered. The court went on to construe the allegations underlying the other claims as if such allegations had been asserted under ERISA but found that none of the allegations amounted to an ERISA violation.