Appeals Court: Voucher Program Elimination Violated ERISA

June 13, 2003 ( - A move by a New Orleans-area supermarket company to drop its grocery voucher program for retirees violated ERISA because the voucher program was actually a pension plan, a federal appeals court ruled.

>In affirming the ruling of a lower court, the 5 th   US Circuit Court of Appeals said the voucher program was a pension plan instead of a welfare benefit plan because the vouchers provided income to the company’s retirees, according to Washington-based legal publisher BNA.

>While ERISA does not define income, the appeals court said it agreed with the lower court’s reliance on the Internal Revenue Code’s (IRC) definition. According to the appeals court, it   “has interpreted the term income broadly under the IRC to include anything that can be valued in terms of currency.”

“The district court was entitled to infer that when [Schwegmann’s] deducted the vouchers’ face value as a business expense on its tax returns under the category of ‘retirement plans’ and issued Internal Revenue Service form 1099-R’s to the recipients of the vouchers, [Schwegmann’s] considered the vouchers as income under the IRC,” the appeals court said.

>In addition, the appeals court agreed with the lower court that retirees who were deprived of grocery voucher benefits should get the cash equivalent of the vouchers. “We see no good reason why the district court was prohibited from making a monetary award. The classic measure of contract damages is the value of the thing of which the plaintiff has been deprived by the breach,” Circuit Judge Eugene Davis said in writing for the appeals court.

>But the appeals court reversed the lower court’s determination that the grocery store’s excess liability insurer was responsible for paying the monetary damages awarded to the retirees. In so ruling, the appeals court found the lower court incorrectly aggregated the retirees’ claims in assessing damages against the liability insurer.

Case Background

>According to the court, Schwegmann Giant Super Markets was founded in 1869 and operated as a “mom and pop” grocery store. The store eventually expanded to more than 40 sites throughout the New Orleans area and employed over 5,000 employees.

>Somewhere between 1984 and 1985, John Schwegmann, the store’s owner, decided to create a grocery voucher program for retirees. Unlike the company’s other employee benefit plans, the voucher program was never formally reduced to writing but the program was common knowledge among the employees. In addition, the company did not set up a separate trust fund to finance the voucher program, but instead funded the program out of the store’s general revenues. Each year, the store would deduct as business expenses the total face value of the vouchers issued to retirees under the program.

>Faced with financial difficulties and pressure from national chain grocery stores, Schwegmann’s was sold in 1997. Following the sale, Schwegmann sent retirees a letter advising them that as a result of the sale they would no longer receive grocery vouchers. The retirees sued Schwegmann’s, its purchaser, and John Schwegmann, alleging that termination of the program violated ERISA.

>A US District judge in the US District Court for the Eastern District of Louisiana found that despite the lack of a written plan or a source of funding, the grocery voucher program was a pension plan governed by ERISA and that Schwegmann’s and its owner violated ERISA in eliminating the program. In that opinion, the district court found that while the store owner’s decision to terminate the voucher program was not in and of itself a breach of ERISA fiduciary duties, the store’s failure to fund the plan and then terminate it without providing for protection of the retirees’ vested rights resulted in a breach of ERISA’s fiduciary standards.

>In a later opinion, the district court found that employees who left the employment of the store before reaching retirement, but who had at least 20 years of service with one year of supervisory experience, were entitled to participate in the grocery voucher program.

An Insurer’s Responsibility

>Then, in January 2002, the district court found Schwegmann personally liable as a plan fiduciary for over $5 million the store owed its retirees after it terminated the grocery voucher program Shortly thereafter, the court issued another opinion finding that the store’s excess liability insurer, United States Fidelity & Guaranty Co. (USF&G) must cover the store’s liability for paying the $5 million to former store employees who were deprived of their grocery vouchers. Although the appeals court ended up upholding most of the lower court’s decisions, it reversed the district court’s decision that USF&G owed the retirees $5 million.

>The appeals court found that the excess liability policy insured against any “claim” in excess of $250,000 and that the lower court had improperly aggregated the retirees’ claims to surpass the $250,000 threshold. USF&G was not liable to the retirees because none of the retirees individually had claims in excess of $250,000.

The case is Musmeci v. Schwegmann Giant Super Markets Inc., 5th Cir., No. 02-30246, 6/11/03.