Court Finds Abuse of Discretion in Eligibility Process for Non-Profit’s SERP

Required Board approval before an employee could be eligible to participate in the SERP was not included in the original eligibility provision of the plan.

A federal court judge has ruled that a former employee of the non-profit Young Adult Institute (YAI) was eligible for, but never enrolled in, a Supplemental Executive Retirement Plan (SERP), and therefore, is owed benefits.

First, U.S. District Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York, rejected the defendants’ contentions that the plaintiff’s Employee Retirement Income Security Act (ERISA) claim is barred by the applicable statute of limitations, or by the defenses of laches or equitable estoppel.

According to the court document, in December 2001, the plaintiff met two of the three criteria of the 1985 SERP:  she (i) had worked at YAI for 15 years; and (ii) had a compensation that was not fully considered in the computation of Federal Social Security benefits.  She believed she met the third criterion, requiring that she be a management employee, because she considered her job as controller to be a management-level position.

However, the Board determined that she was not a management employee within the meaning of the SERP until she was promoted to the position of CFO on July 1, 2006, and Failla previously concluded that this determination was reasonable. Accordingly, the judge determined that the plaintiff satisfied the eligibility criteria of the 1985 SERP on July 1, 2006.

Failla said it appears that, in July 2006, none of the relevant parties believed the plaintiff would be automatically enrolled in the SERP simply because she had satisfied the eligibility criteria.  The defendants, as well as the plaintiff, believed that no person eligible for inclusion in the SERP could be included in the SERP absent express approval from the Board. 

Both parties agree that, from 2004 to 2009, the plaintiff had multiple conversations with YAI’s CEO regarding her participation in the SERP. She consistently maintained that the CEO told her that Board approval was necessary for her participation in the SERP and that the Board was certain to approve her participation. The CEO recommended to the Board that the plaintiff be approved for inclusion in the SERP a total of four times from approximately 2004 to 2008. The Board declined to approve her each time. The final time was in 2008, when the CEO was nearing the end of his tenure at YAI. The Board told him they intended to defer consideration of the plaintiff’s participation in the SERP until after a new CEO and a new chairman of the Board had been appointed, so the application could be examined with “fresh eyes.” The CEO kept the plaintiff fully apprised of each interaction.

Failla found that the plaintiff was led to believe that Board approval was required to enter into the SERP, and that such approval remained, at the least, a very real possibility through 2009. “The fact that the Board had declined to approve Plaintiff for inclusion on the SERP in prior instances would not have provided Plaintiff with clear notice that she would never be approved, because no declination was said to be final or to have been based on Plaintiff’s lack of fitness or failure to qualify,” Failla wrote in the court order.

She disagreed with the defendants’ argument that the record proves the inverse is true:  They contended that the 2008 Amendment put the plaintiff on notice that the SERP was forever closed to her. The 2008 Amendment revised Section 10.1.2 of the SERP, which had set forth the eligibility criteria, to state that “Effective July 1, 2008, the Plan’s sole Participants shall be Joel M. Levy, Philip H. Levy, Stephen Freeman, and Thomas Dern.” Based on testimony and evidence, Failla found that the plaintiff saw the amendment for the first time in July 2010. 

In addition, Failla was not convinced that the plaintiff was made aware that she would be excluded from the SERP when she saw the 2008 Amendment. The amendment did provide a list of the “sole participants” in the SERP effective July 1, 2008, but she had been told by the CEO that the Board had considered adding her to the SERP in 2008, and that the Board would take up that issue again in 2009, after a new CEO was installed. 

In the spring of 2014, the plaintiff approached the then-Chairman of the Board to discuss her SERP benefits. He informed her that, because she was nearing retirement from the organization, YAI would have its legal counsel begin to prepare her SERP package. On July 1, 2014, she received a phone call from the chairman, who told her that the Board had denied her SERP benefits. Failla found that conversation to be the first time anyone at YAI had unequivocally told the plaintiff that she would never be a participant in the SERP.

On August 12, 2016, the plaintiff submitted a formal claim for benefits with the SERP Plan Administrator.  That claim was denied on November 10, 2016. She appealed the denial on January 15, 2017, and that appeal was denied on April 17, 2017. She was informed that the April 17, 2017, letter was meant as a final decision subject to review under ERISA.

Faiila determined in a prior opinion that the Board’s decision was arbitrary and capricious, but she was unable at that time to determine if the plaintiff was, in fact, a participant in the SERP and owed benefits accordingly. Failla this time concluded that the plaintiff is a participant in the SERP and attained a vested interest in the SERP on July 1, 2006. 

Failla found the Board’s decision that the SERP required Board approval before an employee could be eligible to participate in the SERP represented an abuse of discretion. That was not included in the original eligibility provision of the SERP. Thus, the Board’s decision to deny the plaintiff SERP benefits because she had not received Board approval was premised on an unreasonable construction of the terms of the SERP itself and was not worthy of deference under ERISA.

The judge stopped short, however, of granting summary judgment in the plaintiff’s favor and finding that she had a vested interest in the SERP. Failla declined to go to this next step because additional evidence needed to be adduced to determine if the Board’s actions in 2005, which included adopting a recommendation to limit benefit accruals under the SERP to YAI’s top five executives, might have precluded the plaintiff from vesting in the SERP in 2006, before she was a top five executive at YAI.

According to Failla, “The situation changed appreciably with the Second Circuit’s decision in Levy v. Young Adult Institute, Inc.”  In that, the 2nd U.S. Circuit Court of Appeals held that the Board’s actions in 2005 did not constitute a valid amendment of the SERP, finding “YAI’s purported 2005 SERP amendment was invalid because YAI did not follow the SERP’s specific amendment procedures.”

“By virtue of the Second Circuit’s decision in Levy, and the parties’ stipulation thereto, the Court concludes that there is no longer any dispute concerning the effect of the Board’s actions in March 2005. The Board’s actions did not amend the SERP and could not have limited the individuals admissible into the SERP. Thus, the Eligibility Criteria contained in the 1985 SERP were in effect in 2006. Based on the facts contained within the administrative record, the Court concludes that Plaintiff met each of the three Eligibility Criteria on July 1, 2006,” Failla wrote.

She ordered an additional hearing, consisting of oral argument from both the plaintiff and the defendants, to determine the amount of benefits to which the plaintiff is entitled.