Pension & Benefits News Cashed-out former employee not subject to arbitration provision in ESOP
Thursday, October 11, 2018

Cashed-out former employee not subject to arbitration provision in ESOP

By Pension and Benefits Editorial Staff

A mandatory arbitration provision in an ESOP did not apply to a former employee who had cashed out her entire account balance and ceased participation in the plan, according to a federal trial court in Ohio. As the former employee no longer qualified as participant, as defined by the plan, she was not a “claimant” subject to the plan’s arbitration terms.

Plan amendment requires mandatory arbitration of ERISA claims. Henny Penny Corp. was family-owned until December 30, 2014, when the corporation sold all of its stock to the Henny Penny ESOP for $165 million. The stock purchase was paid for by a $165 million loan from Henny Penny to the plan, to be repaid over 45 years.

Following the sale, the plan was amended, effective January 1, 2017, to add a mandatory and binding arbitration provision, which required arbitration of all claims asserted by a “claimant” in his or her individual capacity. In addition, the arbitration terms prohibited group, class, or representative claims.

A former employee and plan participant who left the company in May 2015 and cashed out her individual account in November 2016 brought suit in July 2017 against the plan trustee, alleging prohibited transactions and breach of fiduciary duty under ERISA. Suing on behalf of the plan and a class of all other similarly situated persons, the former employee alleged that the trust paid more than the fair market value for the stock and paid a “control premium” for the stock, even though the family remained in control of the company following the December 2014 stock purchase transaction. The suit sought injunctive relief and the difference between the price paid by the plan and the actual value of the stock, to be allocated to the individual accounts of the class members.

Henny Penny and the trustee filed separate motions seeking to compel individual arbitration of the action and to further strike any claims based on a class or representative basis. The former employee contended that she was not bound by the arbitration requirement because she: (1) did not agree to arbitration, as the provision was added to the plan after she left the company, (2) received no consideration in exchange for the arbitration amendments, and (3) fell outside the plan’s definition of a “claimant.” The federal trial court overruled the motions, allowing the former employee to continue to pursue her claims on a class basis.

Former employee did not agree to arbitrate. Initially the court explained that while ERISA plans may include mandatory arbitration and class action waivers, arbitration is a matter of contract between parties. Thus, a party cannot be required to arbitrate a dispute it has not agreed to submit to arbitration.

With respect to the instant case, the court noted that the former employee had left the company and completely cashed out of the plan before the arbitration provision was enacted. Moreover, her cause of action accrued in 2014, when the stock purchase transaction occurred, two years prior to the amendment of the plan. The company and the trustee, however, argued that the former employee remained bound by the arbitration requirement because the plan had consented to arbitration and the provision was in effect when she filed suit.

The court conceded that employers and plan administrators have broad discretion to modify the terms of a plan. However, a modification will not necessarily bind individuals who have ceased all participation in the plan and whose cause of action accrued prior to the modification. Thus, the former employee was not bound by the arbitration requirement.

Claims outside scope of arbitration provision. The central issue in the case was whether the former employee was subject to arbitration as a “claimant.” The plan expressly defined a claimant as an “employee, participant, or beneficiary.” The plan further stated that an individual who is no longer an employee will cease to be a participant if his or her entire plan benefit is paid in a lump-sum distribution which represents the individual’s entire interest in the plan. Applying the clear terms of the plan, the court determined that because the former employee had terminated her employment, cashed out the entire balance in her ESOP account, and ceased all participation in the plan, she could not be a claimant as defined by the plan. Accordingly, the court concluded that the claims of the former employee were not subject to arbitration.

The company and the trustee maintained that the former employee could not claim to be a vested plan participant for purposes of the company shares allocated to her account while also denying being a participant for arbitration purposes. The court, however, explained that a party may be a participant for purposes of ERISA standing, yet fall outside the plan’s definition of a participant subject to arbitration. The fact that the former employee had statutory standing to assert claims on behalf of the plan, the court stressed, did not subject her to the plan’s arbitration provision, as she was not a participant as that term was defined by the plan.

Source: Brown v. Wilmington Trust, N.A., (DC OH).

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