11/30/07 4:45 PM
8th Circuit: Denial of Deferred Compensation Payments Upheld
By Douglas H. Duerr
Five former executives were properly denied deferred compensation payments because they were covered only by a plan that required payments from their former, bankrupt employer rather than by a separate plan maintained by the acquiring company, according to the
8th U.S. Circuit Court of Appeals
Prior to June 2000, NRG was the wholly owned subsidiary of NSP, which operated power plants and marketed and sold energy. Four of the five executives who sought deferred compensation benefits had worked for a while with NSP before going to work for NRG. (The other executive had gone to work directly for NRG.)
In June 2000, NRG was spun off in an initial public offering. A month later, NSP merged with another company to form Xcel. Xcel ended up owning approximately 74 percent of NRG.
After some initial success, NRG experienced serious financial difficulties. Thus, in 2002, Xcel purchased NRG’s publicly traded stock and merged NRG with a wholly owned subsidiary. The five executives were terminated in June 2002 following the merger and sought benefits under a severance plan. They forced NRG into involuntary bankruptcy and obtained a settlement that resulted in cash payments totaling $10 million. The settlement agreement specifically excluded any deferred compensation plans maintained by NSP or Xcel.
In 1980, NSP had established a “top hat plan,” which provided deferred compensation to a select group of highly compensated employees without their being subject to the Internal Revenue Code’s maximum annual benefit and compensation requirements. The top hat plan was restated in 1992 and again in 2002. Xcel also became the sponsor upon the 2000 merger with NSP. Confusingly, in 2000, Xcel issued a “2000 statement” regarding a top hat plan, and Xcel and the former executives disputed whether the 2000 statement was a stand-alone plan or simply another restatement of the old NSP top hat plan.
Whether the 2000 statement was a stand-alone plan or restatement of the old plan was crucial to the executives’ claims. If they were covered by the original top hat plan, the 1992 and 2002 restatements provided that responsibility for the deferred compensation fell to their former, bankrupt employer, NRG.
If the 2000 statement was a restatement of the old plan, the executives were entitled to deferred compensation benefits. If the 2000 statement was a separate document, none of them would be entitled to benefits, as they were not employed during the relevant time.
The district court concluded that the five executives were not covered by the 2000 statement, which was a separate plan, and the 8th Circuit agreed. The appellate court closely examined the language of the 2000 statement, which not only stated that it “hereby creates” a deferred compensation plan, but also had a different plan name than the original top hat plan.
Furthermore, the 2002 restatement had language explaining the history of the deferred compensation plan, separately referencing the 2000 statement and the 1992 restatement, before merging them into a single plan. Consequently, the executives were not entitled to any deferred compensation benefits from Xcel.
Bender v. Xcel Energy Inc
., 8th Cir., No. 06-2634 (Oct. 29, 2007).
Professional Pointer: This case presents a good example of what can happen when, during the course of mergers and spinoffs, with the attendant creation, merger or termination of plans, both employers and employees can get confused as to what plan is (or what plans are) actually in effect. In this case, Xcel hurt its case by originally taking the position that the 2000 statement was not a separate plan. When dealing with benefits questions, the first place to look is the plan documents, which will have most, if not all, of the answers.
Douglas H. Duerr is an attorney in the firm of
firm in Atlanta.
Editor’s Note: This article should not be construed as legal advice.