Opinion
CIVIL ACTION NO. 02-7359.
June 23, 2003.
MEMORANDUM AND ORDER
After holding a bench trial, the undersigned requested counsel to submit proposed findings of fact/conclusions of law, or similar memoranda once counsel received the transcript of the proceedings. Presently before the court are the post-trial submissions of the parties. This Memorandum and Order shall constitute the court's findings and conclusions. For the reasons that follow, judgment shall be entered against LG Industries Inc. Equivalent Ownership Plan, LG Industries, Inc., LG Industries, LLP, William D. Walker, and Ronald L. Constein in favor of the four Plaintiffs in the total amount of $80,626.52, apportioned as follows: Bandy — $28,044.01; Heron — $7,011; Smith — $14,022; and Robertson — $31,549.51.
FACTS
The issue in this case is whether the Plaintiffs were properly paid certain sums allegedly due to them under the L.G. Industries, Inc. Equivalent Ownership Plan, ("Plan"). In order to resolve this issue we must decide (1) exactly what amounts were due to the Plaintiffs under the Plan, or the Plaintiffs' employment agreements with L.G., or both; and (2) whether the Defendants had the right to condition receipt of any payment owed to Plaintiffs' on their signing releases which, in essence, accepted the Defendant's calculations of those payments.
Three of the Plaintiffs, Bandy, Heron, and Smith, had formerly worked for a company called Simon LG Industries, Inc. ("Simon"). On October 6, 1995, Defendant, LG Industries, LLP ("LLP"), purchased certain assets of Simon, including Simon's Wagontown, PA facility, where these Plaintiffs worked on the design and construction of paper making machinery. Although LLP offered employment to all three men, each credibly testified that he was asked to work for less money than he had been making at Simon. To make up the difference, LLP offered each Plaintiff the opportunity to acquire an ownership interest in their new company.
Plaintiff Robertson had previously worked for Simon, but had left the company prior to its sale to LLP. His offer of employment also included an ownership interest in LLP, in the amount of 2%. (Plaintiff's Exhibit 13) He was later given an additional .25% in exchange for a patent he owned.
In the letters offering employment to the Plaintiffs, Defendants described the ownership interest portion of their compensation as being certain percentages of the company's total value, as to which each Plaintiff would be fully vested after five years employment with LLP. (Plaintiff's Exhibits 2, 9, 19) Thus, for example, Plaintiff Bandy was granted a 2% ownership interest. (Plaintiff's Exhibit 2). The actual mechanism for paying out the ownership interest at time of vesting, however, turned out to be the more formal Equivalent Ownership Plan. The Plan established the concept of "units" rather than percentage, but it has never been disputed that each Plaintiff received, under the Plan, a number of "units" equal to the percentage ownership he was promised at the time of employment. Thus, Mr. Bandy, had 2 units under the Plan.
The Plan also provided for conversion of the Plan units into shares of stock in the event of a public offering, (Plan, at 7.02), and vesting sixty days after the Company's debt was repaid. (Plan, at 6.01). As it turned out, the repayment of the debt upon the sale of LLP to RV Industries triggered vesting for purposes of all the Plaintiffs.
Each of the Plaintiffs remained with LLP until its eventual sale to RV Industries in August 2001, at which time each became fully vested in their ownership interests under the Plan. LLP then calculated the value of these interests, but refused to make any payments to Plaintiffs unless they signed a release. Because each Plaintiff believed that he was owed more money than was being offered, no releases were ever signed. Hence, no money has been paid under the Plan to date. We have, instead, this lawsuit.
The dispute over how each Plaintiff's payment under the Plan was to be calculated can be traced to two separate disagreements. The first of these disagreements had it roots in correspondence that accompanied the Plan materials (Plaintiff's Exhibits 5, 11, 17, 22). This correspondence stated that each unit under the Plan would have a fixed value at the time of vesting that equaled $37,000 per unit. The Plan document itself, however, said nothing of the sort. Rather, the Plan said simply that each unit was valued at $37,000 as of the "Effective Date" of the Plan. (Plan, 2.15). No representations were made as to what, if any, value a unit would have upon vesting in the future. To the contrary, under the Plan itself, the value of a unit depended solely upon the actual book value of the company at the time of vesting.
The second disagreement concerned the number of total outstanding units to be used in calculating unit value. The Plaintiff's believed that one unit equaled one percent of the company. Therefore, no more than 100 units could ever exist. The Defendants, however, calculated unit value using the number 109. It started with a hypothetical 100 units, then added to that number the total number of actual units issued to all employees at the time of calculation of unit value, in this case 9.
The Plaintiff's main argument is that a unit must be worth $37,000, as promised, rather than the $10, 464.18 actually calculated. In the alternative, they argue that even if LLP had not guaranteed a fixed value for a unit, the Plan was still violated when 109 rather than 100 was used to fix the value of a unit. If Plaintiffs are correct in this regard, the proper value of a unit would be $11,405.96.
Plaintiffs contend that their damages include not only the wrongfully withheld sums, but also attorneys fees and liquidated damages since, they argue, Defendants' improper calculation violates both ERISA, 29 U.S.C. § 1132(a)(1)(B) and (g)(1), and the Pennsylvania Wage Payment and Collection Law, 43 P.S. §§ 260.10 and 260.9a(f). We must first determine, therefore, whether the Defendants' Equivalent Ownership Plan is an employee benefit plan within the meaning of ERISA. If we decide that it is not an ERISA plan, our next inquiry is whether the Plan is nonetheless part of Plaintiffs' contract of employment, and, if so, whether it has been breached. Finally, we must determine the applicability, if any, of the Wage Payment and Collection Law.
DISCUSSION A. ERISA
Citing Murphy v. Inexco Oil Co., 611 F.2d 570 (5th Cir. 1980), the Third Circuit recently determined that a stock option incentive plan was neither an employee welfare benefit plan nor an employee pension benefit plan governed by ERISA. Oatway v. American International Group, Inc., 325 F.3d 184, 188-89 (3d Cir. 2003). Although the characteristics of the plan in Oatway are very similar to those of the LLP Plan, the Plaintiffs argue that there is a critical difference. The Plans in Oatway andMurphy did not defer payment until the time of retirement. By contrast, the LLP Plan allowed redemption of Plan Units only upon retirement, death, separation from employment, or change of control. (Plan, at 7.03, 7.04). Therefore, argue the Plaintiffs, the LLP Plan is an employee pension benefit plan as defined by ERISA.
An employee pension benefit plan and pension plan mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program —
(i) provides retirement income to employees, or
(ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.29 U.S.C. § 1002(2)(A).
We are not persuaded by the Plaintiffs' argument. Again, relying on Murphy, the Third Circuit held that "the mere fact that some payments under a plan may be made after an employee has retired or has left the company does not result in ERISA coverage by statutory definition." Oatway, at 188 (citingMurphy, at 576). Rather, the key is whether the plan was "created for the purpose of providing retirement income" or was designed as an incentive plan to provide a financial incentive for employees to remain with the company and improve their performance. Oatway, at 189.
Reviewing the evidence in this case, we conclude that the LLP Plan was an incentive plan. First, the LLP Plan describes itself as an incentive or bonus plan.
The purpose of the L G Industries, Inc. Equivalent Ownership Plan is to provide a means whereby L G Industries, LLP (the "Company") may, through the grant of equivalent units (or options to purchase such units) relating to the limited partnership interests in the Company, offer a reward and an incentive to selected employees, motivate such employees to exert their best efforts on behalf of the Company and align the economic interest of such individuals with those of the Company's partners.
(Plan, at I). Second, the testimony of the Chairman and CEO of LLP comports with this understanding. William Walker testified that the ownership plan was "put into place to provide an incentive." (N.T. 5/5/03, 104). The testimony of the Plaintiffs is also consistent with the Plan being construed as an incentive plan. Each of the Plaintiffs admitted that the Defendants were looking for "key people" to keep the operations of the Wagontown facility running. Each also admitted that the Defendants were looking for a five-year commitment. (N.T. 5/5/03, 20, 44, 55, 67). Finally, each claimed that Defendants offered them company ownership to make up for the fact that they were taking salary cuts. To the extent this is correct — and the units were meant to replace lost salary — it can hardly be said that the Plan was "created for the purpose of providing retirement income."Oatway, at 188. As such, it is clear that the LLP Plan was an Equity Incentive Plan — in exchange for a commitment of five years, the Plaintiffs would be entitled to share in the success of the venture. The LLP Plan was not a pension plan governed by ERISA.
B. Breach of Contract
In the alternative, the Plaintiffs argue that the failure of the Defendants to pay the Plaintiffs the claimed amounts constituted a breach of contract. We agree with the Plaintiffs that there was a breach. However, we do not agree that the basis of the breach was the failure to pay a "guaranteed" amount of $37,000 per unit.
As previously discussed, the Plaintiffs argue that, pursuant to the letters accompanying the Plan documents, the value of their shares was guaranteed to be $37,000 per unit. (Plaintiffs' Exhibits 5, 11, 17, 22). The Defendants argue that they properly calculated the Unit Value pursuant to the language of the Plan document when they valued the units for distribution. Moreover, the Defendants argue that they had a right to condition payment on the releases. Since the Plaintiffs never signed, no breach occurred.
In determining the proper value of each unit, we turn first to the employment contracts. The employment contracts provide each Plaintiff with a salary and an ownership interest in the company. Mr. Bandy was granted a 2% ownership interest (Plaintiffs' Exhibit 2). Mr Heron and Mr. Smith each originally received a 0.5% interest and the opportunity to acquire an additional 0.5% each for $15,000. (Plaintiffs' Exhibit 9). Mr. Smith was granted an additional 0.5% in connection with undertaking added responsibilities. (Plaintiffs' Exhibit 23). Mr. Robertson received a 2% ownership interest (Plaintiffs' Exhibits 13, 14), and received an additional 0.25% interest in exchange for the rights to a patent he assigned to the Company. (N.T. 5/5/03, 64).
According to the Plaintiffs, these percentage ownership interests did not contradict the earlier verbal guarantees as to the minimum values at vesting, which corresponded to the reductions in salary that each of the Plaintiffs accepted. Therefore, argue the Plaintiffs, they are entitled to the guaranteed value, as later modified by the letters accompanying the Plan materials.
The testimony of the Plaintiffs and the Defendants is in direct conflict on this issue. The Plaintiffs testified that they took salary reductions commensurate with the ownership interest each was offered. The Defendants contend that they never guaranteed any minimum value for a unit under the Plan. However, we do not believe that it is necessary to reconcile these two positions. Because the language of the Plan document, itself, is clear and does not guarantee any unit value, parol evidence of prior statements to the contrary, whether oral or written, cannot carry the day.
The Plaintiffs rely on Pilallis v. Electronic Data Systems Corp., No. 97-5662, 1998 WL 211740 (E.D. Pa. Apr. 28, 1998). They argue that since their written employment contract did not specifically deal with the subject of a guaranteed unit value, they are entitled to rely on both the oral representations and the later communication accompanying the Plan documents, suggesting these units were guaranteed to be worth $37,000 each. We disagree.
The plaintiff in Pilallis brought suit, alleging a breach of his employment contract because the defendant ceased paying him commissions to which he claimed entitlement. The Honorable John Padova, of this Court, determined that an examination of parol evidence was appropriate. However, he did so only because "the oral agreement concern[ed] a subject which [was] not specifically dealt with in the written agreement." Pilallis, at *3. The default rule is to the contrary.
Where the alleged prior or contemporaneous oral representations or agreements concern a subject which is specifically dealt with in the written contract, and the written contract covers or purports to cover the entire agreement of the parties, the law is now clearly and well settled that in the absence of fraud, accident or mistake the alleged oral representations or agreements are merged in or superseded by the subsequent written contract, and parol evidence to vary, modify or supersede the written contract is inadmissible in evidence.Pilallis, at *2.
In our case, the alleged oral representations are irrelevant for two reasons. First, the Plaintiffs are incorrect when they state that their employment contracts are silent on the subject of the equity interest. Paragraph 10 of each of the employment contracts provided for the equity interest that had allegedly been discussed between the parties. Each of the Plaintiffs was granted a specific percentage of the Company but there was no mention of any minimum payout. (Plaintiffs' Exhibits, 2, 9, 13, 19). Second, and even more significant, although the Plan is not covered by ERISA, its terms are still part of Plaintiffs' employment contracts. As indicated earlier in this opinion, nowhere in the Plan document is there any unit value guarantee.
We come next to the unit valuation issue. Did the company properly use 109 as the total number of units? We find that it did not. Despite the rather vague language in the Plan concerning the mathematical calculation of unit value, the terms of Plaintiffs' employment letters regarding their equity ownership interests are quite clear. Each was offered a specific percentage of the company. When the final accounting was completed, the Company was worth $1,140,596 after deducting all accounts payable and the debt repayment to Simon. (Plaintiffs' Exhibits 8, 12, 18, 24). However, the Defendants calculated each Unit by dividing $1,140,596 by 109, rather than 100, because there were nine units outstanding. (N.T. 5/5/03, 89, 109). We find that this calculation is both inconsistent with the employment letters, and contrary to any possible logic or fairness.
According to the Plan, Unit Value "shall be equal to the book value of the Company based upon its most recent year end annual report, as updated to the most recent completed fiscal quarter, as determined by the Company's Chief Financial Officer, divided by the total number of limited partnership interests in the Company (assuming the Units were treated as outstanding limited partnership interests) that are outstanding at the date of determination. Plan, at 2.15.
Dividing the "bottom line" by 109 rather than 100 diluted the ownership interest that each Plaintiff accepted in his employment contract. In fact, when the Court asked Mr. Walker what would have happened if the Company had issued 100 units under the Plan rather than 9, Walker confirmed that a grant of 2% of the company would have been worth only 1% of the bottom line. As we stated before, the employment contracts are quite clear that each Plaintiff was receiving a specific percentage ownership interest. Therefore a 1% ownership interest has to be worth 1% of the bottom line. The unjustified dilution of the value of each unit constituted a breach of Plaintiffs' employment contracts. The correct unit value, to which Plaintiffs are entitled is the following:
Bandy 2% $22,811.92
Heron 0.5% $5,702.98
Smith 0.5% + 0.5% $11,405.96
Robertson 2% + 0.25% $25,663.41
C. The Releases and the Wage Payment and Collection Law
Even though neither the Plan nor Plaintiffs' employment contracts require any type of release or waiver to obtain the value of the units upon an event of redemption, the Defendants argue that the release and receipt were consistent with the board's "full power and authority to . . . prescribe . . . forms and procedures as it deem[ed] necessary or appropriate for the proper administration of the Plan." (Plan, at III). The problem with the Defendants' position is that the use of releases in this case had nothing to do with "forms and procedures" for "administration of the Plan." To the contrary, the Defendants used the release requirement to force Plaintiffs to accept less money than they were, in fact, entitled to receive. As such, the release requirement violated not only the substantive terms of the employment contracts, but the Wage Payment and Collection Law, ("WPCL"), as well.
The units were part of Plaintiffs' wages and they were clearly due. Yet, when the due date came, instead of sending them checks, the Defendants sent each of the Plaintiffs a "Receipt and Release." (Plaintiffs' Exhibits, 8, 12, 18, 24). The Release stated, in relevant part:
In consideration of said payment and transfer, the undersigned does hereby release, remise, quitclaim and forever discharge the Board of Director's [sic] of LG Industries, Inc. of and from all actions, suits, payments, accounts, claims and demands whatsoever relating to the LG Industries, Inc. Equivalent Ownership Plan.
(Receipt and Release). Because Defendants' willingness to payany unit value was contingent upon the release of all claims, the Plaintiffs — believing they were entitled to more than they were offered — refused to sign. As a result, they have, to date, received nothing under the Plan, even the amounts agreed to by the Defendants.
The WPCL provides that when a dispute over the amount of wages due an employee arises, the employer shall unconditionally pay the amount the employer concedes is due.
In the case of a dispute over wages, the employer shall give written notice to the employe or his counsel of the amount of wages which he concedes to be due and shall pay such amount without condition within the time set by this act. Acceptance by the employe of any payment made hereunder shall not constitute a release as to the balance of his claim.43 P.S. § 260.6 (emphasis added). By putting a condition — the signing of a release — on the payment of even the undisputed amount owing the Plaintiffs, the Defendants violated the WPCL.
Where an employer withholds wages without a good faith basis, it is liable for liquidated damages of 25% of the total due or $500, whichever is greater. 43 P.S. § 260.10. As the Honorable Herbert Hutton of this Court has noted, "good faith" is not defined in the statute. Judge Hutton concluded that "any contest or dispute that is based on facts that would lead a reasonable person to find a legitimate dispute as to whether wages were due, constitutes good faith." Keegan v. Fahnestock Co. Inc., 1996 WL 530000, *12 (E.D. Pa. Sept. 16, 1996). Judge Hutton premised his conclusion on the fact that a reasonable person could find that the Defendant believed that it did not owe the wages. Id.
Here, the Defendants, themselves, put a dollar figure on the amount owed each of the Plaintiffs. When the Plaintiffs refused to sign the release, the Defendants failed to tender even that amount, instead standing on the formality of a release. Under these circumstances, we believe that liquidated damages are appropriate. However, we will base our calculation of liquidated damages only on the amounts that Defendants, themselves, agreed was due. As to those amounts, we find that Defendants had no good faith basis to withhold payment until the Plaintiffs agreed to release their claims for additional compensation. In fact, requiring such a release directly constituted the specific language of the WPCL, cited supra.
On the other hand, since there was a good faith dispute between the parties as to how to calculate the value of a unit, we will not award liquidated damages on the additional $941.78 that we have added to the value of each unit. Using the Defendants' original unit value calculation, Plaintiffs shall be awarded the following amounts of liquidated damages:
Bandy $5,232.09 (20,928.36 x .25)
Heron $1,308.02 (5,232.09 x .25)
Smith $2,616.04 (10,464.18 x .25)
Robertson $5,886.10 (23,544.41 x .25)
Finally, we reject the Defendants' current defense that Messrs. Heron and Smith are not entitled to any recovery because they failed to sign to the documentation necessary to memorialize their acceptance of the Units, originally. Despite their failure to return the "Unit Certificates," their employment contracts provided for this benefit and the Defendants, themselves, sent them the Return and Release form, indicating their willingness to pay them the unit value as calculated by the Defendants at the time of the sale to RV Industries.
D. Attorneys' Fees
The Plaintiffs also claim that they are entitled to attorneys' fees and costs. Having found that the Defendants violated the WPCL, we agree. See 43 P.S. § 260.9a(f). Therefore, the Plaintiffs shall have ten days to file a petition for attorneys' fees.
An appropriate Order follows.
ORDER
AND NOW, this 23rd day of June, 2003, in accordance with the findings of fact and conclusions of law attached in the form of a Memorandum, IT IS ORDERED that Judgment be and the same is hereby entered in favor of the Plaintiffs and against the Defendants, L.G. Industries, Inc. Equivalent Ownership Plan, LG Industries, Inc., LG Industries, LLP, William D. Walker, and Ronald L. Constein, in the amount of $80,626.52, with the following distribution: Bandy — $28,044.01; Heron — $7,011; Smith — $14,022; and Robertson — $31,549.51. Plaintiffs shall have ten days to file a petition for attorneys' fees.