Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-02211/USCOURTS-ca8-05-02211-0/pdf.json

Parties Involved:
John D. Craig
Appellee
General Mills
Appellant
The Pillsbury Non-Qualified Pension Plan
Appellant

Document Text:

1

The Honorable Andrew W. Bogue, United States District Judge for the District

of South Dakota, sitting by designation.

2

The Honorable Michael J. Davis, United States District Judge for the District

of Minnesota, adopting the Report and Recommendation of the Honorable Janie S.

Mayeron, United States Magistrate Judge for the District of Minnesota.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-2211

___________

John D. Craig, *

*

Appellee, *

* Appeal from the United States

v. * District Court for the

* District of Minnesota.

The Pillsbury Non-Qualified Pension *

Plan; General Mills, Inc., *

*

Appellants. *

___________

Submitted: January 11, 2006

Filed: August 14, 2006

___________

Before BYE and COLLOTON, Circuit Judges, and BOGUE,1

 District Judge.

___________

BYE, Circuit Judge.

The Pillsbury Non-Qualified Pension Plan (Plan) appeals the district court's2

grant of summary judgment in favor of John Craig. The district court determined the

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Plan abused its discretion when it calculated Craig's pension benefits without

including certain bonuses he received in 2001. We affirm.

I

John Craig began working for Pillsbury in 1989 when a subsidiary of his

employer, Grand Metropolitan, Inc. (GMI), acquired Pillsbury. He moved from New

Jersey to Minnesota to work in Pillsbury's tax department, performing tax services for

both GMI and Pillsbury. He later became a Pillsbury vice president, and hence – in

addition to being covered by Pillsbury's standard pension plan (which is not at issue

in this case) – he was covered by Pillsbury's "top hat" plan, the Plan at issue in this

case. A top hat plan is so called because it provides "deferred compensation for a

select group of management or highly compensated employees," 29 U.S.C. § 1051(c),

without being subject to the Internal Revenue Code's maximum annual benefit and

compensation limits.

Craig retired in 2001, requiring the Plan to calculate his monthly pension

benefit, a task complicated by a change of employment which occurred that year and

which requires some background explanation. In 1998, GMI changed its name to

Diageo. In 2000, Diageo announced Pillsbury would merge with General Mills. Craig

worked on the merger, receiving offers from both Diageo and General Mills for

employment after the merger's completion. Craig declined the offers. When the

merger did not occur on its expected completion date, Diageo reclassified certain

employees, including Craig. Effective January 1, 2001, employees staying with

General Mills after the merger remained on Pillsbury's payroll, while those leaving

were transferred to the payroll of Guinness United Distillers and Vintners North

America (Guinness), a company owned by Diageo. Because Craig was not staying

with General Mills after the completion of the merger, he became a Guinness

employee on January 1, 2001. The merger was completed on November 1, 2001, and

he retired soon after on December 31, 2001.

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Craig's reclassification as a Guinness employee did not end his participation in

the Plan. As a Diageo company, Guinness was an "affiliate" under the Plan. But

unlike some affiliates, Guinness had not adopted Pillsbury's pension plans as its own,

so it was considered a "non-adopting affiliate." Both the Plan and the Summary Plan

Description (SPD) issued to Craig explained how a transfer to a non-adopting affiliate

affected an employee's continuing participation in and entitlement to benefits under

the Plan.

The SPD provided in relevant part: 

If you are transferred to another Pillsbury location or affiliate that is not

covered by this Plan [i.e., a non-adopting affiliate], you will become an

inactive participant in this Plan. During the time you are inactive, you

will continue to earn continuous service, but not credited service. When

your pension benefit is calculated, it will be based on your continuous

service before and after the transfer, your credited service prior to your

transfer, and the Plan benefit formula and your final average pay when

you actually retire. 

Appellant's App. at 102. 

Section 3.5(b) of the Plan provided in relevant part: 

Any Participant who transfers into employment with an Employer or an

Affiliate where such Participant becomes an Inactive Participant [i.e.,

employed by a non-adopting affiliate] shall continue to accrue

Continuous Service (but not Credited Service) during the period of such

employment. Any benefit such Participant may become entitled to shall

be determined on the basis of Continuous Service before and after the

date of such transfer, on the Credited Service before the date of such

transfer, and on the Employee's Final Average Compensation and the

applicable benefit formula under the Plan in effect at the Employee's

termination of Continuous Service. Continuous Service for such

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3

Although the two retention bonuses – one for $118,102 and a second "close of

sale" bonus for $48,102 – were paid by Guinness, they reflected promises Pillsbury

made to Craig to induce him to stay through the completion of the merger.

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Employee will terminate and benefits under this Plan shall commence

only after employment for an Employer or Affiliate terminates. 

The Pillsbury Retirement Plan (Plan), Art. 3, § 3.5(b); App. at 16.

 In 2001, Craig received $160,340 in regular pay and $185,383 in performance

bonuses for a total of $345,723 which both Guinness and Pillsbury considered

"pensionable pay," that is, earnings used to calculate a pension benefit. Craig also

received two retention bonuses totaling $166,2043

 which Pillsbury would have

considered pensionable pay if he had still been a Pillsbury employee at the time of

retirement, but which Guinness did not consider pensionable pay. Thus, when the

Plan asked Guinness to provide his 2001 compensation for the purpose of calculating

his pension benefit, Guinness did not include the two retention bonuses, and the Plan

calculated Craig's final average compensation using the $345,723 amount reported by

Guinness.

Craig submitted a request for review contending the two retention bonuses

should have been included. Inclusion of the two bonuses would increase his pension

benefit by $546 per month for the three-year period from February 2005 through

January 2008, and by $601 per month thereafter when he reached the age of 65. The

Plan stood by its exclusion of the retention bonuses, indicating its practice "has

consistently been to include compensation as determined by the last affiliate employer

for use in the calculation of Final Average Compensation." App. at 133.

Craig appealed the Plan's decision administratively. The General Mills Minor

Amendment Committee (Committee) responded to his appeal, explaining its use of

the compensation figure reported by Guinness. According to the Committee, a literal

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4

The Plan's argument can be summarized as follows: 1) the Plan's definition of

"Compensation" limits the term to compensation paid by an "Employer;" 2) the term

"Employer" includes only affiliates who adopt the Pillsbury plan, and thus excludes

non-adopting affiliates; and 3) the phrase "Final Average Compensation" incorporates

the term "Compensation," and therefore does not include compensation paid by a nonadopting affiliate.

5

The Plan requires final average compensation to be calculated using 1) the five

highest compensated years out of the last ten years of continuous service, or 2) the

average monthly compensation for the last sixty months of continuous service, but

also requires years after transfer to an affiliate to count as years of continuous service.

Plan, Art. 3, § 3.5(b); App. at 16. Thus, if the Plan excludes compensation from a

non-adopting affiliate, a longstanding employee who transfers to such an affiliate for

an extended period of time prior to retiring may not receive any monthly pension

benefit at all. For example, consider an employee who built up a sizeable pension

with Pillsbury over twenty years, but then transferred to a non-adopting affiliate for

the last ten years of employment. During the last ten years, the employee's

compensation would be $0 each year if the Plan excluded compensation from a nonadopting affiliate. The Pillsbury pension would be calculated using the top five of

those last ten years of continuous service, or five times $0 for a total of $0 (or the

average monthly compensation for the last sixty months, which would still be $0).

Thus, the ten years of service for a non-adopting affiliate would effectively eliminate

the sizeable pension the employee acquired before leaving Pillsbury.

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reading of the Plan would not allow any compensation Craig received from a nonadopting affiliate in the calculation of his final average pay. 4

 However, because a

literal interpretation of the Plan would cause some vested pensions to, in effect,

disappear (or be significantly reduced) for an employee who transferred to a nonadopting affiliate for an extended period of time prior to retiring,5

 the Plan indicated

it was using its discretion to use the amount of compensation reported by a nonadopting affiliate rather than no compensation at all.

After the Plan made a final decision denying Craig's appeal, he filed an action

against the Plan in federal district court. Cross-motions for summary judgment were

referred to a magistrate judge for a report and recommendation to the district court.

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Concluding the plain language of the Plan, as well as the SPD, required all bonuses

to be included in the calculation of Final Average Compensation, the magistrate judge

recommended Craig's motion for summary judgment be granted and the Plan's motion

be denied. The district court adopted the magistrate judge's report and

recommendation. This timely appeal followed.

II

We review the district court's grant of summary judgment de novo, applying the

same standards as the district court. Fuller v. Hartford Life Ins.Co., 281 F.3d 704,

706 (8th Cir. 2002). The parties disagree about whether the district court should have

reviewed the Plan's decision de novo or for an abuse of discretion. The Plan contends

its decision should be reviewed under an abuse-of-discretion standard because 1) the

Plan gives its administrator discretion to interpret the Plan document and 2) the

circumstances required to trigger less deferential review under Woo v. Deluxe Corp.,

144 F.3d 1157, 1160 (8th Cir. 1998), are not present. Craig claims de novo review

applies because this case involves a top hat plan. The district court did not determine

which standard applies to a top hat plan, concluding the outcome would be the same

under either standard.

The Third Circuit has concluded de novo review applies to top hat plans even

when they give their administrators interpretive discretion because "a top hat

administrator has no fiduciary responsibilities" under ERISA. Goldstein v. Johnson

& Johnson, 251 F.3d 433, 443 (3d Cir. 2001). We agree. "[T]op hat plans should be

treated as unilateral contracts" and reviewed "in accordance with ordinary contract

principles" because the policy considerations relied upon in Firestone Tire & Rubber

Co. v. Bruch, 489 U.S. 101 (1989), to trigger abuse-of-discretion review (i.e., "the

Supreme Court's analogy to trust law, and particularly the fiduciary responsibilities

possessed by administrators with discretionary authority") are simply not present in

the case of a top hat plan. Id.

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The fact that we conduct a de novo review does not, however, alter our analysis

as much as it might appear at first blush. As noted, the Plan grants its administrator

discretion to interpret its terms. This "grant of discretion must be read as part of the

unilateral contract itself. As a term of the contract, it must be given effect as ordinary

contract principles would require[.]" Id. at 444. "Ordinary contract principles require

that, where one party is granted discretion under the terms of the contract, that

discretion must be exercised in good faith – a requirement that includes the duty to

exercise the discretion reasonably." Id.; see also Scribner v. Worldcom, Inc., 249 F.3d

902, 909 (9th Cir. 2001) ("The duty of good faith and fair dealing applies when one

party has discretion to determine certain terms of the contract.") (quoting Goodyear

Tire & Rubber Co. v. Whiteman Tire, Inc., 935 F.2d 628, 632-33 (Wash. Ct. App.

1997)). Thus, ultimately, we must determine whether the Plan's decision was

reasonable. We conclude it was not.

As the district court noted, the Plan unambiguously provided "Compensation"

included bonuses: "'Compensation' means the following amounts paid to an Employee

by an Employer: salary, including pay for time not worked, overtime, bonuses, and

commissions received as cash, plus accrued incentive earnings earned by and credited

to the Employee under an Employer incentive plan[.]" Plan, Art. 2, § 2.1(k)(2); App.

at 8 (emphasis added). The definition of "Final Average Compensation" then

incorporated the term "Compensation" by providing "Final Average Compensation"

means:

[A]n amount equal to the larger of – 

(1) an amount equal to the average monthly Compensation

during the five consecutive calendar years of Continuous

Service (or all such years, if fewer than five), out of the last

ten (or fewer) calendar years of Continuous Service, for

which such average is highest; or

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(2) the average monthly Compensation during the last 60

months (or all such months, if fewer than 60) of Continuous

Service.

 Id. at Art. 2, § 2.1(x); App at 12 (emphasis added).

The SPD was even more straightforward in indicating bonuses were included

in the computation of final average compensation:

Your final average pay is equal to the greater of your average monthly

earnings for the five consecutive highest-paid years out of the last 10

years or your average monthly earnings for the last 60 months before

leaving the Company. In the case of an acquisition, we will include

necessary years of pay from your prior employer to obtain 60 months of

pay.

Your pay includes your salary, any pretax payroll deductions, paid

incentive earnings, bonuses, overtime and commissions, in addition to

paid time away from work due to illness, vacation or holidays.

App. at 102 (emphasis added). The SPD further established for employees who

"transferred to another Pillsbury location or affiliate that is not covered by this Plan

. . . your pension benefit [will be] calculated . . . based on . . . your final average pay

when you actually retire." Id.

The Plan contends the "Continuous Service" provisions of Section 3.5(b)

introduced an ambiguity into the Plan by creating the possibility of a vanishing

pension when an employee transferred to a non-adopting affiliate for an extended

period of time prior to retirement. On one hand, the Plan contemplates employees

who participate in the top hat plan will receive a pension benefit upon retirement. The

Plan also provides that employees who transfer to affiliates, including affiliates who

have not adopted the Pillsbury plans, will continue to accrue continuous service for

the purpose of calculating their pension benefit. On the other hand, the Plan defines

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final average compensation based on the continuous service years closest to

retirement, which could be served with either an "Employer" or a non-adopting

affiliate, while limiting the compensation used to calculate benefits to compensation

paid by an "Employer." As the Plan contends, this creates the absurd potential for a

disappearing pension, because a participant's continuous service for a non-adopting

affiliate could eliminate the pension he or she had before leaving Pillsbury.

We acknowledge the "Continuous Service" provisions of Section 3.5(b) create

an ambiguity, which the Committee had discretion to resolve. We also acknowledge

it was reasonable for the Committee to resolve this ambiguity so as to avoid the

possibility of vanishing pensions, by including compensation paid by non-adopting

affiliates when calculating final average compensation. The Plan contends, however,

when computing the pension benefits in such situations, the Plan's grant of discretion

allowed the use of a different definition of compensation than the one provided for in

the Plan. We disagree.

We believe the ambiguity in the Plan about whether compensation from a nonadopting affiliate should be considered did not render the definition of compensation

itself ambiguous. In other words, once the Plan resolved whether a given year's

compensation would count, its exercise of discretion was complete. We are unaware

of any contract principles under which the resolution of one ambiguity in a contract

permits a party to adopt an entirely different meaning for other parts of the contract

that are otherwise unambiguous. Cf. Verlo v. Equitable Life Assurance Soc'y of

United States, 562 F.2d 1034, 1036 (8th Cir. 1977) ("[W]e will not read an ambiguity

into an otherwise unambiguous document in order to be able to alter or vary its

terms.").

The Ninth Circuit's decision in Scribner is instructive on this point. Like this

case, Scribner involved the interpretation of a contract which gave one party discretion

to interpret its terms, specifically, a stock option plan between an employer and

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employee. 249 F.3d at 905. When Worldcom sold one of its divisions to another

company, it promised the purchaser it would terminate Scribner and other key

employees who ran the division so the purchaser could offer them jobs. The issue was

whether Scribner's termination under these circumstances was "with cause" or

"without cause" for stock options purposes. Id. The word "cause" was not defined in

the stock option plan. Worldcom contended the broad interpretive discretion given

to the plan's administrator gave Worldcom the right to define "cause" in a way that

included terminations made in conjunction with the sale of a division. Scribner

claimed Worldcom was required to give the word "cause" its ordinary meaning, i.e.,

he was terminated as a result of inadequacy of performance or some shortcoming on

his part. Id. at 906-07.

The Ninth Circuit concluded the discretion granted in the plan did not give

Worldcom the right to define "cause" however it chose:

[T]he term "cause" is ordinarily a performance-related concept. Unless

WorldCom can point to something in the Plan, the contracts, or the

context in which they were drafted that would define "cause" otherwise,

we must give the word its ordinary meaning. We cannot allow one

party's "double-secret" interpretation of a word to undermine the other

party's justified expectations as to what that word means.

...

We therefore conclude that the discretion retained by the Committee was

the discretion to determine whether Scribner had in fact been terminated

for deficient performance. The Committee did not retain the power to

redefine the term "cause" in a way that would undermine Scribner's

justified expectations as to what that word meant. Although the

Committee had broad discretion to interpret the contract, it did not have

the authority to redefine its terms. The contract and the context in which

it was drafted indicate that "cause" can only mean termination for

performance-related reasons. The discretion retained by the Committee

allowed it to determine, as a factual matter, whether Scribner had been

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terminated for performance-related reasons, but did not authorize it to

change the ordinary meaning of words after the fact and without notice.

Id. at 908, 911 (internal citation omitted).

Similarly, here, the Plan did not retain the discretion to change the meaning of

the word "Compensation." The term was already specifically defined in the Plan and

the SPD. The discretion retained by the Plan was the discretion to determine whether

"Compensation" from a non-adopting affiliate would be included in the calculation

of pension benefits. The Plan did not have discretion to redefine "Compensation" in

a way that would undermine Craig's justified expectations – based on the Plan and the

SPD – as to what that word meant. The Plan could not give "Compensation" a

"double-secret" meaning after the fact and without notice. Because bonuses are

considered "Compensation," the Plan was required to include the two retention

bonuses Craig received in 2001 in the calculation of his pension benefits.

III

For the reasons stated, we affirm the judgment of the district court.

______________________________

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