Court Opinion

ID: 3014248
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:02:33.535174+00
Date Added: 2024-06-11T11:25:38.664044
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Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

4-27-2004

Schunkewitz v. Prudential
Precedential or Non-Precedential: Non-Precedential

Docket No. 03-1181

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Recommended Citation
"Schunkewitz v. Prudential" (2004). 2004 Decisions. Paper 769.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/769

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                                                                       NOT PRECEDENTIAL

                         UNITED STATES COURT OF APPEALS
                              FOR THE THIRD CIRCUIT
                                   ___________

                                         No. 03-1181
                                         ___________

                          GLEN SCHUNKEW ITZ, individually
                        and on behalf of all others similarly situated,

                                                      Appellant

                                                 v.

                     PRUDENTIAL SECURITIES INCORPORATED;
                           JOHN DOES, 1-100, inclusive

                                      _______________

                      On Appeal from the United States District Court
                             for the District of New Jersey

                 District Court Judge: The Honorable Katharine S. Hayden
                                  (D.C. No. 02-cv-00356)

                                      ________________

                                   Argued January 27, 2004

      Before: NYGAARD, FUENTES, Circuit Judges and O’NEILL,* District Judge

                                    (Filed: April 27, 2004)

       *
         Honorable Thomas N. O=Neill, Jr., Senior District Judge for the United States District
Court for the Eastern District of Pennsylvania, sitting by designation.

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                                ________________________

                                 OPINION OF THE COURT
                                 _______________________

Bruce H. Nagel (argued)
Andrew R. Bronsnick
Nagel Rice & Mazie
301 South Livingston Avenue
Suite 201
Livingston, NJ 07039
       Attorneys for Appellant
       Glen Schunkewitz

Thomas J. Kavaler (argued)
Nicholas S. Goldin
Tammy L. Roy
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005

David J. Libowsky
Bressler, Amery & Ross
325 Columbia Turnpike
Florham Park, NJ 07932
       Attorneys for Appellee
       Prudential Securities
       Incorporated

FUENTES, Circuit Judge:

       On January 25, 2002, Glen Schunkewitz (“Schunkewitz”) filed a class action

lawsuit in the United States District Court for the District of New Jersey against

Prudential Securities Incorporated (“Prudential”) on behalf of himself and others

employed as financial advisors at Prudential. The lawsuit arose out of these employees’

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participation in Prudential’s deferred compensation plan, the MaterShare Plan

(“MasterShare”). Schunkewitz’s complaint included counts for breach of employment

contract, breach of the MasterShare contract, conversion, and unjust enrichment.

Schunkewitz also argued that M asterShare violated NY and NJ statutory wage laws. All

of these claims arose out of MasterShare’s forfeiture provision, which required

participants to forfeit deferred compensation in the form of stock under certain

circumstances.

       Prudential moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for

failure to state a claim upon which relief could be granted. Schunkewitz cross-moved for

partial summary judgment based on MasterShare’s alleged violation of a NJ statute

requiring that any withheld or diverted wages must be used to purchase securities in the

employing company and that the securities must be listed on a stock exchange or be

marketable over the counter. See N.J. Stat. Ann. § 34:11-4.4. The District Court granted

summary judgment in favor of Prudential and denied Schunkewitz’s cross-motion for

partial summary judgment.

       On appeal, Schunkewitz argues that the District Court erred in granting summary

judgment in favor of Prudential because, he contends, MasterShare’s forfeiture clause is

unlawful. He also argues that the District Court erred in applying NY law (rather than NJ

law) to evaluate the legality of the forfeiture clause. Despite the fact that MasterShare

contains an express NY choice of law provision, Schunkewitz asserts that applying NY

                                              3
law results in a violation of NJ public policy by requiring NJ citizens to forfeit a portion

of their earned income.

          Because we agree with the District Court’s thorough and well-reasoned decision

that NY law controls under MasterShare’s express choice of law provision, and that

MasterShare’s forfeiture clause is valid under NY law, we affirm.

                                             I.

          As we write only for the parties, we will not recite the complete factual

background of this case. Under MasterShare, employees could invest up to 25% of their

income on a tax-deferred basis by periodically placing this portion of their earnings into

an individual employee’s deferral account. Prudential would invest this deferred income

into the Prudential Stock Index Fund by buying Restricted Stock on the employee’s

behalf.

          MasterShare contained an express NY choice of law provision, which stated that

NY law would govern all disputes and claims arising out of or in connection with

participation in MasterShare. The provision stated: “The Plan shall be governed by, and

construed and enforced in accordance with the substantive and procedural laws of the

State of New York, without giving effect to the conflicts of laws provisions thereof.”

App. II at 88.

          MasterShare also contained a forfeiture provision. This provision required

participating employees to forfeit their Restricted Stock, or any other compensation in the

form of stock, if they were terminated for cause or voluntarily left Prudential before the

                                                  4
end of a three-year “Restricted Period.” All MasterShare participants are made aware of

the forfeiture provision before investing in the plan. MasterShare participants agree in

writing to terms and conditions that are fully disclosed and explained in detail in the

“MasterShare Plan Booklet.” Resp. Br. at 5. Before investing through MasterShare,

participants must sign a set of representations and warranties acknowledging that they

have “received, read, and understand” the Booklet and all of MasterShare’s terms of

participation and that they had an opportunity to ask questions about the plan. App. II at

85. Schunkewitz voluntarily left Prudential before the end of the Restricted Period. He

was, therefore, required to forfeit the Restricted Stock that Prudential had purchased with

the income he had contributed to MasterShare. Under the terms of MasterShare, forfeited

shares revert to Prudential.

                                             II.

       Schunkewitz argues that NJ law should govern in all of the counts raised in his

complaint, including his two breach of contract claims and the related conversion and

unjust enrichment claims. Schunkewitz bases his argument largely on the assertion that

MasterShare’s forfeiture provision violates “the strong public policy of New Jersey that

its citizens must receive the entire fruits of their labor.” Pet. Br. at 11.

       The District Court noted that “[p]rivate, contractual choice of law provisions will

be upheld save for conflicts in public policy.” App. I at 16, citing General Motors Corp.

v. New A.C. Chevrolet, Inc., 263 F.3d 296, 331 n.21 (3d Cir. 2001) (“New Jersey gives

effect to contracting parties’ private choice of law clauses unless they conflict with New

                                                   5
Jersey public policy.”). However, the Court rejected Shunkewitz’s policy argument and,

consequently, upheld MasterShare’s express NY choice of law provision. We agree that

the provision is valid.

       In Pepe v. Rival Co., we affirmed a ruling in the District of New Jersey that “New

Jersey conflict of laws principles clearly recognize the validity and enforceability of

choice-of-law provisions in contracts . . . .” 254 F.3d 1078 (3d Cir. 2001), affirming 85

F. Supp. 2d 349, 382 (D.N.J. 1999). Applying NY law here does not conflict with NJ

policy, as Schunkewitz contends, because both the NY and NJ statutory wage laws ensure

that employees receive the full amount of their earned compensation. “On their faces New

York and New Jersey Wage Statutes invoke the same protections by controlling the

employer’s ability to withhold wages.” See App. II at 246-47, citing Transcript of Motion

in Marsh v. Prudential Securities Inc., Civ. No. 01-4940 (D.N.J. May 2, 2002).

Therefore, we affirm the District Court’s decision to uphold MasterShare’s NY choice of

law provision.

       Schunkewitz’s argument that NJ law should apply to his common law contract,

conversion, and unjust enrichment claims also fails. He argues that these claims arise out

of Prudential’s alleged breach of his employment contract and, therefore, that

MasterShare’s NY choice of law provision does not cover these claims. See Pet. Br. at

11. However, all of these claims arise from Schunkewitz having forfeited his Restricted

Shares under MasterShare. As the District Court held, the claims “are all directly related

to the forfeiture provision of the Plan . . . . Because Schunkewitz’s common law claims

                                              6
all involve the Plan’s forfeiture provision, they are as such governed by the Plan’s New

York choice of law provision.” App. I at 17. Accordingly, we affirm the decision of the

District Court that, under MasterShare’s choice of law provision, NY law controls in all

of Schunkewitz’s claims.

                                             III.

       Schunkewitz goes on to argue that M asterShare’s forfeiture provision is unlawful. 1

However, courts have upheld forfeiture provisions as part of deferred compensation

agreements, as long as they were not triggered by an employee’s termination without

cause. See, e.g., Cray v. Nationwide Mutual Insurance Co., 136 F. Supp. 2d 171, 179

(W.D.N.Y. 2001) (stating that the mere fact that an insurance agency agreement provided

for forfeiture of agent’s deferred compensation under certain circumstances did not render

that provision invalid as a matter of NY law). As the District Court held, forfeiture

provisions are valid as long as the employee entered into the agreement willingly. App. I

at 17. Here, Schunkewitz agreed in writing to the forfeiture provision after full disclosure

of MasterShare’s terms and conditions. As the District Court found, “Schunkewitz

explicitly signed an authorization at the end of the MasterShare contract in which he

acknowledged and agreed to forfeit his deferred income upon voluntary or involuntary

[termination of] employment” and he “clearly knew the Plan included a forfeiture

       1
          Although Schunkewitz characterizes his claim with respect to MasterShare as a breach
of contract claim, he is actually arguing that MasterShare’s forfeiture provision is unenforceable
due to illegality.

                                                 7
provision.” App. I at 17, 18. Because Schunkewitz willingly entered into MasterShare

after Prudential clearly conveyed the risk of forfeiture under the agreement, we affirm the

District Court’s decision that MasterShare’s forfeiture provision is valid.

       Schunkewitz also argues that Prudential unlawfully converted the income it

withheld and invested under MasterShare into company property, causing Prudential to be

unjustly enriched. However, because the District Court held MasterShare’s forfeiture

provision to be lawful, the Court properly dismissed these related conversion and unjust

enrichment claims. App. I at 17.

                                           IV.

       Finally, Schunkewitz asserts that, if NY law applies, Prudential’s failure to pay all

earned income violates § 193 of the N.Y. Labor Law. The District Court dismissed this

claim, holding that § 193 specifically authorizes employers to make deductions from

employees’ wages that “are expressly authorized in writing by the employee and are for

the benefit of the employee.” App. I at 14-15, citing N.Y. Labor Law § 193(1)(b).

However, until recently, no NY court had ever directly answered the question of whether

a plan structured like MasterShare was valid under N.Y. Labor Law § 193. This issue

arose in Marsh v. Prudential Securities Inc., another class action brought in the District of

New Jersey, and currently on appeal before this Court, challenging the validity of

MasterShare. Civ. No. 01-4940 (D.N.J. May 2, 2002), appeal pending U.S. Ct. App. 3d

Cir. No. 02-2528. In Marsh, we certified the question of M asterShare’s validity under §

193 to the New York Court of Appeals. In November 2003, the New York Court of

                                              8
Appeals held that an employer may divert part of an employee’s wages into a mutual fund

under § 193 where the employee has consented to the diversion because an investment

scheme in mutual funds is similar to other deductions that are specifically authorized by

the statute. See Marsh v. Prudential Securities Inc., 1 N.Y.3d 146, 153 (N.Y. 2003).

Therefore, under the New York Court of Appeals’ interpretation of § 193, Schunkewitz’s

argument that MasterShare violates N.Y. Labor Law fails.

         Accordingly, for the reasons stated above, we affirm the judgment of the District

Court.

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