Opinion
No. 00 C 4677
July 9, 2002
MEMORANDUM OPINION
Before the court are the parties' cross-motions for summary judgment. For the reasons explained below, the motions are denied.
BACKGROUND
Plaintiffs are former highly compensated officers and managers who are retirees from defendant Sames Corporation ("Sames"), formerly known as Binks Sames Corporation and, before that, Binks Manufacturing Co., Inc. Each plaintiff entered into an Executive Retirement Income Contract (the "Executive Contract") with Binks Manufacturing Co., Inc. at some time between 1980 to 1987. The Executive Contracts constitute "top hat" plans (discussed in detail infra), which are designed to provide deferred compensation and other retirement benefits to a select group of employees. In September 1998, Sames (at that time known as "Binks Sames") entered into an Agreement for the Purchase and Sale of Assets and Stock ("Purchase Agreement") with defendant Illinois Tool Works Inc. ("ITW").
The following relevant facts are taken from the parties' statements of undisputed material facts and exhibits attached to the briefs. Plaintiffs entered into the Executive Contracts with Binks Manufacturing Co., Inc.; ITW was not a party to any of these contracts. The Executive Contracts provide for retirement income, death benefits, and the eligibility to participate in life, health, and accident insurance. In addition, the Executive Contracts contain a non-compete clause prohibiting the employee from giving "assistance to a competitor," as defined therein, during the 10-year retirement period. (Defendant's Memorandum, Ex. 1, Exhibit to Amended Complaint, Executive Contract of Richard T. Brend, at 1, 4.) The Executive Contracts also provide that, "[i]f [Binks Manufacturing Company] shall at any time be merged or consolidated with any other corporation or if substantially all of the assets of the Company are transferred to another corporation," the Executive Contracts "shall be binding upon and inure to the benefit of the successor corporation." (Id. at 6.) Sames established a "Rabbi Trust" to provide a source of payment for the the Executive Contracts.
A "rabbi trust" is a type of grantor trust "in which an employer makes contributions to the trust in the name of beneficiaries to create a source of funding for otherwise unfunded benefit plans. Because the trust corpus technically remains property of the employer, the beneficiaries of the trust are not taxed on their portion of the Trust corpus or Trust proceeds until the assets are actually distributed to the beneficiaries. As a condition for this tax benefit, rabbi trusts are required to remain at all times subject to the claims of the grantor's general creditors. Thus, once a grantor files for bankruptcy, the rabbi trust corpus becomes property of the grantor's bankruptcy estate." In re Outboard Marine Corp., 278 B.R. 778, 785 (N.D. Ill. 2002) (Aspen, J.) (citations omitted). The name of the trust is derived from a "type of trust that was established by the congregation of a synagogue to benefit its rabbi and approved as tax-free by the Internal Revenue Service in a private letter ruling in 1980." Id. at 785 n. 6.
On September 30, 1998, Sames and ITW entered into the Purchase Agreement. ITW purchased certain, but not all, of Sames's assets, and assumed certain, but not all, of Sames's liabilities. Essentially, ITW acquired the "Binks Assets" — assets related to the "Binks Business" — which were defined in ¶ 1.2 of the Purchase Agreement and Exhibit A thereto, and did not acquire the "Excluded Assets," which were defined in the Purchase Agreement and primarily consisted of assets related to the "Sames Business." ITW was aware of the existence of the Executive Contracts at the time it entered into the Purchase Agreement, and the Purchase Agreement specifically provided that ITW was not assuming those contracts:
As of the Closing Date, Purchaser shall assume sponsorship of all Foreign Benefit Plans relating to the Subsidiaries and all Employee Benefit Plans listed on Schedule 3.22 in which the [former employees of the Binks Business who accept employment with ITW] participate except the Executive Retirement Income Contracts and the related Rabbi Trust . . . .
(Defendant's Memorandum, Ex. 3, Exhibit B to Affidavit of James H. Wooten, Jr., Purchase Agreement, ¶ 6.9.2 (emphasis added).) Paragraph 1.6 of the Purchase Agreement further provided that ITW would not assume any liabilities relating to the Binks Business except for those liabilities that were explicitly assumed in paragraph 1.5; the Executive Contracts were not listed in paragraph 1.5. (Id., ¶¶ 1.5, 1.6.) The fact that ITW did not assume the Executive Contracts had the effect of increasing the purchase price that ITW paid to Sames by approximately $4.8 million. Sames also retained the "Rabbi Trust."
Both prior to and subsequent to the sale, ITW was a publicly held company traded on the New York Stock Exchange with over 5700 shareholders and over 250,000,000 shares outstanding, and Sames was a publicly held corporation traded on the American Stock Exchange with approximately 2,964,835 shares outstanding. After the sale of the Binks Business, Sames and ITW each retained its own separate corporate existence, its own separate board of directors and officers, and each continued to be owned by its own separate group of shareholders. No Sames employee became an officer or director of ITW.
In July 2000, plaintiffs brought this action against Sames and ITW in the Circuit Court of Cook County, Illinois to enforce the Executive Contracts. Defendants then removed the action to this court, asserting complete preemption by the Employee Retirement Income Security Act of 1974 ("ERISA"), 18 U.S.C. § 1132 et seq., and the existence of federal question jurisdiction pursuant to 28 U.S.C. § 1331. The amended complaint alleges that Sames breached the contracts by terminating plaintiffs' dental insurance plan, increasing the percentage of medical insurance premiums that plaintiffs were required to pay, and increasing premiums. The amended complaint also seeks a declaration that ITW is liable to plaintiffs under the Executive Contracts, on a theory of successor liability. On August 17, 2001, Sames filed for liquidation pursuant to Chapter 7 of the Bankruptcy Code.
Plaintiffs and ITW now cross-move for summary judgment.
DISCUSSION
Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In considering such a motion, the court construes the evidence and all inferences that reasonably can be drawn therefrom in the light most favorable to the nonmoving party. See Pitasi v. Gartner Group, Inc., 184 F.3d 709, 714 (7th Cir. 1999). "Summary judgment should be denied if the dispute is `genuine': `if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Talanda v. KFC Nat'l Management Co., 140 F.3d 1090, 1095 (7th Cir. 1998) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The court will enter summary judgment against a party who does not "come forward with evidence that would reasonably permit the finder of fact to find in [its] favor on a material question." McGrath v. Gillis, 44 F.3d 567, 569 (7th Cir. 1995)
A. Applicable Law
As a threshold matter, we must determine what law applies to plaintiffs' claims. ITW argues that, "[w]hile this action technically arises under ERISA," we should "apply the well-settled common law of Illinois to resolve the dispute." (Defendant's Memorandum at 8.) This appears to be contrary to the position ITW took when it removed the action to this court: "The claims asserted relate to an employee benefit plan and are completely preempted by . . . ERISA." (Notice of Removal at 1.) It is clear why ITW wants us to apply Illinois law; the traditional common law rule "narrowly confine[s]" successorship liability. Upholsterers' Int'l Union Pension Fund v. Artistic Furniture, 920 F.2d 1323, 1326 (7th Cir. 1990); see also EEOC v. G-K-G Inc., 39 F.3d 740, 748 (7th Cir. 1994) (referring to "the more limited approach of the common law generally"). Under Illinois common law, "[t]he well-settled general rule is that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation." Vernon v. Schuster, 688 N.E.2d 1172, 1175 (Ill. 1997). "There are four exceptions to the general rule of successor corporate nonliability: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller's obligations." Id. at 1175-76.
Successor liability under federal common law, which plaintiffs urge us to apply, is broader. Artistic Furniture, 920 F.2d at 1326; see also Chicago Truck Drivers, Helpers Warehouse Workers Union (Indep.) Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 49 (7th Cir. 1995). "[I]n order to protect federal rights or effectuate federal policies, this theory allows lawsuits against even a genuinely distinct purchaser of a business if (1) the successor had notice of the claim before the acquisition; and (2) there was `substantial continuity in the operation of the business before and after the sale.'" Chicago Truck Drivers, 59 F.3d at 49.
According to ITW, the applicable law hinges on the nature of "top hat" plans. Top hat plans are a type of employee benefit plan for high-ranking employees and are exempted from ERISA's substantive provisions regarding participation, vesting, funding, and fiduciary responsibility. See Fasco Indus. v. Mack, 843 F. Supp. 1252, 1255 (N.D. Ill. 1994). Congress believed that these employees have sufficient power to negotiate adequate plans for themselves and do not need the same protections as lower-level employees. See id. Nevertheless, top hat plans remain subject to the enforcement provisions of ERISA. ITW contends that Congress's exemption of "top hat" plans from many of ERISA's requirements "demonstrates a lack of federal interest that would compel this Court to displace well settled state common law of successor liability." (Defendant's Response/Reply at 9.)
We disagree. Although the Seventh Circuit has not addressed the issue with regard to top hat plans, it has held that the federal common law doctrine of successor liability pre-empts state law in actions seeking recovery under ERISA of delinquent multiemployer pension fund contributions. See Artistic Furniture, 920 F.2d at 1327; see also Moriarty v. Svec, 164 F.3d 323, 329 (7th Cir. 1998) ("`The federalization of multiemployer plan contribution obligations evinces a strong congressional desire to minimize contribution losses and the resulting burden such losses impose on other plan participants.' . . . [T]he state law of successor liability, which cuts off the obligation to pay a predecessor's promised contributions, significantly conflicts with this federal interest and justifies a departure." (citing Artistic Furniture, 920 F.2d at 1328)).
We agree with plaintiffs that the reasoning of Artistic Furniture and Moriarty for applying the federal common law of successor liability to multiemployer plan contribution actions applies with equal force to actions seeking enforcement of top hat plans. We follow the court's analysis in Bigda v. Fischbach Corp., 898 F. Supp. 1004, 1015 (S.D.N.Y. 1995):
It is clear that the provisions of the . . . enforcement section of ERISA apply to top hat plans. . . . Furthermore, the goals underlying ERISA's preemption of state laws indicate that all plans covered by ERISA should be protected by preemption. The purpose of preemption is to ensure that all covered benefit plans will be governed by unified law, thus making it simpler for employers operating in several states to administer plans because "[a] patchwork scheme of regulation would introduce considerable inefficiencies in benefit program operation." There is no reason that top hat plans, unlike all other ERISA-covered plans, should be subject to a patchwork of different state laws.
See also Senior Executive Benefit Plan Participants v. New Valley Corp. (In re New Valley Corp.), 89 F.3d 143, 149 (3d Cir. 1996) ("Top hat plans are . . . governed by general principles of federal common law."); Garratt v. Supplemental Executive Retirement Plan of Knowles Elecs., Inc., No. 01 C 4099, 2002 WL 23846, at *2 (N.D. Ill. Jan. 7, 2002) ("Federal common law developed under ERISA governs the enforcement of top hat plans."); Koenig v. Waste Management, Inc., 76 F. Supp.2d 908, 914 (N.D. Ill. 1999) (same). Accordingly, we will apply the federal common law rule of successor liability.
B. Successor Liability
As set forth supra, under federal common law, a successor is liable for the predecessor's liabilities if (1) the successor had notice of the claim before the acquisition; and (2) there was substantial continuity in the operation of the business before and after the sale. See Chicago Truck Drivers, 59 F.3d at 49.
1. Prior Notice
ITW admits that it had notice of the liabilities under the Executive Contracts when it entered into the Purchase Agreement. (Answer, ¶ 10.) (Indeed, the Purchase Agreement expressly provided that ITW was not assuming liability for the Executive Contracts.) ITW's argument that it did not have notice of the claims because they were not "delinquencies" at the time of the Purchase Agreement is not persuasive. ITW cites no relevant authority for this narrow interpretation of the "prior notice" inquiry. The cases that ITW cites are distinguishable because they involved notice of potential employment discrimination lawsuits, not notice of existing contractual liabilities. The Seventh Circuit has recognized that the concept of "notice" depends on the context. See EEOC v. Vucitech, 842 F.2d 936, 945 (7th Cir. 1988) ("There is, however, the following difference between the tort and labor contexts: in the latter, there is no question that the successor knows of any collective bargaining agreements that his predecessor has signed; in the former, the successor may be ignorant of the predecessor's liability. Employment discrimination, a tort in a labor context, is thus a mixed case. Another mixed case is the successor's liability for a predecessor's unfair labor practice; and here as we would expect there must be a showing of notice to the successor.") In this case, the necessary kind of notice is merely ITW's prior knowledge of the plaintiffs' rights under the Executive Contracts, and that prior knowledge is undisputed.
Dybala v. Landau Hayman, Inc., No. 94 C 7719, 1997 WL 162846 (N.D. Ill. Mar. 27, 1997); Wheeler v. Snyder Buick, Inc., 794 F.2d 1228 (7th Cir. 1986) Coleman v. Keebler Co., 997 F. Supp. 1094 (N.D. Ind. 1998).
2. Substantial Continuity
The Supreme Court has held that successor liability depends on whether there is a "substantial continuity" between the two businesses, using a multi-factor analysis:
This approach, which is primarily factual in nature and is based upon the totality of the circumstances of a given situation, requires that . . . the new company has "acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor's business operations." . . . Under this approach, the [court] examines a number of factors: whether the business of both employers is essentially the same; whether the employees of the new company are doing the same jobs in the same working conditions under the same supervisors; and whether the new entity has the same production process, produces the same products, and basically has the same body of customers.
Fall River Dyeing Finishing Corp. v. NLRB, 482 U.S. 27, 43 (1987) (citations omitted). We also consider whether the successor holds itself out to the public as a continuation of the previous enterprise. See Central States, S.E. S.W. Areas Pension Fund v. Hayes, 789 F. Supp. 1430, 1436 (N.D. Ill. 1992).
In addition to the Purchase Agreement, plaintiffs submit the following evidence that bears on substantial continuity: (1) the affidavits of plaintiffs Ernest F. Watts and William W. Roche; and (2) a letter to shareholders dated October 2, 1998 from Binks Sames' Chairman, Wayne F. Edwards, and its President, Arnold H. Dratt, which described the sale to ITW ("the October Letter"). Watts and Roche both state that "the assets which were sold to ITW by Sames constituted all or substantially all of the assets which had been the assets of [Binks Manufacturing Co., Inc.] at the time the Executive Retirement Income Contracts were entered into between [Binks Manufacturing Co., Inc.] and various Plaintiffs in this matter." (Exhibits to Plaintiffs' Memorandum, Affidavits of Ernest F. Watts and William W. Roche, at 1-2.) First of all, these statements miss the point; they address Sames's assets at the time the Executive Contracts were executed, not at the relevant time — when the Purchase Agreement was executed. More importantly, these statements are self-serving and conclusory and do not have further support in the record; therefore, they cannot create a triable issue of fact. See Hall v. Bodine Elec. Co., 276 F.3d 345, 354 (7th Cir. 2002).
The October Letter to Binks Sames shareholders described the September 1998 sale of assets to ITW. The letter stated that "[a]s you are probably aware, Binks Sames announced on August 31, 1998 that it was selling to [ITW] most of the assets and standard product lines of the traditional Binks business." (Exhibit to Plaintiffs' Reply, October Letter, at 1.) The letter summarized what Binks Sames sold to ITW:
Essentially, the sale consisted of Binks standard products line, meaning the conventional spray guns, pumps, tanks, delivery systems, filters, coatings, safety equipment and various accessories. Included in the sale are all assets related to the manufacture and distribution of standard products in the U.S., including a manufacturing plant in Longmont, Colorado; the Poly-Craft Systems division in Oregon; the RD facility in Boulder and domestic branches and warehouses. International operations included in the sale are the Binks Sames businesses in the U.K., Belgium, Germany, Australia and a portion of the Canadian operation. The businesses sold represented a little less than half of Binks Sames sales. The combined revenues accounted for 49.6 percent, or $55.6 million, of the $112 million in sales for the first six months of fiscal 1998. Going forward, this means that the new Binks Sames — which will be renamed Sames Corporation — will consist of the Sames S.A. business in Grenoble, France; Sames Electrostatic Inc. in Livonia, Michigan; Binks Sames Japan; Binks Sames Sweden and the North American Spray Booth Business.
(Id. at 1-2.) Plaintiffs argue that, because ITW bought the "traditional Binks business" or the "Binks Product Line," which included the Executive Contracts, ITW is a successor to those contracts.
Plaintiffs point to various provisions of the Purchase Agreement to support their argument. Regarding employees, the Purchase Agreement stated: "Effective as of the Closing Date, all employees of the Binks Business as listed in Schedule 6.9.1 will be offered employment by [ITW] as of the Closing Date and those individuals who accept employment with [ITW] shall become employees of [ITW] . . . ." (Defendant's Memorandum, Ex. 3, Exhibit B to Affidavit of James H. Wooten, Jr., Purchase Agreement, ¶ 6.9.1.) Plaintiffs also point to the Purchase Agreement's provisions for the sale of customer contracts (¶ 3.12.1) and the sale of all Binks Business-related patents and trademarks. (¶ 1.2.7). Moreover, plaintiffs contend that "ITW held the Binks Business in the predecessors name and continue [sic] to operate in that manner" and that ITW's "spray business unit does not commercially present itself as ITW, but rather as Binks," (Plaintiffs' Reply at 9-10), but provide no evidentiary support for either of these arguments.
ITW's evidence on the issue of successor liability consists of the affidavits of (1) Guy E. Snyder, a partner at the law firm of Vedder, Price, Kaufman Kammholz who was in charge of Binks Sames's legal work in connection with the Purchase Agreement; and (2) James H. Wooten, Jr., ITW's Associate General Counsel and Assistant Secretary, who was the chief ITW attorney with respect to the Purchase Agreement. Snyder states that "[n]one of the Sames shareholders became shareholders of ITW as a result of the [Purchase Agreement] transaction." (Defendant's Memorandum, Ex. 2, Affidavit of Guy E. Snyder, ¶ 4.) Snyder's affidavit contains a list of Binks Sames's officers and directors immediately prior to the execution of the Purchase Agreement. Snyder also states that "Sames sold only a portion of and not all of the assets to ITW" (id., ¶ 9) and that after the transaction, "Sames continued to maintain its own separate corporate existence and identity, and was managed by officers and directors completely separate from ITW's officers and directors" (id., ¶ 11).
The affidavit does not, however, identify who Binks Sames's officers and directors were after the execution of the Purchase Agreement.
Wooten states that "[n]o person formerly employed by Sames became a director or corporate officer of ITW after the [execution] of the Purchase Agreement." (Defendant's Memorandum, Ex. 3, Affidavit of James H. Wooten, Jr., ¶ 3.) Wooten also states that after the transaction, ITW's principal place of business remained in Glenview, Illinois; no ITW shares were exchanged with Sames shareholders in connection with the transaction; and ITW did not acquire any of Sames's common stock. Id., ¶ 8.)
Like Snyder's affidavit, Wooten's affidavit does not contain "before and after" lists of ITW's and Binks Sames's officers and directors for comparison.
The parties frame the analysis differently. ITW characterizes it as a comparison between Sames and ITW. Plaintiffs frame the analysis as a comparison between the Binks Business (which constituted nearly half of Sames's business) and ITW. We agree with plaintiffs that the focus should be on the line of business that was sold, regardless of corporate form and regardless of the disclaimer of liability for the Executive Contracts in the Purchase Agreement. The Executive Contracts were part of the traditional Binks Business. Therefore, we will examine the Binks Business and whether ITW continued, without interruption or substantial change, the operations of the Binks Business.
The evidence submitted precludes summary judgment against either party, but is insufficient to enter summary judgment for either party. It is undisputed that ITW acquired "substantial assets" of Sames. But the evidence submitted by the parties does not tell us enough about what actually happened after the Purchase Agreement was executed to permit us to fully analyze whether ITW continued the operations of the Binks Business "without interruption or substantial change." We know that the Purchase Agreement provided for ITW's hiring of former Sames employees, but we do not know how many or what percentage of former Sames employees became employees of ITW or whether these employees performed the same jobs, in the same working conditions, for the same supervisors. There is no evidence regarding the production processes or facilities, or whether ITW made the same products or sold to the same body of customers. Additional (absent) relevant evidence would address whether there was a stock transfer involving a type of stock other than common stock, and the exact makeup of the companies' officers and directors before and after the sale. Despite plaintiffs' contention that ITW held itself out as a continuation of Sames, there is no evidence regarding this factor either. Granting either party's motion would therefore be unwarranted. We should add that, given the evidence that was presented by the parties, we strongly suspect that any additional evidence would demonstrate that one or more genuine issues of material fact would exist, precluding summary judgment for either party.
C. Unilateral Contract Doctrine
Plaintiffs contend that the "successors and assigns" clause of the Executive Contracts makes ITW liable under the Contracts. The clause provides that, "[i]f [Binks Manufacturing Company] shall at any time be merged or consolidated with any other corporation or if substantially all of the assets of the Company are transferred to another corporation," the Executive Contracts "shall be binding upon and inure to the benefit of the successor corporation." (Defendant's Memorandum, Ex. 1, Exhibit to Amended Complaint, Executive Contract of Richard T. Brend, at 6.) According to plaintiffs, the Executive Contracts are unilateral contracts which they performed; "ITW sought and obtained the benefit of the Contracts" and is thus bound as a successor. (Plaintiffs' Memorandum at 8-9.)
We believe that the principles of successor liability, discussed supra, rather than the language of the Executive Contracts, govern the issue of ITW's liability for the Executive Contracts. See, e.g., Moriarty, 164 F.3d at 328-29 (federal common law of successor liability applies to ERISA claims). Plaintiffs have cited no authority to the contrary.
CONCLUSION
For the foregoing reasons, the parties' cross-motions for summary judgment are denied.