Lettes v. Kinam Gold, INC.

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
JAN 23 2001
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk

MARK LETTES,

Plaintiff - Appellant,

v. No. 00-1057
(D.C. No. 98-S-1899)
KINAM GOLD INC., a Delaware (D. Colo.)
Corporation, formerly known as Amax
Gold, Inc.; AMAX GOLD, INC.,
SEPARATION PLAN FOR KEY
EMPLOYEES; AMAX GOLD, INC.,
BENEFITS COMMITTEE; KINROSS
GOLD CORPORATION BENEFITS
COMMITTEE; KINROSS GOLD
CORPORATION,

Defendants-Appellees.

ORDER AND JUDGMENT *

Before BALDOCK , ANDERSON , and HENRY , Circuit Judges.

After examining the briefs and appellate record, this panel has determined

*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
unanimously to grant the parties’ request for a decision on the briefs without oral

argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore

ordered submitted without oral argument.

Mark Lettes appeals from an order dismissing his state law claims against

appellees as preempted by the Employee Retirement Income Security Act,

29 U.S.C. §§ 1001-1461 (ERISA) but allowing amendment of his complaint to

allege ERISA violations . He also appeals from a second order granting summary

judgment in favor of appellees on the ERISA claims. Our jurisdiction arises

under 28 U.S.C. § 1291, and we reverse and remand with instructions to remand

to state court.

I. Background facts and proceedings

The relevant facts are undisputed. Mr. Lettes was employed by AMAX

Gold, Inc. (AGI) as a “key employee.” In 1997, in anticipation of a pending

merger with Kinross Gold Corporation, AGI adopted a “Separation Plan for Key

Employees” (the plan) that provided an additional, one-time “golden parachute”

monetary payment apart from, and independent of (but reduced by any amount

paid under), the company’s general severance plan. Appellant’s App. at 689-705.

The additional payment became owing upon a key employee’s separation from

service after a “change of control” as defined in the plan, id. at 694, and the plan

automatically terminated at the close of business on December 31, 1999. Id. at

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703. Nine key employees were eligible to participate in the plan. Id. at 115. AGI

named itself as the administrator of the plan and initially delegated its duties

under the plan to its benefits committee consisting of three members. Two of

those members were eligible key employees. See id. at 699-700; 115-16. The

committee, in turn, appointed another AGI employee as plan administrator. Id. at

116.

Just before the merger agreement was executed, in February 1998 the plan

was amended to redefine the meaning of “Separation from Service” to include

termination without cause within twelve months of the merger or by the eligible

employee quitting for “Good Reason.” Id. at 740. The amendment added

definitions for “Cause” 1
and “Good Reason,” 2
id. at 740-41, and omitted the

former requirement that, in order to receive the golden parachute, the eligible

employee also had to meet the terms and conditions of the general severance plan,

id. at 741, 694. The plan further provided that an eligible employee was not

1
The plan defined “Cause” as “(i) substantial and continued failure by the
Eligible Employee to perform his services and duties to the Company . . . (ii) any
act of fraud or embezzlement against the Company . . . or (iii) the conviction, or
pleading guilty or no contest, to a felony.” Appellant’s App. at 740.
2
The plan defined “Good Reason” to mean “any of the following events:
(i) material reduction in the Eligible Employee’s compensation, benefits, title or
duties, or (ii) a change in the Eligible Employee’s principal place of employment
which is more than 35 miles away from the Eligible Employee’s pre-Change of
Control place of employment, and more than 35 miles away from the Eligible
Employee’s primary residence.” Appellant’s App. at 741.

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entitled to benefits if he had been offered “Comparable Employment,” as defined

by the plan, by AGI or its successor. Finally, the plan specifically limited

benefits to eligible employees who had performed their job assignments

satisfactorily and to the best of their ability before separation; who had abided by

the terms of confidentiality and noncompetition agreements; and who had

executed a general release of claims in a form AGI prescribed. Id. at 695. Thus,

under the express terms of the plan, an eligible employee was entitled to receive

golden parachute benefits after separation from service unless he had been

terminated with cause, as defined by the plan, or quit without good reason, as

defined by the plan, as long as he also complied with prior agreements with the

company and signed the release.

The plan provided a formula for benefit based on the employee’s salary

grade and target bonus. Id. at 696-99. Upon merger with Kinross in June 1998,

golden parachute benefits were automatically paid without separate request or

action of the benefit committee to seven of the nine “key employees.” See id. at

117. One key employee apparently resigned and accepted a job with another

company before the change of control. Id. Thus, Mr. Lettes was the only key

employee in June 1998 who had not already been paid the severance benefit.

Before the merger, Mr. Lettes was offered a position at Kinross that AGI

and Kinross believed to be “comparable employment” as defined by the plan. Mr.

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Lettes disagreed, arguing that the proffered job did not provide him with the same

level of autonomy, duties, or potential compensation. He requested, but AGI and

then Kinross denied, the golden parachute benefits under the separation plan.

Mr. Lettes brought suit in Colorado state court, claiming that the appellees

unlawfully refused to pay separation benefits to which he was entitled. Appellees

removed the case to federal court under 28 U.S.C. § 1331, alleging federal

question jurisdiction under ERISA. The district court then granted appellees’

motion to dismiss Mr. Lettes’ state law claims as preempted by ERISA. Because

federal jurisdiction rests on whether ERISA controls the plan, we must answer

that question first. See Steel Co. v. Citizens for a Better Env’t , 523 U.S. 83,

101-02 (1998).

II. Discussion

“[C]ommon law tort and breach of contract claims are preempted by

ERISA if the factual basis of the cause of action involves an employee benefit

plan.” Milton v. Scrivner, Inc. , 53 F.3d 1118, 1121 (10th Cir. 1995) (quotation

omitted). We review de novo the district court’s preliminary determination that

ERISA preempted Mr. Lettes’ state law claims. Pacificare of Okla., Inc. v.

Burrage , 59 F.3d 151, 153 (10th Cir. 1995).

“ERISA was passed by Congress in 1974 to safeguard employees from the

abuse and mismanagement of funds that had been accumulated to finance various

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types of employee benefits.” Massachusetts v. Morash , 490 U.S. 107, 112

(1989). “To that end, it established extensive reporting, disclosure, and fiduciary

duty requirements to insure against the possibility that the employee’s

expectation of the benefit would be defeated through poor management by the

plan administrator.” Id. at 115. Although an agreement to pay severance benefits

may constitute an employee welfare benefit plan subject to ERISA’s regulation,

the agreement is subject to ERISA’s control only if it creates benefits requiring

“an ongoing administrative program to meet the employer’s obligation.” Fort

Halifax Packing Co. v. Coyne , 482 U.S. 1, 11 (1987) (emphasis added). To

further explain the meaning of the term “ongoing,” the Court held that, if under

the agreement, the employer has not assumed a responsibility to process claims

and pay benefits “on a regular basis,” it “faces no periodic demands on its assets

that create a need for financial coordination and control,” and a benefit plan

subject to ERISA has not been established. Id. at 12. The Court in Fort Halifax

found that a statute requiring employers to pay as severance a “one-time, lump-

sum payment triggered by a single event” did not create a benefit plan subject to

ERISA’s control. Id.

In Siemon v. AT&T Corp. , we stated that the Fort Halifax decision was

primarily based on the fact that “only a one-time event would trigger the

payment,” noting that the Court distinguished the severance benefit from death

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payment benefit plans that create an ongoing need for an administrative scheme to

process claims and pay out benefits. 117 F.3d 1173, 1178 (10th Cir. 1997) .

Thus, we have decided that the hallmarks of an ERISA plan are whether the plan

pays benefits triggered by several events, as opposed to a one-time event, and

whether it requires regular periodic payments.

The district court in this case concluded that the language giving the plan

administrator “complete and discretionary authority to construe and interpret the

Plan, correct defects, supply omissions, and reconcile inconsistencies and

ambiguities in and with respect to the Plan” also gave the administrator

significant discretion in deciding whether a change of control had occurred,

whether eligible employees were entitled to benefits, whether eligible employees

had been offered comparable employment, and whether they had performed their

jobs satisfactorily and had abided by the terms of all agreements after separation. 3

Appellant’s App. at 228 (quotation omitted). Citing a Second Circuit case and

focusing on its conclusion that “the making of severance payments . . . requires

3
Although the plan administrator had discretion to interpret ambiguities in
the plan, the language setting out eligibility requirements was explicit and
absolute, thus significantly limiting the administrator’s discretion. The plan set
out four specific components for the administrator to use in determining whether
an eligible employee had good reason to refuse an offer of employment:
“material reduction” in either compensation, benefits, title, or duties. Appellant’s
App. at 435. The administrator’s only discretion lay in determining whether a
reduction in any of those four areas was “material.”

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the ‘exercise of managerial discretion,’” the court concluded that “sufficient

indicia of an ongoing administrative scheme to be governed by ERISA” therefore

existed. Id. (citing James v. Fleet/Norstar Fin. Group, Inc. , 992 F.2d 463, 468

(2d Cir. 1993)). Apparently, the district court found the key factor to be

considered was whether a plan required a “‘case-by-case, discretionary

application of its terms.’” Id. at 229 (quoting Bogue v. Ampex Corp. , 976 F.2d

1319 , 1323 (9th Cir. 1992)). We read our precedent, however, to require

consideration of additional factors.

In Bogue , the court found an “ongoing” scheme to exist solely because the

administrator had discretion in determining eligibility. There, a limited severance

program similar to the one in the case at bar was created for several executives if

they were not offered “substantially equivalent” employment after a merger. 976

F.2d at 1321. The employer argued that discretionary decision making was the

“hallmark of an ERISA plan,” and the court agreed. Id. at 1322. The Bogue court

stated that it chose to follow the approach of Pane v. RCA Corp. , 868 F.2d 631

(3d Cir. 1989), and Fontenot v. NL Industries, Inc. , 953 F.2d 960 (5th Cir. 1992),

in determining what constitutes an ERISA plan. 976 F.2d at 1323.

We conclude, however, that the cases Bogue relied upon poorly support its

analysis. For example, the plaintiff in Pane based federal jurisdiction on ERISA

but then argued that ERISA did not preempt his state law claims, which is an

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inconsistent stance. Pane , 868 F.2d at 634-35. Without analysis, the court stated

only that Fort Halifax “suggests” that the plan at bar was an ERISA plan because

it required an administrative scheme. Id. at 635.

Bogue further proposed that the Fontenot court based ERISA control on

whether “the circumstances of each employee’s termination [had] to be analyzed

in light of certain criteria.” 976 F.2d at 1323 (quotations omitted). Our review of

Fontenot leads to a different conclusion. In Fontenot , the plaintiff asserted that

the golden parachute plan at issue was an ERISA plan, apparently arguing that all

employee benefits requiring administrative schemes are ERISA plans and relying

on Pane v. RCA Corp. , 667 F. Supp. 168 (D.N.J. 1987), aff’d 868 F.2d 631 (3d

Cir. 1989). See Fontenot , 953 F.2d. at 962-63. Fontenot distinguished Pane by

noting that the plan in its case required no administrative scheme whatsoever and

stated only that Pane did not stand for the proposition that every golden parachute

is an ERISA plan. Id. at 963. The Fontenot court did not, as Bogue suggests,

hold that the hallmark of an ERISA plan is whether an individualized

discretionary eligibility decision must be made by a plan administrator, although

that factor entered into the court’s analysis.

Whether a plan administrator has discretion in determining eligibility for

benefits may be one factor to be considered in deciding whether an administrative

scheme for processing claims is necessary, but it says nothing about whether the

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plan is sufficiently “ongoing” to trigger ERISA regulation. The fact that an

administrator has even unfettered discretion in determining eligibility for benefits

does not mean that the employer has assumed a “responsibility to pay benefits on

a regular basis,” thus causing it to face “periodic demands on its assets that create

a need for financial coordination and control.” Fort Halifax , 482 U.S. at 12.

The district court focused on AGI’s discretion in determining eligibility

without examining whether the benefit also necessitated an ongoing scheme to

coordinate and control monies that would fund the regular distribution of

payments, as required by Siemon. See 117 F.3d at 1178-79 (noting that focus of

Fort Halifax decision was the one-time event that triggered single payment); see

also Belanger v. Wyman-Gordon Co. , 71 F.3d 451, 454 (1st Cir. 1995) (stating

that “an employee benefit may be considered a plan for purposes of ERISA only if

it involves the undertaking of continuing administrative and financial obligations

by the employer”) (emphasis added).

The golden parachute agreement in this case was unfunded, contingent on a

one-time event that might never happen, and expressly limited to a narrow time

period. It involved only nine specific employees and the benefit was to be paid

in a lump sum based on a mathematical formula. Although there are factual

differences between the statutorily-required severance payments in Fort Halifax

and the supplemental severance payments that AGI proposed to make to its key

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employees, the reasoning of Fort Halifax is equally applicable to the present case

and requires the same conclusion: AGI’s agreement providing for a lump-sum

payment in the event of a separation after a change of control during a limited

time period did not constitute an employee welfare benefit “plan” within

ERISA’s ambit. Federal jurisdiction based upon § 1331 therefore must fail.

The judgment of the United States District Court for the District of

Colorado is REVERSED. The order dismissing Mr. Lettes’ state law claims is

reversed. ERISA preemption is the sole basis of federal jurisdiction in this case.

Therefore, the order granting summary judgment on the ERISA claims is vacated,

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and we remand with instructions to remand the case to state court.

Entered for the Court

Robert H. Henry
Circuit Judge

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