ERISA DOES NOT PREEMPT STOCKHOLDER AGREEMENT
Krueger
International, Inc. v. Blank, 225
F.3d 806 (7th Cir. 2000)
The parties have been litigating since the 1992 death of Robert Blank concerning his retirement fund. This dispute concerned the relation between an ERISA plan and the stockholder agreement governing the Krueger shares in the ERISA plan.
Robert for retirement through KI's Salaried Employees Retirement Plan (SERP) by investing KI's stock. KI imposed buy/sell restrictions on its shareholders.
Robert’s wife, ex-wife and children argued about the entitlement to 1516 shares valued at $258.70 per share. KI was interested in exercising its repurchase option, but it did not want to become mixed up in any family feuds. KI stated it intended to redeem all of the shares. Due to the ownership dispute, KI could not disburse any proceeds or issue any notes payable for the stock until later.
Robert’s family eventually resolved the ownership dispute in 1996.
During the ownership dispute, the value of the shares increased nearly fourfold. In July 1996, KI stated it would redeem Robert's KI stock at the 1992 price along with interest for the period 1992-1996.
The district court found that KI had exercised its option to redeem its shares. It also said the SERP required the company to value the stock as of the distribution date. (i.e., 1997). Concluding that the SERP and SA were in conflict, the district court decided that the SA was a collateral contract but ERISA preempted the application of the SA.
The
Seventh Circuit attempted to reconcile the apparent contradiction between the
SERP and the SA. The beneficiaries
contended that KI's action to enforce the repurchase option in the SA was a
state law contract action that ERISA preempted and that the SERP must govern.
KI argued on the assumption (which the district court accepted) that KI had effectively exercised its repurchase option in 1992, KI claimed that the value of Robert's KI stock was fixed at $258.70 (plus interest) from the time the option was exercised.
The Court found that before a court can apply the accounting rules of an ERISA plan, the court must determine the basic terms of the asset to be accounted. That is what the SA did--it defined the bundle of rights to which a KI shareholder (whether a direct shareholder or a shareholder through an ERISA plan) is entitled.
Neither the SERP nor ERISA in any way undercut this view of the SA. The SERP governed the relation between the plan and the beneficiary and dictated the way that the plan handles plan assets. But that did not mean that the SERP modified the assets themselves.
If, as the district court found, KI exercised its option when the share price was $258.70, then at that moment Robert's stock became quite different from ordinary KI stock. From that time it was stock subject to an exercised call option. Because the fair market value of stock that someone else has the right to purchase for $ 258.70 is just $ 258.70, there would be no violation of ERISA’s "adequate consideration" rules for KI to pay that amount per share (plus the interest.) The Court determined there was an unresolved fact question whether KI exercised the option and remanded the case to the district court.