Filed: Oct. 01, 2004
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 10-1-2004 Houston v. Aramark Precedential or Non-Precedential: Non-Precedential Docket No. 04-1103 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "Houston v. Aramark" (2004). 2004 Decisions. Paper 263. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/263 This decision is brought to you for free and open access by the Opinions of the Uni
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 10-1-2004 Houston v. Aramark Precedential or Non-Precedential: Non-Precedential Docket No. 04-1103 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "Houston v. Aramark" (2004). 2004 Decisions. Paper 263. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/263 This decision is brought to you for free and open access by the Opinions of the Unit..
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Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
10-1-2004
Houston v. Aramark
Precedential or Non-Precedential: Non-Precedential
Docket No. 04-1103
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"Houston v. Aramark" (2004). 2004 Decisions. Paper 263.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/263
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
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NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Case No: 04-1103
PETER HOUSTON,
Appellant
v.
ARAMARK CORPORATION;
1984 STOCK OPTION PLAN OF
THE ARAMARK CORPORATION;
ARAMARK OWNERSHIP PROGRAM
AND ARAMARK; BENEFIT PLAN
ADMINISTRATOR
________________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. No. 03-cv-03646
District Judge: The Honorable Clarence C. Newcomer
________________
Submitted Pursuant to Third Circuit LAR 34.1
September 30, 2004
Before: RENDELL, FUENTES and SMITH, Circuit Judges
(Filed October 1, 2004)
_________________
OPINION OF THE COURT
_________________
SMITH, Circuit Judge.
Retired employee Peter Houston sued the Aramark Corporation, its 1984 Stock
Option Plan, its Ownership Program, and the Aramark Benefit Plan Administrator
(collectively, Aramark) after Houston learned that the company stock he sold to then-
privately held Aramark roughly doubled in value approximately six weeks later upon the
corporation’s announcement of an initial public offering. Houston asserted two claims
under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §1001
et seq, and one state common law claim. Aramark moved to dismiss Houston’s amended
complaint pursuant to Federal Rule of Civil Procedure12(b)(6), and the District Court
dismissed all counts. For the reasons stated below, we affirm the judgment of the District
Court.
The District Court had federal question jurisdiction over the ERISA claims, 28
U.S.C. §1331, and supplemental jurisdiction over the state law claim, 28 U.S.C. §1367.
See Henglein, et al. v. Informal Plan for Plant Shutdown Benefits for Salaried Emples.,
974 F.2d 391, 397-98 (3d Cir. 1992) (noting that once federal law is invoked, the facts
alleged and their legal sufficiency are questions on the merits, and that “after disposal of a
federal claim, a district court has discretion to hear, dismiss, or remand a supplemental
claim for which there is no independent basis for federal subject matter jurisdiction”).
We have jurisdiction under 28 U.S.C. §1291.
I. Background
Houston worked for Aramark for nearly thirty years before retiring from his
executive position in June 2001. During his tenure, Houston entered into two stock
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option agreements with Aramark, the 1984 Stock Option Plan (1984 Plan) and the
Aramark Ownership Program (ISPO). At the time of his retirement, Houston had
amassed 117,602 shares, 18,224 through the 1984 Plan and 102,625 through the ISPO.
Both the 1984 Plan and the ISPO were intended to align the participants’ interests
with Aramark’s. The “performance stock options” under the 1984 Plan were “designed to
enable key ARA management to purchase shares of ARA Holding Company stock on
terms that will give them a direct, sustained, and long-term interest in ARA’s success.”
Similarly, the ISPO “provide[d] selected management and other key employees
opportunities to participate in the ownership of Aramark” and were generally granted “in
connection with hires, promotions, and other forms of recognition of performance.”
(Emphasis added.)
As is common with such plans, the stock options awarded Houston by the board of
directors allowed him to lock in a purchase price for the shares, and thus their upside
potential, without assuming the risk that the shares would depreciate in value. If Aramark
prospered, the value of Houston’s options would increase, and when certain conditions
were met, Houston could purchase the shares at the lower options price set years before.
Happily for all participants of the plans, Aramark did in fact prosper, and at the time of
his retirement Houston’s 117,000 shares were worth approximately $2,446,000. As
suggested above, other participants, but not Houston, would soon become happier still.
Houston retired on June 1, 2001. Aramark was then still a privately held company,
3
though going public had often been indicated as a possibility, in which case its shares
would very likely appreciate considerably. 1 As part of his retirement planning, in May of
2001, Houston had met with Aramark’s Benefits Director, Robert Bevilacqua. In that
meeting the two discussed the possibility of Aramark going public. If he knew of it,
Bevilacqua did not disclose that Aramark would soon announce its initial public offering.
However, Bevilacqua suggested that Houston could postpone his retirement a year to see
if Aramark would go public during that time. Houston declined.
Upon his retirement, the Stockholders’ Agreement, which governed Houston’s
ownership of Aramark stock, allowed Aramark the right to repurchase, or “call,”
Houston’s shares at their most recent appraisal price. Aramark called Houston’s stock on
June 14, 2001, indicating the appraisal price of $20.80 per share, a total of $2,446,121.60
for the 117,602 shares. On July 17, 2001, Aramark announced its initial public offering,
which increased the value of Aramark stock to $46.00 per share. Since then, instead of
seeing his $2.4m cup as overflowing, Houston has viewed his $5.4m cup as less than half
full. Houston’s appeal to the Plan Administrator to recalculate the repurchase price to
$46.00 was denied, and Houston, believing that Aramark breached its fiduciary
1
Houston had originally planned to stop working in March, but to remain on the
payroll until June 1, 2001, by applying his unused vacation days. When exigencies kept
him working until June 1, 2001, Houston expected that his retirement date would be
pushed back until July 23, 2001. However, on June 1, 2001, a lump sum check for his
unused vacation days had already been prepared. Because undoing the error would have
been burdensome for the administrator responsible, Houston let the error stand, making
his retirement effective June 1, 2001.
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obligations to him by withholding material information concerning the impending public
offering, commenced this litigation.
The District Court applied this Court’s decision in Oatway v. American
International Group, Inc., 325 F.3d 184 (3d Cir. 2003) and determined that ERISA does
not govern the stock option plans at issue because the retirement advantages offered in
them are only incidental to their stated purposes of attracting and retaining key
employees, and of aligning participants’ interests with those of the corporation. The
District Court also dismissed the common law breach of fiduciary duty claim on the
grounds that Houston had waived Aramark’s obligations by contract.
II. Standard of Review
We exercise plenary review in an appeal of a District Court’s grant of a motion to
dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
Burnstein v. Ret. Account Plan for Emples. of Allegheny Health Educ. and Res. Found.,
334 F.3d 365, 374 (3d Cir. 2003). “A motion to dismiss pursuant to Rule 12(b)(6) may be
granted only if, accepting all well-pleaded allegations in the complaint as true, and
viewing them in the light most favorable to the plaintiff, plaintiff is not entitled to relief.”
In re Burlington Coat Factory Litig.,
114 F.3d 1410, 1420 (3d Cir. 1997). In considering
this appeal, we do not examine whether Houston will ultimately prevail, but whether he is
entitled to offer evidence in support of his claims. See
id.
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III. Discussion
A. ERISA Claims
Houston asserted two causes of action under ERISA: (1) pursuant to 29 U.S.C. §
1132(a)(1)(B), wrongful denial of claimed benefits stemming from the Aramark’s Plan
Administrator’s refusal to recalculate the repurchase price of Houston’s shares, and (2)
pursuant to 29 U.S.C. § 1132(a)(3), breach of fiduciary duty based on Aramark’s
nondisclosure of information regarding the impending announcement of an initial public
offering. Determining whether Houston’s stock options were incentive bonuses, or
rather, deferred compensation subject to ERISA, determines Houston’s two causes of
action under ERISA.
ERISA defines “employee pension benefit plan” in 29 U.S.C. §1002(2)(A) as “any
plan, fund, or program...to the extent that by its express terms or as a result of surrounding
circumstances” it (i) “provides retirement income to employees, or (ii) results in a deferral
of income by employees for periods extending to the termination of covered employment
or beyond... .”
By their express terms the plans were designed to align key employees’ interests
with those of Aramark by giving the plans’ participants a stake in the company. Houston,
therefore, argues that the surrounding circumstances of the plans indicate that
notwithstanding their stated purpose, the 1984 Plan and the ISPO nonetheless fall within
ERISA’s purview because they provide retirement income or result in income deferred
6
until participants’ employment with Aramark ends or beyond.
The question is one of perspective. Houston essentially argues that because he
intended to fund his retirement with the stock proceeds, and because the plans resulted in
a deferral of a portion of his income to his retirement date and beyond, the plans meet
ERISA’s definition of “employee pension benefit plan.” This interpretation cannot stand.
As the Fifth Circuit noted in a leading case on ERISA’s applicability to key employee
bonus plans, “Any outright conveyance of property to an employee might result in some
payment to him after retirement.” Murphy v. Inexco Oil Co., 611 F.2d 570, 575 (5th Cir.
1980). The design of the plan at issue, not the individual participants’ intended use of the
proceeds, must be the perspective from which the definition of “employee pension benefit
plan” is determined. See Oatway v. American International Group, Inc.,
325 F.3d 184,
189 (3d Cir. 2003) (“We agree with the legal analysis of Murphy...and the unbroken line
of cases that have followed Murphy’s reasoning.”).
So understood, Aramark’s 1984 Plan and ISPO are not ERISA plans under the
Department of Labor’s interpretation, and the plans fall squarely within this Court’s
holding in Oatway. According to the Department of Labor regulations, “the terms
‘employee pension benefit plan’ and ‘pension plan’ shall not include payments made by
an employer to some or all of its employees as bonuses for work performed, unless such
payments are systematically deferred to the termination of covered employment or
beyond, or so as to provide retirement income to employees.” 29 C.F.R. §2510.3-2(c).
7
Though Aramark was a privately held corporation, and though the Stockholders’
Agreement placed restrictions on the transferability of shares, the deferral of payment for
shares from exercised stock options by 1984 Plan and ISPO participants was not
systematic. It was simply Houston’s choice not to sell his 117,000 shares before he
retired, as evidenced by the fact that he indeed sold over 3,000 shares in 1999. That
Houston’s retirement triggered Aramark’s option to call his shares does not change the
analysis.
The District Court’s determination that the plans here are not materially
distinguishable from those in Oatway is correct. Oatway held that an incentive stock
option plan with a stated purpose of “providing certain key employees...with additional
incentive to continue their efforts on behalf of [the defendant corporations]” was not an
ERISA plan. Oatway, 325 F.3d at 186, 189. As they were to Mr. Oatway, the stock
options granted Houston “were discretionary, given in recognition of special service, and
awarded in addition to his regular compensation.”
Id. at 189. Though Houston elected
not to sell most of his exercised stock options before Aramark called them upon his
retirement, the deferral was not systematic.2 Therefore, Aramark’s 1984 Plan and ISPO
are not ERISA pension benefit plans.
2
The facts of this case do not necessitate that we determine the precise point at which
exercised stock options become “income” under ERISA. Oatway suggests, however, that
stock options are income at the time they are granted. See Oatway, 325 F.3d at 189
(“[The stock options] did not result in the deferral of income even though they could be
exercised after he retired.”).
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B. State Fiduciary Duty Claim
The waivability of fiduciary duties owed by a majority shareholder to a minority
shareholder is the issue that controls the state law claim. The District Court held that by
consenting to the Stockholder’s Agreement, Houston waived Aramark’s duty to disclose
future events which would impact the value of Houston’s shares. Under Delaware law,
Aramark owed Houston fiduciary duties, Ivanhoe Partners v. Newport Mining Corp., 535
A.2d 1334, 1344 (Del. 1987), but those duties were amendable by contract. See Coleman
v. Taub,
638 F.2d 628, 636 (3d Cir. 1981) (noting in the context of a corporate merger
that a minority shareholder can “bargain away” his interests, thus eliminating the
possibility of a breach of fiduciary duty).
Houston bargained away his right to the information specifically at issue here.
Houston was a party to the Stockholder’s Agreement, which states that at the time a
shareholder sells his shares, there may
be proposed or pending an event or a transaction that could
affect the Appraisal Price of the Common Stock, and that the
Appraisal Price of the Common Stock (and, accordingly, the
repurchase price) may be substantially less than the fair
market value as of the current date, and further acknowledges
and agrees that ARAMARK may have valid business reasons,
and in any case shall not be required to, disclose any event or
transaction that may have occurred or be proposed or pending
at the time of any such sale.
It is difficult to imagine a clearer waiver of Aramark’s duty to disclose the
impending announcement of its initial public offering. The District Court correctly
9
dismissed Houston’s breach of duty claim. Because we conclude that Houston waived
Aramark’s duty to disclose future events, we need not address the issue of the
effectiveness of Houston’s release included in the Share Repurchase Agreement.
10
