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An employee's severance agreement with his former employer was a "top-hat" plan.

A top-hat plan is an unfunded plan maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees) exempt from the Employee Retirement Income Security Act, according to the 9th U.S. Circuit Court of Appeals.

Danny G. Hobbs was president and one of three directors of Chemworld Corp. William Duggan was the company's top salesman from 1975 to 1983. A dispute arose between Messrs. Hobbs and Duggan over the computation of Mr. Duggan's commissions and other issues. Unable to find a resolution to the dispute, the parties entered into a written severance agreement in April 1983.

Under the agreement, Mr. Duggan agreed to retire two days later, and Chemworld agreed to pay him about $1,000 per month for life in retirement benefits and up to $300 per month for life and health insurance benefits. Chemworld made the required payments for about nine years. In 1992, Chemworld ran into financial difficulties and stopped making the payments. Eventually, Chemworld became insolvent. Mr. Duggan brought this suit under ERISA against Chemworld and against Mr. Hobbs, individually, alleging breach of contract. The trial court ruled against Chemworld but in favor of Mr. Hobbs. The court concluded that the severance agreement was a top-hat plan and was exempt from ERISA and, as a result, Mr. Hobbs had no personal liability to Mr. Duggan.

The appellate court said the payments owed to Mr. Duggan under the severance agreement are deferred compensation, within the meaning of the top-hat exemption, because they provide compensation for services substantially after the services were rendered. According to the court, Chemworld was providing Mr. Duggan deferred compensation (monthly payments for life) for his past services and loyalty. The court was satisfied that "The compensation was deferred because Mr. Duggan did not receive it until well after he rendered most of the services for which he was being compensated." The trial court decision was affirmed.

William Duggan vs. Hobbs, 9th U.S. Circuit Court of Appeals, Oct. 29, 1996 (BI/03/My.-$10).

Absent father gets benefits

Does a natural father's abandonment of his son disqualify him from being a "father" entitled to death benefits under the Workers Compensation Act? The Supreme Court of South Carolina ruled that it did not.

John F. Adkins was the natural father of Stephen W. Adkins. John F. Adkins and his wife, Mary, resided in Georgia during substantially all of their son's childhood. Many years before Stephen's death in a work-related accident, his father abandoned the family. John Adkins sought to recover workers compensation benefits for the death of his son. Mary contested the father's entitlement to any death benefits, asserting that he was not entitled to benefits, as he had abandoned his son. The compensation commission ruled John was not entitled to receive any benefits. The trial court and Court of Appeals reversed, finding the father was entitled to share equal benefits with the mother.

The state Supreme Court concluded that there was no basis for finding John Adkins was not Stephen's father within the meaning of the workers compensation law. Because there was no order terminating John's parental rights, the court said he was entitled to death benefits. The court emphasized that the state law did not define "father" and placed no restrictions on who is considered a father. Because John was Stephen's legal father at the time of Stephen's death, the court said John Adkins was entitled to benefits.

John F. Adkins vs. Comcar Industries Inc., Supreme Court of South Carolina, Sept. 3, 1996. Rehearing denied Oct. 4, 1996 (BI/04/My.-$10).

Pension participation denied

An employee who worked for a law partnership, which was an affiliate of a law partner who created his own pension plan, was not an "employee" of the partner entitled to coverage under the Employee Retirement Income Security Act plan, according to the 4th U.S. Circuit Court of Appeals.

In 1986, Clarke Murphy Jr. and Koehler, West & Associates formed a law partnership known as White, Page & Lentz. Mr. Murphy joined WPL in his individual capacity. Brian G. West, who was an employee of Koehler, became an employee of WPL. In December 1986, Mr. Murphy created a pension plan designating himself as the plan's sponsor, administrator and sole proprietor. Mr. West alleged he was eligible to participate in the plan as an affiliated employee of Mr. Murphy. He sought a portion of the plan's accrued benefits along with statutory penalties. The trial court dismissed Mr. West's complaint.

The appellate court said the "essence of an employee's pension benefit plan covered by ERISA is an employer/employee relationship." To participate in an ERISA plan, the court said, an individual must be an "employee or former employee of the employer." It was undisputed here, the court said, that Mr. West was never employed by Mr. Murphy in any capacity but was employed by WPL. Furthermore, the court noted that neither Mr. West nor WPL had contributed to the plan. Thus, the court agreed that Mr. West was not eligible to participate in Mr. Murphy's plan.

Brian G. West vs. Clarke Murphy Jr. Self Employed Pension Plan, 4th U.S. Circuit Court of Appeals, Nov. 5, 1996 (BI/05/My.-$10).

These abstracts were prepared by Mayo H. Stiegler. Copies of these decisions are available by sending a $10 check payable to Mayo H. Stiegler, to Business Insurance, 740 N. Rush St., Chicago, Ill. 60611-2590. List the number for each opinion.