Third Circuit Affirms Judgment Awarding Top Hat Plan Participant Additional Benefits, Interest, Attorneys’ Fees, and Costs

In Campbell v. Board of Directors of Bryn Mawr Trust Company, No. 22-2723, 2024 WL 4380142 (3d Cir. Oct. 3, 2024), the Third Circuit Court of Appeals decided a dispute involving a contested lump sum distribution amount paid by the Royal Bank Supplemental Executive Retirement Plan, a deferred supplemental executive retirement benefit plan, commonly known as a “top hat” plan. The Plan appealed the district court’s orders in favor of Plan participant, Joseph Campbell (represented on appeal by the Administrator of his Estate), who alleged that the Plan was obligated to provide him with a lump sum distribution using a discount rate based on the 5-Year United States Treasury Note rather than the Citi Pension Liability Index Rate used by the Plan, which resulted in a lower payout of roughly $368,000. Finding bad faith on behalf of the Committee which decided Campbell’s appeal of his denied benefit claim, the district court also awarded Campbell attorneys’ fees and costs. The Third Circuit affirmed the judgment of the district court, finding that the unambiguous Plan terms required application of the Treasury Rate and the Committee’s decision was unreasonable.

Campbell was a former executive of Royal Bank of America and participated in the Plan, which allowed Royal Bank to create a “Rabbi Trust.” A Rabbi Trust is an irrevocable trust for deferred compensation, the assets of which are segregated from the employer’s other assets and can be used only to pay the deferred compensation. When there is a change in control of the company, the new owners cannot take back the assets of the trust. Royal Bank merged with Bryn Mawr Trust Company, and upon taking control, Bryn Mawr terminated the Plan. This termination triggered Sections 6.2 and 9.7 of the Plan which provides that the Bank may distribute benefits in a lump sum under the Plan if it is terminated after a change of control and the amount payable shall be discounted using the Treasury Rate as published on the first day of the month immediately preceding the date on which the determination is made, compounded annually.

Notwithstanding the provisions of the Plan, Royal Bank’s CFO, Michael Thompson, hired a consulting firm to determine the total amount due to Plan participants if they used the Citi Rate rather than the Treasury Rate. The consultant’s report showed that using the Citi Rate would result in a lower payout of about $3 million dollars. The Bryn Mawr Board of Directors decided to use the Citi Rate to calculate and pay the lump-sum benefits. Campbell submitted a claim to the Bryn Mawr Board challenging the use of the Citi Rate. The Board then formed a three-person Committee to review the claim. Thompson wrote a memorandum to the Board advocating for the Citi Rate but he did not provide the Committee with the consultants’ reports or the Rabbi Trust Agreement, nor did he mention the Rabbi Trust. The Committee rejected Campbell’s claim, finding that the Citi Rate is the Actuarial Equivalent discount rate and Campbell received the correct benefit. Campbell appealed the decision to the Bryn Mawr Board and alerted the Committee that it was incorrectly advised that Royal Bank never funded a Rabbi Trust and that the Treasury Rate could apply to all 26 Plan participants. The Board never verified with Thompson that it was provided with all relevant documents, nor did it seek guidance from members of Royal Bank’s board or attorneys on the meaning of the Plan’s terms. The Board denied the appeal for the same reasons offered by the Committee. Campbell sued.

The district court entered judgment in favor of Campbell following a bench trial and consideration of the Rabbi Trust Agreement which was provided to Campbell for the first time during discovery. The district court determined that even if it owed deference to the Board’s construction of the Plan, the Board acted unreasonably in interpreting the Plan and acted in bad faith.

On appeal, the Third Circuit found that the Plan grants its administrator discretion to construe its provisions so the question it must decide is whether the Plan administrator’s actions are reasonable and exercised in good faith. Turning to the plain language of the Plan, the court found that the use of the Citi Rate was unreasonable. Section 6.2 expressly provides that if Royal Bank had a Rabbi Trust set up at the time of a change of control, the company was required to transfer cash in an amount equal to the discounted present value of all future benefits to each participant using the Treasury Rate. Termination of the Plan does not change this requirement. The court rejected the Plan’s argument that Section 6.2 applies to funding the Rabbi Trust but not to issuing payments. This argument is nonsensical because the Rabbi Trust served as a pass-through account to issue benefits. Interpreting the Plan to require the Citi Rate would render Section 6.2’s specific use of the Treasury Rate meaningless and contravene the canon against superfluity. The court also found that the district court did not commit clear error in finding that the Board acted in bad faith considering that it did not consider the Rabbi Trust Agreement nor the consultants’ reports, Thompson failed to mention the Rabbi Trust and misrepresented to the Board that Royal Bank never funded the Rabbi Trust. Neither the Board nor the Committee investigated Thompson’s representations. For these reasons, the Third Circuit affirmed the district court’s award of additional plan benefits, attorneys’ fees, interest, and costs.