Levy et al v. Young Adult Institute, Inc. et al

Filing 313

OPINION AND ORDER ON REPORT AND RECOMMENDATION re: 282 Report and Recommendation re: 261 MOTION for Partial Summary Judgment filed by Board of Trustees of Young Adult Institute, Inc., Life Insurance Plan and Trust for Certain Management Employees of Yai, Supplemental Pension Plan and Trust for Certain Management Employees of Young Adult Institute, Pension Retirement Committee of the Board of Trustees of Young Adult Institute, Young Adult Institute, Inc. For the foregoing re asons, and the reasons explained in Judge Netburn's Report, that Report (Dkt. No. 282) is hereby ADOPTED in full, and YAI's motion for partial summary judgment (Dkt. No. 261) is hereby DENIED. The Clerk of Court is directed to close the motion at Docket Number 261. (As further set forth in this Order.) (Signed by Judge J. Paul Oetken on 12/2/2015) (kko)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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JOEL M. LEVY and JUDITH W. LYNN,
:
:
Plaintiffs, :
:
:
-v:
YOUNG ADULT INSTITUTE, INC., et al.,
:
:
Defendants. :
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13-CV-2861 (JPO)
OPINION AND ORDER
ON REPORT AND
RECOMMENDATION

J. PAUL OETKEN, District Judge:
Plaintiffs Joel M. Levy and Judith W. Lynn (together, “Plaintiffs”) filed this suit on April
30, 2013, alleging that Levy’s former employer, Youth Adult Institute, Inc. (“YAI”), failed to
pay his retirement benefits in violation of the Employee Retirement Income Security Act of 1974
(“ERISA”) and New York state law. The Court thereafter referred this matter to the Honorable
Sarah Netburn for general pre-trial supervision. (Dkt. No. 24.)
On April 24, 2015, Defendants requested that Judge Netburn bifurcate the proceedings in
order to resolve liability on Plaintiffs’ ERISA claims before further discovery. 1 (Dkt. No. 223.)
Judge Netburn granted the request and permitted Defendants to move for summary judgment on
“the legal question of whether YAI may withhold payment of [P]laintiffs’ ERISA benefits on the
ground that they are excessive or unreasonable under New York law, federal law, or YAI’s
articles of incorporation and by-laws.” (Dkt. No. 230).
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Defendants in this action include: (1) YAI; (2) the Board of Trustees of YAI; (3) the Pension
Retirement Committee of the Board of Trustees of YAI; (4) the Supplemental Pension Plan and
Trust for Certain Management Employees of YAI; (5) the Life Insurance Plan and Trust for
Certain Management Employees of YAI; (6) Israel Discount Bank of New York; and (7) Eliot P.
Green, a lawyer on YAI’s Board. Defendants Israel Discount Bank of New York and Green did
not file the instant motion. (See Dkt. No. 261.) In this opinion, references to “YAI” or
“Defendants” include all Defendants except Green and Israel Discount Bank of New York.
1

On October 9, 2015, Judge Netburn issued a Report and Recommendation (“Report”)
recommending that YAI’s motion for partial summary judgment be denied. (Dkt. No. 282.) The
Court has reviewed the Report, YAI’s objections, Plaintiffs’ opposition to YAI’s objections, and
the record. For the reasons that follow, Judge Netburn’s Report is adopted in full and YAI’s
motion for partial summary judgment is denied. 2
I.

Background
The Court presumes familiarity with the facts and procedural history, which are

summarized in the Report. (Dkt. No. 282 at 1-6.) The Court provides only a brief review of
facts relevant to the objections.
A.

Review of the Facts

Levy worked for YAI, a New York non-profit corporation, from 1979 until his retirement
in 2009. After his retirement, Levy continued to work for YAI under a consulting agreement,
which expired in June 2011. (Dkt. No. 270 (“COF”) ¶ 1.) Throughout Levy’s employment, his
compensation was determined by a committee that reported to YAI’s Board of Trustees (“the
Board”). (Id. ¶ 4.) The Board had the authority to set Levy’s compensation and benefits. (Id.)
Levy’s compensation package included a Supplemental Pension Plan for Certain
Management Employees of Young Adult Institute (“SERP”). (Id. ¶ 15.) The SERP could be
amended by the Board or YAI’s Pension Retirement Committee, but no amendment could reduce
a vested benefit. (Dkt. No. 22-1 § 7.1.)
The Board hired lawyers and consultants to review Levy’s compensation package several
times between 1995 and 2005. (COF ¶ 31; Dkt. No. 97 ¶ 4.) Between 2005 and 2006, one
Board member, Milton Sincoff, expressed concerns that Levy’s compensation might violate New
2

The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331.
2

York Not-for-Profit Corporation Law (“N-PCL”) or the Internal Revenue Code (“IRC”). (COF
¶¶ 66-78.) The Board’s attorneys analyzed Levy’s compensation and informed Sincoff that it
was permissible. (Id. ¶¶ 68-72.) The other Board members agreed with this assessment. (Id.
¶ 79.)
Beginning in 2005, the Board began to reduce Levy’s benefits. First, the Board passed a
resolution freezing Levy’s base salary. (Id. ¶ 92.) It then entered into an agreement with Levy
that reduced his annuity and purported to incorporate the reduced annuity into Levy’s SERP.
(Id. ¶ 93.) Several months later, the Board amended the SERP to change the benefits formula
and to further reduce Levy’s distributions. (Id. ¶ 94.) Finally, when Levy retired in 2009, YAI
and Levy executed a release reducing Levy’s spousal survival benefit. (Id. ¶ 98.)
YAI began making Levy’s SERP payments in January 2010. (Id. ¶ 99.) In August 2011,
the New York Times published an article about Levy’s compensation, and the New York State
Office for People with Developmental Disabilities signaled that it might pursue remedial action
against YAI. (Dkt. No. 263 (“SOF”) ¶ 16-17.) YAI then ceased SERP payments to Levy and
hired Mercer LLC (“Mercer”), an employment consultant, to determine whether Levy’s
compensation was reasonable. (Id. ¶¶ 19-20.) In February 2013, Mercer produced a report (the
“Mercer Report”) concluding that Levy’s compensation was excessive. (Id. ¶ 21; COF ¶ 101.)
Based on Mercer’s conclusions, YAI contacted the IRS to report that it had paid an excess
benefit to Levy. (SOF ¶ 23.) The IRS sent YAI two letters disagreeing with YAI’s analysis and,
to date, has not issued a decision on Levy’s compensation. (COF ¶ 111, 113; Dkt. No. 291
(“Def.’s Obj.”) at 18.)

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B.

Review of the Report

The Report examined whether the N-PCL, the IRC, or YAI’s by-laws permit YAI to
withhold Levy’s compensation on the ground that the corporation now deems Levy’s retirement
package to be unlawfully excessive. The Report determined that YAI could not withhold Levy’s
compensation and recommended that the Court deny YAI’s motion for partial summary
judgment. Judge Netburn concluded, specifically, that (1) neither the N-PCL nor the IRC
authorizes YAI’s unilateral decision to withhold Levy’s benefits payments, and (2) public policy
considerations do not authorize YAI to set aside the SERP as unenforceable.
Judge Netburn based this conclusion on a careful analysis of state and federal law. As to
New York law, the Report explained that the N-PCL prohibits excessive compensation of nonprofit employees and creates a right of action—under § 720—to enforce that prohibition. (Dkt.
No. 282 at 8 (citing N-PCL §§ 515, 720).) Judge Netburn reasoned that YAI cannot invoke the
unreasonableness of Levy’s compensation as a defense to his ERISA claim when YAI has not
filed a § 720 suit. (Id.) The Report determined, moreover, that YAI could not meet the statutory
elements to prevail on a § 720 suit, and that even if it could, any § 720 action would be barred by
ERISA, which explicitly preempts state law claims related to employee benefits where ERISA
remedies are available. (Id. at 9 (citing ERISA § 502(a)(3), codified at 29 U.S.C. § 1132(a)(3)).)
Accordingly, Judge Netburn concluded that the N-PCL does not provide a justification for YAI
to withhold payments to Levy.
As to federal law, the Report noted that the IRC forbids excessive payments to non-profit
executives and creates an “elaborate regulatory scheme” for correcting overpayments. (Id. at 7;
see also 26 U.S.C. §§ 4958(a)-(f).) In light of that scheme, Judge Netburn concluded that there
is no basis for finding an implied private right of action in IRC provisions barring excessive

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payment. (Dkt. No. 282 at 12.) The Report concluded that, since YAI could not sue under the
IRC, it could not invoke that Code to withhold Levy’s compensation.
Finally, the Report rejected YAI’s public policy argument for nonenforcement of the
SERP. In its motion for summary judgment, YAI argued that the SERP is unenforceable
because it conflicts with “an overarching public policy” against excessive compensation. (Dkt.
No. 266 (“Def.’s Mem.”) at 8, 11 n.4.) The Report determined that enforcement of Levy’s SERP
would not endanger public health or constitute fraud, and thus, that the SERP was not per se
unenforceable under New York law. (Dkt. No. 282 at 14-15.) Judge Netburn also reasoned that,
even if the SERP were unlawful, public policy would not favor a federal court rewriting its terms
when Congress and the New York legislature have developed schemes to regulate pension
payments and remedy excessive compensation. The Report concluded that, absent a finding of
some wrongdoing by Levy, public policy supports enforcement of his contract with YAI.
II.

Legal Standard
A district court reviewing a report and recommendation may “accept, reject, or modify, in

whole or in part, the findings or recommendations made by the magistrate judge.” 28 U.S.C.
§ 636(b)(1). Where there are no objections to a report, the court reviews it for clear error.
Coach, Inc. v. O’Brien, No. 10-CV-6071, 2012 WL 1255276, at *1 (S.D.N.Y. Apr. 13, 2012)
(Oetken, J.). Where a party objects, however, the district court reviews the report de novo. Id.
“In order to merit de novo review, a party’s objections must be specific rather than conclusory or
general.” DeJesus v. Comm’r of Soc. Sec., No. 13-CV-2251, 2014 WL 5040874, at *1 (S.D.N.Y.
Sept. 29, 2014) (Nathan, J.). “Merely perfunctory responses . . . rehashing [] the same arguments
set forth in the original petition” do not warrant de novo review. Ortiz v. Barkley, 558 F. Supp.
2d 444, 451 (S.D.N.Y. 2008).

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III.

Discussion
YAI objects to the Report on the grounds that it (1) fails to recognize that YAI’s authority

to withhold Levy’s payments derives from the SERP rather than from the N-PCL or IRC, (2)
misconstrues the public policy considerations at issue, and (3) improperly decides material issues
of fact.
A.

YAI’s Authority under the SERP

In its motion for partial summary judgment, YAI argued that the N-PCL and IRC
authorized it to withhold Levy’s SERP payments. (Def.’s Mem. at 14.) The Report concluded
that those statutes did not permit YAI’s conduct. (Dkt. No. 282 at 7.) Rather than contest this
conclusion, 3 YAI now argues that the Report “misses the point” because YAI’s authority to
withhold Levy’s payments derives not from the sources it originally cited, but from its role as
administrator of the SERP. (Dkt. No. 291 (“Def.’s Obj.”) at 10-11, 15.)
YAI’s argument involves several steps. YAI contends, first, that the SERP authorizes it
to make an independent determination that Levy’s compensation is in violation of the law, and
second, that ERISA requires it to make ongoing determinations that payments are lawful.
(Def.’s Obj. at 11, 15.) YAI argues that, because it has the power to determine that Levy’s
compensation is unlawful, and because ERISA requires it to exercise that power as the
administrator of Levy’s SERP, its decision to withhold Levy’s payments is appropriate and
lawful. (Id. 15-16.)

3

The Court understands YAI’s core contention to be that its authority derives from a source
overlooked in the Report. To the extent that YAI objects to the Report’s analysis of the N-PCL
and IRC, the Court determines, first, that YAI has not raised any arguments not aired in its
briefs, and second, that the Report makes no clear errors in its analysis of the applicable law.
6

Plaintiffs urge the Court to strike this argument because YAI did not raise it until its reply
memorandum. 4 (Dkt. No. 303 at 9.) But the Court need not reject the argument on that ground,
for even if YAI had made it earlier, its argument would fail. YAI’s core assertion is that the
SERP authorizes it to decide—unilaterally and retroactively—that Levy’s compensation is
unlawfully excessive, and to withhold vested benefits on that basis. The SERP provides no such
authorization. (See Dkt. No. 292 at 13.) While the SERP permits YAI to determine the amount
of benefits paid to plan participants, it explicitly prohibits amendments that reduce vested
benefits. (See Dkt. No. 22-1 §§ 3.1, 7.1.) And while YAI may have discretion to interpret the
SERP’s terms, its exercise of that discretion cannot be arbitrary or capricious. 5
Through its objections to the Report, YAI seeks to reinterpret the SERP to undermine the
contract’s clear protection of vested benefits. The SERP does not permit such an interpretation.
YAI’s effort to recast its argument in terms of authority inherent in Levy’s pension plan is
unavailing.

4

Plaintiffs also argue that YAI cannot invoke its authority under ERISA to defend against
Levy’s ERISA claim when YAI has not sued Levy under ERISA § 502(a)(3). (See Dkt. No. 303
at 24; Dkt. No. 291 at 16). Because the Court concludes that the SERP does not authorize YAI’s
conduct, it need not address whether YAI’s posture as a defendant in this suit bars its argument.
5

The federal courts of appeals are divided as to the appropriate standard of review in cases
involving the denial of benefits under a “top-hat” plan, i.e., a pension plan that is “maintained by
an employer for a select group of management or highly compensated employees.” 29 C.F.R. §
2520.104-23(a); see also Am. Int’l Grp., Inc. Amended & Restated Exec. Severance Plan v.
Guterman, 496 Fed. App’x. 149, 151 (2d Cir. 2012) (noting but not reaching the circuit split).
Compare Goldstein v. Johnson & Johnson, 251 F.3d 433, 443 (3d Cir. 2001) (conducting de
novo review); with Comrie v. IPSCO Inc., 636 F.3d 839, 842 (7th Cir. 2011) (applying an
arbitrary and capricious standard). The Court need not decide which standard prevails because
the SERP contains explicit provisions protecting vested benefits. Given these provisions, YAI’s
decision to withhold Levy’s payments fails under either standard of review.
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B.

Public Policy Considerations

YAI’s second objection to the Report is that Judge Netburn “misapplied precedent” on
the “fundamental public policy against enforcing illegal contracts.” (Def.’s Obj. at 12.) YAI
contends, specifically, that the Report “ignored” Schlessinger v. Valspar Corp., 686 F.3d 81 (2d.
Cir. 2012). To the contrary, the Report cites Schlessinger and contains a well-reasoned analysis
of the enforceability of contracts under New York law. (See Dkt. No. 282 at 14-15.) YAI has
not presented new arguments for voiding the SERP on public policy grounds, and the Report
contains no error, clear or otherwise, in its analysis. The Court adopts Judge Netburn’s analysis
in full.
C.

Factual Issues

YAI’s final objection to the Report is that Judge Netburn “prematurely and incorrectly”
decided material disputes of fact. (Def.’s Obj. at 16-17.) YAI cites eight disputes of fact: (1)
whether the consultants who reviewed Levy’s compensation package considered the
reasonableness of the SERP; (2) whether those consultants advised that Levy’s total
compensation was not an excess benefit under the IRC; (3) whether the IRS concluded that
Levy’s compensation was an excess benefit; (4) whether the SERP is “grandfathered” from the
IRC’s intermediate sanction rules; (5) whether the Board’s 2008 amendments to the SERP
reduced Levy’s benefits beyond earlier changes to his compensation package; (6) whether YAI
ceased SERP payments to all executives in August 2011; (7) whether the Mercer report assumed
that the SERP was grandfathered; and (8) whether YAI obtained legal opinions to support the
Mercer Report’s determination that Levy’s compensation was unlawfully excessive. (Id.)
To the extent that they are live, these factual disputes are not material to the legal
question of whether the IRC, the N-PCL, or the SERP authorizes YAI to withhold Levy’s

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payments. “A fact is material if it might affect the outcome of the suit under governing law.”
Peguero v. City of New York, No. 12-CV-5184, 2015 WL 1208353, at *4 (S.D.N.Y. Mar. 17,
2015) (Oetken, J.) (citations omitted). Having reviewed the Report and the record, the Court
concludes that none of YAI’s assertions of fact would alter the outcome of Judge Netburn’s
careful legal analysis.
Finally, to the extent that YAI objects to the scope of the Report, the Court concludes that
Judge Netburn properly considered the question she instructed the parties to brief in her Order
dated May 5, 2015. (Dkt. No. 230.) The argument that YAI preferred a different framing of the
issues is unavailing at this stage, when both parties have been afforded opportunities to make
written and oral arguments on the question Judge Netburn presented.
IV.

Conclusion
For the foregoing reasons, and the reasons explained in Judge Netburn’s Report, that

Report (Dkt. No. 282) is hereby ADOPTED in full, and YAI’s motion for partial summary
judgment (Dkt. No. 261) is hereby DENIED.
The Clerk of Court is directed to close the motion at Docket Number 261.

SO ORDERED.
Dated: December 2, 2015
New York, New York
____________________________________
J. PAUL OETKEN
United States District Judge

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