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Hamilton, Johnston & Co. v. Johnston

Decided: June 1, 1992.


On appeal from Superior Court, Chancery Division, Mercer County.

Antell, Long and Baime. The opinion of the court was delivered by Antell, P.J.A.D.



Third-party defendant James R. Hamilton and defendant Charles L. Johnston together entered the business of a financial consulting service which they incorporated under the name of Hamilton, Johnston, & Co. Inc. (hereinafter "plaintiff"), around January 1977. The firm was joined by defendants James C. Dragon and Deborah L. Gochenour in 1983. Differences arose, and defendants Johnston, Dragon and Gochenour left plaintiff's firm. In October 1988 they formed a new concern under the name of Johnston, Dragon & Associates, which is also a defendant herein. At the time of the breakup Johnston owned 10% of plaintiff's outstanding corporate stock and Hamilton held

90%. Johnston contends that he was fired from his position with plaintiff by Hamilton.

Plaintiff instituted this action against defendants in September 1989. Its amended complaint alleges misappropriation of trade secrets and customer requirements, interference with employment relationships, improper solicitation of plaintiff's customers and conspiracy. In bringing the action, plaintiff sought injunctive relief and damages. Defendants denied the material allegations of the complaint and counterclaimed for distribution of their shares in plaintiff's profit sharing and retirement plan, tortious interference with defendants' ability to earn a living and breach of certain fiduciary responsibilities by Hamilton. Johnston also alleged that his employment was wrongfully terminated by Hamilton in breach of an oral contract between them.

After a two-week trial a judgment was entered on December 7, 1990, and, after post-judgment motions, an amended judgment was entered on January 11, 1991. By its terms, the trial court dismissed plaintiff's claim of unfair competition, but determined that defendant Johnston, Dragon & Associates had plagiarized plaintiff's client report form, thereby committing a trademark infringement. No compensatory damages were found, but defendant Johnston, Dragon & Associates, Inc., was ordered to pay plaintiff $10,000 in punitive damages. Defendants were also enjoined from utilizing "the format and text of Hamilton & Co.'s work products." "Hamilton & Co." is the name by which plaintiff is now known.

The trial court also ordered that plaintiff pay defendants their interests in plaintiff's profit sharing and retirement plan as of December 31, 1988, plus prejudgment interest, totaling $104,439.30 for Johnston, $37,149.84 for Dragon, and $10,458.70 for Gochenour. In addition, plaintiff was ordered to pay Johnston $55,000, "representing the fair value of his shares in Plaintiff Corporation as of August 31, 1988, plus pre-judgment interest in the amount of $9,072.60." Plaintiff was also ordered

to pay defendants' attorneys the sum of $2,500 as fees relating to defendants' claims in the Profit Sharing and Retirement Plan, and $7,500 relating to Johnston's claim "for redemption of his shares of stock in Plaintiff." Plaintiff was further ordered to pay Johnston $8000 for his accountant's fees relating to his claim for the shares of stock and Johnston was ordered to pay $1,250 to plaintiff for the services of a court-appointed expert and $180 for a deposition. Finally, plaintiff's cross-motion for attorney's fees was denied.

Plaintiff first contends that the trial court erred in taking jurisdiction over the individual defendants' profit sharing claims on the ground that the federal Employee Retirement Income Security Act ("ERISA") 29 U.S.C.A. § 1001 et seq., creates exclusive federal jurisdiction over actions involving breaches of fiduciary duties with respect to covered plans. See 29 U.S.C.A. § 1132(e). The trial court did not consider this issue because it was not seasonably raised during the trial. The question of jurisdiction is usually recognized as an exception to the general rule that an appellate court will decline to consider issues not properly presented to the trial court when there was an opportunity to do so. Nieder v. Royal Indemnity Ins. Co., 62 N.J. 229, 234, 300 A.2d 142 (1973); Saul v. Midlantic National Bank/South, 240 N.J. Super. 62, 82, 572 A.2d 650 (App.Div.), certif. denied, 122 N.J. 319, 585 A.2d 338 (1990). R. 4:6-7 states: "Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the matter except as otherwise provided by R. 1:13-4." R. 1:13-4 deals only with the duty of a court which lacks subject matter jurisdiction to transfer the matter to the proper tribunal. We will therefore consider the matter as though it had been properly raised below.

Defendants agree that plaintiff's Profit-Sharing Retirement Plan is covered by ERISA, and that federal law governs under the broad preemption provision of 29 U.S.C.A. § 1144. The issue here is whether this case comes within the concurrent

jurisdiction set forth in 29 U.S.C.A. § 1132. Subsection (e)(1) provides:

Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, or fiduciary. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under subsection (a)(1)(B) of this section.

29 U.S.C.A. § 1132(a)(1)(B) provides:

A civil action may be brought --

(1) by a participant or beneficiary --

(B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.

Paragraph 8 of plaintiff's Profit-Sharing Retirement Plan concerns distribution upon termination of employment. Paragraph 8.2 allows the plan's committee to determine, "in its sole discretion," the time and manner of payment of the participant's vested interest, provided that the commencement of benefits not be postponed later than 60 days after the plan year of the participant's normal retirement date.

Plaintiff argues that this granting of sole discretion removes defendants' claims from the scope of 29 U.S.C.A. § 1132(a)(1)(B). According to plaintiff, defendants must prove more than that benefits were due to them under the terms of the plan; they must prove "that Trustee Hamilton breached his ERISA-defined fiduciary duties to them by 'arbitrarily and capriciously' abusing his discretion." We disagree.

Defendants here make no claim regarding "ERISA-defined fiduciary duties," as set forth in 29 U.S.C.A. §§ 1104-1109. They claim only that benefits are due to them now under the plan. We differentiate between fiduciary duty, which is not in issue here, and an abuse of the discretion which the terms of the plan grant to the committee. Since the terms of the plan here grant discretion to the committee to pay the benefits due now or later, and since there is no claim that the trustee or committee has breached any "ERISA-defined fiduciary duties"

or any other provision of ERISA, we regard this as an action to recover benefits due under the terms of the plan pursuant to 29 U.S.C.A. § 1132(a)(1)(B) and therefore subject to the concurrent jurisdiction of the state and federal courts.

Plaintiff relies on Young v. Sheet Metal Workers' International Assoc. Production Workers Welfare Fund, 112 Misc. 2d 692, 447 N.Y.S. 2d 798 (Sup.Ct.1981). There, some 200 employees were terminated from membership in the subject welfare fund because the employer's contributions were inadequate to support continued coverage. Id. at 693, 447 N.Y.S. 2d at 799. Plaintiffs, the president and negotiating committee of the local union, sought to enjoin the fund from terminating the memberships, alleging that the fund's fiduciary, its board of trustees, "was motivated by bad faith, fraud and arbitrary and capricious conduct." Ibid. The court initially determined, after a trial, that plaintiffs did prove that the trustees' action was arbitrary and capricious, and made in bad faith. Ibid. However, to reach this determination, the court "considered and applied . . . the fiduciary duties of and standards applicable to a fiduciary as established by the Employment [sic] Retirement Income Security Act (ERISA) 29 U.S.C. § 1001 et seq. and by the common law . . . ." Ibid. Apparently, the trustees had either negligently or in bad faith failed to collect required contributions from the employer. 112 Misc. 2d at 693-694, 447 N.Y.S. 2d at 799-800.

On reconsideration, the court determined that it was without jurisdiction under 29 U.S.C.A. § 1132. The court cited H.R.Rep. No. 533, 93rd Cong., 2d Sess. 3 (1974), reprinted in 1974 U.S.Code Cong. & Admin.News, 4639, 5107:

The U.S. district courts are to have exclusive jurisdiction with respect to actions involving breach of fiduciary responsibility as well as exclusive jurisdiction over other actions to enforce or clarify benefit rights provided under title I [the Employee Retirement Income Security Act of 1974]. However, with respect to suits to enforce benefit rights under the plan or to recover benefits under the plan which do not involve application of the title I ...

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