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In re IT Group

May 25, 2006

IN RE: IT GROUP, INC., DEBTOR
JOHN ACCARDI; DAVID L. BACKUS; ROCHELLE BOOKSPAN; MELISSA L.DUBINSKY; DENNIS G. FENN; JOHN P. FRANZ; WILLIAM A. GAUNTT; THOMAS W. GRIMSHAW; DAVID W. HICKMAN; WARREN C. HOUSEMAN; STEPHEN C. KENNEY; JAMES R. MAHONEY; THOMAS R. MARTI; DAVID W. MAYFIELD; WILLIAM H. MCINTOSH; ROY MCKINNEY; DAVID C.MCMURTRY; DANIEL C. MELCHIOR, III; GEORGEANN N. MOREKAS; WILLIAM C. PARIS; MATTHEW G. RADEK; KEVIN R. SMITH; LOUIS STOUT; LEONARD YAMAMOTO; JOHN E. FOLEY; JAMES M. REDWINE; STEWART BORNHOFT; ENZO ZORATTO; POLLY QUICK, APPELLANTS
v.
IT LITIGATION TRUST; IT GROUP, INC., AND THEIR AFFILIATES, AS EMPLOYERS AND FIDUCIARIES, ADMINISTRATORS AND SPONSORS OF THE PLAN; CARLYLE PARTNERS II, LP, AS FIDUCIARY OF THE PLAN AND/OR TORTFEASOR; ANTHONY DELUCA; FRANCIS J. HARVEY; HARRY J. SOOSE, AS FIDUCIARIES OF THE PLAN AND AS OFFICERS; IT CORPORATION DEFERRED COMPENSATION PLAN EFFECTIVE JANUARY 1, 1996



On Appeal from the United States District Court for the District of Delaware (D.C. Civil No. 04-cv-00146) District Judge: Honorable Joseph J. Farnan, Jr.

The opinion of the court was delivered by: Rendell, Circuit Judge.

PRECEDENTIAL

Argued April 3, 2006

Before: RENDELL, SMITH, and BECKER*fn1, Circuit Judges

OPINION OF THE COURT

Plaintiffs (or "Participants"), participants in IT Corporation's Deferred Compensation Plan (the "Plan"), filed an adversary complaint in the Bankruptcy Court for the District of Delaware against IT Corporation (or the "Corporation"), its parent company, IT Group, Inc., and their subsidiaries, seeking secured, priority status for their claims for benefits owed to them under the Plan. The Bankruptcy Court concluded that the Plan was an unfunded "top hat" plan under ERISA, and dismissed Participants' complaint. The District Court for the District of Delaware affirmed.

On appeal, Participants contend that certain novel features of the Plan obligated the Corporation to fund a secular trust, outside the reach of creditors, for their exclusive benefit when the committee learned that the Corporation was facing insolvency. We disagree, and will affirm.

I.

A. Deferred Compensation Plans Generally

A deferred compensation plan "is an agreement by the employer to pay compensation to employees at a future date. The main purpose of the plan is to defer the payment of taxes." David J. Cartano, Taxation of Compensation & Benefits § 20.01, at 709 (2004). The idea is to defer the receipt of compensation until retirement or termination of employment, when the employee is in a lower tax bracket, thus reducing the overall amount of taxes paid. Id. at § 20.02[A], at 710.

Certain deferred compensation plans, known as "top hat" plans, are subject to ERISA's administrative and enforcement provisions, but exempt from the substantive provisions that regulate plan funding and impose fiduciary duties.*fn2 Because the Participants' claims arise under ERISA's substantive provisions, see Pls.' 2d Am. Compl. at 29-37, they depend on a finding that the IT Group Deferred Compensation Plan is subject to ERISA's substantive protections, i.e., that it is not a "top hat" plan.

ERISA defines a top hat plan as:

a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

29 U.S.C. § 1051(2). See also 29 U.S.C. §§ 1081(a)(3), 1101(a)(1).

When a plan is "unfunded," [t]he employer promises to pay the employee the deferred compensation at a specified time, but does not set aside the funds in an escrow, trust fund, or otherwise. The assets used to pay the deferred compensation are the general assets of the employer and are subject to the claims of the employer's creditors.

Cartano, at § 20.02[A], at 721. The employee is not subject to tax on the compensation until he or she actually receives the deferred amount because "the employee may never receive the money if the company becomes insolvent." Id.

An employer may set aside deferred compensation amounts in a segregated fund or trust without jeopardizing a plan's "unfunded" status if the fund or trust remains "subject to the claims of the employer's creditors in the event of insolvency or bankruptcy." Id. at § 20.05[D], at 731.

One commonly-used mechanism is the "rabbi trust," which is an irrevocable trust for deferred compensation. Funds held by the trust are out of reach of the employer, but are subject to the claims of the employer's creditors in the event of bankruptcy or insolvency.

The rabbi trust gives employees some measure of security, while at the same time deferring taxes. The assets set aside in the trust are segregated from the employer's other assets and can be used only to pay the deferred compensation. If there is a change in control of ...


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