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Zaharko v. San Juan Regional Medical Center Executive 457(F) Retirement Plan

United States District Court, D. New Mexico

June 29, 2018



         THIS MATTER comes before the Court upon Defendant's Motion for Summary Judgment, filed February 1, 2018 (Doc. 26). Having reviewed the parties' pleadings and the applicable law, the Court finds that Defendant's motion is not well-taken and, therefore, is denied.


         Plaintiff Catherine Zaharko worked for San Juan Regional Medical Center (“Medical Center”) with her last position as Vice-President of Marketing and Communications for about twelve years. Plaintiff Douglas Frary worked for Defendant for almost thirty-three years, with his last position as Vice-President of Professional and Support Services. Both plaintiffs seek payment of retirement benefits under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001, et seq. (“ERISA”).

         I. Facts [1]

         A. Employment Agreement

         Both Plaintiffs were employed at the Medical Center pursuant to identical other-than-salary-amount employment agreements that provided for an employment benefit of severance pay equal to two years of their respective salaries. The relevant clauses of these employment agreements stated as follows:

Section IX
If Employer elects to terminate this Agreement, Employee shall be entitled to continued compensation at the most recent annual base salary rate but excluding bonus and any incentive pay for the notice period set forth above, and for the following additional months depending on the length of service during the Contract Period. Contract period shall mean continuous employment from July 1, 2003; Employee hire date; or the Employee appointment date, whichever is latest.
. . . During the third 12 months of Contract Period and thereafter = twenty-four (24 months).

Ex. C. (“Section IX”). Each Plaintiff was entitled to this additional payment for twenty-four months based on the time they had been employed by the Medical Center at all times relevant to this Response.

         Each Plaintiff was not entitled to this additional payment of twenty-four months of base salary if he or she voluntarily chose to terminate their agreement. The severance package was available only if the Employer terminated the agreement. These employment agreements were for a term certain but renewed automatically each year unless notice of termination of the agreement was sent per the terms of Section IX of the employment agreement (“agreement”). In their declaration, Plaintiffs submit that these employment agreements originated as a means to retain a select group of management or highly compensated employees.

         B. Executive Compensation Policy

         In August 2017, Plaintiff Zaharko and Plaintiff Frary were each informed by the Jeff Egbert, the interim chief executive officer ("CEO") of the Medical Center that the employment of all executives was being transitioned to an employment at-will arrangement subject to an executive compensation policy, which necessitated the termination of the employment agreements for Mr. Zaharko and Mr. Frary. Upon these agreements being terminated, plaintiffs' employment would continue if they agreed to be employed under a new policy affecting senior management that reduced their severance benefit to one year and made them employees at-will without a written employment agreement. Agreeing to terminate their employment agreement and be subject to only the new policy affecting senior management would cost Catherine Zaharko $179, 725.20, and Doug Frary $218, 400.00 in severance money benefits.

         When Jeff Egbert began work at the Medical Center as the interim CEO before Jeff Bourgeois became CEO, he believed these high-level management employment agreements were too “excessive” or lucrative in the amount of severance offered and that they were too “one-sided” in favor of the employee with regard to an employee's obligations to assist the Medical Center.[2] Mr. Egbert recommended, and the Medical Center Board approved, a new executive compensation policy that would terminate each of these agreements and make each of those management employees (including Plaintiffs) choose to become employees at-will, and to reduce the severance payable from two years to one year only.

         A choice was unilaterally imposed on each employee by the Medical Center: quit, and receive the benefits of their existing contracts or continue under the new policy as employees at-will with reduced job security and reduced severance benefits. However, neither Plaintiff had an expectation or belief that the Medical Center would terminate employment as an employee under the new policy.[3] Faced with the loss of their secure employment agreements guaranteeing their employment absent notice and/or a stated reason for termination, and the loss of one year's severance going forward, both refused to agree sign a document memorializing the mutual termination of the employment agreement and transition to at-will employment. Ms. Zaharko notified Mr. Egbert, the interim CEO of the Medical Center of her decision to resign via email on August 15, 2017.

         The Medical Center unilaterally terminated Plaintiffs' employment agreements.

         Both Plaintiffs received the additional two-year severance payment upon their separation from employment at the Medical Center. In this lawsuit, Plaintiffs seek the benefits of their deferred compensation retirement plan.

         C. Executive 457(f) Retirement Plan

         1.Description of Defendant Plan

         Plaintiffs have brought their claims under the Medical Center Executive 457(f) Retirement Plan (“Defendant Plan” or “the Plan”). The Plan is a nonqualified deferred compensation plan that complies with § 457(f) of the Internal Revenue Code of 1986, as amended (“IRS Code”). As described by Defendant (and not disputed by Plaintiff) Defendant Plan is a “top-hat plan, ” which is an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management under §§ 201(2), 301(a)(3) and 401(a)(1) of ERISA. As a top-hat plan, the Plan is exempt from ERISA's participation, vesting funding, and fiduciary rules contained in §§ 201, 301, and 401. However, the Plan is subject to ERISA's enforcement rules, including ERISA §§ 502(a)(1)(B), 29 U.S.C. 1132(a)(1)(B).

         Defendant Plan is composed of a plan document and an adoption agreement, and was established effective January 1, 2008 pursuant to an adoption agreement dated April 8, 2008 (“2008 Adoption Agreement”). The Plan was amended effective January 1, 2008 pursuant to a new adoption agreement dated April 20, 2009 (“2009 Adoption Agreement”). Defendant Plan was amended again effective January 1, 2012 pursuant to a new adoption agreement dated December 30, 2011 (“2011 Adoption Agreement”).

         Section 8.2 of the plan document regarding General Administration of Defendant Plan provides that:

[A] Committee is responsible for the operation and administration of Defendant Plan and for carrying out its provisions. Each of the aforementioned adoption agreements provide that [the Medical Center] shall serve as the committee. As a general matter, when such designations are made, the CEO of [the Medical Center] has authority to act on behalf thereof.

Ex. 10 (Bourgeois Aff) & attached Ex. A.

         Section 8.2 of the plan document further provides that

. . . the “Committee shall have the full authority and discretion to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretation of this Plan, as may arise in connection with this Plan. Any such action taken by the Committee shall be final and conclusive on any party. To the extent the Committee has been granted discretionary authority under the Plan, the Committee's prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter.

Ex. 10 & attached Ex. A

         The 2009 Adoption Agreement provided that a plan participant in the Defendant Plan would vest in his or her account in the following circumstances:

An Active Participant shall be fully vested in their Deferred Compensation Account upon the first to occur of the following dates: . . .
(c) The date the Participant attains age 62 and completes 5 years of Service. . . .
(e) The date the Participant has an Involuntarily [sic] Separation from Service from the ...

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