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Two former Schnader Harrison Segal & Lewis partners are entitled to their full vested retirement benefits despite an amendment to the firm’s partnership agreement that would have reduced their retirement incomes by approximately one-half, the Pennsylvania Superior Court has ruled in a case of first impression. The decision should please partners approaching retirement, as the court concluded that absent a specific contract provision to the contrary, firms may not amend partnership agreements to shrink benefits previously earned by retirees. “Under certain circumstances,” Judge Debra M. Todd wrote, “contractual retirement benefits vest, and once vesting occurs, the right cannot be altered, amended, or changed by unilateral action.” The case is Abbott v. Schnader Harrison. “I’m sorry that the Superior Court ruled as it did,” Schnader Harrison chairman Ralph G. Wellington said. “We were sorry this lawsuit was brought by [Frank H.] Abbott and [Vincent P.] Haley as we’ve reached amicable conclusions with all of our other retired partners.” Wellington said the suit was not of any economic moment to the firm, but rather the firm felt it had to defend the suit as a matter of principle. Plaintiffs Abbott and Haley filed suit against Philadelphia’s Schnader Harrison in June 2000, after spending 44 and 40 years with the firm, respectively. Abbott officially retired in January 1993, and Haley in January 1999, though Haley continued to work for an additional year pursuant to a discretionary extension that did not affect his 1999 benefit calculation date. The court noted that as of March 31, 2000, Abbott was entitled to $94,257 and Haley to $94,509 per year. The December 1999 amendment to their 1984 partnership agreements would have capped Abbott and Haley’s retirement incomes at $50,000 per year and limited the duration of compensation to 10 years from the date of retirement, the court said. The plaintiffs sued on breach of contract, promissory estoppel and breach of good faith theories. After the parties filed cross-motions for summary judgment, the trial court found in favor of Abbott and Haley because it concluded that the partnership agreement’s retirement provision was severable from the rest of the contract, and constituted an offer by Schnader Harrison to enter into a unilateral contract, the conditions of which had been satisfied. The Superior Court determined that the question was not whether the amendment applied to the benefits provision at all, but rather whether the provision could act to preclude vesting of the benefits. “A vested right is one that is fixed and without condition,” Todd wrote. Todd then quoted from the Pennsylvania Supreme Court case Retirement Board of Allegheny County v. McGovern: “Until an employee has earned his retirement pay, or until the time arrives when he may retire, his retirement pay is but an inchoate right; but when the conditions are satisfied, at that time retirement pay becomes a vested right of which the person entitled thereto cannot be deprived; it has ripened into a full contractual obligation.” The Superior Court also cited numerous Commonwealth and Superior court cases for the proposition that an employee’s vested benefits may not be denied. According to the opinion, Schnader Harrison argued that the employer-employee cases did not apply in Abbott because partners’ relationships are not akin to employer-employee relationships. Todd said the court rejected the defendant’s contention because the vesting of contractual retirement benefits is a generalizable concept. The Abbott court next turned to the lone Pennsylvania case directly on point. In Kornstein v. Taylor, limited partners attempted to withdraw from a partnership and recoup their investments pursuant to a partnership agreement. The general partners subsequently decided to resolve the partnership, and amended the partnership agreement to provide that current and former limited partners received their investments only after the firm’s debts had been paid. In that case, the Superior Court ruled that the amendment could not prevent the limited partners from recovering their investments. “Particularly relevant to the present case,” Todd wrote, “the court noted that the partnership agreement [in Kornstein] did not contain any provision giving the remaining partners the right to dissolve the partnership retroactively.” According to Todd, it was undisputed that Abbott and Haley had satisfied all the conditions necessary to receive retirement benefits under the partnership agreement. However, Schnader Harrison argued that the benefits provision could not be vested because the 1984 partnership agreement contained a broad amendment provision permitting a 75 percent vote of active partners to change the contract, the court said. “Under this interpretation,” Todd wrote, “the retirement benefits were incapable of vesting, and, as a result, the promise of such benefits was entirely illusory.” The Superior Court followed the trial court in relying on a line of 3rd U.S. Circuit Court of Appeals cases that require an explicit reservation of the right to amend a benefits provision in order to avoid vesting. The cases, the court said, are illustrated by Kemmerer v. ICI Americas Inc. In that case, the plaintiffs’ retirement pay schedule was unilaterally changed by the defendant employer. The 3rd Circuit found that the change in timing breached the employees’ benefit plan. “Even when a plan reserves to the sponsor an explicit right to terminate the plan,” the Kemmerer court wrote, “acceptance by performance closes that door under unilateral contract principles unless an explicit right to terminate or amend after the participants’ performance is reserved.” Todd said the 3rd Circuit approach recognizes the reasonable expectation that contractual retirement benefits may not be abrogated after performance without an explicit reservation of the power to do so. “In the context of the agreement as a whole and its amendment history, we conclude that plaintiffs’ interpretation is the only reasonable one,” the court said. “We find it difficult to accept an interpretation of the partnership agreement that would make the promise of retirement benefits wholly illusory.” Wellington said his firm has not yet decided whether they will appeal the decision. Alfred W. Putnam of Philadelphia-based Drinker Biddle & Reath represented Abbott and Haley. Elizabeth K. Ainslie of Schnader Harrison and Gillian Lathrop Thomas, formerly of Schnader Harrison, represented the firm.

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