Article

Note: Employer, Alfa Laval, Inc., agreed with Employee, David Nichols, a former President and CEO, to fund a pension plan. In the course of their dealings, there were several agreements. One agreement provided that Employee would receive a lump-sum payment in lieu of all future pension benefits and that the agreement would "extinguish and supersede" all prior pension agreements between Employer and Employee. For one such prior pension agreement, Employer (Applicant) obtained a standby LC in the amount of US$4,000,000 from Svenska Handelsbanken (Issuer) in favor of the Employee (Beneficiary) in order to "[secure] the obligations of" the agreement.

Contending that the Employee breached his agreement by making a claim in Canada for benefits from Employer's Canadian Pension Plan, Employer sued Employee for recovery of benefits that the Canadian government compelled Employer to pay. After a trial, the United States District Court of the Eastern District of Virginia, Richmond Division, Dohnal, J., ruled that Employee must pay damages to the Employer for the value of benefits received under the Canadian Pension Plan.

At trial, Employee argued that his right to receive benefits under the Canadian Pension Plan was protected by U.S. law, the Employee Retirement Income Security Act (ERISA), because the standby constituted a separate source of funding for the plan. The court ruled that the standby was not a separate source of the funding for the plan because Employer "contracted with the Bank to issue a standby letter of credit in favor of [Employee] whereby the Bank would honor the letter of credit if [Employer] failed to fulfill its contractual obligations to [Employee]. However, where [Employer] did not default, [Employee's] pension payments were still paid out of the general assets of [Employer] and there is no evidence or allegation that [Employer] maintained a segregated fund or that it established a trust from which the pension benefits were to be paid."

[JEB/adk]

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