Schachter v. Citigroup, Inc. 1/18/08 CA2/7

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B193713

Case Date: 05/15/2008

Preview:Filed 1/18/08

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SEVEN

DAVID B. SCHACHTER, Plaintiff and Appellant, v. CITIGROUP, INC., et al., Defendants and Respondents.

B193713 (Los Angeles County Super. Ct. No. BC191447)

APPEAL from a judgment of the Superior Court of Los Angeles County, Victoria G. Chaney, Judge. Affirmed. Law Offices of Ashley D. Posner, Ashley D. Posner and Barbara Brudno for Plaintiff and Apellant David S. Schachter. Skadden, Arps, Slate, Meagher & Flom and Raoul D. Kennedy, Joren S. Bass, Joan Shreffler, Douglas B. Adler and Seth M. Schwartz for Defendants and Respondents Citigroup, Inc. and Saloman Smith Barney, Inc. ___________________

A financial brokerage company offers qualifying employees an incentive compensation plan that allows participants the option of using a portion of their annual earnings to purchase shares in the company's stock at a price below the stock's publiclytraded market price. If the participating employee resigns or is terminated for cause within a two-year vesting period, the employee forfeits the stock as well as the money used to purchase it. Do the forfeiture provisions of this voluntary incentive compensation plan violate Labor Code sections 201 and 202,1 which require an employer to pay its employee all earned but unpaid compensation following the employee's discharge or his or her voluntary termination of employment? As a matter of economic reality, employees who elect to participate in the plan's stock-purchase program are paid all the wages they designate to invest in company stock. Thus, the plan's forfeiture provisions do not violate the Labor Code; and the trial court in this case properly granted summary judgment in favor of the brokerage company. FACTUAL AND PROCEDURAL BACKGROUND 1. The Incentive Compensation Plan David B. Schachter is a former securities salesperson for Salomon Smith Barney (Smith Barney), a subsidiary of Citigroup, Inc. On December 21, 1994, while employed by Smith Barney, Schachter elected to participate in Smith Barney's voluntary Capital Accumulation Plan (the Plan),2 an incentive compensation plan intended, in part, to encourage retention of high-level employees.3 Under the terms of the Plan, Schachter
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Statutory references are to the Labor Code unless otherwise indicated.

When initially established, the Plan was sponsored by Travelers Group, Inc., the publicly-traded parent company of Smith Barney. Travelers Group subsequently merged with Citicorp to create Citigroup, Inc. As expressed in the Plan documents, "The purpose of the Plan is to enable [Citigroup] and its Subsidiaries to attract, retain and motivate officers and other key employees, to compensate them for their contributions to the growth and profits of the Company and to encourage ownership of stock in the Company on the part of such personnel." 2
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directed Smith Barney to pay him 5 percent of his total compensation "in the form of restricted stock out of all cash compensation paid to me" during the specified periods.4 An employee's restricted Citigroup shares acquired under the Plan were purchased at a 25 percent discount below the stock's then-current market price.5 Under the restrictions provided in the Plan, the stock could not be sold, transferred, pledged or assigned during a two-year period, which commenced on the date the stock was initially acquired. However, the participating employee retained the right during the two-year period to receive any regular dividends on the shares of restricted stock, as well as the right to direct the vote of his or her shares. If the participating employee remained employed for two years from the time the shares issued, title to the shares fully vested with the employee free of all restrictions.6 If, on the other hand, the employee voluntarily terminated his or her employment or was terminated for cause during the two-year period, he or she forfeited the shares, as well as the money used to purchase them.7

Under the Plan's terms the participating employee had a choice of selecting 5, 10, 15, 20 or 25 percent of his or her cash compensation to be used to purchase the shares of restricted stock. The election form Schachter signed on December 21, 1994 stated, "I elect to participate in the Capital Accumulation Plan (CAP) subject to all of the provisions and administrative rules of the Plan. I hereby Irrevocably direct my employer, Smith Barney, to pay me the percent indicated below in the form of restricted stock out of all cash compensation paid to me during the period indicated below. I understand if I leave Smith Barney voluntarily or if I am terminated with Cause before the restrictions lapse on shares of restricted stock received under the Plan, I will forfeit the stock as well as the money I am authorizing to be paid in the form of such restricted stock." Schachter checked the box on the form indicating the portion of his total compensation he wished to be paid to him in restricted company stock was 5 percent.
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Schachter and Citigroup agree the participating employees' restricted shares were not included in the participants' gross income for federal tax purposes until the two-year vesting period had expired, pursuant to section 83 of the United States Internal Revenue Code (26 U.S.C.

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