Creditors eye savings of lender’s employees
Gregory J. Schroeder socked away $876,721 in a special retirement savings plan during his nine years as a marketing executive for sub-prime lender New Century Financial Corp.
Now, he may have to share his nest egg with a bevy of strangers, including Wall Street firms, landlords, delivery services and others who claim the collapsed Irvine company owes them money.
That’s because Schroeder’s funds rest in a “top hat” retirement program, a plan that companies set up as a perk for select employees in addition to traditional retirement plans. Unlike pension funds or 401(k) plans, which are protected by law, top hat funds are considered assets of the company. That makes them fair game for the creditors circling New Century in U.S. Bankruptcy Court.
Hoping to get their money back, Schroeder and nearly 600 other New Century employees have asked a federal judge to let a committee represent them as they challenge the validity of the company’s top hat program.
“It’s our money -- this was actual deductions from our pay,” said Schroeder, who lives in Trabuco Canyon near New Century’s Irvine headquarters.
The money in question is deferred compensation -- salary and bonuses diverted into special accounts so that favored employees could avoid paying taxes until they needed the funds in retirement. New Century had one such fund for senior managers such as Schroeder and another for high-earning employees, mostly sales personnel.
New Century declined to discuss details of the plans.
The employees, who had $40 million in the plans, asked the federal bankruptcy trustee two days after the company’s Chapter 11 filing to appoint an official committee to represent them. That request has gone unanswered. So last week, they asked Bankruptcy Judge Kevin J. Carey to intervene, contending that the committee representing unsecured creditors won’t act in their best interests.
The Official Committee of Unsecured Creditors -- which represents most of those owed money by New Century -- opposes formation of a separate committee for the beneficiaries of the retirement plans, said the panel’s attorney, Bonnie G. Fatell. In the eyes of the law, she said, these people are unsecured creditors like everyone else.
Schroeder, 48, who had been executive vice president of marketing and e-commerce at the lender, estimated that he put about 35% of his salary and bonuses in the plan over the years.
The owner of a separate wine business, he said he had become tired of the lending business after 20 years at mortgage companies and quit New Century in mid-February without any inkling that the company would soon wind up in bankruptcy.
“Much of my decision to retire was based on thinking that the [deferred-compensation] money would be there later,” he said.
One of the employees’ lawyers, Robert A. Keach, said he would argue that New Century overstepped the usual bounds for such accounts by offering them to lower-level employees who didn’t qualify for the benefit.
If Keach wins a ruling that New Century’s top hat program was not legitimate, the funds could be protected after all under the federal Employee Retirement Income Security Act, which safeguards pension and 401(k) plans -- and the employees might be able to reclaim their contributions in full.
As supplements to traditional retirement plans, top hat plans are supposed to include only employees who, because of high earnings or positions of authority, “are presumed to be able to fend for themselves financially” and therefore don’t need ERISA protection, said Claudia H. Allen, a corporate governance attorney at Neal, Gerber & Eisenberg in Chicago.
The plans are common these days, and because of incentive-based compensation plans it’s not unusual for hundreds or even thousands of corporate employees to participate in them, said Alan Johnson, a compensation consultant at Johnson Associates Inc. in New York.
“Basically, to be in the plan you would have to make a quarter-million dollars a year,” he said, adding that it will be tough for New Century’s top hat participants to show they weren’t sophisticated enough to merit being exempted from ERISA.
“You’re talking about people who live in a big house, have nice cars and made a lot of money holding themselves out as financial experts,” he said.
Schroeder said there have been few similar cases, and prior legal decisions have not been favorable. But he said when other employees approached him about leading a legal battle, he thought the fight was necessary.
“I honestly felt like somebody’s got to do something,” he said. “There’s so much money at stake. A lot of lives are going to be ruined.”
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