Bennett v. Conrail Matched Savings Plan Administrative Committee

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
2-23-1999
Bennett v. Conrail Matched Sav
Precedential or Non-Precedential:
Docket 97-1916
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Filed February 23, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 97-1916/1917/1918
STEVEN W. BENNETT; EDMUND L. GILLOOLEY;
JOSEPH L. ALESSANDRINI, JR.; FRANK W. HEWITT;
RICHARD E. SEMARAD; WARREN E. KAYLOR,
Individually and on behalf of all others similarly situated
v.
CONRAIL MATCHED SAVINGS PLAN ADMINISTRATIVE
COMMITTEE; DEBORAH A. MELNYK; JOHN/JANE DOES
1-10; CONSOLIDATED RAIL CORPORATION MATCHED
SAVINGS PLAN
Steven W. Bennett; Edmund L. Gillooley;
Joseph L. Alessandrini, Jr.; Frank W. Hewitt;
Richard E. Semarad; Warren E. Kaylor,
Individually and on behalf of all members of the
proposed class,
Appellants in 97-1916.
JOANNE KELLY, Individually and on behalf of all others
similarly situated
v.
CONRAIL MATCHED SAVINGS PLAN ADMINISTRATIVE
COMMITTEE; DEBORAH A. MELNYK; JOHN/JANE DOES
1-10; CONSOLIDATED RAIL CORPORATION MATCHED
SAVINGS PLAN
Joanne Kelly,
Appellant in 97-1917.
GEORGE E. GALE, III, Individually and on behalf of all
others similarly situated,
Appellant 97-1918.
v.
CONRAIL MATCHED SAVINGS PLAN ADMINISTRATIVE
COMMITTEE; DEBORAH A. MELNYK; JOHN/JANE DOES
1-10; CONSOLIDATED RAIL CORPORATION MATCHED
SAVINGS PLAN
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action Nos. 97-cv-04535; 05017 & 05345)
District Judge: Honorable Harvey Bartle, III
Argued July 13, 1998
Before: SLOVITER and ROTH, Circuit Judges
FEIKENS,1 District Judge
(Opinion filed February 23, 1999)
Alan M. Sandals, Esquire (Argued)
Howard I. Langer, Esquire
Sandals, Langer & Taylor, LLP
1650 Market Street
One Liberty Place, 47th Floor
Philadelphia, PA 19103
Attorney for Appellants Bennett,
Gillooley, Alessandrini, Hewitt,
Semarad and Kaylor
_________________________________________________________________
1. The Honorable John Feikens, United States District Court Judge for
the Eastern District of Michigan, sitting by designation.
2
Kenneth I. Trujillo, Esquire
Ira Neil Richards, Esquire
Trujillo, Rodriguez & Richards, LLC
226 West Rittenhouse Square
The Penthouse
Philadelphia, PA 19103
Attorneys for Appellants
Kelly, et al.
David Berger, Esquire
Harold Berger, Esquire
Stanley R. Wolfe, Esquire
Patricia D. Gugin, Esquire
Berger & Montague, P.C.
1622 Locust Street
Philadelphia, PA 19103
Attorneys for Appellants
Gale, et al.
Laurence Z. Shiekman, Esquire
(Argued)
Brian T. Ortelere, Esquire
Pepper Hamilton LLP
18th & Arch Streets
3000 Two Logan Square
Philadelphia, PA 19103-2799
Attorneys for Appellees
OPINION OF THE COURT
ROTH, Circuit Judge:
Appellants are former employees of Conrail Corporation.
They challenge the distribution of surplus assets of an
employee stock ownership plan ("ESOP" or the "Plan"). The
Plan is governed by the Employee Retirement Income
Securities Act ("ERISA"). We must decide whether ERISA
entitled the former employees to a portion of the cash
surplus in the Plan that resulted from a favorable tender
offer for Conrail's stock. Appellants argue that under ERISA
they are entitled to share in the surplus and that Conrail's
3
failure to permit them to do so violates fiduciary duties
imposed by ERISA. We conclude that appellants were not
entitled to participate in the apportionment of the surplus
and that the District Court correctly dismissed their claims.
I. FACTS
In 1990, Conrail established a voluntary savings plan for
non-union employees. The Plan was a defined contribution
plan2 and included an employee stock ownership plan and
a deferred compensation plan. To get established, the Plan
borrowed $290 million from Conrail to purchase a specially
created class of Conrail preferred stock. This stock was
held in an unallocated account. Participating employees
contributed a portion of their salary into individual
accounts and Conrail matched these contributions with
stock from the unallocated account. These contributions
vested immediately. Under the Plan, "all amounts allocated
to the Account of a Participant shall be fully vested and
nonforfeitable at all times." Conrail Plan Agreement, P 12.1.
The benefits, which accrued under the defined contribution
plan, were based solely on the performance of the shares in
the individual accounts. As the District Court noted, the
benefits depended on the vagaries of the marketplace.
Shortly after establishing the Plan, Conrail began to
terminate employees. A terminated employee was entitled
"to a distribution of all amounts credited to his account."
Conrail Plan Agreement, P 8.1. Appellants do not dispute
that they were fully vested and that, when they were
terminated by Conrail, they were credited with the total
vested balance in their individual accounts.
In 1997, Norfolk Southern and CSX Corporations made a
favorable tender offer to purchase Conrail. The tender offer
was for all outstanding shares of Conrail stock, including
_________________________________________________________________
2. In a defined contribution plan "employees are not promised any
particular level of benefits; instead they are promised only that they
will
receive the balance in their individual accounts." Pension Benefit Guar.
Corp. v. LTV Corp., 496 U.S. 633, 637 n.1 (1990). This is in contrast to
a defined benefit plan which provides a fixed benefit to the employee. 29
U.S.C. S 1002(35).
4
shares held in the unallocated account. The price Norfolk
Southern and CSX paid for the stock was substantially in
excess of its market value. After the Plan repaid Conrail the
funds which it had borrowed to establish the Plan, the
Plan's share of the proceeds from the tender offer resulted
in a cash surplus of approximately $533 million in the
unallocated account.
In June 1997, the Plan was amended to allocate this
surplus to persons employed by Conrail from 1996-1998.3
The amendment provided that these allocations would be
made to the maximum extent allowed under the Internal
Revenue Code (either $30,000 or 25% of annual
compensation for the eligible employee, whichever is less).
Employees terminated or otherwise separated from
employment with Conrail before 1996 were not eligible to
share in the surplus. Appellants are among this ineligible
group.
Appellants brought suit in the U.S. District Court for the
Eastern District of Pennsylvania, alleging two counts of
ERISA violations. The District Court concluded that
appellants received their accrued benefits as mandated by
ERISA and for that reason they were not entitled to share
in the surplus. The District Court dismissed both counts
for failure to state a claim under Rule 12(b)(6). This appeal
followed.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction over this action based
on 28 U.S.C. S 1331 and 29 U.S.C. S 1132(e). We have
jurisdiction over the appeal of the dismissal pursuant to 28
U.S.C. S 1291. We review a dismissal under Rule 12(b)(6)
under a plenary standard of review. Malia v. General
Electric Co., 23 F.3d 828, 830 (3d Cir. 1994).
_________________________________________________________________
3. Under the Plan, Conrail's Board of Directors could "amend or
terminate, in whole or in part, the Plan . . . at any time and in any
manner, without prior notification. . . . no amendment to the Plan shall
decrease a Participant's benefit or eliminate an optional form of
distribution. No amendment shall make it possible for any assets of the
Plan to be used for or diverted to any purpose other than for the
exclusive benefit of Participants and Beneficiaries." Plan at P 14.1.
5
III. DISCUSSION
Appellants' complaint set forth two counts, alleging
violations of ERISA. First, they claim that Conrail violated
ERISA and tax code provisions governing partial and
complete termination of pension plans. In the second
count, they allege that under ERISA, Conrail breached its
fiduciary duty by amending the Plan to adopt an
inequitable distribution scheme. Appellants contend that on
its termination, the Plan was essentially a "wasting trust"
and therefore Conrail had a duty to distribute all its assets
equitably.
A. Partial Termination
We turn first to appellants' claim that a partial
termination occurred and that the partial termination
mandated distribution of a share of the unallocated assets
to appellants. Appellants contend that the Plan was
partially terminated when in 1990, shortly after Conrail had
established it, Conrail started laying off employees.
Appellants argue that, under the Internal Revenue Code, a
partial termination requires the distribution of unallocated
Plan assets to the terminated employees. 26 U.S.C.
S 411(d)(3).
The District Court assumed that the employees were
correct in contending that the layoffs constituted a partial
termination of the Plan. This assumption is consistent with
our conclusion in Gluck v. Unisys Corp., 960 F.2d 1168,
1183 (3d Cir. 1992), that "partial termination...involves a
significant reduction in plan liability by means of a
corresponding reduction in employee benefits. That
reduction may be achieved either by excluding a segment of
employees, or by reducing benefits generally." Since we
have found that excluding employees through layoffs is a
"vertical partial termination," id., the District Court
reasonably assumed that a partial termination had
occurred.
This conclusion does not, however, help appellants. Even
though a partial termination of the Plan may have
occurred, the tax code does not afford the appellants the
relief they seek. Appellants argue that the Internal Revenue
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Code requires any partially terminated tax-qualified
pension plan to distribute benefits to all "affected
employees." They cite to 26 U.S.C. S 411(d)(3), which
provides that a plan will retain its tax qualified status if
upon its termination or partial termination . . . the
rights of all affected employees to benefits accrued to
the date of such termination, partial termination, or
discontinuance, to the extent funded as of such date,
or the amounts credited to the employees' accounts are
nonforfeitable.
Appellants' reliance on this section is, however,
misplaced. Section 411(d)(3) refers only to "benefits
accrued." The code defines "benefits accrued" for defined
contribution plans as the balance in the individual's
account. 26 U.S.C. S 411(a)(7)(A)(ii).4 In addition, as
S 411(d)(3) makes clear, affected employees are entitled to
"benefits accrued to the date of such termination, [or]
partial termination." Appellants were fully vested in the
balance in their accounts when they were laid off, but their
contributions to the Plan ceased at that time. The Plan
would not reopen as to them to gather in further assets to
accrue for their benefit. Indeed, by the express language of
the Plan, only participants having a base salary earned for
services could contribute to the Plan. Plan Agreement, P 3.1
and p. 3. For that reason, after their lay-off, appellants
were no longer entitled to receive new benefits in the Plan.
Moreover, appellants are conflating accrued benefits with
plan assets. Assets and benefits are treated differently
under ERISA. As we noted in Malia:
"benefits" are elements that are conceptualized and
treated differently in a plan termination than are
"assets" of that plan. "Benefits" are computed in a
different manner than "assets." Accrued benefits are
placed on the liability side, rather than on the asset
side of the balance sheet.
23 F.3d at 832.
_________________________________________________________________
4. ERISA also defines "accrued benefit" as the balance of an individual's
account. 29 U.S.C. S 1002(23)(B).
7
In Malia, two pension plans merged resulting in surplus
assets. Participants sued to receive the surplus in addition
to their benefits under the defined benefit plan. In
upholding the dismissal of the employees' claims, we held
that assets and benefits are distinct. Unallocated assets are
not the same as accrued benefits. ERISA protects only
anticipated benefits, not surplus assets.
We came to a similar conclusion in Chait v. Bernstein,
835 F.2d 1017 (3d Cir. 1987), where, in considering the
applicability of S 411(d)(3) of the tax code to a claim for
surplus assets after a partial termination of an employee
benefit plan, we held that "the purposes and policies of
partial terminations under the tax code do not apply in the
context of vested employees attempting to gain plan
surplus." Id. at 1021.
The appellants argue, however, that Treasury Regulation
S 1.411(d)-2(a)(2)(i) supports their position that they are
entitled to their share of the surplus. This regulation
provides that, in order for a plan to remain a tax qualified
one upon partial termination, unallocated funds must be
allocated to covered employees:
(2) Required allocation. (i) A plan is not a qualified plan
. . . unless the plan provides for the allocation of any
previously unallocated funds to the employees covered
by the plan upon termination or partial termination of
the plan . . ..
Treas. Reg. S 1.411(d)-2(a)(2)(i). As the District Court
pointed out, however, this regulation does not "require the
allocation of amounts to the account of any employee if
such amounts are not required to be used to satisfy the
liabilities with respect to employees and their beneficiaries
under the plan." Treas. Reg. S 1.411(d)-2(a)(2)(iii).
The question then is whether the accumulation of a
surplus in a plan may properly be considered an
outstanding liability of that plan. We conclude that it
should not be so considered. As we determined in Malia,
accrued benefits are liabilities of a plan; assets (such as
surplus) fall on the other side, the asset side, of the balance
sheet. See 23 F.3d at 832.
8
Nevertheless, appellants argue that, since the Plan
contains no employer reversion provision, there is nowhere
for the surplus to go but to them.5 For this reason, they
contend, distribution of the surplus must be considered an
outstanding liability. While appealing in its simplicity, this
"by process of elimination argument" fails because, as we
have pointed out, benefits are a liability of a plan; assets
are not.
We conclude, therefore, that both under the relevant
portions of the tax code and under the applicable treasury
regulations, appellants are not entitled to share in the
surplus upon partial termination of the Plan.
Appellants next urge that Conrail's failure to distribute
surplus assets to them upon partial termination of the Plan
constituted a breach of the duties imposed by ERISA. Their
first argument relies on 29 U.S.C. S 1344 (S 4044 of ERISA).
They contend that S 1344 requires that, upon termination,
plan assets be distributed equitably. However, S 1344
applies to the partial termination of a plan only when the
plan provides that it do so. Ashenbaugh v. Crucible Inc.,
1975 Salaried Retirement Plan, 854 F.2d 1516, 1529 n.15
(3d Cir. 1988). The Conrail Plan does not so provide.
Therefore, appellants' argument that S 1344 should apply to
this partially terminated plan is unavailing.
Finally, appellants argue that the distribution scheme
simply is unfair. They contend that they assumed the risk
of the market performance of the Conrail stock throughout
their tenure at Conrail and now they are being excluded
when it comes time to realize the reward of its increase in
value. However, ERISA does not confer substantive rights
on employees; rather it ensures that they will receive those
benefits that the employers have guaranteed to them. See
Hughes Aircraft Co. v. Jacobson, No. 97-1287, 1999 WL
24546, at *6 (U.S. Jan. 25, 1999). As we stated in Malia:
ERISA provides for comprehensive federal regulation of
employee pension plans . . . . [T]he major concern of
_________________________________________________________________
5. Typically, defined contribution plans do not include a provision for
reversion to the employer. See H.R. Conf. Rpt. No. 841, 99th Cong., 2d
Sess. at Vol. II-482 (1986), reprinted in 1986 U.S.C.C.A.N. 4078, 4570.
9
Congress was to ensure that bona fide employees with
long years of employment and contributions realize
anticipated pension benefits.
23 F.3d at 830, quoting, Reuther v. Trustees of Trucking
Employees of Passaic and Bergen County Welfare Fund, 575
F.2d 1074, 1076-77 (3d Cir. 1978). While ERISA provides
that a fiduciary must act "(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries;"
29 U.S.C. S 1104(a)(1)(A), ERISA does no more than protect
the benefits which are due to an employee under a plan.
It is true that appellants' level of benefits was contingent
on the performance of Conrail securities purchased for their
individual accounts, based on their level of contribution. As
the value of those securities went up, so did the value of
their accounts. Accordingly, appellants realized the increase
in value of those securities while appellants were
participants in the Plan. However, ERISA only guarantees
them the level of the benefits accrued up to the time of
their termination by Conrail. For this reason, the windfall,
from which they claim they were excluded, was not one to
which they were entitled.
Moreover, appellants overstate the magnitude of the so-
called windfall. The distribution of the cash surplus can
only be made up to the limit allowed by the tax code. This
is the lesser of 25% of an employee's salary or $30,000.
Since many of the employees who receive this "windfall" will
lose their jobs as a result of the CSX-Norfolk Southern
takeover, the amount of their windfall hardly seems
inequitable.
Even if we conclude then that a partial termination did
occur as a result of the layoffs at Conrail, ERISA protects
only accrued benefits. These were credited to appellants in
the form of the balance of the individual accounts
guaranteed to appellants when they were laid off.
Appellants are not entitled to the surplus that resulted from
the tender offer.
B. Complete Termination of the Plan and
Application of S 1344
We now turn to the application of 29 U.S.C. S 1344 to a
complete termination of the Plan. Appellants assert that,
10
even if no partial termination occurred, they were entitled
to share in the surplus when Conrail completely terminated
the Plan in May 1997. They argue that S 1344(d) governs
the distribution of residual assets when a plan is
terminated and that, pursuant to its language, former
employees should share in the surplus.
Appellants point out that ERISA directs that a plan
termination be conducted according to the procedure set
forth in S 1344. Section 1103(d) provides that "[u]pon
termination of a pension plan . . . the assets of the plan
shall be allocated in accordance with the provisions of
section 1344 . . .." 29 U.S.C. S 1103(d)(1). Section
1103(d)(2) further provides that a plan's assets shall be
distributed "in accordance with the terms of the plan."
Section 1344(d) regulates the distribution of residual
assets to the employer after the satisfaction of all liabilities
to plan participants. It reads in part:
(1) Subject to paragraph (3), any residual assets of a
single-employer plan may be distributed to the
employer if--
(A) all liabilities of the plan to participants and their
beneficiaries have been satisfied,
(B) the distribution does not contravene any
provision of law, and
(C) the plan provides for such distribution in these
circumstances.
* * *
(3)(A) Before any distribution from a plan pursuant
to paragraph (1), if any assets of the plan
attributable to employee contributions remain after
satisfaction of all liabilities described in subsection
(a) of this section, such remaining assets shall be
equitably distributed to the participants who made
such contributions or their beneficiaries (including
alternate payees, within the meaning of section
1056(d)(3)-(K)) of this title.
29 U.S.C. S 1344(d) (emphasis added).
11
Appellants are correct that ERISA directs that a plan
termination be conducted in accord with S 1344 and that
S 1344(d) governs the distribution of residual assets.
Appellants argue that, since ERISA defines "participants" to
include employees and former employees, 29 U.S.C.
S1002(7), appellants should be included in the allocation
described in S 1344(d). The plain language ofS 1344(d),
however, proves the error of their argument. Section
1344(d) applies only when an employer is seeking a
reversion of assets to itself. 29 U.S.C. S 1344(d)(3)(A). That
is not the case here. Appellants concede that the Plan
contains no employer reversion provision. In addition,
S 1344(d) refers to the distribution of residual assets
"attributable to employee contributions." This case,
however, involves the distribution to participants of a
surplus resulting from a favorable tender offer, not a
distribution of the remainder of their contributions. For
these reasons, we conclude that S 1344 does not entitle
appellants to a share of the surplus assets.
Finally, appellants argue that in amending the Plan to
create the distribution scheme now under attack, Conrail
violated its fiduciary duties to act with loyalty and
impartiality. ERISA basically requires that fiduciaries
comply with the plan as written unless it is inconsistent
with ERISA. 29 U.S.C. S 1104(1)(D). Chait v. Bernstein, 835
F.2d 1017 (3d Cir. 1987) (receiver who took over
management of corporation that contributed to plan did not
self-deal when he terminated the plan in accord with
ERISA.) Essentially, appellants claim that Conrail's actions
inure to the benefit of management and to the exclusion of
plan participants in direct contravention of ERISA. Because
we find that appellants are not entitled to any of the
surplus either upon partial termination or complete
termination, we find appellants lack standing to challenge
the manner in which that surplus is ultimately distributed.
In short, they are not harmed by the distribution scheme.6
_________________________________________________________________
6. Since appellants lack standing to challenge the distribution scheme,
we will take no position at this time whether the scheme is in accord
with ERISA.
12
C. Fiduciary Duty
The second count of the dismissed complaint makes a
claim of breach of fiduciary duty by Conrail. Appellants
argue that, when terminated, the Plan became a "wasting
trust"7 and as a consequence Conrail had an obligation
under common law to distribute all the assets equitably.
Conrail contends that its actions in amending the Plan were
not those of a fiduciary under ERISA.
ERISA imposes fiduciary duties in the administration of
plans which it governs. American Flint Glass Workers Union
v. Beaumont Glass Co., 62 F.3d 574, 579 (3d Cir. 1995);
Walling v. Brady, 125 F.3d 114, 118-19 (3d Cir. 1997). We
have recognized, however, that ERISA permits employers to
"wear ``two hats'," one as plan administrator, the other as
plan sponsor. Blaw Knox Retirement Income Plan v. White
Consol. Indus., 998 F.2d 1185, 1189 (3d Cir. 1993),
quoting, Payonk v. HMW Indus., Inc., 883 F.2d 221, 225 (3d
Cir. 1989). Fiduciary duties attach to the actions of
employers " ``only when and to the extent' that they function
in their capacity as plan administrators, not when they
conduct business that is not regulated by ERISA." Id.Under ERISA, an employer has broad authority to amend
a plan, Hughes Aircraft, 1999 WL 24546, at *5 (holding that
where employer "makes a decision regarding the form or
structure of the plan," ERISA's fiduciary duty requirement
is not implicated). In amending a plan, the employer is
acting as a settlor. Id.; Lockheed Corp. v. Spink, 517 U.S.
882, 890 (1996). There are portions of ERISA which govern
plan amendments; for example, under S 1054(g), an
amendment may not decrease accrued benefits. However,
as long as an amendment does not violate a specific
provision of ERISA, "the act of amending a pension plan
does not trigger ERISA's fiduciary provisions." See Hughes
Aircraft, 1999 WL 24546, at *5. Thus, the mere fact that
Conrail amended its Plan did not breach any fiduciary
duties under ERISA.
_________________________________________________________________
7. A "wasting trust" is recognized under common law as a trust that has
had its purposes accomplished so that its continuation would frustrate
the settlor's intent. See Hughes Aircraft Co. v. Jacobson, No. 97-1287,
1999 WL 24546, at *9 (U.S. Jan. 25, 1999).
13
With regard to appellants' wasting trust argument,
because ERISA is a "comprehensive and reticulated statute"
and is "enormously complex and detailed," it should be
supplemented by the common law only where ERISA does
not address an issue. See Hughes Aircraft, 1999 WL 24546,
at *6; Jordan v. Fed. Express Corp., 116 F.3d 1005, 1017-
18 (3d Cir. 1997). Moreover, even if we were to invoke the
common law, the Plan was not a wasting trust. The Plan
itself provided for its termination and the distribution of its
assets. The District Court found that the Plan could not be
likened to a wasting trust because it was an active plan up
until just six months prior to the filing of this suit. Thus,
appellants' fiduciary duty arguments under their common
law claim must fail.
IV. CONCLUSION
For the reasons stated above, we will affirm the judgment
of the District Court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
14