In Re: IT Grp Inc

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
5-25-2006
In Re: IT Grp Inc
Precedential or Non-Precedential: Precedential
Docket No. 05-2191
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________
No. 05-2191
_________
IN RE: IT GROUP, INC.,
Debtor
JOHN ACCARDI; DAVID L. BACKUS;
ROCHELLE BOOKSPAN; MELISSA L.DUBINSKY;
DENNIS G. FENN; JOHN P. FRANZ;
WILLIAM A. GAUNTT; THOMAS W. GRIMSHAW;
DAVID W. HICKMAN; WARREN C. HOUSEMAN;
STEPHEN C. KENNEY; JAMES R. MAHONEY;
THOMAS R. MARTI; DAVIDW. MAYFIELD;
WILLIAM H. MCINTOSH; ROY MCKINNEY;
DAVID C.MCMURTRY; DANIEL C. MELCHIOR, III;
GEORGEANN N. MOREKAS; WILLIAM C. PARIS;
MATTHEW G. RADEK; KEVIN R. SMITH;
LOUIS STOUT; LEONARD YAMAMOTO;
JOHN E. FOLEY; JAMES M. REDWINE;
STEWART BORNHOFT; ENZO ZORATTO;
POLLY QUICK,
Appellants
v.
IT LITIGATION TRUST; IT GROUP, INC.,
and their Affiliates, as employers and fiduciaries,
administrators and sponsors of the Plan;
CARLYLE PARTNERS II, LP, as fiduciary of the Plan
and/or tortfeasor; ANTHONY DELUCA;
FRANCIS J. HARVEY; HARRY J. SOOSE, as fiduciaries of
the Plan and as officers; IT CORPORATION DEFERRED
COMPENSATION PLAN EFFECTIVE JANUARY 1, 1996
MARK S. KENNEY,
Trustee
_________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil No. 04-cv-00146)
District Judge: Honorable Joseph J. Farnan, Jr.
__________
Argued April 3, 2006
Before: RENDELL, SMITH, and BECKER*, Circuit Judges
(Filed: May 25, 2006)
____________________
* The Honorable Edward R. Becker approved this
opinion but died before it was released.
2
John M. Stull
1300 North Market Street
P. O. Box 1947
Wilmington, DE 19899
Thomas A. Johnson [ARGUED]
Suite 201
33 West Mission Street
Santa Barbara, CA 93101
Counsel for Appellants
John Accardi; David L. Backus; Rochelle Bookspan;
Melissa L. Dubinsky; Dennis G. Fenn; John P. Franz;
William A. Gauntt; Thomas W. Grimshaw;
David W. Hickman; Warren C. Houseman;
Stephen C. Kenney; James R. Mahoney;
Thomas R. Marti; David W. Mayfield;
William H. McIntosh; Roy McKinney;
David C. McMurtry; Daniel C. Melchior, III;
Georgeann N. Morekas; William C. Paris;
Matthew G. Radek; Kevin R. Smith; Louis Stout;
Leonard Yamamoto; John E. Foley;
James M. Redwine; Stewart Bornhoft;
Enzo Zoratto; Polly Quick
Jeffrey M. Schlerf
The Bayard Firm
222 Delaware Avenue
P. O. Box 25130, 9th Floor
Wilmington, DE 19899
3
John K. Cunningham
Ileana A. Cruz
White & Case
200 South Biscayne Boulevard
Suite 4900
Miami, FL 33131
Counsel for Appellees
IT Litigation Trust; IT Group, Inc.,
and Their Affiliates, As Employers and
Fiduciaries, Administrators and Sponsors
of the Plan
Mark D. Collins
Jason M. Madron
Richards, Layton & Finger
One Rodney Square
P. O. Box 551
Wilmington, DE 19899
Timothy L. Patten
Latham & Watkins
555 11th Street, N.W.
Suite 1000
Washington, DC 20004
Counsel for Appellees
Carlyle Partners II, LP, as Fiduciary of the
Plan And/or Tortfeasor
4
Ronald S. Gellert
Eckert, Seamans, Cherin & Mellott
1515 Market Street, Suite 900
Philadelphia, PA 19102
Mark A. Willard
Delia B. Bianchin
Sandra R. Mihok
Eckert, Seamans, Cherin & Mellott
600 Grant Street, 44th Floor
Pittsburgh, PA 15219
Counsel for Appellee
Anthony DeLuca
Michael J. Prame [ARGUED]
Groom Law Group Chartered
1701 Pennsylvania Avenue, N.W.
Suite 1200
Washington, DC 20006
Counsel for Appellee
Francis J. Harvey
5
Charles A. DeMonaco
Dickie, McCamey & Chilcote
Two PPG Place
Suite 400
Pittsburgh, PA 15222-5402
Counsel for Appellee
Harry J. Soose, as Fiduciaries of the Plan
and as Officers
__________
OPINION OF THE COURT
__________
RENDELL, Circuit Judge.
Plaintiffs (or “Participants”), participants in IT
Corporation’s Deferred Compensation Plan (the “Plan”), filed
an adversary complaint in the Bankruptcy Court for the
District of Delaware against IT Corporation (or the
“Corporation”), its parent company, IT Group, Inc., and their
subsidiaries, seeking secured, priority status for their claims
for benefits owed to them under the Plan. The Bankruptcy
Court concluded that the Plan was an unfunded “top hat” plan
under ERISA, and dismissed Participants’ complaint. The
District Court for the District of Delaware affirmed.
6
On appeal, Participants contend that certain novel
features of the Plan obligated the Corporation to fund a
secular trust, outside the reach of creditors, for their exclusive
benefit when the committee learned that the Corporation was
facing insolvency. We disagree, and will affirm.
I.
A. Deferred Compensation Plans Generally
A deferred compensation plan “is an agreement by the
employer to pay compensation to employees at a future date.
The main purpose of the plan is to defer the payment of
taxes.” David J. Cartano, Taxation of Compensation &
Benefits § 20.01, at 709 (2004). The idea is to defer the
receipt of compensation until retirement or termination of
employment, when the employee is in a lower tax bracket,
thus reducing the overall amount of taxes paid. Id. at
§ 20.02[A], at 710.
Certain deferred compensation plans, known as “top
hat” plans, are subject to ERISA’s administrative and
enforcement provisions, but exempt from the substantive
provisions that regulate plan funding and impose fiduciary
7
duties.1 Because the Participants’ claims arise under ERISA’s
substantive provisions, see Pls.’ 2d Am. Compl. at 29-37, they
depend on a finding that the IT Group Deferred Compensa-
tion Plan is subject to ERISA’s substantive protections, i.e.,
that it is not a “top hat” plan.
ERISA defines a top hat plan as:
a plan which is unfunded and is maintained by an
employer primarily for the purpose of providing
deferred compensation for a select group of
management or highly compensated employees.
29 U.S.C. § 1051(2). See also 29 U.S.C. §§ 1081(a)(3),
1101(a)(1).
1
The Department of Labor has explained that Congress
exempted “top hat” plans from ERISA’s substantive protections
because it believed that, unlike other employees, management
and highly compensated employees have sufficient bargaining
power to negotiate favorable deferred compensation plans and
are capable of taking the risks attendant to such plans into
account. Dep’t of Labor, Pension & Welfare Benefit Programs,
Op. Ltr. 90-14A, 1990 ERISA LEXIS 12, at *3-4 (May 8,
1990).
8
When a plan is “unfunded,”
[t]he employer promises to pay the employee the
deferred compensation at a specified time, but
does not set aside the funds in an escrow, trust
fund, or otherwise. The assets used to pay the
deferred compensation are the general assets of
the employer and are subject to the claims of the
employer’s creditors.
Cartano, at § 20.02[A], at 721. The employee is not subject
to tax on the compensation until he or she actually receives
the deferred amount because “the employee may never
receive the money if the company becomes insolvent.” Id.
An employer may set aside deferred compensation
amounts in a segregated fund or trust without jeopardizing a
plan’s “unfunded” status if the fund or trust remains “subject
to the claims of the employer’s creditors in the event of
insolvency or bankruptcy.” Id. at § 20.05[D], at 731.
One commonly-used mechanism is the “rabbi trust,”
which is
an irrevocable trust for deferred compensation.
Funds held by the trust are out of reach of the
employer, but are subject to the claims of the
9
employer’s creditors in the event of bankruptcy
or insolvency.
The rabbi trust gives employees some
measure of security, while at the same time
deferring taxes. The assets set aside in the trust
are segregated from the employer’s other assets
and can be used only to pay the deferred
compensation. If there is a change in control of
the company, the new owners cannot take back
the assets of the trust.
The employee is not taxed until receipt of
benefits as long as the trust funds are subject to
the claims of the employer’s creditors. The
employer is treated as the owner of the funds and
taxed on all fund earnings until the date of
distribution.
Id. at § 20.05[D][3], at 735. The Department of Labor has
opined that “a plan will not fail to be ‘unfunded’ . . . solely
because there is maintained in connection with such plan a
‘rabbi trust.’” Dep’t of Labor, Pension & Welfare Benefit
Programs, Op. Ltr. 91-16A, 1991 ERISA LEXIS 16, at *6-7
(Apr. 5, 1991).
10
B. IT Corporation’s Deferred Compensation Plan
IT Corporation adopted the Plan in January of 1996.
Participation in the Plan was limited to “non-employee
directors and to employees . . . who are part of a select group
of management or highly compensated employees.” Plan
¶ 2.1. The Plan document specifies that it “constitutes an
unfunded plan,” that participants in the Plan have “no legal or
equitable right, interest or claim in any property or assets of”
the Corporation or its affiliates and that the Corporation’s
obligation under the Plan is “merely that of an unfunded and
unsecured promise to pay money in the future.” Plan ¶ 13.1.
The Plan is administered by a committee established by the
Corporation’s President and Chief Executive Officer. Plan
¶ 10.1.
IT Corporation agreed to establish a trust in connection
with the Plan, Plan ¶ 1.28, and to “transfer over to the Trust
such assets, if any, as the Committee determines, from time to
time and in its sole discretion, are appropriate,” Plan ¶ 12.1.
At the same time that it adopted the Plan, the Corporation
adopted a “Master Trust Agreement for Deferred
Compensation Plans.” The Trust Agreement provided that
assets contributed to the Trust were to be held “subject to the
claims of the Company’s and the Subsidiaries’ creditors in the
event of their Insolvency,” and that the Trust would not
“affect the status of the Plans as unfunded plans maintained
for the purpose of providing supplemental compensation for a
11
select group of management, highly compensated employees
and/or Directors for purposes of Title I of ERISA.” Trust
¶ 1.2.
C. Procedural History
IT Group, IT Corporation and other affiliated
subsidiaries filed for bankruptcy protection under Chapter 11
on January 16, 2002 in the Bankruptcy Court for the District
of Delaware. On September 4, 2002, Participants filed the
adversary complaint that began this proceeding. They named
IT Group, all of its subsidiaries in bankruptcy, various former
executive officers of IT Group and Carlyle Partners II, LP, a
major shareholder of IT Group, as defendants. Participants
claimed that the Plan did not qualify for “unfunded,” “top
hat” status under ERISA, and was thus subject to ERISA’s
funding and fiduciary duty requirements. Under this theory,
Participants contend that IT Corporation had a duty to set
aside, in a trust for Participants’ exclusive benefit, i.e., beyond
the reach of the Corporation’s creditors, assets sufficient to
satisfy the Corporation’s obligations under the Plan. The
executive and shareholder defendants, correspondingly, owed
Participants fiduciary duties under ERISA to ensure that the
trust was funded before the bankruptcy petition date.2
2
Participants also set forth state law causes of action in their
complaint, see 2d Am. Compl. at 37-47, App. at 257-267, but do
not appeal the dismissal of those claims.
12
Participants’ complaint relied principally on the Plan
and Trust documents, but also alleged that a former President
and CEO of IT Corporation orally promised a senior officer
and other potential Plan participants that the Corporation
would fund the Trust for the exclusive benefit of plan
participants and ensure that benefits would be paid in full if
the Corporation ever faced the prospect of insolvency or
bankruptcy. 2d Am. Compl. at 8.
The defendants filed, and the Bankruptcy Court
granted, a consolidated motion to dismiss Participants’ claims.
The Court found that the Plan was “unfunded” and offered
only to a “select group of management or highly compensated
employees,” and was, thus, a top hat plan exempt from
ERISA’s substantive protections. Participants appealed to the
District Court for the District of Delaware; the District Court
affirmed.
II.
The District Court had jurisdiction to hear Participants’
appeal from the Bankruptcy Court’s final order dismissing
their adversary complaint pursuant to 28 U.S.C. § 158(a); our
jurisdiction over the appeal from the District Court’s order
arises under 28 U.S.C. § 158(d).
On appeal, “we stand in the shoes of the district court,
applying a clearly erroneous standard to the bankruptcy
13
court’s findings of fact and a plenary standard to that court’s
legal conclusions.” Am. Flint Glass Workers Union v. Anchor
Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). Because
the District and Bankruptcy Courts dismissed Participants’
complaint for failure to state a claim upon which relief could
be granted, a purely legal question, we review their decisions
de novo. Id.
In reviewing a motion to dismiss, we accept all factual
allegations in the complaint as true and view them in the light
most favorable to the plaintiffs. We may not dismiss a
complaint for failure to state a claim upon which relief can be
granted unless we find that the plaintiff can prove no set of
facts that would entitle him to relief. Pryor v. Nat’l
Collegiate Athletic Ass’n, 288 F.3d 548, 559 (3d Cir. 2002).
We may consider documents that are attached to or submitted
with the complaint and any legal arguments presented in the
briefs and arguments of counsel. Id. at 360.
III.
The primary issue before us, as in the Bankruptcy and
District Court proceedings, is whether the Plan qualifies for
the top hat exemption from ERISA’s substantive provisions.
Because Participants do not challenge those courts’
determinations that the Plan was offered only to management
and highly compensated employees, the only remaining
question is whether the Plan was, in fact, “unfunded.”
14
A.
ERISA does not specify, and we have not previously
considered, what requirements a plan must meet in order to be
considered “unfunded” for purposes of exemption from
ERISA’s substantive provisions.3 However, the decisions of
other courts of appeals provide useful guidance in this regard.
Other courts of appeals that have examined this issue
have focused primarily on what are essentially two sides of
the same coin: whether the corporation has set aside funds,
separate from its general assets, for payment of plan benefits
and whether the beneficiaries have a legal right greater than
3
In previous cases involving deferred compensation plans
offered to management and highly compensated employees, we
have always assumed, without further examination, that
ERISA’s “top hat” exemption applies. See, e.g., Goldstein v.
Johnson & Johnson, 251 F.3d 433, 435 (3d Cir. 2001)
(considering the proper scope of judicial review of an
administrator’s decision to deny benefits owed under a top hat
plan); Senior Executive Benefit Plan Participants v. New Valley
Corp. (In re New Valley Corp.), 89 F.3d 143, 148 (3d Cir. 1996)
(“Both plans at issue are top hat plans . . . .”); Kemmerer v. ICI
Americas Inc., 70 F.3d 281, 284 (3d Cir. 1995) (“The dispute on
appeal centers around [an] executive deferred compensation
plan, which like all such plans is commonly referred to as a ‘top
hat’ plan.”).
15
that of a general, unsecured creditor to the corporation’s
assets.
The Eighth Circuit Court of Appeals has examined this
issue from both sides. In considering whether a death benefit
plan supported by a life insurance policy was subject to
ERISA’s substantive requirements, it stated that “[f]unding
implies the existence of a res separate from the ordinary assets
of the corporation.” Dependahl v. Falstaff Brewing Corp.,
653 F.2d 1208, 1214 (8th Cir. 1981). The plan was “funded”
because the insurance policy provided “a res separate from
the corporation” to which beneficiaries could look for
payment of benefits under the plan. Id. On the other hand, an
excess benefit plan that specified that the rights of the
beneficiary under the plan would “be solely those of an
unsecured creditor” was unfunded, even though the employer
had purchased an insurance policy to help it finance the plan,
because the policy in that case “simply became a general,
unpledged, unrestricted asset of the [employer] and those . . .
assets in turn would be used to fund [the] plan.” Belsky v.
First Nat’l Life Ins. Co., 818 F.2d 661, 663-64 (8th Cir.
1987).
Similarly, the Second Circuit Court of Appeals has
observed that a plan under which benefits were to be paid
“‘solely from the general assets of the employer’” is
unfunded. Demery v. Extebank Deferred Compensation Plan,
216 F.3d 283, 287 (2d Cir. 2000) (quoting Gallione v.
16
Flaherty, 70 F.3d 724, 725 (2d Cir. 1995)). More recently, it
adopted a standard first articulated in Miller v. Heller, 915 F.
Supp. 651 (S.D.N.Y. 1996):
the question a court must ask in determining
whether a plan is unfunded is: “can the
beneficiary establish, through the plan documents,
a legal right any greater than that of an unsecured
creditor to a specific set of funds from which the
employer is, under the terms of the plan, obligated
to pay the deferred compensation?”
Demery, 216 F.3d at 287 (quoting Miller, 915 F. Supp. at
660). Applying this test, the court found that a deferred
compensation plan that was financed using life insurance
contracts, the proceeds of which were kept in a separate
account, was unfunded. According to the court, the plan’s
terms did not “give plaintiffs a greater legal right to the funds
in the Deferred Compensation Liability Account than that
possessed by an unsecured creditor.” Id. Although the
account was separate, it was part of the “general assets” of the
corporation, and the plan was therefore “unfunded as a matter
of law.” Id.
The Fifth Circuit Court of Appeals employed a similar
analysis, but also considered the tax treatment of the plan. In
Reliable Home Health Care, Inc. v. Union Central Insurance
Co., 295 F.3d 505 (5th Cir. 2002), it surveyed the decisions of
17
the other courts of appeals, and noted that the Department of
Labor had provided the following guidance: “‘[A]ny
determination of the ‘unfunded’ status of an ‘excess benefit’
or ‘top hat’ plan of deferred compensation requires an
examination of the facts and circumstances, including the
status of the plan under non-ERISA law.’” Id. at 513 (quoting
Dep’t of Labor, Pension & Welfare Benefit Programs, Op.
Ltr. 92-13A, 1992 ERISA LEXIS 14, at *7 (May 19, 1992)).
More specifically, the court emphasized DOL’s advice that
the tax consequences of the plan should be considered in the
analysis, id. (citing DOL Op. Ltr. 92-13A, 1992 ERISA
LEXIS 14, at *7), and noted a district court’s holding that “a
‘plan is more likely than not to be regarded as unfunded if the
beneficiaries under the plan do not incur tax liability during
the year that the contributions to the plan are made,’” id. at
514 (quoting Miller, 915 F. Supp. at 659). Combining all of
this information, the court devised the following test:
in determining whether a plan is “funded” or
“unfunded” under ERISA, a court must first look
to the surrounding facts and circumstances,
including the status of the plan under non-ERISA
law. Second, a court should identify whether a
[plan] is funded by a res separate from the general
assets of the company.
Id.
18
The Reliable court concluded, under this test, that a
death benefit plan was unfunded. Like the plans at issue in
Demery and Belsky, the plan was financed through the
purchase of life insurance contracts on behalf of participating
employees. However, those contracts belonged to the
company, not the participating employees. Plan participants
were prohibited from contributing to the plan, and did not
treat the company’s contributions to the plan on their behalf
as taxable income. Thus, the plan was unfunded and exempt
from ERISA’s substantive provisions. Id. at 514-15.
We agree with our fellow courts of appeals that the
keys to the determination of whether a plan is “funded” or
“unfunded” under ERISA are (1) whether beneficiaries of the
plan can look to a res separate from the general assets of the
corporation to satisfy their claims; (2) whether beneficiaries
of the plan have a legal right greater than that of general,
unsecured creditors to the assets of the corporation or to some
specific subset of corporate assets. We may also consider the
plan’s intended and actual tax treatment.4 We will analyze the
4
As noted above, a plan under which the beneficiaries do not
incur tax liability during the year that the contributions to the
plan are made is “more likely than not” an “unfunded” plan.
Miller v. Heller, 915 F. Supp. 651, 659 (S.D.N.Y. 1996). This
is so because the tests for taxation of deferred compensation and
for funding status overlap–deferred compensation is not taxable
as current income only where the future payment of the
compensation is somehow uncertain, i.e., where the assets used
19
IT Corporation Plan accordingly.
B.
The IT Corporation Plan is an unfunded top hat plan
under ERISA. At the outset, we note that the Plan and Trust
documents express, in no uncertain terms, IT Corporation’s
intent to create an unfunded plan. The “Purpose” section of
the Plan document provides that the “Plan constitutes an
unfunded plan.” And the Trust document explicitly states that
the Trust “shall not affect the status of the Plans as unfunded
plans . . . for purposes of Title I of ERISA.” Trust ¶ 1.2.
Beyond the Corporation’s stated intent, an examination
of the factors set forth above fully supports our conclusion.
First, there is no res separate from IT Corporation’s general
assets to which Participants can look to satisfy their claims.
Although the Plan document provides for, and the Trust
document establishes, a “Trust” for participants’ benefit, no
funds were ever deposited into the Trust. And Participants’
to pay participants’ claims are also subject to other creditors’
claims. Thus, the fact that a plan qualifies for deferred tax
treatment strongly supports the conclusion that it was unfunded.
See Dep’t of Labor, Pension & Welfare Benefit Programs, Op.
Ltr. 92-13A, 1992 ERISA LEXIS 14, at *7 (May 19, 1992)
(noting that “the tax consequences to trust beneficiaries should
be accorded significant weight” in determining whether a plan
is “funded” or “unfunded”).
20
“account balances,” listed on their annual benefit statements,
do not reflect actual deposits held in a particular location; the
Plan specifically states that each balance is a “bookkeeping
entry only,” designed to “be utilized solely as a device for the
measurement and determination of amounts to be paid to or in
respect of a Participant pursuant to the Plan.” Plan ¶ 1.2.
Second, even if the Trust were funded, Participants’
legal rights to its assets, and to the assets of the Corporation
as a whole, are no greater than those of the Corporation’s
general, unsecured creditors. The Deferred Compensation
Plan Questions & Answers, which was circulated to potential
participants along with the Plan document, explains that the
Trust is a “‘Rabbi Trust’” that “does not provide security in
the event that IT Corporation or its subsidiaries become
insolvent or file for bankruptcy.”5 Moreover, the Trust
document unequivocally establishes that Trust assets are
subject to creditors’ claims in the event of insolvency, and
that such claims are on par with those of Plan participants.
See, e.g., Trust ¶ 1.3 (“The Participants and their
5
As noted above, the DOL has opined that a “rabbi trust”
maintained in connection with a deferred compensation plan
will not undermine the plan’s “unfunded” status. See Dep’t of
Labor, Pension & Welfare Benefit Programs, Op. Ltr.
91-16A , 1991 ERISA LEXIS 16, at *6-7 (Apr. 5, 1991).
21
Beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of the Trust. . . .
Any assets held by the Trust will be subject to the claims of
the Company’s and the Subsidiaries’ general creditors under
federal and state law in the event of Insolvency . . . .”);
Trust ¶ 3.6(a) (“To the extent that any Participant or
Beneficiary acquires the right to receive payments under any
of the Plans, such right shall be no greater than that of an
unsecured general creditor of the Company and the
Subsidiaries and such Participant or Beneficiary shall have
only the unsecured promise of the Company and the
Subsidiaries that such payments shall be made.”).
The Plan document similarly limits Participants’ legal
rights to IT Corporation’s general corporate assets. E.g., Plan
¶ 13.1 (“Participants . . . shall have no legal or equitable right,
interest or claim in any property or assets of an Employer. . . .
An Employer’s obligation under the Plan shall be merely that
of an unfunded and unsecured promise to pay money in the
future.”).
Finally, we note that Participants did not pay taxes on
22
the compensation that they deferred under the Plan.6
Participants do not mount much of a challenge to any
of the foregoing (aside from our consideration of the tax
treatment of the Plan, see supra note 6). Instead, they argue
that this analysis fails to take into account other facts and
circumstances that render the Plan “funded.” Participants
advance two arguments in this regard. We address each
theory in turn.
C.
The “centerpiece” of Participants’ claim, see
Appellants’ Br. at 22, is that the Plan document obligated the
Plan’s administrative committee to create and fund a secular
trust for their exclusive benefit in the event of impending
insolvency. More specifically, they argue: (1) that paragraph
6
Participants argue that the tax treatment of the Plan is
“irrelevant.” Although they acknowledge that they did not
report deferred compensation as income for tax purposes, they
contend that the Plan as drafted “was never entitled to favorable
tax treatment” because of the administrative committee’s alleged
obligation to fund an exclusive benefit trust on their behalf in
the event of insolvency. Appellants’ Br. at 38. Given that
Participants benefitted from this tax treatment when the
Corporation was solvent, their argument seems more than a little
disingenuous. Moreover, as we discuss in Section III.C below,
we reject Participants’ characterization of the Plan.
23
12.1 of the Plan document,7 which gives the Plan’s
administrative committee “sole discretion” over the funding
decisions related to the Plan, implies a duty to actually fund
the Trust in “good faith”; (2) that the duty of good faith
carries an obligation to avoid forfeitures, which, in this case,
could only have been accomplished by funding an exclusive
benefit trust before the Corporation became insolvent; and
(3) that the Corporation “pre-approved,” in the Trust
document, an amendment to the Trust that would convert it
from a “rabbi trust,” susceptible to general creditors’ claims,
into a secular trust for the exclusive benefit of Plan
participants. Thus, Participants conclude, they have a legal
right to payment of Plan benefits greater than that of the
Corporation’s general, unsecured creditors.
We need not dwell on this argument for long, because
we reject its fundamental premise. Although we have
recognized that terms of top hat plans that confer discretion to
plan administrators are subject to the implied duty of good
faith, Goldstein v. Johnson & Johnson, 251 F.3d 433, 448 (3d
Cir. 2001), that duty does not extend as far as Participants
7
The full text of paragraph 12.1 is as follows:
The Employers shall establish the Trust and shall
transfer over to the Trust such assets, if any, as
the Committee determines, from time to time and
in its sole discretion, are appropriate.
24
contend. The implied duty of good faith is merely an
“interpretive tool to determine the parties’ justifiable
expectations,” Northview Motors, Inc. v. Chrysler Motors
Corp., 227 F.3d 78, 91 (3d Cir. 2000); it may not be used to
add new terms to an agreement, Lorenz v. CSX Corp., 1 F.3d
1406, 1415 (3d Cir. 1993), or to override express contractual
terms, Northview, 227 F.3d at 91. For Participants to succeed,
we would have to do just that–to hold that the duty requires
the Plan’s administrative committee to fund a trust for their
exclusive benefit. This runs directly afoul of the Plan’s stated
purpose to remain “unfunded” for ERISA purposes and its
express provision that Participants are not entitled to any
“legal or equitable right, interest or claim in any property or
assets of” the Company, and that the Company’s obligation
under the Plan “shall be merely that of an unfunded and
unsecured promise to pay money in the future.” Plan ¶ 13.1.
Participants urge that at least one court has used the
doctrine of “necessary implication” to imply an obligation to
fund an employee benefit plan that was not expressly
provided in the terms of the plan. See Killian v. McCulloch,
850 F. Supp. 1239, 1250-51 (E.D. Pa. 1994). However, that
doctrine is only employed to
imply an agreement by the parties to a contract to
do and perform those things that according to
reason and justice they should do in order to
carry out the purpose for which the contract was
25
made and to refrain from doing anything that
would destroy or injure the other party’s right to
receive the fruits of the contract.
Id. (quoting Somers v. Somers, 419 Pa. Super. 131, 613 A.2d
1211, 1212 (1992)) (emphasis added). It does not apply
where, as here, the implied agreement would not accomplish
either of those goals, but would destroy, rather than carry out,
the express purpose of the Plan. Here, the Committee, in
failing to fund the trust, did nothing to destroy or injure
Participants’ rights under the Plan–the Plan granted them only
a limited, unsecured right to future payment.
Participants would have us employ the implied duty of
good faith and the doctrine of necessary implication to expand
their rights under the Plan, not to “carry out the purpose” for
which it was created. To accept Participants’ argument would
require us to depart significantly from our previous decisions
regarding the scope of the implied duty of good faith, to
broaden the doctrine of “necessary implication” and to
disregard the plain and unambiguous language of the Plan and
Trust documents. We cannot, and will not, do so.
D.
Participants’ second claim relies on parol evidence, in
the form of an alleged oral representation made by the former
President and CEO of IT Corporation to various Plan
26
participants, to establish that the plan was “funded.” In their
complaint, Participants alleged that the former President and
CEO assured prospective participants that, in the event of
insolvency, the Trust would be funded and they would be paid
in full.
Participants argue, first, that terms of the Plan and
Trust documents that give the Plan’s administrative
committee discretion to fund the Trust create ambiguity as to
the Plan’s intended funding status, and, second, that the
alleged representation should be used to resolve that
ambiguity. See Senior Executive Benefit Plan Participants v.
New Valley Corp. (In re New Valley Corp.), 89 F.3d 143, 150
(3d Cir. 1996) (“[O]nce a contract provision is found to be
ambiguous, extrinsic evidence must be considered to clarify
its meaning.”).
We disagree. As discussed above, the terms of the
Plan and Trust documents clearly and unambiguously evince
the Corporation’s intent to create an unfunded top hat plan.
Moreover, as the Bankruptcy Court observed, the oral
representation alleged by Participants “would add an
additional term to the contract regarding funding; it would not
shed light on the written terms of the Plan.” IT Group, Inc. v.
Bookspan (In re IT Group, Inc.), 305 B.R. 402, 411 (Bankr.
D. Del. 2004). Thus, the oral representation does not
27
undermine our initial conclusion that the Plan is unfunded,
and has no place in our analysis.
IV.
For the foregoing reasons, we agree with the
Bankruptcy and District Courts that Participants’ claims
should be dismissed. We will accordingly AFFIRM the
District Court’s order.
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