Phelps v. CT Enterprises, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-2071
PAUL L. PHELPS; JERRY H. GILSTRAP; JERRY W.
CUDDY; GERALD W. LYDA; NINA POSEY; THOMAS R.
WILLIAMS; ALVIN A. STIWINTER; TROY J.
COTTRELL; THOMAS L. CARLSON; ROBERT W. CARTER;
WAYNE F. MCWHORTER; RODNEY K. DEANHARDT, SR.;
MELVIN M. BROCK; EDWARD J. COOLEY; CHARLES A.
FURR; FRANCIS C. AIKEN; ELIZABETH AUDREY
LOREDO; JIMMY S. STATON; NORMAN DAVIS; EUGENE
M. KRENEK; RICHARD N. RYDER, II; KATHERINE D.
LACKEY,
Plaintiffs - Appellants,
versus
CT ENTERPRISES, INCORPORATED; SACO LOWELL,
INCORPORATED,
Defendants - Appellees,
and
CLIFF THEISEN; TOM POMIAN; MIKE TEMPLETON;
BRANCH BANKING AND TRUST OF SOUTH CAROLINA,
Defendants.
Appeal from the United States District Court for the District of
South Carolina, at Greenville. Henry M. Herlong, Jr., District
Judge. (CA-02-3739-HMH)
Argued: May 26, 2006 Decided: August 9, 2006
Before WILKINSON and WILLIAMS, Circuit Judges, and Glen E. CONRAD,
United States District Judge for the Western District of Virginia,
sitting by designation.
Affirmed by unpublished per curiam opinion.
John Robert Peace, Greenville, South Carolina, for Appellants.
Vance Earle Drawdy, OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C.,
Greenville, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
2
PER CURIAM:
This appeal arises out of a claim for plan benefits under the
Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
§ 1001, et seq.; 29 U.S.C. § 1132; 28 U.S.C. § 1331, brought by
former employees (“the Employees”) of Saco Lowell (“Saco Lowell”)
and CT Enterprises (“CT”). The Employees allege that Saco Lowell
and CT violated their fiduciary duties regarding plan assets. The
district court, concluding that the defendants did not violate
their fiduciary duties and that the plaintiffs did not suffer any
loss, entered an order granting summary judgment to the defendants.
The Employees appeal the order granting summary judgment. For the
reasons set forth below, we affirm the judgment of the district
court.
I.
Saco Lowell manufactured equipment used in the textile
industry. Employees were eligible to participate in the CT
Enterprises Group Health Benefits Plan (“the Plan”), a self-
insured, ERISA-governed, group health plan. The Plan’s claim
administrator, Kanawha Benefit Solutions, Inc. (“Kanawha”),
received contributions, processed claims, and distributed benefits.
Employees were paid weekly, and participants in the Plan had
contributions withheld from their weekly paychecks on a pretax
3
basis. From May 25, 2000, to December 12, 2000, Saco Lowell and CT
paid Kanawha administrative fees.1
Beginning in about July 2000, however, CT did not provide
sufficient funds to Kanawha to pay all outstanding claims of
participants. On July 21, 2000, Kanawha issued a check log bill
for $84,999.41 in claims, indicating that payment in full was
required. During approximately the same period, the bank informed
Saco Lowell and CT that it would no longer fund the company.
In August of 2000, the bank took control of a new account for
Saco Lowell. In September, the bank agreed to forbear from calling
in various promissory notes; the notes provided that any judgment
not paid within 30 days would constitute default. Due to these
problems, the company management held meetings to inform employees
of the company’s financial situation, during which shortcomings in
funding claims under the Plan were also mentioned. Employees were
told that the company was doing everything it could to pay
outstanding claims, but they were never told that employer
contributions were not being made to Kanawha. On November 21,
2000, the Employees were given notice that the Plan would be
terminated on November 28. The Employees were not informed at this
point about the status of claims incurred prior to November 28,
2000, or of the status of employer contributions to the Plan.
1
In an amendment to the Plan effective July 1, 2000, CT was
listed as the employer.
4
II.
On November 5, 2002, twenty-two participants in the Plan, who
had made claims prior to its termination, filed an action against
CT Enterprises, Inc., Saco Lowell, Inc., Cliff Theisen, Tom Pomian,
Mike Templeton, and Branch Banking and Trust of South Carolina2, in
the United States District Court for South Carolina. They sought
to recover payment for approved but unpaid claims, as well as other
appropriate equitable relief. The defendants filed a motion to
dismiss, which was granted in part and denied in part by the
district court. The parties filed cross-motions for summary
judgment, and the district court granted the defendants’ motion.
On appeal, we vacated the district court’s opinion and remanded for
further proceedings. See Phelps, et al. v. C.T. Enter., Inc., et
al., 394 F.3d 213 (4th Cir. 2005). We directed the district court
to reconsider the Employees’ theory that Saco Lowell and CT
breached a fiduciary duty by failing to remit the Employees’
contributions to Kanawha.
Following remand, the parties again filed cross-motions for
summary judgment, and the district court granted in part and denied
in part the defendants’ motion, and denied the Employees’ motion.
Both parties submitted motions for reconsideration. Following
additional submissions, the district court entered judgment in
favor of the defendants. The district court concluded that failure
2
The defendant bank was later dismissed.
5
to remit employee contributions to the Plan as soon as practicable
did not result in loss to the Employees, because the Plan was
exempt from the trust requirements of ERISA. The court also found
that failure to disclose to the Employees that the contributions
were no longer being remitted to Kanawha on a weekly basis did not
constitute a breach of any fiduciary duty. The Employees filed a
motion to amend/correct the order, which the district court denied.
The Employees now appeal the district court’s decision to grant
summary judgment, contending that Saco Lowell and CT breached their
fiduciary duties in two ways: they misused employee contributions
and failed to remit employee contributions to the plan
administrator as soon as practicable; and they failed to disclose
material information about the Plan to the Employees.
III.
We review a grant of summary judgment de novo, viewing all
facts and inferences in the light most favorable to the nonmoving
party. Love-Lane v. Martin, 355 F.3d 766, 775 (4th Cir. 2004).
Summary judgment is appropriate only if “there is no genuine issue
as to any material fact and ... the moving party is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(c).
6
IV.
The Employees contend that Saco Lowell and CT breached their
fiduciary duties by misapplying employee contributions and failing
to remit employee contributions to the plan administrator as soon
as practicable. Saco Lowell and CT assert that they timely
submitted employee contributions to the Plan and there was no
breach of fiduciary duty.
The Employee Retirement Income Security Act, or ERISA, was
enacted
to protect interstate commerce and the interests of
participants in employee benefit plans and their
beneficiaries, by requiring the disclosure and reporting
to participants and beneficiaries of financial and other
information with respect thereto, by establishing
standards of conduct, responsibility, and obligation for
fiduciaries of employee benefit plans, and by providing
for appropriate remedies, sanctions, and ready access to
the Federal courts.
29 U.S.C. § 1001(b) (2006). Assets of an ERISA plan “shall never
inure to the benefit of any employer and shall be held for the
exclusive purposes of providing benefits to participants in the
plan and their beneficiaries and defraying reasonable expenses of
administering the plan.” 29 U.S.C. § 1103(c)(1) (2006). See also
Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541
U.S. 1, 22 (2004) (holding that 29 U.S.C. § 1103(c)(1) “demands
only that plan assets be held for supplying benefits to plan
participants”). The fiduciary responsibility provisions of ERISA
“apply the law of trusts to discourage abuses such as self-dealing,
7
imprudent investment, and misappropriation of plan assets, by
employers and others.” Id. at 23.
It is a requirement of most ERISA plans that the assets be
held in trust. See 29 U.S.C. § 1103 (2006). The Saco Lowell and
CT Plan was not subject to the trust requirement, however, because
the Plan was a “cafeteria plan,” as defined by 26 U.S.C. § 125(2006).3 For cafeteria plans, the Department of Labor does not
assert a violation “solely because of a failure to hold participant
contributions in trust.” ERISA Technical Release 92-01, 57 Fed.
Reg. 23272 (June 2, 1992). However, this allowance does not
relieve fiduciaries “of an obligation to ensure that participant
contributions are applied only to the payment of benefits and
reasonable administrative expenses of the plan.” Id. Therefore,
even though the Saco Lowell and CT Plan was not subject to any
trust requirement, there was still a fiduciary duty to ensure that
employee contributions were not used for the company’s general
operating expenses.
In our earlier decision in Phelps v. C.T. Enterprises, Inc.,
we concluded that the district court had not thoroughly addressed
the Employees’ claim that Saco Lowell and CT failed to remit the
contributions withheld from the Employees’ paychecks to Kanawha.
3
A “cafeteria plan” is defined as an arrangement under which
“all participants are employees, and the participants may choose
among 2 or more benefits consisting of cash and qualified
benefits.” 26 U.S.C. § 125 (2006).
8
394 F.3d at 221. We directed attention to the case of Pension
Benefit Guaranty Corp. v. Solmsen, 671 F. Supp. 938 (E.D.N.Y.
1987), which held that a defendant who did not forward employee
contributions to an ERISA-governed plan, instead using the
contributions to pay company expenses, breached a fiduciary duty.
Subsequent to the decision in Solmsen, the Department of Labor
issued a regulation which provided that employee contributions are
plan assets. 29 C.F.R. § 2510.3-102 (2004). These contributions
become plan assets “as of the earliest date on which such
contributions can reasonably be segregated from the employer’s
general assets.” Id.The date on which the contributions become plan assets cannot
occur later than 90 days from the date the contributions are
withheld. Id. Even if all employee contributions are submitted to
the plan within 90 days, however, this fact does not necessarily
establish that an employer has fulfilled its fiduciary duty. The
90-day period is not intended to serve as a “safe harbor.”
Regulation Relating to Definition of “Plan Assets”–Participant
Contributions, 61 Fed. Reg. 41220, 41223 (Aug. 7, 1996). An ERISA
Technical Release specifically provides that
[t]he regulation is not intended ... to allow employers
to use participant contributions for their own purposes
... employers who fail to transmit promptly such amounts,
and plan fiduciaries who fail to collect those amounts in
a timely manner, will violate the requirement that plan
assets be held in trust; in addition, such employers and
fiduciaries may be engaging in prohibited transactions
.... The Department wishes to stress that the outside
9
limit of 90 days is not intended to supercede the
preceding portion of the rule, that is, the participant
contributions become plan assets “as of the earliest date
on which such contributions can reasonably be segregated
from the employer’s general assets.”
ERISA Technical Release 92-01, 57 Fed. Reg. 23272 (June 2, 1992).
Considering these basic principles underlying ERISA and the
contours of fiduciary duties regarding plan assets, we conclude
that funds withheld as employee contributions to a plan cannot be
used by an employer for any purpose other than funding the plan.
In this case, if Saco Lowell and CT had used the funds withheld
from the Employees’ weekly paychecks as general assets of the
company, there would have been a clear breach of Saco Lowell’s and
CT’s fiduciary duties. Even though the cafeteria plan avoided the
trust requirement, there was still a requirement that plan assets,
including employee contributions, be used only to benefit the
participants, and not as general assets of the company.
In their brief, Saco Lowell and CT claim that “the undisputed
evidence” shows that all amounts withheld from employee paychecks
were ultimately remitted to the Plan. (Appellee Br. at 27). The
Employees have presented no evidence to the contrary. Templeton,
Saco Lowell’s comptroller, testified that all employee
contributions were transferred to the Plan. (J.A. 163, 166, and
168). He specifically verified that “all of the employee
contributions that were withheld were ... transferred to Kanawha
for either the payment of claims or the reasonable expense of
10
administering the Plan.” (J.A. 168). Clifford Thiesen, Saco
Lowell’s chief executive officer, also testified that all employee
contributions were forwarded to the Plan. (J.A. 103).
Until July of 2000, employee contributions were submitted to
the Plan on a weekly basis. After this point, Saco Lowell withheld
employee contributions on a weekly basis, but stopped making
submissions to Kanawha on a weekly basis. However, within 90 days
of each weekly paycheck, CT forwarded amounts greater than the sum
of the employee contributions to Kanawha. While these amounts were
not sufficient to pay all the claims, it is now clear that all
employee contributions were remitted to Kanawha within 90 days of
receipt.
After consideration of the record, which has been expanded
since the case was previously before us, we conclude that Saco
Lowell and CT did not breach any fiduciary duty in the processing
of employee contributions. All contributions were remitted to the
Plan within 90 days, and there is no evidence that Saco Lowell and
CT used the contributions inappropriately, as general assets of the
company, during the intervening time. Although Saco Lowell’s
comptroller recognized that funds taken out of employee paychecks
were not sequestered from other company funds (J.A. 163), the
regulations do not require that participant contributions to
cafeteria plans be held in trust. ERISA Technical Release 92-01,
57 Fed. Reg. 23272 (June 2, 1992). In addition, the comptroller
11
agreed that “all of the employee contributions that were withheld
were, in fact, transferred to Kanawha for either the payment of
claims or the reasonable expense of administering the Plan.” (J.A.
168). The chief executive officer stated that, to the best of his
knowledge, “no amounts held from any Saco Lowell employee’s pay for
the Medical Plan were used for any purpose other than for paying
benefits and/or administrative expenses under the Medical Plan.”
(J.A. 103). Therefore, viewing the evidence in the light most
favorable to the Employees, there is no support for the claim that
Saco Lowell and CT breached their fiduciary duties by applying the
employee contributions to payroll or other general company
expenses. In fact, all evidence is to the contrary, supporting
Saco Lowell and CT’s assertion that employee contributions were not
used as general assets. Further, to the extent of the Employees’
argument that the change in the timing of payment of employee
contributions to the administrator constituted a breach of
fiduciary duty, we conclude that CT forwarded contributions to
Kanawha as soon as practicable, in light of the extenuating
financial situation of the company.4
4
The facts of this case are distinguishable from those in
Solmsen, in which the employer suffered substantial business
hardship and used employee plan contributions to pay general
expenses of the company. 671 F. Supp. at 945. While changed
financial circumstances did not justify the misuse of employee
contributions in Solmsen, an employer does not breach a fiduciary
duty merely because the timing of payments to the plan
administrator is altered in the face of an onset of adverse
circumstances.
12
V.
The Employees also allege that the district court erred in
finding that there was no claim for breach of fiduciary duty
regarding the failure to disclose material information to plan
participants. The district court found that there was no breach of
fiduciary duty because there was no loss caused by any delay in
remission of employee contributions, and the failure to remit
contributions on a weekly basis was therefore not a material fact
that the Employees needed to know. The Employees claim that Saco
Lowell and CT breached their fiduciary duties in three ways: by
failing to provide complete information in response to beneficiary
questions; by failing to notify the Employees that their required
contributions were no longer being transferred to Kanawha on a
weekly basis; and by failing to notify the Employees that employer
contributions to the Plan were not being paid. According to the
Employees, this information was material because if the information
had been disclosed to them, they could have obtained other medical
coverage.
Our Circuit has identified two situations in which an ERISA
administrator has a fiduciary duty to advise beneficiaries. See
Griggs v. E.I. DuPont De Nemours & Co., 237 F.3d 371, 381 (4th Cir.
2001). First, a fiduciary must give complete and accurate
information to a beneficiary if the beneficiary requests
information. Id. Second, a fiduciary must provide “material facts
13
affecting the interest of the beneficiary which he knows the
beneficiary does not know and which the beneficiary needs to know
for his protection.” Id. The Employees contend that Saco Lowell
and CT have breached both of these duties.
The Employees first claim that Saco Lowell and CT
misrepresented the status of the Plan in response to a direct
question at the meeting with the Employees in November. They base
this claim upon Templeton’s statement in his deposition that “I do
remember questions coming up about the health care [at an employee
meeting] which Cliff [Thiesen] said that we were doing everything
we could to get them paid at the time.” (J.A. 50). This is the
only evidence presented by the Employees in support of their claim.
We conclude that, even viewed in the light most favorable to the
Employees, the statement does not support the notion that Templeton
breached a fiduciary duty to provide information. The evidence
establishes that Templeton gave information that was correct as he
understood the circumstances at the time of the meeting.
The Employees also claim that Saco Lowell and CT failed to
disclose material information that beneficiaries needed to know
about the status of the Plan. In regards to the employee
contributions to the Plan, there were no “material facts affecting
the interest of the beneficiary which [the fiduciary] knows the
beneficiary does not know and which the beneficiary needs to know
for his protection.” Griggs, 237 F.3d at 381. We have concluded
14
that employee contributions were not used as general assets, and
that CT forwarded contributions to Kanawha as soon as practicable
considering the change in Saco Lowell’s and CT’s circumstances, and
within 90 days. Therefore, we conclude that the district court
properly held that there was no fiduciary duty to disclose
information relating to the employee contributions to the fund, and
there was no loss to the Employees resulting from a failure to
disclose this information.
Based upon a de novo review of the record, we further conclude
that Saco Lowell and CT adequately informed the Employees about the
circumstances of the Plan and employer contributions to the Plan.
In August, the Employees were told that the company was not
“currently meeting all [] obligations, that the bank was
controlling the purse strings, and hopefully, [the company] would
be able to resolve this going forward.” (J.A. 188). As to the
health care plan, Thiesen testified in his deposition that he told
the participants that “right now we’re having some problems–that
was obvious–and we’re hoping to resolve them in the near future.”
(J.A. 189). According to Thiesen, the Employees were not told that
the plan was no longer solvent, because “we didn’t think that we
were not solvent. We felt that we had opportunities that were
going to allow us to continue as a business.” (J.A. 190). Thiesen
further stated in his deposition that “[w]e had submitted a plan to
the bank that we thought we could get approved and would allow us
15
to continue on.” (J.A. 192). These statements demonstrate that
Saco Lowell and CT kept the Employees apprised of the circumstances
of the company and the Plan as they were understood. We conclude
that the Employees were informed of the status of the Plan to the
extent of Saco Lowell’s and CT’s knowledge, and there was no breach
of the fiduciary duty to inform.
VI.
Viewing the facts in the record and the reasonable inferences
in the light most favorable to the Employees, we conclude that Saco
Lowell and CT did not breach their fiduciary duties to participants
in the ERISA-governed Plan. CT forwarded all employee
contributions to Kanawha within 90 days of withholding from weekly
paychecks, and there is no evidence that employee contributions
were misused for general business expenses of the company. In
addition, representatives of the company did inform the Employees
about the financial status of the Plan and the company, to the best
of the representatives’ knowledge. They therefore did not breach
a fiduciary duty to inform the Employees about material facts of
which the participants had a need to know. Accordingly, we
conclude that the district court properly determined that the
defendants were entitled to summary judgment. We affirm the
decision of the district court, and find it unnecessary to reach
16
the issue of whether the individual plaintiffs would have been
entitled to damages.
The judgment of the district court is hereby
AFFIRMED.
17