Izzarelli v. Rexene Products Co.

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 92-8458
_____________________
LEONARD N. IZZARELLI, on Behalf
of Themselves and All 1986
Participants in the El Paso Products
Company Stock Bonus Plan who are
similarly situated, ET AL.,
Plaintiffs-Appellees
Cross-Appellants,
VERSUS
REXENE PRODUCTS COMPANY, A Delaware
Corporation, REXENE CORPORATION, a
Delaware Corporation and EL PASO
PRODUCTS COMPANY STOCK BONUS PLAN,
Defendants-Appellants
Cross-Appellees,
and
TEXAS COMMERCE BANK - ODESSA,
Defendant-Cross-Appellee.
*****************************************************************
_____________________
No. 92-8694
_____________________
LEONARD N. IZZARELLI, ETC., ET AL.,
Plaintiffs-Appellees,
VERSUS
REXENE PRODUCTS COMPANY, a
Delaware Corporation, ET AL.,
Defendants,
TEXAS COMMERCE BANK - ODESSA,
Defendant-Appellant.
____________________________________________________
Appeals from the United States District Court
for the Western District of Texas
(MO-91-CA-016 and MO-91-CV-16)
_____________________________________________________
June 22, 1994
Before WISDOM, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
The primary issue in this action under the Employee Retirement
Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461,
concerns when benefits accrued for the participants in a defined
contribution plan. Each of the several parties appeals. Rexene
Products Company, Rexene Corporation, and Rexene's Stock Bonus Plan
challenge the adverse judgment totalling approximately $7.2
million. Leonard N. Izzarelli and Donald J. Schelfhout
(representing themselves and current and former Rexene Products
Company employees who were Plan participants in 1986) contest both
a credit the district court granted the Rexene defendants, and the
judgment as a matter of law granted the Plan trustee, Texas
Commerce Bank - Odessa, N.A. And, the Bank disputes the denial of
its attorney's fees. We AFFIRM in part and REVERSE in part.
I.
At stake is Rexene Products Company's contribution, for Plan
year 1986, to its Stock Bonus Plan (the Plan), an ERISA defined
contribution employee benefit plan, 29 U.S.C. §§ 1001-1461.1 In
1
A defined contribution, or individual account, plan, such as
the Stock Bonus Plan, is "a pension plan which provides for an
individual account for each participant and for benefits based
- 2 -
1983, Rexene Products Company (then The El Paso Products Company)
was a division of The El Paso Company. Because the division was
not profitable, El Paso sold it in 1984 to Rexene Corporation (the
Corporation), a holding company formed and wholly owned by the
division's senior management. The former division was renamed
Rexene Products Company (Rexene).
Rexene established the Plan in 1985.2 Texas Commerce Bank -
Odessa was the Plan trustee; Rexene, the Plan's administrator and
sponsor.3 The Plan was administered by an Administrative Committee
made up of Rexene officers. All Rexene employees, with the
exception of a few officers and members of senior management, were
eligible to participate in the Plan; and for Plan year 1986, there
were approximately 1,050 participants. The Plan supplemented
existing benefits plans, including the Savings Plan, discussed in
solely upon the amount contributed to the participant's account,
and any income, expenses, gains and losses, and any forfeitures of
accounts of other participants which may be allocated to such
participant's account." 29 U.S.C. § 1002(34) (1985); see Connolly
v. Pension Ben. Guar. Corp., 475 U.S. 211, 230 (1986) (unlike
defined benefit plans, individual account plans "do[] not specify
benefits to be paid, but instead establish[] an individual account
for each participant to which employer contributions are made").
2
Rexene had established earlier an ERISA-qualified Savings
Plan, under which Rexene would match voluntary employee
contributions up to a certain level. The contributions were to be
used to buy stock in Rexene.
3
The Bank and the Administrative Committee appointed by Rexene
were named as Plan fiduciaries. As well, under ERISA § 33(21)(A),
Rexene (named as the Plan Administrator) was a fiduciary, because,
under the Plan, it "exercise[d] ... discretionary authority or
discretionary control respecting management of [the] plan ... [and]
ha[d] ... discretionary authority or discretionary responsibility
in the administration of [the] plan." 29 U.S.C. § 1002(21)(A)(i),
(iii).
- 3 -
note 2. Under the Plan, Rexene had the discretion to decide
whether a contribution would be made for a given plan year, and, if
so, in what amount.
The Plan specified that contributions would be made in the
form of cash or stock in the Corporation. Rexene had set an
informal goal of, over five years, contributing to the Plan
approximately 22-25% of the Corporation's stock (approximately
543,000 shares). In accordance with this goal, in early 1986,
Rexene contributed 135,725 shares for Plan year 1985. The shares
were valued at $1.00 per share, using a valuation date of December
31, 1985 -- the last day of the tax year to which the 1985
contribution was attributed.
In early 1987, Rexene again voted a contribution: 101,794
shares for the Plan year 1986. The Corporation authorized it in
February 1987; and Rexene informed Plan participants of this in a
bulletin board notice. A stock certificate representing the shares
was prepared on March 2, 1987, and was listed on the Corporation's
books as being transferred on that date to the Bank as Plan
trustee. But, the certificate was not delivered to the Bank until
that May; under cover letter dated May 1, it was received by the
Bank on May 13.
The 1986 contribution was authorized before the shares were
appraised. The first appraisal, not ordered until May 1, 1987,
used a valuation date of December 31, 1986, consistent with the
procedure that had been followed for the 1985 contribution. The
appraisal, delivered on June 15, 1987, reflected a marked increase
- 4 -
in the value: $76.34 per share as of December 31, 1986. The day
after the appraisal was delivered, Rexene notified the participants
of the value, and the approximate amount that would be allocated to
each participant's account. By means of a bulletin board notice,
Rexene informed the participants that they would receive
approximately one share for every $303 of 1986 straight-time
earnings.4 The notice stated that account statements would be
prepared and mailed within the next two weeks.
Rexene's accountants then began to allocate the contribution
among the participants. But, while the accountants were preparing
the account statements, they realized that the contribution, at
$76.34 per share (approximately $7.7 million total), was an
"overcontribution". That is, it would cause many accounts to
exceed the Internal Revenue Code § 415 limit on excludable income
contributed to qualified benefit plans.5 Exceeding the § 415
limits could have disqualified the Plan under ERISA. See 26 U.S.C.
§ 415(a)(1)(B). Accordingly, Rexene began considering ways to deal
with the problem. Regardless of what strategy Rexene chose, a Plan
amendment was needed.
4
Rexene provided Plan participants with this information in
order to allow them to calculate the amount that would be allocated
to each account.
5
Contributions to defined contribution plans are excludable
from taxable income if they do not exceed the lesser of $30,000 or
25% of the taxpayer's gross wages in a given year. 26 U.S.C. §
415(c). The section aggregates amounts excluded under all
qualified benefit plans; for Rexene, therefore, contributions to
the Savings Plan would be aggregated with those to the Plan.
- 5 -
Outside counsel, who had helped to develop the Plan, first
suggested that Rexene follow the terms of the Plan, specifically §
4.3, as closely as possible. That section provided that, if a
contribution would cause any account to exceed the § 415 limit, the
excess was to be "allocated and reallocated" to the other accounts,
until all participants reached their § 415 limits. If any excess
still existed, it was, with the permission of the Internal Revenue
Service, to be held in a "suspense account" for allocation in
future years to the accounts of those who had been participants
when the overcontribution occurred. Outside counsel advised,
however, that it might take five to six months for the IRS to issue
a determination letter with regard to the suspense account.
Despite this anticipated delay, he advised Rexene that IRS approval
of such an account was likely.6
Rexene did not choose this alternative. The district court
found that the determination letter delay made this alternative
unattractive to Rexene, because it had begun, in April 1987, to
investigate selling the company or taking it public. By late July
1987, Rexene -- anticipating a sale -- had prepared a draft
Agreement of Merger. (The sale occurred in April 1988.)
6
But, outside counsel also advised that the IRS was not likely
to approve a suspense account of the exact type contemplated by §
4.3. That is, the account was to be allocated in later years to
only the accounts of those whose allocations had created the over-
contribution -- i.e., not also to the accounts of participants who
joined the Plan in later years. Outside counsel considered it
unlikely that the IRS would approve this, because it could violate
26 U.S.C. § 404(a)(4)'s anti-discrimination provisions.
- 6 -
The district court found also that Rexene was motivated by a
desire to ensure that its employees had no reason to frustrate the
sale. Many of the highly-paid employees -- who had voting rights
with respect to sales or mergers -- were dissatisfied with the
proposal to "allocate and reallocate" the 1986 overcontribution
pursuant to § 4.3. These employees (part of the group whom the
parties classify as "heavy savers") had contributed large amounts
to the Savings Plan in 1986. Thus, they were closer than others to
reaching § 415's limits. Therefore, under the Plan's "allocate-
reallocate" strategy, the heavy savers would receive very little of
the 1986 contribution, whereas the others would receive
comparatively more through the reallocation process.
At trial, however, inside counsel emphasized repeatedly that
the impending sale did not affect Rexene's Plan decisions.
Consistent with this testimony, Rexene contends that its decision
to amend the Plan in the manner it did was motivated primarily by
its desire not to penalize the heavy savers. Members of Rexene's
management testified that there "was a very, very strong feeling of
management, that the people who had [invested in the Savings Plan]
... [had indicated] commitment to the company", because the Savings
Plan's assets were used to purchase Rexene stock. And, outside
counsel testified that, in addition to this concern, Rexene's
interest was in maintaining the Plan's ERISA-qualified status.
Similarly, inside counsel testified that Rexene did not follow Plan
§ 4.3 because
it would not have achieved ... the equitable
distribution that we wished to achieve. We had
- 7 -
never foreseen the possibility of the problem that
we had gotten into. And we did not want ... to
penalize the savers and we felt [that] ...
ultimately, everybody could receive the benefit of
that 101,000 shares and ... we would continue to
follow the equitable allocation based upon the
ratio of their salary to the aggregate salary.
Although inside counsel testified that the value of the deduction
allowed for shares in a suspense account would affect Rexene's
value at the time of sale, he testified that Rexene was not
concerned as much with its value, as with "trying to determine a
solution to the over-contribution problem".
As an alternative to following § 4.3's allocation-reallocation
process (with its attendant determination letter delay), outside
counsel suggested that the 1986 contribution be allocated to take
all participants up to their § 415 limits, with those who, but for
§ 415, would have received more stock, being given an additional
cash bonus outside the Plan, equivalent to the value of the stock
they would have received. After this, the excess would be placed
in a suspense account that would be used as part of the
contribution for subsequent plan years for all participants, not
just those who were participants when the overcontribution was
made.
Unlike outside counsel's first alternative, this proposal
would not require waiting for a determination letter, because, he
advised, this type of allocation was "not unusual". Thus, although
the amendment would still have to be submitted to the IRS, Rexene
would "be safe in pursuing this course of action immediately and in
notifying the participants immediately as to their actual account
- 8 -
balances without making the notification subject to[,] or the
actual allocation await[,] the determination letter." But, Rexene
rejected this alternative also, partly because it would have
necessitated paying large bonuses outside the Plan, which Rexene
was not in a position to do, and partly because it, like the first
alternative, had the effect of penalizing heavy savers.
Rexene decided on the following Plan amendment. On September
9, 1987, it submitted for IRS approval the Second Amendment, which
would allocate to each participant shares valued at 6.32% of his or
her 1986 considered compensation.7 Using this system, Rexene could
allocate only about 26,000 shares;8 the remainder would revert to
Rexene. The amendment's provision for the reversion was based on
a "mistake of fact" theory, one of the few justifications, under
the Plan, for a reversion. Outside counsel advised, however, that
the IRS might not approve an amendment that allowed a reversion.
On counsel's advice, therefore, Rexene authorized further
amendment as necessary to allow the Plan to maintain its qualified
status.9 This authorization was submitted to the IRS on February
1, 1988, as part of the Fourth Amendment to the Plan, discussed
7
Rexene chose 6.32% because that percentage allowed it to
allocate shares up to the § 415 limits of most of the heavy savers.
Even using this relatively small percentage, however, 84 of the
approximately 1,050 participants would have exceeded their § 415
limits. When the 6.32% scheme was effected, these 84 participants
received an additional bonus outside the Plan.
8
There is no dispute that this allocation was less than that
which could have been allocated without violating § 415.
9
Rexene's outside counsel testified that it was customary to
authorize whatever further amendments were necessary, when
attempting to secure IRS approval of plan amendments.
- 9 -
infra. On February 11, 1988, the IRS issued a favorable
determination letter, pursuant to which it implicitly disapproved
the reversion under the Second Amendment. Pursuant to Rexene's
further amendment authorization, however, the IRS approved the
Fourth Amendment. Under that amendment, each participant would
receive, as under the Second Amendment, shares valued at 6.32% of
1986 considered compensation; however, the excess would be placed
in a suspense fund, rather than reverting to Rexene. The Fourth
Amendment called for the excess to be distributed in later years to
all participants, including those who joined after 1986.
As stated, under the 6.32% allocation, Rexene could have
allocated approximately 26,000 shares ($76.34 per share). On
February 4, 1988, however -- while the IRS approval was pending --
Rexene commissioned another appraisal, with a valuation date of May
31, 1987. The 1986 contribution had, as stated, been appraised at
$76.34 per share, using a valuation date of December 31, 1986, the
last day of the tax year to which the contribution was attributed.
As also noted, the same valuation method had been used for the 1985
contribution, made in early 1986. And, while seeking approval of
the Second and Fourth Amendments, Rexene had on several occasions
advised the IRS that the 1986 contribution was made on February 26,
1987 (when approved by Rexene), and valued at $76.34 per share --
i.e., as of December 31, 1986.
After Rexene had submitted its amendments to the IRS for
approval, however, outside counsel advised that it would be
preferable instead to value the contribution as of the date it was
- 10 -
contributed to the trustee. As discussed infra, he advised that
the contribution be re-appraised, to determine its value as of May
31, 1987, the last day of the month in which the stock certificate
representing the 1986 contribution was delivered to the Bank.
Using the May valuation date resulted in an appraisal of $158.37
per share, or approximately $16.2 million overall.10 Using this
value caused only 11,775 shares to be allocated, with the remaining
90,019 being placed in the suspense account. Again, this
allocation was significantly less than the amount that could have
been allocated (even using the higher valuation) without violating
§ 415. Plan participants were advised of the new valuation by a
bulletin board notice dated March 11, 1988. The notice also stated
that the IRS had approved a revised allocation method for the 1986
contribution, and that the change was required by law.
Finally, in early 1988, shares were allocated under the 6.32%
formula, and statements distributed to participants, for Plan year
1986.11 When Rexene was sold in April 1988, the 90,019 suspense
account shares were sold, with the Plan receiving $203.95 per
share. These proceeds were allocated among all participants for
Plan years 1987-1991, using the Fourth Amendment formula. In all,
10
As discussed infra, the higher the value attributed to the
contribution, the larger the tax deduction for Rexene. The value
of the contributed shares thus affected Rexene's value. As also
noted, however, Rexene contends that this was not its primary
motivation either in deciding to amend the Plan, or in deciding
when to value the stock.
11
For its 1986 tax return, filed in September 1987, Rexene had
taken a deduction for the 25,580 shares, using the more
conservative $76.34 valuation.
- 11 -
1986 participants received the equivalent of 82,248 of the 101,794-
share 1986 contribution.
Plaintiffs -- 1986 participants -- brought this action in
February 1991, under ERISA § 502, 29 U.S.C. § 1132.12 See, e.g.,
Christopher v. Mobil Oil Co., 950 F.2d 1209, 1220 (5th Cir.), cert.
denied, ___ U.S. ___, 113 S. Ct. 68 (1992) (discussing § 1132,
which provides for civil actions under ERISA). They sought to
enforce ERISA § 204(g), 29 U.S.C. § 1054(g) ("anti-cutback"
provision), and §§ 404 and 405, 29 U.S.C. §§ 1104, 1105 (fiduciary
duty provisions). They claim, inter alia, that Rexene, the
Corporation, and the Bank breached their fiduciary duties and
violated ERISA's benefits protection provisions by failing to
follow the Plan, amending the Plan, and re-valuing the 1986
contribution; and that this reduced the accrued benefits for 1986
participants. (The Plan was also named as a defendant, for the
limited purpose of effectuating whatever relief was granted. The
Plan, Rexene, and the Corporation are "the Rexene defendants".)
During a bench trial, at the conclusion of plaintiffs' case,
the district court granted the Bank judgment as a matter of law.
After trial, it held against the Rexene defendants, based on
finding that the 1986 contribution was contributed on March 2,
1987, and accrued then, at the $76.34 value. In the alternative,
12
Several months after suit was filed, Rexene and the
Corporation filed for bankruptcy. While the bankruptcy was
pending, the district court certified the class, denied Rexene and
the Corporation summary judgment, and stayed the case pending
resolution of the bankruptcy proceedings. In April 1992, the
bankruptcy court granted plaintiffs' motion to lift stay, and later
did so to permit this appeal.
- 12 -
it found that the contribution accrued when Rexene gave
participants the information necessary to calculate their
individual balances. (The first bulletin board notices stating
that participants would receive approximately one share for each
$303 of 1986 compensation were posted in March 1987.) The court
concluded that these accrued benefits were decreased by the Fourth
Amendment, in violation of ERISA's anti-cutback provision, 29
U.S.C. § 1054, and in violation of Rexene's fiduciary duty under
ERISA, 29 U.S.C. § 1104.
The Rexene defendants moved to modify the judgment, or in the
alternative for new trial; plaintiffs, to amend the findings of
fact and conclusions of law. The district court entered amended
conclusions of law and findings of fact, and denied the new trial.
In an amended judgment, it awarded plaintiffs $4,807,636, together
with $1,786,689 for lost interest and earnings, and $594,856.15 for
attorneys' fees and costs. The award was offset partially by a
credit awarded Rexene for the portions of the 1986 contribution
allocated to 1986 participants post-Plan year 1986. Finally, the
court denied the Bank attorney's fees.
II.
The Rexene defendants assert, inter alia, that they neither
violated 29 U.S.C. § 1054(g) (the anti-cutback provision), nor
breached their fiduciary duty under 29 U.S.C. § 1104. Plaintiffs
cross-appeal from both the credit granted the Rexene defendants,
and the judgment as a matter of law granted the Bank. The Bank
appeals from the denial of its attorney's fees.
- 13 -
We review the district court's findings of fact only for clear
error. Fed. R. Civ. P. 52(a); e.g., Anderson v. City of Bessemer
City, 470 U.S. 564 (1985); Brock v. El Paso Natural Gas Co., 826
F.2d 369 (5th Cir. 1987). A finding of fact is clearly erroneous
if, "although there is evidence to support it, the reviewing court
on the entire evidence is left with the definite and firm
conviction that a mistake has been committed." Anderson, 470 U.S.
at 573 (internal citations and quotation marks omitted).
We review freely conclusions of law, Salve Regina College v.
Russell, 499 U.S. 225 (1991). Along that line, in actions brought
under 29 U.S.C. § 1132 involving the interpretation of an ERISA-
covered plan, we likewise construe a plan's terms, unless the
"benefit plan gives the administrator discretionary authority to
determine eligibility for benefits or to construe the terms of the
plan". Haubold v. Intermedics, Inc., 11 F.3d 1333, 1336 (5th Cir.
1994) (citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101,
115 (1989)); accord, Harms v. Cavenham Forest Indus., Inc., 984
F.2d 686, 688 (5th Cir.), cert. denied, ___ U.S. ___, 114 S. Ct.
382 (1993); Morales v. Pan Amer. Life Ins. Co., 914 F.2d 83, 87
(5th Cir. 1990).
Rexene had discretion to amend the Plan, § 10.1, and to decide
whether, and when, to make contributions, § 3.2. And, the
Administrative Committee had discretionary authority to determine
eligibility, § 7.2(e), to allocate contributed stock among
participants in the "time and manner" it saw fit, § 4.4., and to
construe the terms of the Plan, as well as to "correct any defect,
- 14 -
supply any omission, or reconcile any inconsistency" in it, §
7.2(b), (c).
Accordingly, when reviewing the Plan documents and decisions
made with regard to the Plan, we must defer to the Administrative
Committee's or Rexene's interpretation, reviewing it only for abuse
of discretion. E.g., Salley v. E.I. DuPont de Nemours & Co., 966
F.2d 1011, 1014 (5th Cir. 1992). (For ease of reference, and
because both were administrators and decision-makers for the Plan,
we refer to the Administrative Committee and Rexene as "Rexene".)
"In applying the abuse of discretion standard, we analyze whether
the plan administrator acted arbitrarily or capriciously."13 Id.
at 1014 (citing Penn v. Howe-Baker Eng'rs, Inc., 898 F.2d 1096,
1100 n.2A (5th Cir. 1990)); Vasseur v. Halliburton Co., 950 F.2d
1002, 1006 (5th Cir. 1992) (citing cases). But, obviously,
13
We note that our abuse of discretion/arbitrary and capricious
standard of review is informed by two additional factors. First,
as in Bruch, the Plan is a defined-contribution, rather than a
defined-benefit, plan. All contributions were made by the
employer. Thus, "`every dollar provided in benefits is a dollar
spent by ... [Rexene], the employer; and every dollar saved by the
administrator on behalf of his employer is a dollar in [Rexene's]
pocket.'" Lowry v. Bankers Life & Cas. Retirement Plan, 871 F.2d
522, 525-26 & n.7 (5th Cir.) (quoting Third Circuit decision in
Bruch, 828 F.2d 134, 144 (3d Cir. 1987), and construing Bruch, 489
U.S. 101), cert. denied, 493 U.S. 852 (1989). This fact leads to
an inference that "the administrator or fiduciary is operating
under a possible or actual conflict of interest", see Bruch, 489
U.S. at 115.
Second, as discussed infra, we obviously give no deference to
Rexene's decisions where they turn purely on questions of law.
These additional considerations "must be weighed as ... `factor[s]
in determining whether there is an abuse of discretion.'" Lowry,
871 F.2d at 525 (quoting Bruch, 489 U.S. at 115, 109 S. Ct. at 956
(citation omitted)).
- 15 -
in contrast to the great deference we grant the
[administrator's] interpretations of the Plan,
which involve contract interpretation, we accord no
deference to [its] conclusions as to the
controlling law, which involve statutory
interpretation. The interpretation of ERISA itself
must be made de novo by the court.
Penn, 898 F.2d at 1100 (footnote and citations omitted).
A.
The Rexene defendants contend first that the district court
erred in concluding that the 1986 contribution accrued, and
therefore became subject to ERISA's anti-cutback provision, prior
to its formal allocation to the participants; second, that the
valuation date was May 31, 1987 (when the stock was valued at
$158.37), not, as the district court concluded, either December 31,
1986, or February 26 or March 2, 1987 (when the district court
found the stock was worth $76.34 per share); third, that it was
error to conclude both that amending the Plan was a breach of
fiduciary duty, and that the 1986 contribution was required to be
allocated only to 1986 participants; and, fourth, that a prior
settlement in another action bars some plaintiffs from asserting
claims in this action.
1.
Section 204(g)(1) of ERISA, 29 U.S.C. § 1054(g)(1) (anti-
cutback provision), with exceptions not applicable here, prohibits
plan amendments which decrease participants' "accrued benefits".
29 U.S.C. § 1054(g)(1).14 The key to the district court's
14
The section provides:
The accrued benefit of a participant under a plan
- 16 -
conclusion that the amendments violated § 1054(g) was its finding
that, when the Plan was amended, the 1986 contribution was already
an "accrued benefit" protected by § 1054(g), pursuant to its
finding that the contribution accrued when it was contributed to
the Plan. As noted, we review only for abuse of discretion
Rexene's administrative decisions with regard to the Plan. But, in
this instance, the record does not show that Rexene made any
decision with regard to when benefits would accrue. Further, the
Plan does not define the term "accrued benefits". In sum, we are
faced instead with a question of law, reviewed freely, involving
the interpretation of ERISA and the Plan documents. Penn, 898 F.2d
at 1100.
a.
Rexene maintains that the 1986 contribution did not accrue
until April 1988, when it formally notified participants of their
account balances.15 For defined contribution or "individual
account" plans, ERISA defines accrued benefits as "the balance of
the individual's account". 29 U.S.C. § 1002(23)(B). It does not
may not be decreased by an amendment of the plan,
other than an amendment described in section
1082(c)(8) or 1441 of this title.
29 U.S.C. § 1054(g)(1) (1988). The Plan tracks this section; §
10.1(c) prohibits amendments that "[d]ecrease the accrued benefit
of any" participant.
15
Under the Plan, each participant's account was defined as "the
ledger account maintained by the Administrative Committee to set
out [the participant's] proportionate interest" in the common Plan
trust fund. Until a contribution was allocated to a participant's
account, it would not appear on the ledger account statements that
the Administrative Committee sent to that participant.
- 17 -
state, however, when a contribution becomes part of that balance;
and few cases have addressed the issue.16 In one of the few cases
to do so, the court remanded for further fact finding on when
benefits accrue, because
[w]hile `allocations' are made to each
participant's account monthly ... the financial
balance of ... each individual's account is
valuated [sic] annually according to [the plan].
How the contributions have been made under past
practice and when they become accrued benefits for
ERISA purposes are undeveloped in the record.
16
As the Rexene defendants note, the vast majority of cases that
discuss the definition of "accrued benefits" involve defined
benefit, rather than defined contribution, plans. These defined
benefit cases are of little use to the present inquiry, however.
Under ERISA § 3(23), 29 U.S.C. § 1002(23), the definition of
"accrued benefits" differs completely, depending on whether a
defined benefit or a defined contribution plan is involved.
Accrual of benefits in defined benefit plans focuses on when
the plan is funded and participants complete eligibility
requirements. See, e.g., Independent Assn. of Publishers'
Employees, Inc. v. Dow Jones & Co., Inc., 671 F. Supp. 1365, 1368
(S.D. N.Y. 1987) (in defined benefit plan, benefits must be funded,
not "merely contemplated or expected", to be "accrued benefits");
Lynch v. J.P. Stevens & Co., Inc., 758 F. Supp. 976, 1001 (D. N.J.
1991) (in defined benefit plan, funded benefits did not become
accrued until participants satisfied length-of-service requirements
in Plan document).
By contrast, for defined contribution plans, the key is when
a contribution becomes part of -- is allocated to -- a
participant's account. E.g., Hickerson v. Velsicol Chem. Corp.,
778 F.2d 365, 376 (7th Cir. 1985) ("accrued benefit ... in a
defined-contribution plan is the balance allocated to [a
participant's] individual account"; upon conversion of defined
contribution to defined benefit plan, participants are entitled to
"value of the accounts allocated to [them] at the time of
conversion", but not to value of future returns on trust assets)
(emphasis added), cert. denied, 479 U.S. 815 (1986); Rummel v.
Consol. Freightways, Inc., No. C-91-4168 DLJ, 1992 WL 486913 at *3
(N.D. Cal. 1992) (not reported in F. Supp.) (upon plan termination,
participants have no legally recognized interest in unallocated
(i.e., unaccrued) plan assets held in suspense fund).
- 18 -
Johnson v. St. Francis Xavier Cabrini Hosp., 910 F.2d 594, 597-98
(9th Cir. 1990) (emphasis added). Thus, the crucial question is
how, and when, benefits were allocated according to the Plan.
In finding that the 1986 contribution became accrued benefits
when it was contributed, the district court stated:
[Rexene] intended the 101,794 shares [the 1986
contribution] to be contributed and allocated to
the 1986 Plan participants. No employee was
required to do anything else to qualify as a 1986
Plan participant. All the information necessary to
make allocations under the Plan's formula were
either known or readily available to [Rexene].
Although REXENE argues to the contrary, the task of
allocation was "ministerial" ... thus the
contribution when made was an "accrued benefit" for
purposes of ERISA.
(Emphasis added.)
As the district court found, the Plan did specify a formula
for allocating contributions; it contemplates that allocation will
occur according to that formula, at some time after a contribution
is made. Rexene does not dispute that the contribution was made
with the intention that it would be distributed among participants'
accounts. Further, when the stock certificate was issued, and
transferred to the Bank to be contributed to the Plan -- and until
it discovered the overcontribution problem -- Rexene no doubt
contemplated that the contribution would be allocated to 1986
participants. But, the mere fact that the 101,794 shares were
contributed to the Plan does not, according to the Plan, mean that
their allocation was either automatic or simultaneous with that
contribution.
- 19 -
The Plan draws a distinction between contribution and
allocation. Even had the 1986 contribution not caused § 415
problems, the Plan does not require it to be allocated immediately
upon contribution. Under Plan § 1.21, contributions initially are
held in the "Unprorated Fund", i.e., "that portion of the assets or
property in the [Plan] ... which at any particular time, has not
been allocated to a particular Member's Account...." (Emphasis
added.)17 A contribution cannot remain in the Unprorated Fund
indefinitely; Plan § 4.4 requires that a contribution be allocated
before the end of the Plan year in which it was contributed.18 Other
than these restrictions, however, Plan § 4.4 gives Rexene "complete
discretion" to control the "time and manner of allocating Stock
among [participants'] Accounts".
In addition, allocation of the 1986 contribution was not
merely "ministerial". Rexene concedes that the allocation was
intended to be ministerial, and that it had been so for the 1985
17
Also, the Plan prohibits the reversion of a contribution to
Rexene or the Corporation, unless it (1) was made because of a
mistake of fact; (2) caused the plan to become disqualified under
I.R.C. § 401, 26 U.S.C. § 401; or (3) is determined by the IRS not
to be deductible under I.R.C. § 404, 26 U.S.C. § 404. The Plan was
never disqualified under § 401; and the entire 1986 contribution
was determined to be deductible under § 404. As discussed,
although Rexene attempted originally to amend the Plan based on a
mistake of fact theory (the Second Amendment), the IRS implicitly
rejected this justification when it approved the Fourth Amendment
to the Plan, instead of the Second Amendment.
18
We note, however, that this did not occur in this case; on
counsel's advice, even the initial 11,775 shares of the 1986
contribution apparently were not allocated (or at least account
statements were not distributed showing the allocation) until 1988.
Pursuant to the Fourth Amendment, however, the normal allocation
procedure set out in § 4.4 -- including the one-year allocation
deadline -- was suspended until the 101,794 shares were allocated.
- 20 -
contribution. The 1986 contribution, however, was different, due
to the tremendous -- and somewhat unexpected -- increase in the
stock's value. Outside counsel advised Rexene not to make even a
partial allocation, because to do so without knowing "what
[Rexene's] problems were under the [tax] code", i.e., § 415, would
risk disqualification. Outside and inside counsel testified that,
regardless of whether the stock was valued at $76.34 or $158.37,
the increase in value made it impossible to allocate the entire
101,794 shares for Plan year 1986, without reaching § 415's limit
for all participants, and exceeding it for some.
The Plan does not provide for dealing with such an
overcontribution. If allocation to one account would cause that
account to exceed § 415's limit, the Plan provides for the excess
to "be reallocated to the Accounts of other [participants]". In
such cases, however, the Plan allows this "allocate-reallocate"
procedure only on the condition that "the Excess amount allocated
to each such other [participant's] Account shall not exceed the
amount which can be allocated without ... exceeding" § 415. The
1986 contribution, even if allocated and reallocated among all
participants' accounts, would have exceeded § 415's limit.
The Plan does contain some guidance for when the allocate-
reallocate process causes some accounts to reach (and potentially
exceed) § 415's limit. It authorizes creation of a suspense
account for overcontributions, to be used for future contributions
to the accounts of the participants whose accounts had created the
excess. The Plan does not specify, however, whether a suspense
- 21 -
account could be created where, as here, all participants' accounts
would reach or exceed § 415's limit. Further, as stated, creation
of such a suspense account was conditioned on IRS approval.19
Finally, even with such approval, the creation of a suspense
account was proper only if the overcontribution was the result of
(1) allocation of previous forfeitures; (2) a mistake in estimating
a participant's considered compensation, or (3) "other facts and
circumstances which the Commissioner of the [IRS] finds justify"
the creation of a suspense account. Plan § 4.3. Only the third
circumstance would have applied. Thus, in order to allocate the
shares according to the Plan, the Commissioner would have had to
find that the circumstance that created the overcontribution
justified the creation of a suspense account, and also would have
had to approve the operation of the suspense account as specified
by the Plan.
In sum, the Plan did not, by its terms, contain a method for
dealing with the overcontribution; nor did it seem likely that the
IRS would approve creation of the suspense account contemplated by
the Plan. See supra note 19. Therefore, Rexene was unable simply
to follow the Plan allocation process. When it made the 1986
contribution, Rexene did not -- as the district court characterized
19
As discussed, outside counsel advised, in the process of
drafting the challenged amendments, that the IRS was unlikely to
approve the creation of a suspense fund that would be used only for
1986 participants, because it might be considered discriminatory in
favor of one group of employees, and thus might violate I.R.C. §
401(a)(4), 26 U.S.C. § 401(a)(4). See supra note 6. Based on the
record, then, it appears that the IRS might not have approved a
suspense fund created under Plan § 4.3.
- 22 -
it -- know "[a]ll the information necessary to make allocations
under the Plan's formula". Instead, Rexene lacked two crucial
pieces of information: the stock value, and whether, if that value
was too great to be allocated under the Plan, the IRS would approve
the creation of a suspense fund to benefit only the 1986
participants. Under these circumstances, the allocation process
was not merely "ministerial"; a full allocation simultaneously with
the contribution, or automatically thereafter, would have
disqualified the Plan. In sum, the finding that the contribution
accrued when contributed was clearly erroneous.
b.
Plaintiffs assert, as an alternative to the contribution
accruing when contributed, that it accrued when Rexene posted a
series of bulletin board notices regarding the allocation. They
contend that these notices effected a "de facto" allocation.20 We
construe this claim -- made without citation to any authority -- as
a form of estoppel, i.e. that plaintiffs relied on the notices to
calculate the amount that they expected to be allocated, and that
they therefore are entitled to it.
ERISA disfavors generally arguments based on promissory
estoppel or on alleged modifications of plan documents that are not
made via the plan's internal amendment process. See Williams v.
Bridgestone/Firestone, Inc., 954 F.2d 1070, 1072-73 (5th Cir. 1992)
(citing Cefalu v. B.F. Goodrich, 871 F.2d 1290 (5th Cir. 1989)
20
As noted, Rexene concedes that the bulletin board notices
concerning the contribution were intended to help participants
calculate the amount that would be allocated to their accounts.
- 23 -
(oral modifications cannot be the basis of a breach of contract
claim under ERISA); Degan v. Ford Motor Co., 869 F.2d 889, 895 (5th
Cir. 1989); Rodrigue v. Western & S. Life Ins. Co., 948 F.2d 969,
971 (5th Cir. 1991) (plain meaning of plan cannot be altered based
on equitable estoppel argument)); Meadows ex rel. Meadows v.
Cagle's, Inc., 954 F.2d 686, 690-91 (11th Cir. 1992) (citing
cases); Musto v. American Gen. Corp., 861 F.2d 897, 910 (6th Cir.
1988), cert. denied, 490 U.S. 1020 (1989). In most cases, however,
plaintiffs have attempted unsuccessfully to base estoppel on
alleged oral modifications of the plan. Here, plaintiffs rely on
written notices, which purported to describe the allocation they
would receive. Assuming arguendo that an estoppel argument based
on these documents could succeed, we turn to the notices.
The first two informed participants of the contribution, its
appraised value, and the approximate amount they could expect to
receive on allocation. But, they were posted before Rexene's
accountants informed it that the contribution, valued at $76.34,
was an overcontribution. Had the approximate allocation of one
share per $303.00 of earnings been followed, the Plan would have
exceeded § 415 limitations.21 Plaintiffs cannot base a "de facto
allocation" argument on a strategy which, if followed, would have
resulted in Plan disqualification.
Nor do the later notices provide a foundation for a de facto
allocation. After Rexene learned of the problem, it continued to
21
As stated, this is true regardless of which valuation is used.
Even at the lower $76.34 valuation, only some 80,000 shares could
have been allocated without exceeding § 415 limitations.
- 24 -
post notices. A July 30, 1987, notice advised that Rexene had
undertaken a complete review of the Plan and the Savings Plan as a
result of the increased valuation, delaying the production of
account statements.22 Another notice, dated that same day, advised
22
The notice stated:
July 30, 1987
BULLETIN BOARD NOTICE
TO: ALL STOCK BONUS PLAN PARTICIPANTS
Because of the unexpected higher appraisal
value on our company stock, we have undertaken a
very complete review of the impact of this bonus
and the IRS regulations as they apply to our
employees. Section 415 of the IRS Code requires
the company to add together the company
contribution to the Stock Bonus Plan, the Savings
Plan and the employee's contribution to the Savings
Plan in determining the maximum amount that can be
granted to any employee. The total cannot exceed
25% of the employee's compensation.
This review has caused an unforeseen delay in
the production of the individual employee Stock
Bonus statements, but was absolutely necessary to
ensure that both the Savings and Stock Bonus Plans
maintain their IRS-approved tax-deferred status.
The company will contribute the 101,794 shares
of stock as previously announced. When the company
announced it would contribute the 101,794 shares,
it was not known what value would be placed on the
shares by the independent appraisal. The appraised
value of the shares was substantially higher than
the value projected at the time of announcement.
This higher-than-expected value ($76.34) of the
shares will impact our Savings Plan for 1987,
particularly in view of the anticipated dollar-for-
dollar matching in the Savings Plan. It appears
that we will have to temporarily halt contributions
to the Savings Plan until we are able to calculate
the 1987 impact of company contributions on each
plan participant individually. The IRS regulations
require us as a company to keep plan participants
in compliance with the Section 415 limits.
- 25 -
that Rexene hoped to distribute individual account statements
within the next ten days. Later notices advised that it was not
possible under § 415 to allocate the entire 1986 contribution for
1986; that the Board had decided to allocate shares up to the § 415
limits of those employees who had contributed the greatest
percentage to the Savings Plan; that Rexene had applied to the IRS
for approval of Plan amendments; and that the stock had been re-
appraised at $158.37 per share.
Plaintiffs could not have relied on these notices for the
proposition that their accounts had already been allocated a
portion of the 1986 contribution. The notices do not constitute a
de facto allocation. And, because the 1986 contribution did not
accrue until actually allocated, after the Plan amendments, those
amendments cannot have violated § 1054(g). "`ERISA simply does not
prohibit a company from eliminating previously offered benefits
that are neither vested nor accrued.'" Wise v. El Paso Natural Gas
Co., 986 F.2d 929, 935 (5th Cir.) (quoting Phillips v. Amoco Oil
Co., 799 F.2d 1464, 1471 (11th Cir. 1986), cert. denied, 481 U.S.
1016 (1987)), cert. denied, ___ U.S. ___, 114 S. Ct. 196 (1993);
accord, Bass v. Retirement Plan of Conoco, Inc., 676 F. Supp. 735,
745 (W.D. La. 1988).
We regret the disappointment that this
announcement may cause, but please be assured that
we are contributing the maximum number of shares
and maximum dollars permitted under our federally-
qualified plans. We must follow the IRS
regulations to the letter of the law to maintain
the tax-deferred status of our plans.
- 26 -
2.
Concerning valuation, Plan §§ 4.2, 4.4 require that a
contribution be valued as of the date it is contributed to the
Plan. The district court found that "the Trustee was deemed for
purposes of the Plan to have received the contribution as of
December 31, 1986. The actual date of contribution was no later
than March 2, 1987." And, it found that "[f]or valuation purposes,
the date of contribution ... was December 31, 1986. The appraised
value of the 101,794 shares was $76.34 per share as of December 31,
1986."23
The Rexene defendants counter that the stock was properly
valued at $158.37 per share, as of May 1987. Rexene contends that
the Plan mandates valuation as of the actual date of contribution,
despite the fact that, for tax purposes only, Plan § 3.3 allows a
contribution made after the end of the calendar year to be treated
as if contributed on the last day of that year.
As discussed, the Plan gives Rexene discretion to interpret
its terms. Unlike the purely legal question of when benefits
accrued, Rexene's decisions regarding the date(s) of contribution
and valuation were Plan interpretations, specifically, of § 3.3.
Those interpretations conflict with the district court's.
Nonetheless, they were made by Rexene in the course of its
discretionary functions, allocated to it by the Plan; accordingly,
23
The district court concluded also that the value remained
$76.34 per share on February 26, 1987 (when the Board of Directors
voted on the 1986 contribution), and on March 2, 1987 (when the
stock certificate was issued).
- 27 -
as discussed, we review them only for abuse of that discretion.
Bruch, 489 U.S. at 115. To the extent that the district court
based its findings of fact on a de novo review, those findings are
predicated on an erroneous standard of review; and, as a result, we
cannot give them deference.24
Accordingly, we review only for abuse of discretion Rexene's
decisions regarding the dates on which the 1986 contribution was
contributed and valued. As noted, in reviewing a decision under
that standard,
[f]irst, the court must determine the [legally]
correct interpretation of the Plan's provisions.
Second, the court must determine whether the Plan
administrators acted arbitrarily or capriciously in
light of the interpretation they gave the Plan in
the particular instance.
Batchelor v. Int'l Bhd. of Elec. Workers Local 861 Pension &
Retirement Fund, 877 F.2d 441, 444 (5th Cir. 1989) (brackets in
Batchelor). If the Plan interpretation was legally correct, the
24
Plaintiffs contend that the Rexene defendants have waived the
more deferential standard of review. But, a standard of review
cannot be waived. See United States v. Vontsteen, 950 F.2d 1086,
1091-92 (5th Cir.) (en banc) (failing to bring proper standard of
review to court's attention until appellate oral argument is
"unfortunate, but not fatal"), cert. denied, ___ U.S. ___, 112 S.
Ct. 3039 (1992). "The parties' failure to brief and argue properly
the appropriate standard may lead the court to choose the wrong
standard.... If neither party suggests the appropriate standard,
the reviewing court must determine the proper standard on its own".
Id. at 1091 (citations omitted).
Certainly, it would have been preferable -- and indeed, might
have obviated the need for this appeal -- if the Rexene defendants
had presented the proper standard of review to the district court,
either as part of the pretrial order, or at some other point in the
proceedings. Rexene's not having done so at an earlier stage,
however, does not excuse us from applying the proper standard now.
- 28 -
court need not proceed to the second step.25 E.g., Duhon v. Texaco,
Inc., 15 F.3d 1302, 1306-08 & n.3 (5th Cir. 1994); Wildbur v. Arco
Chem. Co., 974 F.2d 631, 637 (5th Cir.), modified, 979 F.2d 1013
(5th Cir. 1992), appeal after remand, No. 93-5069 (5th Cir. argued
May 5, 1994); Jordan v. Cameron Iron Works, Inc., 900 F.2d 53, 56
(5th Cir.) (citing Batchelor, 877 F.2d at 444), cert. denied, 488
U.S. 939 (1990).
In determining the legally correct interpretation of the
Plan's contribution and valuation provisions, we are guided by the
three-factor test set out in Dennard v. Richards Group, Inc., 681
F.2d 306, 314 (5th Cir. 1982), cited and quoted in Batchelor, 877
F.2d at 444. We consider "(1) `uniformity of construction [i.e.,
previous construction of the same provisions]; (2) fair reading and
reasonableness of that reading; and (3) unanticipated costs'" to
the plan under a particular interpretation. Batchelor, 877 F.2d at
444 (quoting Dennard, 681 F.2d at 314); see also Duhon, 15 F.3d at
1307-08 & n.3 (court may, but is not required to, follow Dennard
test in evaluating interpretation for abuse of discretion); cf.
Wildbur, 974 F.2d 631 (remanding for district court to explain its
reasoning according to Dennard test).
a.
Plan § 3.3 provides that a contribution by Rexene after the
last day of its taxable year (December 31) but prior to filing its
tax return for that year,
25
Because we conclude that Rexene's interpretation was legally
correct, we do not reach the second step of the test.
- 29 -
shall, for purposes of the Plan[,] be treated as if
it had been received by the [Bank] on the last day
of such taxable year if (1) [Rexene designates the
payment as being] on account of such taxable year,
or (2) [Rexene] claims such Contribution as a
deduction on its tax return for such taxable year.
This provision follows the language of I.R.C. § 404(a)(6), 26
U.S.C. § 404(a)(6), which provides that for purposes of
deductibility of ERISA contributions, the contributor
shall be deemed to have made a payment on the last
day of the preceding taxable year if the payment is
on account of such taxable year and is made not
later than the time prescribed by law for filing
the return for such taxable year (including
extensions thereof).
26 U.S.C. § 404(a)(6). (Rexene's 1986 tax return was filed
September 14, 1987, pursuant to its application for an automatic
extension of time until September 15, 1987.) Rexene contends that,
under a fair reading of the Plan, this provision and the
corresponding Plan § 3.3, do not determine the date of contribution
for valuation purposes. Instead, it maintains that these
provisions determine the contribution date only for purposes of
determining the taxable year to which it is attributable.
Rexene asserts that, on the other hand, the date for valuation
purposes is the date the shares were actually contributed to the
Plan. In support, it cites Revenue Ruling 73-583, in which an
ERISA plan sponsor claimed a deduction based on a $50 per share
value of the stock it contributed to the plan. The contribution,
pursuant to § 404(a)(6), was deemed for tax purposes to have been
made on the last day of the company's taxable year, although it was
not actually contributed until the next year. On the company's
- 30 -
books, the contribution was entered as a liability as of the last
day of the taxable year. By the time the contribution was actually
made, however, the value had declined to $35 per share.
The IRS determined that the company was entitled to a
deduction only of $35, not $50, per share. It stated: "the value
of the stock at the time the liability was incurred has no bearing
on the amount of the employer's deduction in this case". The
proper valuation was the value on the date of actual contribution,
"not the value at the time the liability to make a contribution was
accrued on the employer's books." Rev. Rul. 73-583, 1973-2 C.B.
146. Similarly, Treasury Regulation § 1.415-6(b)(4), dealing with
valuation of contributions for purposes of determining § 415
limitations, requires valuation as of the date of contribution,
rather than as of the date a deduction is claimed for that
contribution. Treas. Reg. § 1.415-6(b)(4) (as amended in 1992).
Because the Plan was in only its second year when the
contribution for 1986 was made, there is little guidance with
regard to a "uniform construction" of the Plan. As noted, the
contribution for 1985 -- the first made -- was appraised as of
December 31, 1985, and valued at $1.00 per share.
While instructive, the 1985 appraisal date does not control
the date of contribution for valuation purposes for the 1986
contribution. The date used for 1985 was erroneous; according to
outside counsel's testimony, the IRS's position was consistently
that stock should be valued as of the date it was delivered to the
trustee. Thus, using December 31, 1985, as the valuation date for
- 31 -
the 1985 contribution was improper. In any event, in 1985, such an
error was immaterial. As several witnesses testified, Rexene was
unconcerned with the exact value of the 1985 contribution; because
the share value remained constant at around $1.00, it was
irrelevant whether the stock was valued as of December 31, 1985, or
as of February 1986. But, the contribution for 1986 appreciated
rapidly between the first (December 31, 1986) and second (May 31,
1987) appraisal dates. The valuation date was crucial; and when
Rexene realized it initially had made the same mistake (using the
wrong valuation date) in valuing the contribution for 1986 as it
had done for 1985, it moved to correct its error.
The second Dennard factor is a "fair reading" of the Plan,
i.e., an interpretation of its plain language. See Batchelor, 877
F.2d at 444. A fair reading of the Plan indicates that § 3.3 is
concerned with the contribution date only for purposes of applying
the contribution to a particular taxable year. For valuation
purposes, other provisions define when a contribution is made.
Plan § 1.6 defines "Contribution" as "the total amount which
[Rexene] pays to the [Bank] ..."; §§ 4.2 and 4.4 provide that the
cost to Rexene and the valuation of contributed shares shall be
computed at "Market Value as of date of contribution". Because a
contribution is defined in terms of payment of shares to the
trustee, rather than in terms of the amount claimed as a deduction,
it seems consistent to value the contribution as of date of
payment, rather than as of the last day of the preceding taxable
year.
- 32 -
Finally, Dennard cautions considering any unanticipated costs
to the Plan which would result from the administrator's
interpretations. Batchelor, 877 F.2d at 444. If an interpretation
would result in "`substantial unanticipated costs to the Plan'", it
is less likely to be legally correct. Id. at 445 (quoting Lowry v.
Bankers Life & Cas. Retirement Plan, 865 F.2d 692 (5th Cir.), cert.
denied, 493 U.S. 852 (1989)). It is unclear whether Rexene's
interpretation would have resulted in such costs. What is clear is
that Rexene was attempting to avoid the substantial unanticipated
costs to participants that would have resulted if the Plan had been
disqualified. That is, had the stock been allocated at a value of
$76.34, and that value later had been determined by the IRS to be
erroneous -- with the result that the Plan was disqualified
(because, at the correct, higher valuation, e.g., $158.37, the Plan
would have far exceeded its § 415 limit) -- the participants would
have had stock in the company, and corresponding tax liability, but
no corresponding income to pay it.26
26
As Rexene's expert witness testified, disqualification is a
particular problem
[i]n a stock bonus plan like this, [where] you have
a company that is closely held, the participants
can't do anything with the stock, yet the stock has
value. If the plan is disqualified, the
participants now get this block of stock that may
be worth thousands of dollars. They can't sell it.
They now have income on their tax return, they have
no money to pay their taxes. And at the same time,
unless the plan is terminated, they won't even
receive the shares of stock until the plan is
terminated. So they lose their retirement, they
get a tax impact, they don't have any money to pay
the tax, the company may or may not lose the
deduction,.... [I]t is a catastrophic problem.
- 33 -
In sum, we conclude that the correct legal interpretation of
the Plan's relevant language is essentially as presented by Rexene,
i.e., that the date of actual contribution should control
valuation, regardless of when, as provided by § 3.3, it may have
been claimed as a tax deduction.27
b.
We turn next to the proper appraisal value of the shares. By
advising a re-appraisal as of May 1987, outside counsel was
attempting to avoid a problem similar to that covered by Rev. Rul.
73-583, 1973-2 C.B. 146, discussed supra. As plaintiffs point out,
outside counsel had advised Rexene to use the earliest possible
date of contribution (February 26, 1987) when discussing amendments
to the Plan with the IRS. In discussions with the IRS and in the
amendments submitted to it, Rexene had designated the date of
contribution as February 26, 1987 (the date the Board authorized
the contribution). Outside counsel testified that he advised
Rexene to use this date when discussing possible amendments to the
Plan, because it was the earliest possible contribution date. Any
Plan amendment that resulted in a reversion of shares to the Plan
(as contemplated by the Second Amendment) would have had to be made
within a year of the date of contribution. Thus, by choosing the
earliest possible contribution date in communications with the IRS,
outside counsel was "[taking] the most conservative point of view
27
As noted, Rexene claimed a deduction of $1,952,777 for
contributions to the Plan in fiscal year 1986; this corresponds to
a contribution of 25,580 shares valued at $76.34 per share.
- 34 -
[with regard to the deadline for any amendment to the Plan], which
was the date that [the contribution] was first authorized".
Outside counsel testified, however, that at some point between
the submission of the Second Amendment to the IRS and the passage
of the Fourth (i.e., in late 1987 or early 1988), he realized that
the value might have increased rapidly so that the $76.34 appraisal
would no longer be accurate. Out of concern that Rexene might be
audited, outside counsel "hit the books" in an attempt to determine
the correct valuation date.
With regard to the proper valuation date, outside counsel
testified that both he and the IRS "on all fronts said the same
thing ... a contribution is [valued] on the date that you actually
give it to the trustee, and that was the position they took." In
determining the date for valuation purposes, then, outside counsel
attempted to use the latest possible one -- May 1987 -- again out
of concern for what the IRS might do.28 Outside counsel testified
that, although Rexene executives would have preferred to use the
$76.34 valuation, he advised using $158.37, because "if they had
made the other choice, they may very well have disqualified the
plan." Outside counsel explained that, using $76.34, more shares
could have been allocated than using $158.37. If the lower
valuation were used, and the IRS had audited the Plan (which
outside counsel testified he "felt certain" would occur) and
28
At oral argument, Rexene's counsel stated that the re-
appraisal was commissioned as of May 31, instead of May 13, 1987,
because it was necessary to have a "cut-off" date for bookkeeping
purposes.
- 35 -
determined that the $158.37 was correct, the change in valuation
"would have busted [the § 415 limit]". Because an audit would
likely have come after the one-year deadline for amendments, "[w]e
would have had no chance to amend or do anything else" to correct
the problem, and the Plan would have been disqualified.
In short, the decision to re-appraise the stock as of the date
of its delivery to the trustee was a considered decision, which
Rexene made on the advice of counsel, and out of concern that the
Plan would be disqualified if an earlier valuation date was used.
Because we hold that Rexene's interpretation of the Plan -- that
§ 3.3 governs the date of contribution only for purposes of
deductibility, and that the contribution otherwise is valued as of
the date of actual contribution -- is the correct legal
interpretation, we need not reach whether it acted arbitrarily and
capriciously in making that interpretation. Wildbur, 974 F.2d at
637. The Rexene defendants did not violate § 1054(g) when they
amended the Plan.
3.
Plaintiffs charge also that the Rexene defendants' decisions
concerning the Plan constituted a breach of their fiduciary duty,
in violation of ERISA § 404, 29 U.S.C. § 1104.29 This contention
29
Although a Plan amendment may be permissible under other
applicable sections of ERISA, including 29 U.S.C. § 1054, it also
must satisfy ERISA's fiduciary duty requirements, contained in 29
U.S.C. § 1104.
- 36 -
centers on three subsections of § 1104; we need consider only
(a)(1)(A).30
Plaintiffs contend that by using $158.37, instead of $76.34,
the Rexene defendants breached their fiduciary duty under §
1104(a)(1)(A), which requires Plan fiduciaries to
discharge [their] duties with respect to a plan
solely in the interest of the participants and
beneficiaries and ---
(A) for the exclusive purpose of:
(i) providing benefits to participants
and their beneficiaries; and
(ii) defraying reasonable expenses of
administering the plan[.]
29 U.S.C. § 1104(a)(1) (1988) (emphasis added). They contend that,
by amending the Plan in such a way that 1986 participants received
less than 100% of the 1986 contribution, Rexene and the corporation
violated their duty to administer the Plan "for the exclusive
purpose of ... providing benefits to participants". Id. In
support, plaintiffs make much of Rexene's selling all of its stock
in April 1988 -- shortly after the Fourth Amendment to the Plan was
approved in February 1988 by the IRS -- and negotiating in
preparation for the sale since the fall of 1987.
According to plaintiffs, the Plan amendments were motivated
primarily by the impending sale: because the shares in the
suspense account were included in Rexene's value, the greater their
30
Because we hold that Rexene was not acting as a plan fiduciary
when it amended the Plan, and therefore that it cannot have
violated § 1104, we need not consider §§ 1104(a)(1)(B) (failure to
manage the plan with the requisite care, skill and prudence),
1104(a)(1)(D) (failure to follow plan documents).
- 37 -
value, the greater the company's value, and the larger the
deduction a buyer could take for the shares. Thus, plaintiffs
contend, Rexene had an incentive to re-value the shares at as high
a value as possible, and to ensure that as few shares as possible
were allocated to participants in advance of the sale. The
district court agreed, finding that the decisions with regard to
the Plan were made "because of the Company's concern for the
Savings Plan contributions [i.e., for the heavy savers] and the
imminent sale." This motivation is the cornerstone of the district
court's conclusion that the Rexene defendants were acting in
Rexene's self-interest, rather than as fiduciaries of the Plan for
its benefit and that of the participants.
Rexene's witnesses testified that Rexene acted only to ensure
that the contribution was allocated in a fashion that did not cause
the Plan to be disqualified, and did not penalize the heavy savers.
But, we give special deference to the district court's assessment
of the witnesses' credibility, and must defer to its assessment of
the evidence, if it is
plausible in light of the record viewed in its
entirety ... even though convinced that had [we]
been sitting as the trier of fact, [we] would have
weighed the evidence differently. Where there are
two permissible views of the evidence, the
factfinder's choice between them cannot be clearly
erroneous.
Anderson v. City of Bessemer City, 470 U.S. at 574.
Accordingly, we accept the district court's findings with
regard to the motivation of Rexene and the Administrative
Committee. With this in mind, we turn to § 1104(a)(1).
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a.
Section 1104 mandates that a plan be administered "solely in
the interest of the participants and beneficiaries". 29 U.S.C. §
1104(a)(1) (emphasis added). Plaintiffs read this to require
Rexene to manage the Plan solely in the interest of 1986 Plan
participants and their beneficiaries. But, a fiduciary's duty
"runs to the plan as a whole," not to any individual beneficiary or
group of beneficiaries. Williams v. Caterpillar, Inc., 944 F.2d
658, 665 (9th Cir. 1991). Plaintiffs' concern, at bottom, is that
the entire 101,794-share 1986 contribution was not allocated to
them; and while it is true that 1986 participants received only the
equivalent of 82,248 shares, this does not mean, ipso facto, that
the Rexene defendants failed to administer the Plan for the benefit
of all its participants and their beneficiaries.31 Indeed, as in
Williams, plaintiffs do not assert that the challenged actions
"were detrimental to all claimants under ... the plan[] in
question; they have sued only on their own behalf." Id. In sum,
the record supports a conclusion that, in addition to the
motivation found by the district court, the Rexene defendants acted
out of concern for the long-term viability of the Plan, including
its continued status as an ERISA-qualified plan.
31
But see Deak v. Masters, Mates & Pilots Pension Plan, 821 F.2d
572, 578-79, 581 (11th Cir. 1987) (finding amendment to Plan that
benefitted certain participants at expense of others, to be
arbitrary and capricious, and breach of fiduciary duty under ERISA,
even though, if adopted "absent from or insulated from any
conflicts of interest," same amendment might not violate ERISA),
cert. denied, 484 U.S. 1005 (1988).
- 39 -
b.
Moreover, even if Rexene's decisions with regard to the Plan
were made with the primary motive of benefitting Rexene, those
decisions had the secondary purpose of benefitting (or at least,
not harming) the Plan as a whole. In this situation, we are faced
with two lines of authority.
The first counsels that such an incidental benefit cannot
"legitimize" a fiduciary's improper (self-interested) motives.
Deak v. Masters, Mates & Pilots Pension Plan, 821 F.2d 572, 579-81
& n.12 (11th Cir. 1987), cert. denied, 484 U.S. 1005 (1988). In
Deak, the plaintiff was a participant in an ERISA plan administered
by employees of the Union that had created it. Id. at 597-98. The
administrators' decision to amend the plan was, at least in part,
motivated by a desire to benefit the Union, rather than, as ERISA
commands, solely the plan participants and beneficiaries. In
analyzing the decision, the court stated:
It is difficult to conceive of a situation
where a benefit to the Union would not have
incidental benefit to the Plan.... However, the
statute requires the Trustees to act for the sole
benefit of the Plan beneficiaries. The District
Court was entitled to find from the evidence at
trial that the actions of the Trustees were for the
benefit of the Union. The benefit to the Plan
cannot legitimize their motives, especially in
light of the findings of fact that the Plan was
underfinanced at the time and that the Trustees
made no actuarial investigation of [the amendment].
Id. at 580 n.12 (emphasis added). Quoting Donovan v. Bierwirth,
680 F.2d 263, 271 (2d Cir.), cert. denied, 459 U.S. 1069 (1982),
the Deak court noted that "`officers of a corporation who are
Trustees of its pension plan ... must [act] with an eye single to
- 40 -
the interest of the participants and beneficiaries.'" Id. at 580
(citation omitted).
As noted, the district court found that Rexene acted, at best,
with a dual motivation: to avoid the Plan being disqualified and
heavy savers being penalized on the one hand, and on the other, to
facilitate the impending sale. Under the reasoning in Deak, 821
F.2d at 578-81, then, Rexene's decision to amend the Plan would be
a breach of fiduciary duty under § 1104(a)(1)(A), because -- in the
view of the district court -- it was not enacted primarily, or
solely, for the benefit of the participants.
Another line of cases weighs in favor of the opposite result.
It provides that, when an employer is also a fiduciary for its
ERISA plans, it acts as a fiduciary "only when and to the extent
that [it] function[s] in [its] capacity as plan administrator[],
not when [it] conduct[s] business that is not regulated by ERISA."
Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1158 (3d Cir.
1990) (internal quotation marks and citations omitted); accord,
McGath v. Auto-Body North Shore, Inc., 7 F.3d 665, 670 (7th Cir.
1993) (citing Hozier). Business not regulated by ERISA has been
widely held to include decisions to amend or terminate ERISA plans;
as part of a balance between the employer's need to manage its
business and Congress's "desire to regulate" ERISA plans, an
employer is given broader discretion to act with regard to a plan
when it does so as employer, instead of as fiduciary. See Hozier,
908 F.2d at 1159-60 (discussing policy rationale for distinction
between actions available to employer-as-employer and employer-as-
- 41 -
fiduciary); cf. McGann v. H&H Music Co., 946 F.2d 401, 407 (5th
Cir. 1991) (non-fiduciary issue; Congress intended "that employers
remain free to create, modify and terminate the terms and
conditions of employee benefit plans without governmental
interference."), cert. denied, ___ U.S. ___, 113 S. Ct. 482 (1992);
Wise v. El Paso Natural Gas, 986 F.2d at 937 (employer generally
may modify or discontinue non-vested benefits without violating
ERISA). "An employer can wear two hats: one as a fiduciary
administering a pension plan and the other as the drafter of a
plan's terms.... [A]n employer does not act as a fiduciary when it
amends or otherwise sets the terms of a plan." McGath, 7 F.3d at
670-71 (citing cases, including Jos. Schlitz Brewing Co. v.
Milwaukee Brewery Workers' Pension Plan, 3 F.3d 994 at 1001, 1002
(7th Cir. 1993), petition for cert. filed, 62 U.S.L.W. 3378 (U.S.
Nov. 12, 1993) (No. 93-768)).
Of course, an employer does not have "unfettered discretion to
amend or terminate plans at will", Hozier, 908 F.2d at 1162;
"ERISA's detailed accrual and vesting provisions substantially
limit this power", as do the terms of the plan documents,
collective bargaining agreements, and other ERISA provisions
relating to the form of amendments. Id. But, in general, an
employer that decides to terminate, amend, or renegotiate a plan
does not act as a fiduciary, and thus cannot violate its fiduciary
duty, provided that the benefits reduced or eliminated are not
accrued or vested at the time, and that the amendment does not
- 42 -
otherwise violate ERISA or the express terms of the plan.32 See id.
at 1160-61.
A majority of the circuits have followed this approach; we
consider it the sound one, as did the Third Circuit in Hozier. Id.
(citing cases); see also McGann, 946 F.2d at 407 & n.9 (citing
language from Musto, 861 F.2d at 911, which notes that a company
acts as fiduciary when administering plan, but not when deciding
plan's terms).33 Accordingly, we bring our circuit into line with
the majority, adopting the reasoning that, in amending the Plan as
it did, Rexene was not acting as fiduciary, but as employer.
Accordingly, it did not breach a § 1104 fiduciary duty.34
32
As discussed, plaintiffs had no accrued or vested interest in
the 1986 contribution when the Plan was amended; and, as stated,
"ERISA simply does not prevent a company from eliminating
previously offered benefits that are neither vested nor accrued."
Phillips, 799 F.2d at 1471.
33
Hozier's list of decisions in accord includes Musto, 861 F.2d
at 912 (6th Cir. 1988); Young v. Standard Oil (Indiana), 849 F.2d
1039, 1045 (7th Cir. 1988), cert. denied, 488 U.S. 981 (1989);
Anderson v. John Morrell & Co., 830 F.2d 872, 876 (8th Cir. 1987);
Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1432-33 (9th Cir. 1986)
(employer not acting as fiduciary when it made "business decision"
to terminate plan); Phillips v. Amoco, 799 F.2d at 1471 (11th Cir.
1986); Amato v. Western Union Int'l, 773 F.2d 1402, 1417 (2d Cir.
1985) (officers acted on behalf of corporation, rather than as
fiduciaries, when amending corporate pension plan), cert.
dismissed, 474 U.S. 1113 (1986); and Sutton v. Weirton Steel Div.
of Nat'l Steel Corp., 724 F.2d 406, 411 (4th Cir. 1983), cert.
denied, 467 U.S. 1205 (1984) (employer's decision "to renegotiate
or amend" unfunded benefits was not fiduciary action). Further,
Hozier states that "[w]e know of no decision by any court of
appeals to the contrary." 908 F.2d at 1161.
34
Because we reverse the district court on the §§ 1054(g) and
1104 claims, we need not reach the following issues: (1) the
Rexene defendants' assertion that most of the plaintiffs are barred
from pursuing claims against them, because of a settlement in a
prior state action against Rexene's predecessor; (2) plaintiffs'
challenge to the credit granted the Rexene defendants for the
- 43 -
B.
Finally, the Bank appeals from the denial of its attorney's
fees motion. We review the denial only for abuse of discretion,
portions of the 1986 contribution allocated to 1986 participants in
plan years 1987-1991; and (3) as discussed below, plaintiffs'
cross-appeal from the Bank's judgment as a matter of law.
Plaintiffs' cross-appeal concerns claims under 29 U.S.C. §§
1104 and 1105 (fiduciary and co-fiduciary liability). Because
there was no breach of fiduciary duty on the part of the Rexene
defendants, it goes without saying that the Bank cannot be liable
as a co-fiduciary for the same conduct. Accordingly, we need not
address the § 1105 claims.
With regard to § 1104, the district court found correctly that
the Bank was a directed custodial trustee, with no
right, power, or duty to determine how the [Plan]
assets would be allocated.... Further, the Bank
did not possess information necessary to make
allocation determinations and did not have access
to the information or any right to use the
information ... [or to play] any role in the
allocation process.
The Bank was a fiduciary "only with respect to those aspects of the
plan over which [it] exercise[d] authority or control." Sommers
Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enters.,
Inc., 793 F.2d 1456, 1459-60 (5th Cir 1986) (citing Brandt v.
Grounds, 687 F.2d 895, 897 (7th Cir. 1982), cert. denied, 479 U.S.
1034 (1987)); ERISA § 2(21)(a), 29 U.S.C. § 1002(21)(A). It is
undisputed that, by the Plan's plain terms, the Bank had no duty,
discretion, or responsibility to value or allocate contributions or
amend the Plan. Under the Plan, the Bank's only duties were
custodial: to hold, preserve, and invest the assets of the Plan,
subject to directions from Rexene. A breach of the Bank's
fiduciary duty, then, could occur only if the Bank breached those
duties. See Sommers Drug, 793 F.2d at 1459-60; Brandt, 687 F.2d at
897.
Plaintiffs stipulated that the Bank did not improperly invest
the assets. They contend, nevertheless, that it breached its duty
to hold and preserve the assets by consenting to the Second and
Fourth Amendments, on the basis that the amendments had the effect
of decreasing the assets' value. Again, we need not address this
argument, because we hold that the amendments did not violate
ERISA.
- 44 -
pursuant to ERISA § 502, 29 U.S.C. § 1132(g)(1), which provides
that "the court in its discretion may allow a reasonable attorney's
fee and costs of action to either party." See also Salley, 966
F.2d at 1017 (attorney's fees awards under ERISA are reviewed for
abuse of discretion).
The Bank contends, essentially, that it is entitled to the
fees because -- as evidenced by the judgment in its favor --
plaintiffs' claims against it were "not substantially justified".
The Bank relies heavily on the "degree of the opposing parties' ...
bad faith", the first of the five factors this court uses to rule
on fees under ERISA. Iron Workers Local No. 272 v. Bowen, 624 F.2d
1255, 1266 (5th Cir. 1980).35 Despite granting the Bank judgment
as a matter of law, the district court found that
[p]laintiffs' case was not brought in bad faith,
the case was sufficient to withstand [the Bank's]
Motion for Summary Judgment, and [the Bank's] being
granted a Judgment as a Matter of Law fails to
35
The Bowen factors are:
(1) the degree of the opposing parties' culpability
or bad faith; (2) the ability of the opposing
parties to satisfy an award of attorneys' fees; (3)
whether an award of attorneys' fees against the
opposing parties would deter other persons acting
under similar circumstances; (4) whether the
parties requesting attorneys' fees sought to
benefit all participants and beneficiaries of an
ERISA plan or to resolve a significant legal
question regarding ERISA itself; and (5) the
relative merits of the parties' positions. No one
of these factors is necessarily decisive, and some
may not be apropos in a given case, but together
they are the nuclei of concerns that a court should
address in applying [ERISA] section 502(g) [29
U.S.C. § 1132(g)].
Bowen, 624 F.2d at 1266, quoted in Harms, 984 F.2d at 694.
- 45 -
support any claim that Plaintiffs' claim was
groundless. (Emphasis added.)
Nor do the remaining Bowen factors aid the Bank. Especially
because we reverse the judgment awarded plaintiffs, it is not clear
that, under the second factor, they would be able to satisfy a fees
award. And, there is no evidence that, pursuant to the fourth
factor, the Bank sought (by its actions in defending this suit) to
benefit the participants or beneficiaries of the Plan or that it
sought to resolve an important question under ERISA. Moreover, in
light of the district court finding that plaintiffs' claim against
the Bank was not meritless or groundless, we cannot say that the
"relative merits" of the parties' positions assist the Bank, per
the fifth factor; nor that there is a particular need for
deterrence under the third. As this court stated in Harms, 984
F.2d at 694, "we believe the absence of any culpability or bad
faith on the defendants' part ... coupled with the closeness of the
legal issues presented ... supports our conclusion" that the
district court did not abuse its discretion in denying the Bank's
motion for attorney's fees.36
III.
For the foregoing reasons, we REVERSE the judgment against the
Rexene defendants; as to Texas Commerce Bank, we AFFIRM the
judgment that it is not liable and that it is not entitled to
attorney's fees.
AFFIRMED in PART; REVERSED in PART
36
This is especially true given that Rexene has agreed to
reimburse some part of the Bank's costs in this suit.
- 46 -