Matz, Robert J. v. Household Int'l Tax

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1109
ROBERT J. MATZ, individually and
on behalf of all others similarly situated,
Plaintiff-Appellee,
v.
HOUSEHOLD INTERNATIONAL TAX
REDUCTION INVESTMENT PLAN,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 96 C 1095--Joan B. Gottschall, Judge.
Argued May 17, 2000--Decided September 21, 2000
Before Bauer, Coffey and Kanne, Circuit Judges.
Bauer, Circuit Judge. Robert J. Matz and other
employees of Hamilton Investments, Inc. lost
their jobs and the non-vested portions of their
retirement benefit plan in 1994 when the company
was sold. Matz filed suit on behalf of himself
and other terminated employees who were
participants in the ERISA pension plan, claiming
entitlement to the benefits as a result of a
partial termination of the plan. To prove partial
termination, he seeks to count both vested and
non-vested participants and, because he believes
that the partial termination was the result of a
multi-year corporate reorganization, to aggregate
terminations that occurred in multiple plan
years. The District Court ruled that he could do
both, and certified the issues to us for
interlocutory appeal. We affirm.
I. BACKGROUND
In 1994, Household International, Inc. was the
parent corporation of a varied group of
companies. Its portfolio included mortgage
companies, banking institutions, retail
securities brokerages, insurance businesses and
credit card companies. In August, 1994, Household
began selling off some of its subsidiaries,
beginning with Hamilton Investments, Inc., the
company for which Robert Matz worked from March
28, 1989 until his termination on September 1,
1994.
Hamilton, through its parent corporation
Household, provided a retirement benefit plan
("the Plan") to its employees. It was an employee
benefit plan within the meaning of 29 U.S.C.
sec.1002(2)(A). The Plan allowed participants to
make payroll contributions which were matched by
contributions from Hamilton. Although the
participant’s contributions vested immediately,
Hamilton’s contributions were subject to deferred
vesting. Section 14.1 of the Plan provided that
a participant became vested in Hamilton’s
contributions at a rate of 20% per year. Thus, a
participant had to remain with Hamilton for five
years before he became fully vested. If his
service to the company ended before that time, he
forfeited the non-vested portion of Hamilton’s
contribution.
When Matz’s job ended he had a 60% vested
benefit in his employer’s matching contribution.
He elected to take a distribution and was paid
$27,914.10, which represented 100% of his
contributions to the Plan and 60% of Hamilton’s
contributions. The remaining 40%, $7,289.92, was
forfeited and used by Household to reduce its
matching contributions.
Matz sues to recover his forfeited amount. If
he can prove that there was a termination or
partial termination of the Plan,/1 ERISA affords
him relief. 26 U.S.C. sec.411(d)(3) provides:
A trust shall not constitute a qualified trust
under sec.401(a) unless the plan of which such
trust is a part provides that--
A. Upon its termination or partial termination
. . . the rights of all affected employees to
benefits accrued to the date of such termination,
partial termination or discontinuance, to the
extent funded as of such date, or the amounts
credited to the employee’s accounts are non-
forfeitable.
ERISA does not, however, define what constitutes
a partial termination. Treasury Regulation
sec.1.411(d)-2(b)(1) provides some guidance:
Whether or not a partial termination of a
qualified plan occurs (and the time of such
event) shall be determined by the Commissioner
with regard to all the facts and circumstances in
a particular case. Such facts and circumstances
include: the exclusion, by reason of a plan
amendment or severance by the employer, of a
group of employees who have previously been
covered by the plan; and plan amendments which
adversely affect the rights of employees to vest
in benefits under the plan.
(emphasis added).
Matz alleges that a partial termination of the
Plan occurred beginning in August, 1994 (with the
sale of Hamilton) and ending in May, 1996. During
that period, Household discontinued or sold
Household Mortgage Services, Inc., various
branches of Household Bank, F.S.B., and Alexander
Hamilton Life Insurance Company. Matz believes
that this series of corporate transactions were
part of a single reorganization plan and resulted
in the Plan’s partial termination. For that
reason, he seeks to combine all of the
terminations by Household in all of those years.
He also seeks to count all fully vested employee
terminations as well as non-vested employee
terminations.
The Plan, by contrast, contends that a partial
termination analysis should look at individual
plan years, not aggregated years. Furthermore, it
argues that aggregation is inappropriate because
there was no corporate reorganization that would
justify such an approach. It also asks that only
non-vested participants be counted. Finally, the
Plan contends that any partial termination
analysis must end on September 30, 1995, the date
it issued a plan amendment vesting, fully and
immediately, all participants./2 Pointing to the
language of 26 U.S.C. sec.411(d)(3), the Plan
states that participants who separated from
service after September 30, 1995 cannot be
"affected employees" because all Plan accounts
became non-forfeitable at that time.
The parties briefed the issues to the District
Court. The court, after careful analysis, ruled
that both vested and non-vested participants
could be counted to determine whether a partial
termination occurred and that Matz could combine
all terminations for 1994 through 1996. Matz v.
Household International Tax Reduction Investment
Plan, 1998 WL 851491 (N.D.Ill. 1998); Matz v.
Household International Tax Reduction Investment
Plan, 1999 WL 754659 (N.D.Ill. 1999). Upon the
Plan’s motion, the rulings were certified for
interlocutory appeal. Now before us are the
questions: (1) whether, for purposes of
determining if the Plan was "partially
terminated," the court’s analysis should include
fully-vested employees terminated after the 1995
Plan amendment; and (2) whether the plaintiff’s
partial termination analysis may include
terminations that take place over multiple (here,
three) plan years. We affirm the District Court.
II. DISCUSSION
The question of whether a partial termination
has occurred is a question of law subject to de
novo review. Sage v. Automation, Inc. Pension
Plan and Trust, 845 F.2d 885, 890 (10th Cir.
1988). Although many courts have addressed the
issue of partial termination, few have addressed
the questions of whether fully vested
participants must be counted and whether the
counting period is an individual plan year or the
aggregation of multiple plan years. Indeed, they
are issues of first impression to this court. We
find that Matz has standing to raise these issues
and address each one in turn.
A. Counting Of Vested And Non-Vested
Participants
When interpreting congressional statutes, we
look first at the plain language of the statute.
See Reves v. Ernst & Young, 507 U.S. 170, 177
(1993). If the language is clear and unambiguous,
we apply the statute so as to give effect to its
plain meaning. United States v. Hayward, 6 F.3d
1241, 1245 (7th Cir. 1993). We cannot do that here
because, although 26 U.S.C. sec.411(d)(3) refers
to a partial termination, it does not define it.
Nor does it provide us with the framework for an
analysis. Thus, we must search the legislative
history for instruction.
The legislative history provides little more
guidance than that found in the statute. The
House and Senate Reports state only that
"[e]xamples of a partial termination might
include, under certain circumstances, a large
reduction in the work force, or a sizable
reduction in benefits under the plan." H.R.Rep.
No. 807, 93rd Cong., 2d Sess., reprinted in 1974
U.S.C.C.A.N. 4670, 4731; S.Rep. No, 383, 93rd
Cong. 2d Sess., reprinted in 1974 U.S.C.C.A.N.
4890, 4935. Although this is somewhat more
helpful, it still does not provide us with a
clear standard by which to judge a particular
case.
Our sister circuit struggled with the same
dilemma before inviting an amicus brief from the
IRS. See Weil v. Retirement Plan Administrative
Committee, 933 F.2d 106, 109-10 (2nd Cir. 1991)
("Weil III"). The Weil III decision, finding that
vested and non-vested participants must be
counted when determining whether a partial
termination occurred, was the culmination of
several decisions by the District Court and the
Second Circuit. Initially, the District Court
ruled that a partial termination had not
occurred. Weil, 577 F.Supp. 781 (S.D.N.Y. 1984).
The Second Circuit reversed. Weil, 750 F.2d 10(2d Cir. 1984) ("Weil I"). On remand, the
District Court, counting both vested and non-
vested participants, found that a partial
termination had occurred. Weil, 1988 WL 64862(S.D.N.Y. 1988). The Second Circuit reversed
again, holding that only non-vested participants
should be considered. Weil, 913 F.2d 1045, 1050-
51 (2nd Cir. 1990) ("Weil II").
On rehearing, the Weil III court had the
benefit of the IRS’ position of the issue. Giving
"great weight" and deference to the IRS’ view
that both vested and non-vested participants
should be counted, the Second Circuit vacated, in
part, its ruling in Weil II and held that both
classes of participants were to be considered in
a partial termination analysis. Weil, 933 F.2d at
110. In so doing, the court found that the IRS’
interpretation was reasonable and judicial
deference was required as the IRS was the agency
responsible for administering the partial
termination statute. Id."Courts have generally held that termination of
a number of employees does not constitute a
’partial termination’ unless there is a
significant reduction in plan participants."
Matz, 1998 WL 851491, *2. To determine whether
there is a significant reduction in plan
participants, courts apply a "significant
percentage" test. Kreis v. Charles O. Townley,
M.D. & Associates, 833 F.2d 74, 79 (6th Cir.
1987). Partial termination is measured by using
the ratio of terminated plan participants over
total plan participants.
Matz urges us to include all terminated
participants (vested and non-vested) in the
numerator, while the Plan asks us to consider
only the non-vested participants in the top of
the equation. Both claim that their method best
furthers the purposes of the statute. Once again,
however, both the statute and its legislative
history are silent as to the purpose of the
partial termination statute. Courts, though, have
generally understood the statute’s purposes to
be: (1) to protect employees’ legitimate
expectation of pension benefits; and (2) to
prevent employers from abusing pension plans to
reap tax benefits. Weil, 933 at 106, 107;
Halliburton v. Commissioner of Internal Revenue,
83 T.C. 154, 161 (1984).
The Plan argues that the counting of vested
participants would further neither of these
purposes. It states "[t]he partial termination
remedy is aimed at protecting employees from a
forfeiture of unvested benefits, and preventing
employers from receiving sizable, tax-free
reversions of surplus plan assets." From a policy
standpoint, the Plan makes a logical argument.
Vested participants do not need further
protection for their pension benefits and do not
benefit from a finding of partial termination.
Their benefits, by virtue of vesting, are non-
forfeitable. The employer gains nothing either.
No monies revert back to it because the benefits
are vested and non-forfeitable. We agree with the
Plan’s arguments. And, as the District Court
stated, "if [we] were writing on a blank slate,
[we] would be inclined to consider only non-
vested employees" in deciding whether a partial
termination had occurred. However, we are not
writing on a clean slate.
We are not alone in our view or our holding.
The District Court for the Eastern District of
Louisiana ruled that both vested and non-vested
terminees must be considered, "[e]ven though the
issue of partial termination affects only non-
vested participants." Morales v. Pan American
Life Insurance Company, 718 F.Supp. 1297, 1302
(E.D.La. 1989). Although the District Court’s
decision was appealed, the Fifth Circuit did not
decide the issue, holding instead that plaintiff
Morales, a vested employee, did not have standing
to raise the issue on behalf of the non-vested
employees. Morales v. Pan American life Insurance
Company, 914 F.2d 83, 86 (5th Cir. 1990).
In a thorough and thoughtful opinion, the
District Court for the Southern District of Texas
also agreed that neither policy was furthered by
the counting of vested participants. But, it
ruled that only non-vested terminees would be
counted. In re Gulf Pension Litigation, 764
F.Supp. 1149, 1165 (S.D.Tex. 1991). Realizing
that approach would skew the percentage
calculation and cause it to be artificially low
(thereby increasing the chances of finding that
there had not been a significant reduction in
plan participants) the court excluded vested
participants from both halves of the ratio. Id.
at n.10. Having calculated in this manner, the
court found a partial termination of the plan. On
appeal, the Fifth Circuit did not consider
whether a partial termination occurred and
affirmed on other grounds. Borst v. Chevron
Corporation, 36 F.3d 1308, 1314, n.11 (5th Cir.
1994) ("Because we do not consider whether or not
a partial vertical (or horizontal) termination
occurred, the district court’s ruling on this
issue is not conclusive between the parties.").
Purely from a policy standpoint, we believe
that the method adopted in Gulf Pension
Litigation best furthers the purposes of the
partial termination statute. However, we are
constrained in our analysis of the statute and
must decide only whether the IRS’ construction is
reasonable. See Weil, 933 F.2d at 107-08. We
conclude that it is. Neither the statute, its
legislative history nor the Treasury Regulation
mentioned above differentiate between vested and
non-vested participants. Indeed, the Treasury
Regulation says that a partial termination may
occur when "a group of employees," previously
covered by the plan, are excluded from the plan
by reason of a severance from employment.
A finding of reasonableness is also supported
by the fact that the exclusion of vested
participants from the ratio calculation gives an
inaccurate assessment of whether there has been
a significant reduction in plan participation,
the benchmark against which partial termination
is measured. For the calculation to be accurate,
the circumstances as a whole must be considered.
This, we think, buttresses a finding that vested
participants must be included.
"To uphold [the agency’s interpretation] we need
not find that [its] construction is the only
reasonable one, or even that it is the result we
would have reached had the question arisen in the
first instance in judicial proceedings. . . We
need only conclude that it is a reasonable
interpretation of the relevant provisions." Weil
III, 933 F.2d at 107-08 (internal quotation marks
and citations omitted.). For the above reasons,
we find that there is a factual basis for finding
that the IRS’ interpretation of the statute is
reasonable. That is the only question on which we
must rule. The order of the District Court,
finding that both vested and non-vested terminees
must be considered in its partial termination
analysis, is affirmed./3
B. Aggregation Of Multiple Plan Years
We next turn to the question of whether
terminations occurring in multiple plan years can
be combined in determining partial termination.
Initially, we note that this issue has been
addressed by only two other courts (excluding the
District Court below) and both have found that it
is permissible to aggregate terminations for
multiple years. Weil, 750 F.2d at 13, n.2; Gulf
Pension Litigation, 764 F.Supp. at 1167-68./4 We
add our voice to theirs.
Matz argues that it is proper to combine all
participant terminations in 1994, 1995 and 1996
because Household engaged in a corporate
reorganization during that time./5 The Plan
counters by arguing that because this a tax
event, the relevant period should be one year, as
are tax years. It also argues that "[a]ll of the
published Revenue Rulings dealing with the issue
of partial terminations" examined only
terminations occurring within a single plan year.
We note, however, that in all of the decisions
cited by the Plan, the event that affected the
plan participants occurred within one year. Thus,
those cases are inapposite and unpersuasive in
our analysis.
Neither the statute nor its legislative history
specify whether aggregation is permissible. The
IRS has taken no position on the issue and
because of that we receive no guidance from it.
The only instruction we have comes from Treasury
Regulation sec.1.411(d)-2(b)(1), which provides
that we must consider "all of the facts and
circumstances in a particular case." No framework
is provided beyond that.
We hold that because there is nothing in the
language of the rule itself that requires a
significant corporate event to occur within a
plan year, Matz can combine terminations from
1994, 1995 and 1996, provided that he show that
the corporate events of those years were related.
We believe this view reflects the realities of
the modern corporate world. Mergers and corporate
reorganizations have grown into large and complex
events, see e.g., In re Gulf Pension Litigation,
764 F.Supp. 1149, and often cannot be completed
in one year. Furthermore, to establish a rigid
rule that only terminations in individual plan
years can be counted allows an unscrupulous
employer to terminate some participants in
December of one year and January of the next
year, thereby eviscerating both the purpose of
protecting employee benefits and the purpose of
prohibiting employers from reaping unfair tax
benefits. We are convinced that the requirement
that the multiple year terminations be proven
related prevents a plaintiff from gaining undue
advantage too.
III. CONCLUSION
For the foregoing reasons, the orders of the
District Court, holding that both vested and non-
vested participants both be counted and that
multiple plan years may be aggregated, in
considering whether the Plan was partially
terminated, are affirmed.
AFFIRMED.
/1 There is no dispute that the Plan continued after
the sale of Hamilton. Thus, our inquiry focuses
on the issue of partial termination.
/2 The amendment provides that "if a Participant’s
employment with [Household and its affiliates] is
terminated for any reason on or after September
30, 1995 he shall be 100% vested in his account."
/3 We make a special point of noting, for the sake
of clarity, that employees who were vested in
1995 by virtue of the Plan amendment are to be
counted. The fact that they vested because of the
Plan amendment and not because of years of
service is of no consequence.
/4 In dicta, the United States Tax court stated "we
do not agree that we should limit ourselves to
considering the events of only one plan year in
resolving the partial termination issue, as
events bearing on such issue may extend over more
than one year." Halliburton, 100 T.C. at 246.
/5 The issue of whether the defendant’s events of
1994, 1995 and 1996 were a corporate re-
organization or a corporate event is not before
this court and we do not decide that issue.