Malia v. General Electric Company , 23 F.3d 828 ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
5-13-1994
Malia, et al v. General Electric Company, et al.
Precedential or Non-Precedential:
Docket 92-7487
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Recommended Citation
"Malia, et al v. General Electric Company, et al." (1994). 1994 Decisions. Paper 15.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 92-7487
SAM J. MALIA; JOHN A. GLUCKSNIS;
MATTHEW J. LOFTUS
v.
GENERAL ELECTRIC COMPANY; RCA
CORPORATION; RETIREMENT PLAN FOR
THE EMPLOYEES OF RCA CORPORATION AND
SUBSIDIARY COMPANIES; GE PENSION PLAN
Sam J. Malia, John A. Glucksnis
and Matthew J. Loftus, for
themselves and all others
similarly situated,
Appellants
On Appeal From the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 91-01743)
Argued on March 17, 1993
Before: STAPLETON, ROTH and LEWIS, Circuit Judges
(Opinion Filed May 13, 1994)
Thomas W. Jennings, Esquire
Kent Cprek, Esquire (Argued)
Sagot, Jennings & Sigmond
1172 Public Ledger Building
Independence Square West
1
Philadelphia, PA 19106
Attorneys for Appellants
Joseph J. Costello, Esquire
Robert J. Lichtenstein, Esquire
Mark S. Dichter, Esquire (Argued)
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103
Attorneys for Appellees
OPINION OF THE COURT
ROTH, Circuit Judge:
I.
Appellants challenge the results of the merger of two large
pension plans. The central issue of this case is whether pension
plan participants whose plan is merged with another pension plan
are entitled by law to receive only the defined benefits that
they had actually accrued under the previous plan or are also
entitled to receive a share of any surplus assets in their
pension plan. Appellants allege that under two distinct sections
of the Employee Retirement Income Security Act of 1974 ("ERISA")
they are entitled to a share of the surplus assets that existed
in their pension plan at the time of the merger. Appellants cite
no case law supporting this position, relying solely on statutory
language and legislative history. Appellants also allege that
their employer's conduct of the merger violated its fiduciary
duty under ERISA. Our detailed review of appellants' allegations
2
and argument convinces us that the district court correctly
dismissed their claims.
II.
Plaintiffs were entitled to receive benefits under RCA
Corporation's ("RCA") pension plan as long-time employees of RCA
and contributors to its pension fund. RCA's pension plan was a
defined benefit plan that required employees to make
contributions to the plan in order to receive a specified level
of benefits upon retirement. In 1986, General Electric ("GE")
bought out RCA, which became a wholly-owned subsidiary of GE.
General Electric also sponsored a defined benefits plan for its
employees.
Upon hearing of GE's intention to merge the two plans,
appellant Sam J. Malia withdrew his contributions from the RCA
plan effective December 10, 1988. In January 1989, the RCA and
GE pension benefit plans were merged, and Malia's two co-
appellants became participants in the GE pension plan. At the
time of the merger, RCA's pension plan had residual assets --
assets in excess of liabilities -- of roughly $1.3 billion. The
core of appellants' argument is that GE improperly "plann[ed] the
capture of more than $1 billion in residual assets of the RCA
Pension Plan for its own benefit." They further allege that GE
intended to convert the RCA pension plan surplus to offset its
own liabilities to GE employees. They contend that GE's capture
of the surplus was improper in that under 29 U.S.C. §§ 1058 and
1344(d)(3) the RCA pensioners were entitled to receive a share of
3
the excess assets from the former RCA pension plan.1 However,
appellants fail to point out that the assets of the GE plan also
exceeded its liabilities by nearly $7.5 billion. Thus, all
benefits that had accrued under the RCA plan were fully funded
and protected under the merged GE-RCA plan.
Appellants further allege that GE intentionally misled RCA
plan participants in an effort to get them to cash out of the
plan in order to increase GE's share of any future distribution
of residual assets, that GE breached a fiduciary duty owed to
plaintiffs under 29 U.S.C. §§ 1021-25 by failing to inform them
of a possible forfeiture of their interest in residual assets
from the RCA plan, and that GE improperly failed to appoint an
independent representative of the pension plan participants to
review and approve the plan merger under 29 U.S.C. §§ 1104 and
1106(b)(1).
On August 10, 1992, the district court granted defendants'
Rule 12(b)(6) motion to dismiss all counts. This appeal
followed. We conclude that the district court correctly
dismissed appellants' complaint on the ground that it failed to
state a claim.
1
GE did not, in fact, take steps to terminate the merged pension
plan in an effort to capture the surplus funds. Appellants
attribute this inaction to changes in the law which made
mandatory the distribution of a significant portion of the
surplus of a pension plan to employees upon termination of the
plan.
4
III.
The jurisdiction of the district court rested on 29 U.S.C.
§1132(e). The appellate jurisdiction of this Court rests on 28
U.S.C. § 1291. As we are reviewing the district court's grant of
a Rule 12(b)(6) motion to dismiss for failure to state a claim,
our standard of review is plenary. Unger v. National Residents
Matching Program, 928 F.2d 1392, 1394 (3d Cir. 1991). In
addition, all facts alleged in the complaint and all reasonable
inferences that can be drawn from them must be accepted as true.
Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir.
1990).
IV.
Appellants' complaint alleges that GE violated ERISA. As
this Court has stated, "ERISA provides for comprehensive federal
regulation of employee pension plans . . . . [T]he major concern
of Congress was to ensure that bona fide employees with long
years of employment and contributions realize anticipated pension
benefits." Reuther v. Trustees of Trucking Employees of Passaic
& Bergen County Welfare Fund, 575 F.2d 1074, 1076-77 (3d Cir.
1978). We will review appellants' contentions with this
regulatory concern in mind.
A. Distribution of Residual Assets
In general, pension plans like the RCA and GE plans hold a
portfolio of investments that are managed by the plan
administrator in order to provide in the future a defined set of
5
accrued benefits for the pension plan participants. When the
investments of a pension plan increase in value more rapidly than
the anticipated liabilities of the plan, an actuarial surplus
results that fluctuates as the value of the plan's portfolio
changes.2 Employers are permitted to recover the surplus assets
of a pension plan under some circumstances if the plan is first
terminated. See Edward Veal & Edward Mackiewicz, Pension Plan
Terminations 211-12 (1989).
Appellants acknowledge that their accrued benefits under the
RCA plan were adequately protected under the merged plan. What
they seek is to have these benefits increased by a share of the
residual assets which existed in the RCA pension plan at the time
of its merger with the GE plan. For authority, appellants rely
on two distinct sections of ERISA, 29 U.S.C. §§ 1058 and
1344(d)(3). Appellants contend that these two sections, when
2
ERISA permits both defined benefit and defined contribution
plans to require employee contributions. Chait v. Bernstein, 835
F.2d 1017, 1019 n.7 (3d Cir. 1987). In a "defined benefit" plan
such as the RCA and GE plans, benefits are not dependent upon the
current or future assets of the plan. The employer must provide
a "defined benefit" to the plan participant upon retirement,
termination or disability, id., and the employer must satisfy
shortfalls if the actuarial assumptions of the plan prove
incorrect. In contrast, in a "defined contribution" plan, the
benefits paid upon retirement are dependent upon the amounts
contributed by the employee or employer on behalf of the plan
participant. 29 U.S.C. § 1002(34). On the surface, it may
appear that an employer profits from employee contributions when
the employer does not distribute residual assets to plan
participants. Residual assets are, however, a function of the
actual rate of return on plan investments exceeding actuarial
expectations of plan asset performance. In a defined benefit
plan, just as an employer would be required to fund any
deficiency in assets resulting from poor plan asset performance,
any excess in assets resulting from superior plan asset
performance typically accrues to the employer's benefit by
reducing the out-of-pocket contribution the employer must make to
maintain required funding levels for the present value of the
defined benefits. Therefore, a defined benefit plan containing
residual assets by its nature benefits an employer; the benefit
does not come about simply in the context of a merger or
termination. Cf. Bruce, Pension Claims: Rights and Obligations
at 18 (2d ed. 1993).
6
read together, support their claim. The first section, § 1058,
protects pension plan beneficiaries from losing benefits through
the merger or consolidation of pension plans. It provides that:
"A pension plan may not merge or consolidate with, or transfer
its assets or liabilities to any other plan . . . unless each
participant in the plan would (if the plan were then terminated)
receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would
have been entitled to receive immediately before the merger,
consolidation or transfer (if the plan had then terminated).
The second, § 1344(d)(3), governs the distribution of residual
plan assets in the event of a plan termination.3
We agree with appellants that the language of § 1058 should
be read together with § 1344 as a whole in order to understand
the "benefits" that would be payable at the time of the
hypothetical termination envisaged in § 1058. The problem with
appellants' argument is that, in the situation of a merger of
pension plans, appellants equate the "benefits" receivable, as
defined in § 1058 as of the time of a hypothetical termination,
with the "residual assets" which may ultimately be distributed
under § 1344(d)(3) in the case of an actual termination. An
examination of § 1344, however, demonstrates that "benefits" are
distinguished from "assets" in the language of § 1344.
Section 1344(a) sets out the priority of allocation of
assets of the plan on termination, giving first priority to
accrued benefits derived from a participant's contributions to
the plan which were not mandatory contributions; second priority
to accrued benefits derived from mandatory contributions; third
3
§ 1344 controls the allocation of assets on the termination of a
single-employer plan. The GE pension plan is a single-employer
defined benefit plan. § 1344(d)(3)(A) sets out the priority of
residual asset distribution in connection with such a
termination.
7
priority to benefits payable as an annuity; and fourth priority
to other and additional benefits. Subsections 1344(b) and (c)
provide for adjustment of allocations and increase or decrease in
value of assets during the termination process. Subsection
1344(d) then regulates the distribution of residual assets to the
employer after the satisfaction of all liabilities to plan
participants and their heir beneficiaries. As described in
§1344(a), those "liabilities" are the designated benefits payable
to the participants. Section 1344(d)(3)(A) then provides that,
before any residual assets are distributed to the employer, "any
assets of the plan attributable to employee contributions . . .
shall be equitably distributed to the participants who made such
contributions . . .."
This language of § 1344 demonstrates clearly that "benefits"
are elements that are conceptualized and treated differently in a
plan termination than are the "assets" of that plan. "Benefits"
are computed in a different manner than "assets." Accrued
benefits are placed on the liability side, rather than on the
asset side of the balance sheet. "Residual assets" are computed
only after liability for accrued benefits has been satisfied;
"residual assets" are payable to the employer only after assets
attributable to employee contributions have been returned to the
employees.
8
The Treasury Regulation, interpreting pension plan mergers,
corroborates this distinction between "benefits" and "assets"
which is made in § 1344. It provides:4
(e) Merger of defined benefit plans -- (1) General
rule. Section 414(1) compares the benefits on a
termination basis before and after the merger. If the
sum of the assets of all plans is not less than the sum
of the present values of the accrued benefit (whether
or not vested) of all plans, the requirements of
section 414(1) will be satisfied merely by combining
the assets and preserving each participant's accrued
benefits. This is so because all the accrued benefits
of the plan as merged are provided on a termination
basis by the plan as merged. However, if the sum of
the assets of all plans is less than the sum of the
present values of the accrued benefits (whether or not
vested) in all plans, the accrued benefits in the plan
as merged are not provided on a termination basis.
Moreover, the district court, in its opinion dismissing
appellants' claims, correctly noted that "benefits" under § 1058
have consistently been held under both regulations and case law
to refer to "accrued benefits" and not to include projected
residual assets of a plan after termination. Malia v. General
Electric Co., slip op. at 6-7, (E.D. Pa., Aug. 10, 1992). The
district court cited both Van Orman v. American Ins. Co., 608 F.
Supp. 13, 25 (D.N.J. 1984) and In re Gulf Pension Litigation, 764
F. Supp. 1149, 1185 (S.D. Tex. 1991) for the proposition that the
4
These regulations were promulgated under 26 U.S.C. § 414(1), the
Internal Revenue Code counterpart to ERISA § 1058 which has
almost the same language as § 1058. In the ERISA Reorganization
Plan of 1978 the Treasury Department was assigned responsibility
for issuing regulations under certain provisions of ERISA,
including § 1058. See 44 Fed. Reg. 1065 (attached to D's brief).
Thus, "all regulations implementing the provisions of [sections
1058 and 414(1)] have been promulgated by the Secretary of the
Treasury, mostly under § 414(1) of the Internal Revenue Code."
Van Orman v. American Ins. Co., 608 F. Supp. 13, 24 n.3 (D.N.J.
1984), on remand from 680 F.2d 301 (3d Cir. 1982).
9
relevant Treasury Department regulations correctly interpreted
"benefits" under § 1058 as being limited to "accrued benefits,"
rather than including all benefits to which a plan participant
would be entitled upon termination.
Appellants attempt to discredit the district court's opinion
as relying on "irrelevant and obsolete authority." However, the
1987 changes in 29 U.S.C. § 1344(d)(3) raised by appellants are
not relevant to this issue, and the facts of Van Orman and Gulf
Pension are quite similar to the case at issue.
Our interpretation of this ERISA language is supported by
the recent decision of the Seventh Circuit in Johnson v. Georgia-
Pacific Corp., No. 93-2357, 1994 WL 92167 (7th Cir. March 23,
1994). Johnson involved a suit by pensioners who complained that
the promised pension benefits of current employees could not be
increased without a corresponding increase in the retirees'
pensions. The retirees asserted that it was their contributions
that had produced the surplus by which the current employees'
benefits were increased; in other words, that they owned the
"surplus" of the plan which had enabled the employer to increase
the current employees' benefits. In holding that the employer
did not exceed its powers under ERISA to amend the plan, the
court described the same distinction under an ERISA defined
benefit plan between "benefits" and "assets":
A defined-benefit plan gives current and former
employees property interests in their pension benefits
but not in the assets held by the trust. (Citation
omitted). If the investments appreciate, the plan need
not devote that increase to improving benefits; it may
retain the surplus as a cushion against the day when
yields decrease, or the employer may cease making
10
contributions and allow the surplus to erode as
liabilities continue to increase.
1994 WL 92167 at *6.
We conclude, therefore, in light of the language of the
statute that §§ 1058 and 1344(d)(3) cannot be combined to provide
plan participants with a right to residual assets in the context
of a plan merger. The district court correctly granted
appellees' motion to dismiss on this claim.
B. Fiduciary Duty to Notify
Appellants next claim that RCA should have notified them
that they would not in the future be entitled to residual assets
if they withdrew their contributions from the RCA Pension Plan
prior to its merger with the GE plan. However, the reporting and
disclosure provisions of ERISA, and regulations adopted pursuant
to these code sections, impose no requirement that a pension plan
sponsor notify beneficiaries of the possibility of forfeiture of
interest in residual assets resulting from the early withdrawal
of employee contributions. See 29 U.S.C. §§ 1021-25.
Under ERISA, stringent fiduciary duties attach when an
employer acts directly as the pension plan administrator or makes
decisions directly affecting the administration of the plan. See
29 U.S.C. §§ 1002 (21)(A), 1104. However, employers take on
fiduciary obligations of the type alleged in appellants' second
claim only to the extent that they act as the actual plan
administrators:
Under ERISA, the roles of plan administrator and plan
sponsor are distinct. The plan administrator owes a
11
fiduciary duty to the plan participants; the plan
sponsor, as long as it is not acting as an
administrator, generally does not.
Payonk v. HMW Indus., Inc., 883 F.2d 221, 231 (3d Cir. 1989)
(Stapleton, J., concurring in the judgment).
Only plan administrators are required to disclose benefits
information to beneficiaries, and such information typically
involves an accounting of the plan's assets and liabilities and
of the actual benefits accrued by individual beneficiaries rather
than including notice of the existence of possible residual
assets which might be recouped should the plan be terminated. See
29 U.S.C. §§ 1021-25. Thus, given that appellant Malia sought
relief under a fiduciary duty not borne by GE, the district court
correctly granted appellees' motion to dismiss on this claim.
C. Fiduciary Duty to Appoint Independent Manager
The district court found that under the circumstances of a
pension plan merger as presented here, the only fiduciary duties
borne by the appellees were the anti-dilution obligations imposed
by § 1058. As the district court held that GE complied with the
requirements of § 1058, it properly dismissed appellants' claim
on this issue. Efforts by an employer to merge two pension plans
do not invoke the fiduciary duty provisions of ERISA. Such
duties do not attach to business decisions related to
modification of the design of a pension plan, and in such
circumstances the plan sponsor is free to act "as an employer and
12
not a fiduciary." See Hlinka v. Bethlehem Steel Corp., 863 F.2d
279, 285 (3d Cir. 1983).
V.
For all the reasons discussed above, we will affirm the
opinion of the district court.
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