Faircloth v. Lundy Packing Co , 91 F.3d 648 ( 1996 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JANICE FAY FAIRCLOTH; EVELYN D.
FREDERICK; CALLWEALL W. SMILING,
Plaintiffs-Appellants,
v.
LUNDY PACKING COMPANY;
ANNABELLE L. FETTERMAN, Trustee
Lundy Packing Company Stock
Ownership Plan; MABEL F. HELD,
Trustee Lundy Packing Company
No. 95-1275
Stock Ownership Plan,
Defendants-Appellees,
and
JOHN DOES,
Defendants.
AMERICAN ASSOCIATION OF RETIRED
PERSONS; NATIONAL EMPLOYMENT
LAWYERS ASSOCIATION,
Amici Curiae.
Appeal from the United States District Court
for the Eastern District of North Carolina, at Fayetteville.
Malcolm J. Howard, District Judge.
(CA-93-45-3-H)
Argued: March 4, 1996
Decided: August 2, 1996
Before HAMILTON, WILLIAMS, and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed in part, reversed in part and remanded by published opinion.
Judge Hamilton wrote the opinion, in which Judge Williams joined.
Judge Michael wrote a separate opinion concurring in part and dis-
senting in part.
_________________________________________________________________
COUNSEL
ARGUED: Marc H. Rifkind, SLEVIN & HART, Washington, D.C.,
for Appellants. Susanna Knutson Gibbons, POYNER & SPRUILL,
L.L.P., Raleigh, North Carolina, for Appellees. ON BRIEF: Bary S.
Slevin, SLEVIN & HART, Washington, D.C.; Martha Ann Geer,
PATTERSON, HARKAVY & LAWRENCE, Raleigh, North Caro-
lina, for Appellants. Robin Tatum Morris, POYNER & SPRUILL,
L.L.P., Raleigh, North Carolina, for Appellees. Daniel Feinberg, Jef-
frey Lewis, SIGMAN, LEWIS & FEINBERG, Oakland, California;
Joan S. Wise, Cathy Ventrell-Monsees, Mary Ellen Signorille,
AMERICAN ASSOCIATION OF RETIRED PERSONS, Washing-
ton, D.C., for Amici Curiae.
_________________________________________________________________
OPINION
HAMILTON, Circuit Judge:
Janice Fay Faircloth, Evelyn D. Frederick, and Callweall W. Smil-
ing (the Appellants), three participants in the employee stock owner-
ship plan (the ESOP) of Lundy Packing Company (Lundy), brought
this action against Lundy, which is the ESOP's administrator, and
Annabelle L. Fetterman and Mabel F. Held, who are the ESOP's
trustees. The Appellants alleged that Lundy, Fetterman, and Held vio-
lated provisions of the Employee Retirement Income Security Act
(ERISA), 29 U.S.C. §§ 1001-1461, by refusing to furnish certain doc-
uments to the Appellants. On October 12, 1994, the district court
granted partial summary judgment in favor of Lundy, Fetterman, and
Held. On January 20, 1995, the district court granted summary judg-
ment in favor of the Appellants on their remaining claims and
imposed penalties on Lundy for its refusal to furnish some of the doc-
2
uments to the Appellants. The Appellants appeal both orders.1 We
affirm in part, reverse in part, and remand with instructions.
I.
Lundy, a North Carolina closely held corporation that sells pork
products, established the ESOP in 1976. Lundy employees who have
completed one year of employment with Lundy are eligible to partici-
pate in the ESOP. The ESOP provides benefits to participants upon
defined events, such as retirement. Lundy maintains an account for
each participant and provides each participant with an annual state-
ment of her or his account. The amount of a participant's benefits
under the ESOP is based on the participant's account balance.
The majority of the assets of the ESOP are invested in Lundy
stock. An independent appraiser values Lundy stock and provides
Lundy with an appraisal report on an annual basis. Lundy uses the
valuation contained in the annual appraisal reports in calculating the
account balances of ESOP participants.
In 1992, the Appellants received statements of account showing
that the value of Lundy stock declined by approximately 42%
between June 1991 and July 1992 and that their account balances had
dropped as a result. When the Appellants received these statements
of account, the United Food and Commercial Workers Union (the
Union) was conducting an organizational campaign at Lundy. Con-
cerned about the drop in their account balances, the Appellants turned
to a Union representative for assistance in determining why the value
of Lundy stock had declined. The Union then prepared identical let-
ters, dated March 23, 1993, that each of the Appellants signed,
requesting the following documents from Lundy in its capacity as
plan administrator: (1) the plan document; (2) the trust agreement; (3)
the latest summary plan description (SPD); (4) any other rules and
regulations governing the ESOP; (5) the last three annual reports
(Form 5500s); (6) the last three audited financial statements for the
ESOP; (7) the last three summary annual reports; (8) the last three
_________________________________________________________________
1 The American Association of Retired Persons and the National
Employment Lawyers Association have filed a brief amici curiae in sup-
port of the Appellants.
3
summaries of material modifications; (9) any contracts between the
ESOP and any third party, including insurance contracts and contracts
with custodians of assets and investment managers; (10) any policies
adopted by the ESOP's fiduciaries, including any investment policy,
trustee expense policy, cost-sharing policy, and funding policy; (11)
any insurance policy and/or bonding policy covering the ESOP and
its fiduciaries; (12) minutes of any meeting regarding the ESOP dur-
ing the last three years; (13) the last IRS determination of tax qualifi-
cation for the ESOP; and (14) the results of discrimination tests under
I.R.C. §§ 401(k) and 401(m).
On April 19, 1993, after reviewing the requests with Fetterman,
Held notified the Appellants that Lundy would only provide them
with the plan document, the trust agreement, the latest SPD, and the
last three summary annual reports. Held also informed the Appellants
that no summaries of material modifications existed and asked the
Appellants to clarify requests nine, ten, and twelve. The Appellants
never provided a clarification of these requests.
On May 25, 1993, the Appellants sent Lundy another letter--this
time requesting all appraisal reports regarding Lundy stock and "any
and all documents concerning [Lundy's] financial status and opera-
tions supplied to the person or entity that prepared each appraisal or
valuation report[ ]." (J.A. 42). Two days later, the Appellants filed
this action against Lundy, Held, and Fetterman, claiming that they
had violated ERISA by refusing to provide the documents requested
in the March 23 letter.
On June 18, 1993, Held, acting on behalf of Lundy, denied the
Appellants' May 25 requests, but informed the Appellants that upon
further review of the March 23 requests, Lundy had determined that
they were entitled to the last three Form 5500s. Accordingly, Held
provided those documents to the Appellants. On July 21, 1993, the
Appellants amended their complaint to allege that Lundy's refusal to
provide the documents requested on May 25 constituted an additional
violation of ERISA.
After conducting discovery, both sides moved for summary judg-
ment. On October 12, 1994, the district court granted partial summary
judgment in favor of Lundy, Held, and Fetterman. The district court
4
determined that the Appellants were not entitled to most of the docu-
ments they requested, but reserved judgment on whether the Appel-
lants were entitled to copies of contracts with custodians of assets,
investment managers, and insurers of plan assets. On January 20,
1995, the district court determined that the Appellants were entitled
to these contracts and granted summary judgment in favor of the
Appellants regarding these contracts. The district court also ordered
Lundy to pay each Appellant $2500 as penalties for Lundy's delay in
furnishing the Appellants with the Form 5500s and for its failure to
furnish the Appellants with the contracts with custodians of assets,
investment managers, and insurers of plan assets. The Appellants
appeal both of the district court's orders, contending that the district
court erred in determining that they were not entitled to certain docu-
ments they requested and in imposing insufficient penalties against
Lundy.
II.
The Appellants argue that the district court erred in determining
that they were not entitled to receive five sets of documents: (1) the
last IRS determination of tax qualification; (2) the bonding policy
covering the ESOP and its fiduciaries; (3) the appraisal reports and
supporting documentation; (4) the minutes of meetings regarding the
ESOP during the last three years; and (5) the investment, funding,
cost-sharing, and trustee expense policies. They claim that they are
entitled to these documents under three sections of ERISA:
§ 104(b)(4), § 404(a)(1)(A), and § 404(a)(1)(D). We shall address
each of these provisions in turn.
A.
ERISA § 104(b)(4) provides:
The administrator shall, upon written request of any par-
ticipant or beneficiary, furnish a copy of the latest updated
summary plan description, plan description, and the latest
annual report, any terminal report, the bargaining agree-
ment, trust agreement, contract, or other instruments under
which the plan is established or operated. The administrator
may make a reasonable charge to cover the cost of furnish-
5
ing such complete copies. The Secretary may by regulation
prescribe the maximum amount which will constitute a rea-
sonable charge under the preceding sentence.
29 U.S.C. § 1024(b)(4) (emphasis added). In this case, we must inter-
pret the meaning of the emphasized language and determine whether
the emphasized language encompasses the documents requested by
the Appellants.
When confronted with a question of statutory interpretation, our
inquiry begins with an examination of the language used in the stat-
ute. See Stiltner v. Beretta U.S.A. Corp., 74 F.3d 1473, 1482 (4th Cir.
1996). If the statutory language is clear and unambiguous, our inquiry
ends there as well; we neither resort to an examination of the statute's
legislative history nor apply the traditional rules of statutory construc-
tion. Id. See Caminetti v. United States , 242 U.S. 470, 485 (1917)
("[T]he rules which are to aid doubtful meanings need no discussion"
when the statutory language is clear and unambiguous.).
Here, the statutory language "other instruments under which the
plan is established or operated" is clear and unambiguous. "Instru-
ment" means "[a] formal or legal document in writing, such as a con-
tract, deed, will, bond, or lease. . . . Anything reduced to writing, a
document of a formal or solemn character . . . ." Black's Law Dictio-
nary 801 (6th ed. 1990); see also Webster's New World Dictionary
700 (3d college ed. 1991) (defining "instrument" as "a formal docu-
ment, [such] as a deed, contract, etc.")."Establish" means "to order,
ordain, or enact . . . permanently" or "to set up." Webster's New
World Dictionary at 465. "Operate" means "to conduct or direct the
affairs of (a business, etc.); manage." Id. at 949. Therefore, the lan-
guage "other instruments under which the plan is established or oper-
ated" encompasses formal or legal documents under which a plan is
set up or managed. The language at issue being unambiguous, we do
not resort to an examination of ERISA's legislative history nor apply
the rules of statutory construction. See Stiltner, 74 F.3d at 1482.
Although the dissent does not even suggest that the language at
issue is ambiguous, nor could it, it nonetheless heavily relies on
ERISA's legislative history in support of its unduly broad interpreta-
6
tion. As previously set forth, any reliance on ERISA's legislative his-
tory in this case is prohibited. Id.
The Appellants and the Amici argue that § 104(b)(4) should be
construed broadly to encompass any documents that would assist par-
ticipants and beneficiaries in determining their rights under a plan and
in determining whether a plan is being properly administered. They
assert that other courts have interpreted § 104(b)(4) broadly.2 But our
examination of the two circuit court cases addressing the scope of
§ 104(b)(4) does not convince us that § 104(b)(4) should be construed
broadly. See Hughes Salaried Retirees Action Comm. v. Administra-
tor of the Hughes Non-Bargaining Retirement Plan, 72 F.3d 686 (9th
Cir. 1995) (en banc); Bartling v. Fruehauf Corp., 29 F.3d 1062 (6th
Cir. 1994).3
_________________________________________________________________
2 The Appellants also argue that the scope of § 104(b)(4) is broad
because it is coextensive with § 107, which requires plan administrators
and others to maintain an extensive array of documents that verify infor-
mation contained in reports that must be filed with the government. See
29 U.S.C. § 1027. The Appellants argue that documents required to be
maintained under § 107 must be furnished on request under § 104(b)(4).
The Appellants have not cited any case holding that the scope of
§ 104(b)(4) is coextensive with § 107, and we have not found one. More-
over, nothing on the face of the two statutes indicates that they are coex-
tensive. Section 104(b)(4) does not in any way reference § 107, and the
two statutes do not use similar language. Therefore,§ 107 and
§ 104(b)(4) are not coextensive.
3 Although one case in this circuit touches on the meaning of
§ 104(b)(4), it does not delineate the scope of documents encompassed
by the statute. See Aliff v. BP America, Inc. , 26 F.3d 486 (4th Cir. 1994).
Aliff involved several ERISA issues, including a request for an actuarial
report used to determine whether the plaintiffs would receive benefits
under an involuntary separation program (ISP). The district court held
that the plaintiffs were not entitled to the actuarial report under
§ 104(b)(4). The district court stated, "This statute does not require the
plan administrator to supply a copy of the pertinent actuarial report. The
Court also notes that Plaintiffs were provided with a copy of the ISP, the
document `under which the [severance] plan . . . [was] established or
operated.'" Aliff v. BP America, Inc., 826 F. Supp. 178, 188 (S.D.W. Va.
1993) (quoting § 104(b)(4)). On appeal, we addressed certain issues in
detail, but summarily affirmed the district court's rulings on other issues,
including the § 104(b)(4) issue, "for the reasons stated in the district
court's opinion." Aliff, 26 F.3d at 490. Aliff did not purport to delineate
the scope of § 104(b)(4). It simply addressed the application of
§ 104(b)(4) to the particular document at issue in the case.
7
In Bartling, the Sixth Circuit held that§ 104(b)(4) encompassed an
actuarial report required to be prepared by ERISA and a written cal-
culation procedure used in deriving benefits under the plan. The court
stated that "all other things being equal, courts should favor disclosure
[under § 104(b)(4)] where it would help participants understand their
rights." Bartling, 29 F.3d at 1070. The court thus established a pre-
sumption of disclosure under § 104(b)(4). We find nothing in the
clear and unambiguous statutory language to support such a presump-
tion. Accordingly, we do not find Bartling persuasive.
In Hughes, certain retirees requested the plan administrator to fur-
nish them a list of the names and addresses of all retired participants
in the plan so that they could communicate with the other retirees
regarding the plan and obtain assistance in monitoring the plan. The
plan administrator used the list in paying benefits. A panel of the
Ninth Circuit held that § 104(b)(4) encompassed the list because it
was "critical to the operation" of the plan. Hughes Salaried Retirees
Action Comm. v. Administrator of the Hughes Non-Bargaining Retire-
ment Plan, 39 F.3d 1002, 1007 (9th Cir. 1995). During the pendency
of the appeal in this case, the Ninth Circuit, sitting en banc, rejected
the panel's interpretation of § 104(b)(4). The en banc court narrowed
the broad interpretation of § 104(b)(4) adopted by the panel by stat-
ing:
[W]e decline to interpret § 104(b)(4) to require general dis-
closure, subject only to specified exceptions. On the con-
trary, § 104(b)(4) requires the disclosure of only the
documents described with particularity and `other instru-
ments' similar in nature.
Hughes, 72 F.3d at 691. The en banc court further stated that "[t]he
relevant documents are those documents that provide individual par-
ticipants with information about the plan and benefits." Id. at 690.
Applying its interpretation of § 104(b)(4) to the document at issue in
the case, the en banc court held that § 104(b)(4) did not encompass
the list of retired participants because the list provided "no informa-
tion about the plan or benefits." Id.
We will not speculate on how the Ninth Circuit would apply its
decision in Hughes to the facts of this case. We note, however, that
8
if Congress had intended § 104(b)(4) to encompass all documents that
provide information about the plan and benefits, Congress could have
used language to that effect. Instead, Congress used language limiting
§ 104(b)(4) to "instruments under which the plan is established or
operated." The clear and unambiguous meaning of this statutory lan-
guage encompasses only formal or legal documents under which a
plan is set up or managed. To the extent that the Ninth Circuit's inter-
pretation of § 104(b)(4) encompasses documents other than those
under which a plan is set up or managed, the interpretation is unsup-
ported by the statutory language and therefore unpersuasive.
Having ascertained the proper interpretation of§ 104(b)(4), we
now apply that interpretation to the documents at issue in this case.
1.
The Appellants requested the IRS determination letter showing that
the ESOP is tax-qualified.4 The determination letter does nothing to
set up or manage the ESOP. Accordingly, § 104(b)(4) does not
encompass the determination letter.
2.
The Appellants also requested the bonding policy insuring the
ESOP against fiduciary misconduct. Like the determination letter, the
bonding policy does nothing to set up or manage the ESOP. Accord-
ingly, § 104(b)(4) does not encompass the bonding policy.
3.
The Appellants also requested "all appraisal reports or valuation
reports of the Lundy Packing Company stock" and"any and all docu-
ments concerning Lundy Packing Company's financial status and
operations supplied to the person or entity that prepared each
appraisal or valuation report[ ]." (J.A. 42). The ESOP is not set up or
managed under these documents. The appraisal reports simply derive
_________________________________________________________________
4 Tax qualification of an ESOP results in favorable tax treatment for the
employer and the participants. See I.R.C.§ 401(a).
9
the value of Lundy stock, and the supporting documents included in
this request provide the raw material from which the appraisal report
is derived. Accordingly, § 104(b)(4) does not encompass the appraisal
reports or their supporting documentation.
4.
The Appellants also requested "minutes of any meetings regarding
the [ESOP] during the last three years." (J.A. 30). According to the
Department of Labor, certain minutes of trustees' meetings may fall
within § 104(b)(4). See, e.g., DOL Advisory Opinion Letter 87-010A
(opining that § 104(b)(4) does not encompass minutes of a trustees'
meeting in which the trustees reviewed the performance of an invest-
ment manager, but does encompass minutes of a trustees' meeting in
which the trustees established a claim procedure); but see Chambless
v. Masters, Mates & Pilot's Pension Plan, 571 F. Supp. 1430, 1456
(S.D.N.Y. 1983) ("Neither ERISA nor the federal regulations issued
thereunder make any mention of any requirement that plan partici-
pants be allowed to see the minutes of trustees' meetings or prior
decisions by the trustees.").
We need not decide whether trustees' meeting minutes can ever
constitute formal or legal documents under which a plan is set up or
managed because here the Appellants' request for meeting minutes
was too broad to fall within § 104(b)(4) and the Appellants refused
to clarify the request. See Anderson v. Flexel, Inc., 47 F.3d 243, 248
(7th Cir. 1995) (holding that a request for documents under
§ 104(b)(4) necessitates a response from an administrator when it
gives the administrator "clear notice" of the information sought). The
Appellants' request did not give any indication of the information
sought by the Appellants. Their request for "any" meeting minutes
"regarding" the ESOP in the last three years was akin to asking Lundy
to comb the past three years of trustees' meeting minutes to determine
if they contained any information that could possibly be encompassed
by § 104(b)(4). Accordingly, Lundy wrote to the Appellants seeking
clarification of this request. Lundy stated, "[Y]our request . . . is
unclear, overly broad and does not appear to be within the scope of
Section 104(b)(4) of ERISA. . . . [I]t would be appreciated if you
could further define your request . . . ." (J.A. 32). The Appellants
refused to clarify the request. Therefore, assuming arguendo that
10
§ 104(b)(4) may encompass certain trustees' meeting minutes, Lundy
did not violate § 104(b)(4) by failing to provide the trustees' meeting
minutes in this case.
5.
Finally, the Appellants requested "any policies adopted by the fidu-
ciaries of the [ESOP], including, but not limited to, any investment
policy, trustee expense policy, cost-sharing policy and funding pol-
icy." (J.A. 30). Lundy asked the Appellants to clarify this request and
the Appellants refused.
On appeal, the Appellants assert that the cost-sharing policy deter-
mines the percentage of ESOP expenses that will be borne by the
ESOP and by Lundy. They argue that they did not provide clarifica-
tion of their request for this policy because "cost-sharing policy" is a
term of art that any plan administrator should understand. But we can-
not take judicial notice that the plan administrator should know the
meaning of "cost-sharing policy." See Minnesota Fed'n of Teachers
v. Randall, 891 F.2d 1354, 1359 n.9 (8th Cir. 1989) (refusing to take
judicial notice of a fact for the first time on appeal). The record indi-
cates that the plan administrator did not know what"cost-sharing pol-
icy" means. The ESOP does not use the term, and Held, who
responded to the Appellants' requests on behalf of Lundy, the plan
administrator, testified that she did not know what a cost-sharing pol-
icy is. Therefore, assuming arguendo that a cost-sharing policy, as
defined by the Appellants, could constitute a formal or legal docu-
ment under which a plan is managed, we conclude that the Appellants
were not entitled to such a policy in this case.
Similarly, the Appellants were not entitled to receive a trustee
expense policy. The Appellants assert that the trustee expense policy
determines which expenses of the trustee will be paid by the ESOP.
Whether such a policy could ever constitute a formal or legal docu-
ment under which a plan is managed is a question we need not decide,
because the record does not indicate that such a policy exists in this
case.
The Appellants were, however, entitled to the funding and invest-
ment policies. As described in the ESOP, the funding and investment
11
policies set forth Lundy's obligations to fund the ESOP and explain
the responsibilities regarding investing the assets of the ESOP. Thus,
both the funding policy and the investment policy are formal docu-
ments under which the ESOP is managed. They are therefore encom-
passed by § 104(b)(4).
Moreover, the request for the funding and investment policies pro-
vided Lundy with clear notice as to the information sought by the
Appellants. The ESOP contemplates the establishment of funding and
investment policies, and the Appellants' request refers to the funding
and investment policies by name. In her deposition testimony, Held
indicated that she knew what a funding policy and an investment pol-
icy were and that the ESOP has a funding policy and an investment
policy. Accordingly, we conclude that the Appellants' refusal to clar-
ify their request for the funding and investment policies does not
excuse Lundy's failure to provide these policies to the Appellants.
B.
The Appellants and the Amici next argue that even if Lundy, as the
plan administrator, was not required to furnish the Appellants the
requested documents under § 104(b)(4), Fetterman and Held, the plan
fiduciaries who determined which documents Lundy would provide
to the Appellants, were required to furnish the requested documents
under ERISA § 404(a)(1)(A). Section 404(a)(1)(A) provides:
[A] fiduciary shall discharge his 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 admin-
istering the plan . . . .
29 U.S.C. § 1104(a)(1)(A).
12
Section 404(a)(1)(A) is included in the fiduciary responsibility pro-
visions of ERISA. See 29 U.S.C. §§ 1101-14. The fiduciary responsi-
bility provisions invoke the common law of trusts. See Central States,
Southeast & Southwest Areas Pension Fund v. Central Transport,
Inc., 472 U.S. 559, 570 (1985); S. Rep. No. 127, 93d Cong. (1973),
reprinted in 1974 U.S.C.C.A.N. 4639, 4865 ("The fiduciary responsi-
bility section, in essence, codifies and makes applicable to [ERISA]
fiduciaries certain principles developed in the evolution of the law of
trusts."). At common law, trustees have a duty to give beneficiaries
upon request "complete and accurate information as to the nature and
amount of the trust property." Restatement (Second) of Trusts § 173
(1959). And beneficiaries are "always entitled to such information as
is reasonably necessary to enable [them] to enforce [their] rights
under the trust or to prevent or redress a breach of trust." Id. cmt. c.
The Appellants and the Amici assert that the information requested
by the Appellants will help the Appellants to enforce their rights and
to prevent a breach of trust. They argue that the Appellants are there-
fore entitled to the information under § 404(a)(1)(A), because that
statute incorporates the common-law principle that beneficiaries are
entitled to information that is reasonably necessary to enable them to
enforce their rights or to prevent a breach of trust. The Appellants and
the Amici thus argue that even if § 104(b)(4) does not require the
administrator of the ESOP to furnish the requested documents,
§ 404(a)(1)(A) requires the fiduciaries of the ESOP to furnish the
requested documents.
To accept the argument of the Appellants and the Amici we would
have to hold that ERISA's general fiduciary duty provision,
§ 404(a)(1)(A), requires plan fiduciaries to furnish documents to par-
ticipants and beneficiaries in addition to the documents that ERISA's
specific disclosure provision, § 104(b)(4), requires the plan adminis-
trator to furnish. Such a holding would conflict with the principle that
specific statutes govern general statutes. See Morales v. Trans World
Airlines, Inc., 504 U.S. 374, 384 (1992); Farmer v. Employment Sec.
Comm'n, 4 F.3d 1274, 1284 (4th Cir. 1993). "However inclusive may
be the general language of a statute, it `will not be held to apply to
a matter specifically dealt with in another part of the same enact-
ment.'" Clifford F. MacEvoy Co. v. United States, 322 U.S. 102, 107
(1944) (quoting Ginsberg & Sons v. Popkin, 285 U.S. 204, 208
13
(1932)). This principle "applies with special force with regard to a
reticulated statute such as ERISA." Bigger v. American Commercial
Lines, 862 F.2d 1341, 1344 (8th Cir. 1988); see also Pension Benefit
Guar. Corp. v. Alloytek, Inc., 924 F.2d 620, 626 (6th Cir. 1991).
In Bigger, the court rejected an attempt to use the general fiduciary
duty standard of § 404(a)(1)(A) to expand the duties imposed under
another ERISA section that specifically governed the situation at
issue. 862 F.2d at 1344. We likewise decline to use§ 404(a)(1)(A) to
expand the duties imposed under § 104(b)(4), the ERISA section that
specifically governs the situation at issue here--a request for docu-
ments related to the ESOP. As the Supreme Court has noted, ERISA's
reporting and disclosure scheme, which includes§ 104(b)(4), "may
not be a foolproof informational scheme, although it is quite thor-
ough. Either way, it is the scheme that Congress devised. And we do
not think Congress intended it to be supplemented by a far-away pro-
vision in another part of [ERISA.]" Curtiss-Wright Corp. v.
Schoonejongen, 115 S. Ct. 1223, 1231 (1995).
The Appellants and the Amici maintain that the case law constru-
ing § 404(a)(1)(A) supports their position that § 404(a)(1)(A) requires
plan fiduciaries to furnish information to participants and beneficia-
ries in addition to the documents that § 104(b)(4) requires plan
administrators to furnish. Our review of the case law, however,
reveals no support for their position.
The Appellants and the Amici rely mainly on the panel opinion in
Hughes, 39 F.3d 1002 (9th Cir. 1995). The panel stated that
§ 404(a)(1)(A) may, under some circumstances, require the furnishing
of information in addition to the information required to be furnished
by § 104(b)(4). Id. at 1006 (citing Acosta v. Pacific Enters., 950 F.2d
611, 618 (9th Cir. 1991)). As noted above, however, during the pen-
dency of this appeal, the Ninth Circuit, sitting en banc, vacated the
panel opinion in Hughes. The en banc court expressly declined to
decide "[w]hether § 404(a)(1)(A), a general ERISA provision, may be
interpreted to require the disclosure of documents that relate to the
provision of benefits or the defrayment of expenses but are not docu-
ments required to be disclosed under § 104(b)(4), ERISA's specific
disclosure provision." Hughes, 72 F.3d at 694.
14
The other cases cited by the Appellants and the Amici in support
of their argument merely hold that ERISA fiduciaries may not mis-
lead participants or beneficiaries; the cases do not recognize a general
fiduciary obligation under ERISA to provide information related to
the plan on request. See Howe v. Varity Corp. , 36 F.3d 746, 753 (8th
Cir. 1994) (holding that an employer who used misrepresentations to
induce employees to transfer to a newly created, undercapitalized sis-
ter company, with the intention of ridding itself of obligations under
an employee benefit plan, violated § 404(a)(1)(A)), aff'd, 116 S. Ct.
1065 (1996); Mullins v. Pfizer, Inc., 23 F.3d 663, 669 (2d Cir. 1994)
(holding that plan administrators may not make affirmative material
misrepresentations to plan participants regarding changes to employee
benefit plans); Bixler v. Central Pennsylvania Teamsters Health &
Welfare Fund, 12 F.3d 1292, 1300 (3d Cir. 1993) (stating that trustees
have a duty not to misinform beneficiaries and to disclose information
to beneficiaries when the trustee knows that failure to disclose might
be harmful to beneficiaries); Anweiler v. American Elec. Power Serv.
Corp., 3 F.3d 986, 991-92 (7th Cir. 1993) (holding that defendants
breached their fiduciary duties by persuading a plan participant to
designate one of the defendants the beneficiary of his life insurance
policy, where the participant was led to believe that he was required
to make the designation in order to receive his benefits); Fischer v.
Philadelphia Elec. Co., 994 F.2d 130, 135 (3d Cir.) (holding that "[a]
plan administrator may not make affirmative material misrepresenta-
tions to plan participants about changes to an employee pension bene-
fit plan"), cert. denied, 114 S. Ct. 622 (1993); Drennan v. General
Motors Corp., 977 F.2d 246, 251 (6th Cir. 1992) (holding that an
employer violated its fiduciary duties by misleading employees
regarding the availability of participation in a plan), cert. denied, 508
U.S. 940 (1993); Eddy v. Colonial Life Ins. Co. , 919 F.2d 747, 750-
51 (D.C. Cir. 1990) (holding that an ERISA fiduciary violated its
fiduciary duties when a participant whose insurance coverage was
being terminated inquired about the possibility of maintaining cover-
age and the fiduciary failed to disclose sufficient information regard-
ing his options for maintaining coverage); Berlin v. Michigan Bell
Tel. Co., 858 F.2d 1154, 1163 (6th Cir. 1988) (holding that "a fidu-
ciary may not materially mislead those to whom the duties of loyalty
and prudence described in [§ 404] are owed"). Here, the Appellants
do not allege that they have been misled; they allege that they need
15
the requested information to exercise an oversight role regarding the
ESOP. Therefore, the cases discussed above are inapposite.
C.
The Appellants argue that even if they are not entitled to the
requested documents under § 104(b)(4) or § 404(a)(1)(A), they are
entitled to the documents under § 404(a)(1)(D). Section 404(a)(1)(D)
requires plan fiduciaries to discharge their duties with respect to a
plan "in accordance with the documents and instruments governing
the plan." 29 U.S.C. § 1104(a)(1)(D). The Appellants assert that the
SPD, one of the documents and instruments governing the ESOP,
entitles them to obtain the documents they requested. They accord-
ingly maintain that Fetterman and Held violated§ 404(a)(1)(D) by
failing to furnish the Appellants with the requested documents.
ERISA authorizes the Secretary of Labor to promulgate a regula-
tion requiring administrators of employee benefit plans to provide
participants with a statement of their rights under ERISA. See 29
U.S.C. § 1024(c). Pursuant to this authorization, the Secretary has
promulgated a regulation requiring SPDs to contain a statement of
ERISA rights. See 29 C.F.R. § 2520.102-3(t)(1). The regulation also
sets forth a model statement of ERISA rights. See 29 C.F.R.
§ 2520.102-3(t)(2). The SPD language relied upon by the Appellants
here tracks, almost verbatim, the model statement of ERISA rights set
forth in the regulation.5 Thus, the language relied on by the Appel-
lants is included in the SPD in an attempt to comply with the regula-
tion. The language does not create additional disclosure obligations
beyond the disclosure obligations imposed by ERISA.
_________________________________________________________________
5 The SPD states:
16. ERISA RIGHTS. As a Member in the Plan you are enti-
tled to certain rights and protections under [ERISA]. ERISA pro-
vides that all Plan Members shall be entitled to:
(a) Examine, without charge, . . . all Plan documents, includ-
ing insurance contracts . . . .
(b) Obtain copies of all Plan documents and other Plan infor-
mation upon written request to the Plan Administrator. . . .
(J.A. 210).
16
To summarize, we conclude that neither § 404(a)(1)(A) nor
§ 404(a)(1)(D) requires Fetterman and Held to furnish the documents
at issue in this case to the Appellants. However,§ 104(b)(4) requires
Lundy to furnish the funding and investment policies to the Appel-
lants. We now proceed to consider the Appellants' arguments regard-
ing the appropriate penalties for Lundy's failure to furnish the
Appellants all the documents to which they were entitled under
§ 104(b)(4).
III.
Under ERISA § 502(c)(1), a district court may, in its discretion,
assess penalties of up to $100 a day against plan administrators who
fail to furnish requested documents that are required to be furnished
by § 104(b)(4). See 29 U.S.C. § 1132(c)(1); Glocker v. W.R. Grace &
Co., 974 F.2d 540, 544 (4th Cir. 1992). In accordance with this dis-
cretionary authority, the district court ordered Lundy to pay each
Appellant $2500 because of Lundy's delay in furnishing the Form
5500s and its failure to furnish the contracts with custodians of assets,
investment managers, and insurers of Plan assets. The Appellants
argue that the district court should have imposed a larger penalty
against Lundy.
The purpose of § 502(c)(1) is not to compensate participants for
injuries, but to punish noncompliance with ERISA. Daughtrey v.
Honeywell, Inc., 3 F.3d 1488, 1494 (11th Cir. 1993). Accordingly,
prejudice to the party requesting the documents is not a prerequisite
to the imposition of penalties. See Moothart v. Bell, 21 F.3d 1499,
1506 (10th Cir. 1994). But prejudice is a factor that a district court
may consider in deciding whether to impose a penalty. Id. The district
court may also consider whether the administrator acted in bad faith.
See Rodriguez-Abreu v. Chase-Manhattan Bank, N.A. , 986 F.2d 580,
588 (1st Cir. 1993).
The district court determined that Lundy did not act in bad faith
and that the Appellants did not suffer prejudice as a result of Lundy's
refusal to furnish the Form 5500s and the contracts with custodians
of assets, investment managers, and insurers of plan assets. We find
no reversible error in these determinations as they relate to the Form
5500s and the contracts with custodians of assets, investment manag-
17
ers, and insurers of plan assets. However, in light of our conclusion
that § 104(b)(4) encompasses the funding and investment policies and
that clarification of the Appellants' request for these documents was
not necessary, we remand to the district court to determine whether,
in its discretion, any additional penalties should be imposed because
of Lundy's failure to furnish these policies to the Appellants.6
IV.
For the reasons stated herein, the district court's determination that
the Appellants were not entitled to the funding and investment poli-
cies is reversed. In all other respects, the district court's orders are
affirmed. The case is remanded for the district court to determine
whether, in its discretion, any additional penalties should be imposed
on Lundy for its failure to furnish these policies.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
WITH INSTRUCTIONS
MICHAEL, Circuit Judge, concurring in part and dissenting in part:
I concur in the majority opinion insofar as it provides for disclosure
of the Plan's funding and investment policies, for non-disclosure of
cost-sharing policies, trustee expense policies, and trustees' meeting
minutes, and for a remand to determine whether a more severe pen-
_________________________________________________________________
6 The Appellants also argue that Fetterman and Held violated
§ 404(a)(1) by breaching the fiduciary standards of loyalty and care. The
Appellants maintain that in responding to their requests for documents,
Fetterman and Held put the interests of Lundy before the interests of the
ESOP participants and failed to exercise care in determining which docu-
ments they were required to furnish the Appellants. The Appellants seek
the removal of Fetterman and Held as trustees of the ESOP because of
these alleged fiduciary breaches. Removal of trustees is appropriate when
the trustees have engaged in repeated or substantial violations of their
fiduciary duties. See 29 U.S.C. § 1109; Katsaros v. Cody, 744 F.2d 270,
281 (2d Cir.), cert. denied, 469 U.S. 1072 (1984). Assuming that the con-
duct of Fetterman and Held amounted to breaches of their fiduciary
duties, the breaches were not substantial or repeated. Therefore, their
removal as trustees is not warranted.
18
alty should be assessed. I respectfully dissent, however, from the
majority's holding that Plan participants are not entitled to see
appraisal reports (and supporting documentation), the Plan's tax
determination letter, and the Plan's fiduciary bonding policy. The
Plan participants should be allowed to see this latter group of docu-
ments because they are instruments under which the Plan is estab-
lished or operated, because "all other things being equal, courts
should favor disclosure where it would help participants understand
their rights," Bartling v. Fruehauf Corp., 29 F.3d 1062, 1070 (6th Cir.
1994), and because Lundy has not shown good cause for non-
disclosure.
I.
A.
Our task is to determine what Congress intended when it enacted
ERISA § 104(b)(4), which provides for disclosure to plan participants
of "instruments under which the plan is established or operated."
The majority's method of defining the term "instrument" is not
grounded in the policies the drafters of ERISA sought to promote.
Understanding Congressional will requires more than the mechanical
application of dictionary definitions.1 We must "look not only at the
particular statutory language, but to the design of the statute as a
whole and to its object and policy." Crandon v. United States, 494
U.S. 152, 158 (1990); see also King v. St. Vincent's Hosp., 502 U.S.
215, 221 (1991) ("the meaning of statutory language, plain or not,
depends on context").
_________________________________________________________________
1 In any event, there are dictionary definitions of "instrument" that are
more suitable to § 104(b)(4)'s purposes than those relied upon by the
majority. For example, an "instrument" includes: "[any] written docu-
ment" (Black's Law Dictionary 719 (5th ed. 1979) (first definition)); "a
means whereby something is achieved, performed, or furthered" (Web-
ster's Third New Int'l Dictionary (Unabridged) 1172 (Merriam-Webster,
1981) (definition 1a)); or "something capable of being presented as evi-
dence to a court for inspection" (id. (definition 5b)). In light of the wide
range of definitions of the word "instrument," I respectfully disagree with
the majority's contention that the word is unambiguous.
19
It is always an unsafe way of construing a statute or contract
to divide it by a process of etymological dissection, and to
separate words and then apply to each, thus separated from
its context, some particular definition given by lexicogra-
phers and then reconstruct the instrument upon the basis of
these definitions. An instrument must always be construed
as a whole, and the particular meaning to be attached to any
word or phrase is usually to be ascribed from the context,
the nature of the subject matter treated of, and the purpose
or intention of the parties who executed the contract or of
the body which enacted or framed the statute or constitution.
2A Sutherland Statutory Construction § 46.05, at 103 (5th ed. 1992)
(footnote omitted).
The legislative history makes clear that "instrument" should be
defined more broadly than the majority has defined it. Congress
intended broad disclosure to Plan participants and beneficiaries
because they are the primary enforcers of their rights under ERISA.
The Senate Committee on Labor and Public Welfare explained that
a Plan participant or beneficiary is entitled to know "exactly where he
stands with respect to the plan." S. Rep. No. 127, 93 Cong., 2d Sess.
(1974), reprinted in 1974 U.S.S.C.A.N. 4838, 4863 ("ERISA Legisla-
tive History") (quoted in Hughes Salaried Retirees Action Comm. v.
Administrator, 72 F.3d 686, 690 (9th Cir. 1995) (en banc)). The dis-
closure requirement of ERISA § 104(b)(4) also serves to reinforce
ERISA § 404, the fiduciary duty section:
[T]he safeguarding effect of the fiduciary responsibility sec-
tion will operate efficiently only if fiduciaries are aware that
the details of their dealings will be open to inspection, and
that individual participants and beneficiaries will be armed
with enough information to enforce their own rights as well
as the obligations owed by the fiduciary to the plan in gen-
eral.
Id. (quoted in Hughes, 72 F.3d at 690 n. 3 (9th Cir. 1995) (en banc));
see also Curtiss-Wright Corp. v. Schoonejongen, 115 S. Ct. 1223,
1231 (1995) (§ 104(b)(4) requires disclosure of all "governing plan
20
documents"); Bartling, 29 F.3d at 1070 ("courts should favor disclo-
sure where it would help participants understand their rights").
A look at the Welfare and Pension Plans Disclosure Act of 1958,
Pub. L. No. 85-836 (Aug. 28, 1958), 72 Stat. 997, the precursor to
ERISA § 104(b)(4), also aids in a proper understanding of ERISA.
See 2A Sutherland Statutory Construction§ 48.03 (court should con-
sider development of statutory scheme over time"including prior stat-
utes on the same subject"). The 1958 Act required disclosure only of
"a description of the plan" and "an annual financial report." 72 Stat.
at 999 (§ 5(a)). Congress amended the Act in 1962 to provide for
more effective sanctions for its violation, to impose more detailed dis-
closure duties, and to require plan administrators to retain supporting
documentation. Pub. L. No. 87-420 (Mar. 20, 1962), 76 Stat. 35. But
Congress ultimately determined that even these measures were inef-
fective to adequately protect the rights of employees. ERISA Legisla-
tive History, 1974 U.S.C.C.A.N. at 4642. For that reason, when
Congress passed ERISA in 1974, it imposed a whole new set of dis-
closure duties on plan administrators. Id. Congressional will on this
subject is plain: employees are given broad rights of access to materi-
als necessary for them to understand whether their pension savings
are secure.
Such a clear revelation of Congressional purpose leads me to
believe that § 104(b)(4) was meant to impose on Plan fiduciaries a
disclosure duty similar to that imposed on trustees under the common
law of trusts. See Central States, S.E. & S.W. Areas Pension Fund v.
Central Transport, Inc., 472 U.S. 559, 570 (1985); Restatement (Sec-
ond) of Trusts § 173 (trustee, upon request of beneficiary, must dis-
close "complete and accurate information as to the nature of the trust
property") & cmt. c ("the beneficiary is always entitled to such infor-
mation as is reasonably necessary to enable him to enforce his rights
under the trust or to prevent or redress a breach of trust").
I do agree with the majority, ante at 12-16, that even though
ERISA § 404(a)(1)(A) imports general common law principles of
trusts, any duty to disclose that may exist under§ 404 can be no
broader than the specific disclosure duty described in § 104(b)(4). See
Bigger v. American Commercial Lines., Inc., 862 F.2d 1341, 1344
(8th Cir. 1988) ("a specific statutory provision prevails over a more
21
general provision"). Nevertheless, I disagree with the majority's nar-
row reading of § 104(b)(4). The terms "instrument" and "established
or operated" should be read broadly (although not without limit, see
infra Part III) to best serve the remedial goals of ERISA and to ensure
that Plan participants and beneficiaries have enough information to
adequately enforce their rights under the Plan.
B.
The main difficulty in this case flows from the fact that Congress
did not expressly indicate how § 104(b)(4) should be applied in the
special context of an employee stock ownership plan (ESOP). A brief
discussion is in order, then, of what an ESOP is, what it does, and
how its existence benefits the employer/sponsor. In a nutshell,
§ 104(b)(4) must be read broadly in the ESOP situation because
ESOP investments can be riskier than many other investments. Maxi-
mum disclosure should be required so employees will have all the
information necessary for them to understand and manage the risk
associated with their ESOP investment.
An ESOP is a defined-contribution pension or welfare plan that
invests primarily in the stock of the employer. 26 U.S.C. § 4975(e)(7).
Other forms of employee stock ownership exist, but the term "ESOP"
has this specialized meaning. See Joseph R. Blasi & Douglas L.
Kruse, The New Owners: The Mass Emergence of Employee Owner-
ship in Public Companies and What It Means to American Business
23-29 (1991).
The term "defined-contribution" means that a certain amount of
money is contributed into the plan (by the employer or the employee),
but the value of the assets at the time they are withdrawn from the
plan (say, at retirement) is not guaranteed. A "defined-benefit" plan,
by contrast, is one in which the employer (sponsor) guarantees to pay
a certain fixed benefit when the benefit is due; the employer, there-
fore, must rely on actuarial projections in funding a defined-benefit
plan so it will have enough assets to meet future obligations. The key
distinction between the two types of plans is how they allocate risk
between employer and employee. With a defined-contribution pen-
sion plan, the employee bears the risk that the plan's investments will
do poorly. The employee also bears the risk that he will outlive his
22
retirement savings ("longevity risk"). A further risk is that unlike
defined-benefit plans, defined-contribution plans are not guaranteed
by the Pension Benefit Guarantee Association. With a defined-benefit
plan, the employer bears the investment and longevity risks, but
employees bear the risk that by the time they retire inflation will have
diminished the real value of their benefits. A defined-contribution
plan potentially could give greater benefits to employees because
employees retain the additional return if the plan's investments
exceed expectations. Administrative costs of operating a defined-
contribution plan also are lower than the costs of operating a standard
defined-benefit plan. Id. at 22; see also Douglas L. Kruse, Pension
Substitution in the 1980s: Why the shift toward defined contribution?,
34 Indus. Rel. 218 (Apr. 1995).
A corporate employer which introduces an ESOP (as opposed to a
standard defined-contribution plan) gains advantages beyond shifting
investment and longevity risks to its employees. There is some evi-
dence that implementation of an ESOP makes workers feel they have
more of a stake in the corporation and that loyalty and productivity
improve as a result. See, e.g., Michael A. Conte, Economic Research
and Public Policy Toward Employee Ownership in the United States,
28 J. Econ. Issues 427 (June 1994); Aaron A. Buchko, Employee
Ownership, Attitudes, and Turnover: An Empirical Assessment, 45
Hum. Rel. 711 (July 1992). But see Wallace N. Davidson III & Dan
L. Worrell, ESOP's Fables: The influence of employee stock owner-
ship plans on corporate stock prices and subsequent operating
performance, 17 Hum. Resource Planning 69 (1994).
The most important advantages an ESOP brings to a corporate
employer, however, relate to the corporation's interaction with capital
markets. Use of an ESOP provides a corporation with a cheap and
ready source of capital that may be used for expansion, to pay down
debt, or (as may be the case with a closely-held corporation) to buy
out a minority shareholder. See Kruse, Pension Substitution. ESOPs
also may benefit management (sometimes at shareholder expense) by
making the corporation more resistant to a hostile takeover. See Blasi
& Kruse at 139-210. The effect of the existence of an ESOP on a
takeover attempt or proxy fight depends on a wide range of factors,
but within the business community ESOP implementation is largely
perceived as a strategy favoring incumbent management. See
23
generally Randall Smith, Takeover Bid for NCR Gets Boost in Court,
Wall St. J., Mar. 20, 1991, at A3; Kevin G. Salwen & David B.
Hilder, MacMillan Officers Charged in Failure to Disclose ESOP
Was Takeover Defense, Wall St. J., Dec. 7, 1989; Craig P. Dunn,
ESOPs: The "Trojan Horse" of the Antitakover Realm, Business Hori-
zons, July 1, 1989, at 28; Frank Altmann, Manager's Journal:
Another Battle in the Takeover Wars, Or Just an ESOP Fable?, Wall
St. J., June 12, 1989; David B. Hilder & Randall Smith, ESOP
Defenses Are Likely to Increase, Wall. St. J., Apr. 6, 1989.
From an employee's perspective, an ESOP is much riskier than the
typical defined-contribution plan. When much of an employee's
retirement savings is tied up in an ESOP, the employee bears signifi-
cant risks associated with the fact that his retirement savings are not
diversified. This risk is unique to ESOPs and is not present in the typ-
ical defined-contribution plan. It has been said that "ESOPs, which tie
retirement income to the fate of a single company, violate good port-
folio management." Daniel J.B. Mitchell, Profit Sharing and
Employee Ownership: Policy Implications, 13 Contemp. Econ. Pol'y
16 (Apr. 1995). In short, "most employee-ownership plans do not
have a safety net." Blasi & Kruse at 246.
[I]nvestment in an employer's securities subjects plan par-
ticipants to a double risk of loss. If an employer has severe
financial reverses, his employees may not only lose their
jobs (and the employer's contributions for their retirement
may substantially decrease), but also they may suffer a loss
from decreases in the securities' value and dividends.
S. Rep. No. 383, 93d Cong., 2d Sess. (1974), reprinted in 1974
U.S.C.C.A.N. 4890, 4983; see also Martin v. Feilen, 965 F.2d 660,
664 (8th Cir. 1992) ("an ESOP places employee retirement assets at
much greater risk than does the typical diversified ERISA plan"),
cert. denied, 506 U.S. 1054 (1993); William R. Levin, The False
Promise of Worker Capitalism: Congress and the Leveraged
Employee Stock Ownership Plan, 95 Yale L.J. 148, 168 (1985)
("Workers own a single asset far riskier than they would otherwise
choose. In the event of bankruptcy, workers lose their jobs and their
pension assets."); Bob Ortega, Life Without Sam: What Does Wal-
Mart Do if Stock Drop Cuts Into Workers' Morale, Wall St. J., Jan.
24
4., 1995, at A1 (husband and wife in their seventies, both employees
at same company, cannot afford to retire due to precipitous drop in
company's stock value); James A. White, As ESOPs Become Victims
of '90s Bankruptcies, Workers Are Watching Their Nest Eggs Vanish,
Wall St. J., Jan. 25, 1991, at C1.
This concern is especially important in this case, where in the space
of one year Lundy's assessed share value fell more than 40 percent.2
The decline in value of Lundy stock caused the value of plaintiff Eve-
lyn D. Frederick's ESOP retirement investment to fall $11,375.63.
Plaintiff Callweall Smiling, a retiree from Lundy, lost $33,559.11 due
to the sudden decline. Frederick said, "[W]hen you see stock fall all
of a sudden like this, it makes you wonder: What are you looking at
towards the future [ ] [ ]; when Iretire [ ] [ ] will there be anything
there for me? So, I needed to -- I just need to know." The plaintiffs
are asking one of the most basic questions a worker can ask, i.e., is
my retirement secure, and the company is refusing to give them the
information they need to know the answer.
A final concern with ESOPs is the inherent conflict of interest
between the ESOP and the sponsor corporation, both of which are
buyers and sellers of the corporation's shares. Like all corporations,
the sponsor wishes to buy its own shares cheap and sell them dear.
When the same people manage both the ESOP and the sponsor com-
pany, as in this case, employees need to know that share prices have
not been manipulated for the benefit of the sponsor."[T]he fiduciary
may well be subject to great pressure to time the purchases and sales
[of shares] so as to improve the market in those securities, whether
or not the interests of protecting retirement benefits of plan partici-
pants may be adversely affected." S. Rep. No. 383, 93d Cong., 2d
Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 4890, 4983. This dan-
ger is maximized in the case of a closely-held corporation like Lundy
due to the absence of any general stock market check on the potential
for value manipulation. See Donovan v. Cunningham, 716 F.2d 1455
(5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).3
_________________________________________________________________
2 Strangely, in the same year Lundy's net earnings were nearly $2 mil-
lion.
3 I do not mean to suggest that an ESOP never is an appropriate method
of corporate finance. There are notable examples of ESOP success sto-
25
Because of high risk to employees, great benefits to employers, and
built-in conflict between the two, employees must be given maximum
ability to protect their substantial investment, both financial and per-
sonal, in their ESOP. ERISA grants employees this protection by
imposing broad duties of disclosure under § 104(b)(4). I therefore
would give sufficient scope to the terms "instrument" and "established
or operated" to ensure that employees have access to information that
would help them understand exactly how secure their retirement sav-
ings are. An employee should be allowed to know enough so he can
make an informed judgment on whether Plan fiduciaries are making
prudent decisions, including whether they are buying and selling
shares of the sponsor company at a fair price. When all of an employ-
ee's eggs are in one basket, he should be allowed to know how strong
or weak the basket is.
II.
I turn now to a more specific discussion of the documents I believe
the plaintiffs are entitled to have.
A. The Tax Determination Letter
Plan participants have a right to see the Plan's tax determination
letter because the Plan is not a valid ESOP unless it "is qualified"
within the meaning of 26 U.S.C. § 4975(e)(7). Thus the letter is an
instrument under which the Plan is "established," and without the let-
ter the Plan may not "operate." Under 26 U.S.C. §§ 401-404, qualified
ESOP plans receive preferential tax treatment. Most importantly,
employer contributions to the Plan are not taxable to employees in the
year of contribution. If the Plan is not properly tax-qualified, employ-
ees are liable for tax on employer contributions in the year those con-
tributions are made. This result would mean hardship for employees
because they would be required to pay tax on contributions converted
into what could be highly illiquid (and in this case, substantially
_________________________________________________________________
ries. ESOP implementation at Weirton Steel, for example, saved the
company from bankruptcy, preserved jobs, and allowed employees to
share in the company's future successes. See Alex Kotlowitz, Pilots'
Offer May Spur Other Unions to Attempt to Purchase Companies, Wall
St. J., Apr. 17, 1987.
26
underperforming) assets, assets whose value they will not enjoy until
retirement, which might be many years away. Although the Plan's
Form 5500 Annual Report represents that a positive determination let-
ter has been issued and that the Plan is therefore properly tax-
qualified, the only way Plan participants can confirm the Plan's tax
status is to see a copy of the letter issued by the IRS. Thus, Plan par-
ticipants need to see the letter so they can be sure that their own tax
returns are accurate. See Sage v. Automation, Inc. Pension Plan &
Trust, 845 F.2d 885, 894 n.4 (10th Cir. 1988).
B. The Bonding Policy
Both the Plan and ERISA § 412(a) require Plan fiduciaries to be
bonded. Because the Plan cannot operate without fiduciaries, and
fiduciaries cannot be appointed unless they are bonded, the Plan can-
not operate without some sort of bonding policy. Hence, I would treat
the bonding policy as an instrument under which the Plan is "oper-
ated" because the policy is "indispensable to the operation of the
plan." Bartling, 29 F.3d at 1070. Even though the Annual Report says
the trustees are bonded and discloses the amount of the bond and the
name of the surety company, participants should be able to examine
the bonding policy and its terms to ensure that their interests are ade-
quately protected.
C. The Appraisal Reports and Supporting Documentation
The Plan Administrator uses the appraisal reports to determine the
price at which the Plan buys and sells Lundy shares. The Administra-
tor also uses the reports to inform Plan participants how much their
retirement accounts are worth. Thus, the reports are instruments under
which the Plan is operated.
An ESOP's core function is to buy and sell shares of the sponsor
corporation. Plan fiduciaries are required to ensure that the Plan does
not pay too much or receive too little for those shares. An accurate
valuation of those shares, then, is absolutely critical to the Plan's
operation. Plan participants are entitled to know how the value of
their shares is calculated in order to assess whether Plan fiduciaries
are faithfully protecting employee interests. Werner v. Morgan Equip.
Co., 15 Employee Benefits Cas. (BNA) 2295 (N.D. Cal. 1992); see
27
Bartling (actuarial report); cf. Simpson v. Ernst & Young, 879 F.
Supp. 802, 824 (S.D. Ohio 1994) (method by which benefits are cal-
culated); Lee v. Dayton Power & Light Co., 604 F. Supp. 987, 1002
(S.D. Ohio 1985) (manual describing method of benefit calculation).
Just because Lundy commissioned an independent appraisal does not
mean Plan participants' interests have been adequately protected. "An
independent appraisal is not a magic wand that fiduciaries may simply
wave over a transaction to ensure that their responsibilities are ful-
filled." Donovan, 716 F.2d at 1474. For these reasons, I would hold
that the stock valuation report and supporting documentation are
instruments under which the Plan is operated.4
III.
The Plan's duty to disclose documents relating to the finances of
the sponsor corporation is not, however, limitless. Because ESOP
Plan participants ultimately are the owners of the sponsor corporation
in the same manner as corporate shareholders are, I believe the rights
of Plan participants who seek corporate documents are analogous to
the rights of shareholders to inspect the books and records of a corpo-
ration. But I also believe that the rights of Plan participants to inspect
corporate documents should be subject to limitations similar to those
imposed on shareholders.
The law of every state permits inspection of corporate
records by stockholders, directors, or other interested par-
ties. Although not a right which attaches universally to cor-
porate shares in the absence of common law or statute, it is
a right which courts have been liberal in affirming not only
for shareholders, but equitable owners, beneficial owners,
and even quasi-owners. In its common-law form, the right
to inspect gives the shareholder seeking information for a
"proper purpose" access to all significant corporate docu-
ments.
_________________________________________________________________
4 The defendants cannot claim that disclosure would be burdensome.
The Plan Administrator is already required to maintain backup documen-
tation for all mandatory government filings, see ERISA § 107, and the
Administrator may charge participants and beneficiaries a reasonable
copying cost, see 29 C.F.R. § 2520.104b-30.
28
2 Roger J. Magnuson, Shareholder Litig.§ 14.08, at 9-10 (1994)
(footnotes omitted).
I would allow a corporation to avoid disclosure if, taking into
account its legitimate interests and the legitimate needs of the ESOP
Plan participant, there is good cause to maintain confidentiality. See,
e.g., S.C. Code § 33-16-102(c) (corporation need not permit share-
holder to inspect books and records if inspection request is not "made
in good faith and for a proper purpose"); Magnuson, supra, at 10
(some states "recognize a legitimate corporate interest in protecting
certain kinds of material, `confidential information' useful to compe-
tition for example, from indiscriminate shareholder inspection") & 13
(access may be denied if shareholder demands access out of "idle
curiosity," to aid a competitor, or for "a vexatious and hostile pur-
pose"). Disclosure of financial information to its ESOP Plan partici-
pants, however, is not necessarily something an employer should fear.
See Timothy L. O'Brien, Company Wins Workers' Loyalty by Open-
ing its Books, Wall St. J., Dec. 20, 1993, at B1 (company's stock price
grew from 10 cents to $18.60 in ten years since adoption of open-
book policy; sales and employment also grew significantly).
In this case, Lundy has made no concrete showing of any need for
secrecy. Some of the material the plaintiffs seek already has been
made available to other Lundy shareholders. Shareholder Elton C.
Parker, Jr., for example, was provided with Lundy's consolidated
financial statements and schedules after requesting them, even though
he did not indicate why he wanted the information or for what pur-
poses he intended to use it. Furthermore, the plaintiffs' request was
made for a proper purpose, namely, to find out why the assessed value
of their ESOP shares fell more than 40 percent in a year when the
company was profitable. Thus, I believe the plaintiffs are entitled to
the appraisal reports and supporting documentation.
***
I respectfully dissent to the extent I have indicated. The majority's
narrow construction of § 104(b)(4) cannot be squared with Congress's
goal of giving employees maximum power to monitor the security of
their pension savings.
29