TABLE OF CONTENTS I. INTRODUCTION....................................................................... 1160 II. PARTIAL TERMINATION CLAIMS ........................................................ 1161 A. General ........................................................................ 1161 B. Vertical Partial Termination ................................................... 1163 1. Significant Number or Percent ............................................... 1163 2. What Number or Percent is Significant? ...................................... 1164 3. How is the Number or Percent Calculated? .................................... 1164 a. Vested or Non-Vested Terminations ........................................ 1164 b. Employees Who Transferred to a Successor Plan ............................ 1165 c. Turnover Rate ............................................................ 1166 d. Time Period .............................................................. 1167 e. The Relevant Number and Percent .......................................... 1167 4. Significant Corporate Event ................................................. 1169 5. The Number and Percent are Significant ...................................... 1170 6. The IRS Determination ....................................................... 1170 C. Horizontal Partial Termination ................................................. 1172 III. REMEDY FOR PARTIAL TERMINATION .................................................... 1178 A. The Gulf Pension Plan .......................................................... 1179 B. Remedy Under the Gulf Pension Plan Upon a Partial Termination .................. 1180 1. Standard of Review .......................................................... 1181 2. The Legally Correct Interpretation .......................................... 1182 a. Uniformity of Construction ............................................... 1182 b. Fair Reading of § 10.A.2 ............................................ 1182 (1) Does § 10.A.2 Apply When the Plan is Overfunded at the Time of a Partial Termination? ....................................... 1182 (2) Does § 18.d of the Chevron Retirement Plan Bar Plaintiffs' Claims to Surplus Gulf Plan Assets? .................................. 1183 (a) Validity of § 18.d Under ERISA's Exclusive Benefit Rule ..... 1184 (b) Validity of the 1986 Plan Merger Under § 208 of ERISA ....... 1185 (c) Validity of § 18.d Under the A & B Plan, the CRP and the SAP .............................................................. 1185 (i) The A & B Plan ............................................... 1186 (ii) The CRP ..................................................... 1190 (iii) The SAP .................................................... 1194 (3) Can Surplus CRP and SAP Assets be Distributed Under § 10.A.2 Upon a Partial Termination? ............................ 1196 (4) Consequences of a Fair Reading of § 10.A.2 ...................... 1198 c. Unanticipated Costs ...................................................... 1198 3. Abuse of Discretion ......................................................... 1198 a. Internal Consistency ..................................................... 1198 b. Relevant Regulations ..................................................... 1199 c. Factual Background and Inference of Lack of Good Faith ................... 1199 d. Conclusion ............................................................... 1201 IV. TERMINATION OF THE CRP AND SAP AS WASTING TRUSTS .................................. 1201 V. FIDUCIARY CLAIMS .................................................................. 1205 A. Pension Plan Expenses .......................................................... 1205 B. Self-Dealing by Chevron ........................................................ 1208 C. SRAP ........................................................................... 1211 D. AVIS ........................................................................... 1212 E. Defendants' Promises to Set Aside Gulf Plan Assets for Plaintiffs' Benefit ........................................................................ 1213 F. Other Alleged Fiduciary Breaches ............................................... 1214 VI. CONCLUSION ........................................................................ 1214 Page
LAKE, District Judge.
This is a consolidated class action brought by more than 40,000 former participants in the Pension Plan of Gulf Oil Corporation. Defendants are Chevron Corporation, Gulf Oil Corporation, the Chevron Corporation Retirement Plan, the Pension Plan of Gulf Oil Corporation, the Benefits Committee of the Pension Plan of Gulf Oil Corporation and each of its members, and the Pension Committee of the Pension Plan of Gulf Oil Corporation and each of its members.
To understand the case some appreciation of the demise of Gulf Oil Corporation is necessary. On January 1, 1982, Gulf had 29,706 employees covered under the Gulf Pension Plan and was one of the largest integrated oil companies in the United States. Concerned that Gulf's share price did not reflect its true value, Gulf's management began a plan to streamline the company that included substantial reductions in the number of employees. By the end of 1983 Gulf had reduced its work force to 23,054 active Gulf Plan participants, but its share price had still not risen substantially. In January of 1984 Gulf management learned that a hostile tender offer was imminent from a group led by T. Boone Pickens. Gulf sought to interest several other large oil companies, including Chevron Corporation, in a friendly merger to avoid the Pickens' takeover attempt.
In February of 1984 Gulf and Chevron announced a merger, and a merger agreement was signed in March of 1984. For the next year the companies operated independently under a standstill agreement while Gulf divested itself of certain assets required by the FTC and a number of combined Gulf-Chevron working groups determined how to integrate the two companies and their pension and other employee benefit plans. Because Gulf and Chevron were in the same business it became apparent that a number of employees would be redundant in the merged company. Chevron also decided to sell parts of Gulf to help pay the debt it had incurred in making the acquisition. By July 1, 1986, when the Gulf Pension Plan and the Chevron Annuity Plan were merged into the Chevron Retirement Plan, 13,545 former Gulf Pension Plan participants remained on Chevron's payroll. All of the Gulf employees who left between January 1, 1982, and June 30, 1986, were covered by Gulf employee benefit programs, including pension plans.
This action was filed by plaintiffs, Dean Borst, et al., in November 1986. In April of 1987, plaintiffs, Harry Back, et al., filed a similar action in the United States District Court for the Western District of Pennsylvania. On the motion of the defendants, the Back action was transferred to this Court and consolidated with the Borst action. The Court preliminarily certified the case as a class action on November 9, 1987, and appointed the individual plaintiffs as class representatives. After several hearings, on February 26, 1990, the Court certified the consolidated action under Fed. R.Civ.P. 23(b)(2) and defined the main class as
The Court also certified a divestiture sub-class defined as
On January 4, 1990, the Court granted defendants' motion to strike plaintiffs' request for a jury trial, and granted defendants' motion to dismiss most of plaintiffs' common law claims as preempted by the Employee Retirement Income Security Act of 1974, 88 Stat. 829, as amended, 29 U.S.C. §§ 1001, et seq. ("ERISA"). The parties agree that the Court has jurisdiction over the remaining claims pursuant to § 502(e) and (f) of ERISA, 29 U.S.C. § 1132(e) and (f).
Plaintiffs went to trial seeking relief under ERISA and the language of various benefit plans for four types of wrongs allegedly committed by defendants. First, plaintiffs claimed that defendants' actions resulted in a partial termination of the Gulf Pension Plan and its predecessor plans that entitled plaintiffs to relief provided by ERISA and the Plan. Alternatively, plaintiffs claimed that two of the plans had served their purposes and their trusts should be terminated as "wasting trusts" under common law. Second, former Gulf employees who were transferred to Sohio, Cumberland Farms, and Champion Energy as a part of divestitures of former Gulf operations in 1985 and 1986 sought early retirement benefits under the Gulf Pension Plan. Third, former Gulf employees who were transferred to Champion Energy, Cumberland Farms, and Thermex incident to divestitures sought benefits under a severance plan that existed from February 1, 1984, to February 1, 1986 (Plan 728). Finally, plaintiffs sought damages for a number of alleged breaches of fiduciary duty during the corporate merger and the integration of the two pension plans.
On November 8, 1990, after hearing 16 days of testimony, the Court ordered the attorneys in charge for the class and defendants and the CEO of Chevron to meet and determine if some or all of the claims could be settled. The following week the parties announced a proposed settlement of the plaintiffs' claims for early retirement benefits and severance benefits under Plan 728. As part of the settlement Chevron also agreed to vest in their accrued benefits under the Gulf Pension Plan all members of the class whose employment with Gulf was terminated between January 1, 1984, and June 30, 1986, without a vested pension benefit, and plaintiffs agreed to dismiss the partial termination claims of former Gulf employees who were terminated between January 1, 1982, and December 31, 1983. After notice to the class, the Court held a hearing on the partial settlement on January 25, 1991, and approved it. The Court will now address the plaintiffs' remaining claims.
II. PARTIAL TERMINATION CLAIMS
An understanding of the partial termination claims requires an appreciation of some basic features of pension plans. An employee normally does not have an unconditional right to benefits provided by a defined pension benefit plan
An employer makes contributions to a defined benefit pension plan based on its estimate of the amount of money needed by the plan to pay for current and future liabilities. For a number of reasons, a plan can achieve a surplus over what is needed to fund current and future liabilities. If a surplus is created and the plan terminates, i.e., ceases to exist, the surplus may revert to the employer if allowed by the plan.
One of the benefits an employer receives by making contributions to a qualified ERISA pension plan is the right to deduct contributions to the plan for federal income tax purposes.
Unlike a complete termination, a plan continues after a partial termination. The genesis of the partial termination concept was apparently a 1954 article by the IRS's chief pension expert, Isidore Goodman, who explained that "[a]t times, it is easier to devour an object with several bites than it is to attempt to swallow it in one gulp. So it is with a plan which is chopped down little by little until it becomes merely an empty shell." 32 TAXES 48, 53 (January 1954). Two kinds of plan-related activities can result in a partial termination: (1) The number of participants can be reduced, thereby causing the number of non-vested employees who forfeit their pension benefits to be greater than would otherwise be anticipated under actuarial formulas, or (2) future benefit accruals can be reduced, thereby increasing the potential for a reversion of plan assets to the employer upon termination of the plan. Commentators have referred to these two scenarios as "vertical" and "horizontal" partial terminations. Stuart M. Lewis, Partial Terminations of Qualified Retirement Plans — An Evolving Doctrine, 13 COMP. PLAN J. (BNA) 223 (1985).
This case involves claims that both types of partial terminations occurred. Even though Chevron agreed, as part of the partial settlement, to vest all plaintiffs who were terminated during the period when plaintiffs now allege that a vertical partial termination occurred (January 1, 1984,
Although an employer may declare whether a partial termination has occurred, that determination is accorded no deference by a court; the question is one of law for the court to decide de novo. Anderson v. Emergency Medicine Associates, 860 F.2d 987, 990 (10th Cir.1988). Neither ERISA nor the Internal Revenue Code defines a partial termination. Aside from case law, most of the authority addressing this question is found in Treasury Regulations, IRS revenue rulings, and the IRS Plan Termination Handbook.
B. Vertical Partial Termination
The vertical partial termination rule is found within the "facts and circumstances" test of Treas.Reg. § 1.411(d)-2(b)(1).
Perhaps because this rule gives so little guidance, it has spawned a number of complex issues, few of which have been resolved by controlling authority in this Circuit, and most of which are present in this case. Before addressing the issues, the Court will first describe them.
1. Significant Number or Percent
IRS revenue rulings suggest that an employer-initiated permanent reduction of either a significant number or a significant percent of employees from a plan as part of a major corporate event may constitute a partial termination. Rev.Rul. 81-27, 1981-1 C.B. 228 (termination of 95 of 165 employees in connection with the closing of one of two divisions was a significant number that resulted in a partial termination); Rev.Rul. 73-284, 1973-2 C.B. 139 (when 12 of the 15 employees (80%) covered by a qualified plan declined to transfer to a new location and were terminated, a partial termination occurred because a significant percent of the employees were excluded from participating in the plan); Rev.Rul. 72-439, 1972-2 C.B. 223 (the significant percent test was met when 120 of the plan's 170 participants (71%) became ineligible to participate in future employer contributions).
Although courts have given lip service to the significant number test, they have been reluctant to use this test as a basis for holding that a partial termination has or has not occurred. See Tipton, 83 T.C. at 160 n. 5 ("[Since 34% and 51% are significant,] [w]e need not and do not decide whether a partial termination would occur where a significant number of participants but not a significant percent, are excluded from participation in a plan."); Ehm v. Phillips Petroleum Co., 583 F.Supp. 1113, 1115-16 (D.Kan.1984) (since 415 terminated employees comprised only 2.5% of the plan participants, the court found no partial termination
In this case plaintiffs argue that the loss of approximately 10,000 Gulf Plan participants between January 1, 1984, and June 30, 1986, satisfies both the significant percent and the significant number tests. Plaintiffs concede that the only reported instance in which the significant number test has been used to find a partial termination involved the discontinuance of an employer's business at a particular location with attendant layoffs. Rev.Rul. 81-27, 1981-1 C.B. 228.
2. What Number or Percent is Significant?
Problems arise in applying the significant number and the significant percent tests when the facts are not as manifest as those in the cases and revenue rulings cited above. The Internal Revenue Service has stated, and some courts have found persuasive, that an employer-initiated turnover rate in excess of 20% of a plan's participants might be significant if it is coupled with other factors, such as the closing of a plant or division. These authorities state that termination of a lesser percent of plan participants, especially on a company-wide basis, could only be significant if the plaintiffs present evidence of egregious factors such as evasion of pension obligations or prohibited discrimination in favor of highly compensated employees. See Weil v. Retirement Plan Administrative Committee of the Terson Co., 913 F.2d 1045, 1052 (2d Cir.1990) ("Weil II"); Plan Termination Handbook §§ 252(8), 252(9)(d) and 252(10).
3. How is the Number or Percent Calculated?
The significant percent and significant number analyses in this case are further complicated by disagreements concerning:
Because the number and percent of terminated Gulf employees must first be quantified before their significance can be
a. Vested or Non-Vested Terminations
Many of the former Gulf employees who were terminated between January 1, 1984, and June 30, 1986, were vested under the Gulf Pension Plan.
b. Employees Who Transferred to a Successor Plan
In 1985 Gulf sold certain refining and marketing facilities to Sohio, and Chevron sold the merged company's Northeast and Ohio marketing assets to Cumberland Farms. In both divestitures the asset purchase agreements obligated the buyers to establish defined benefit pension plans with terms substantially similar to those of the Gulf Pension Plan. Incident to both divestitures Gulf and Chevron agreed to transfer pension assets in amounts at least equal to the accrued benefits of the transferring employees. Defendants argue that former Gulf employees who transferred to Sohio and Cumberland Farms should not be included as terminees for purposes of the vertical partial termination analysis.
In Morales v. Pan American Life Ins. Co., 718 F.Supp. 1297, 1302 (E.D.La.1989), aff'd, 914 F.2d 83 (5th Cir.1990), the employer, PALIC, closed its Medicare Division on December 31, 1984. During the preceding months PALIC transferred 30 of the 159 Medicare Division employees to other jobs in PALIC. In calculating the percentage of employees who were involuntarily terminated, the Court held that "[t]he transferred employees should not be included with the number of employees involuntarily terminated as they remained PALIC employees and Plan participants ..." The Court is persuaded that the reasoning of Morales is also applicable to this case.
Although the Sohio and Cumberland Farms transferees did not remain Gulf employees or members of the Gulf Pension Plan, assets from the Gulf Pension Plan sufficient to cover all of the transferred employees' accrued benefits under the Gulf Plan were transferred to the Sohio and
c. Turnover Rate
Since one of the purposes of the partial termination rule is to deter employers from terminating non-vested employees, it is generally agreed that in calculating the number or percentage reduction of plan members, only involuntary, employer-initiated, terminations should be considered. E.g., Anderson, 860 F.2d at 990. In cases involving relatively few employees it may be possible to resolve this issue by determining the facts surrounding each termination. More often, however, as exemplified by this case, it is not feasible to analyze individual terminations. To address this problem, the IRS Plan Termination Handbook allows an employer to exclude its normal turnover rate in determining whether the reduction in employees is significant. Section 252 provides in part:
Defendants seek to exclude from consideration those Gulf employees who retired and terminated voluntarily between January 1, 1984, and June 30, 1986. Since defendants recognize that many of these departures, however labeled in defendants' employment records, may have been prompted by the impending closings or divestitures of Gulf facilities and across-the-board reductions-in-force, defendants have calculated what they contend was Gulf's "normal turnover rate" before the onset of the troubles described at the beginning of this opinion. Using the years 1978-1981 as the base period, Defendants' Ex. 10 purports to calculate a "normal" Gulf turnover rate of 8.59% and a "normal" Gulf retirement rate of 2.43%.
There are several problems with defendants' 8.59% "normal" turnover rate. Although 1978 through 1981 was a period of normal business operations by Gulf, it was also a period when many new employees were hired each year. In contrast, during the period from January 1, 1984, through June 30, 1986, very few new employees were hired by Gulf. From 1978 through 1981 at least 3,500 new employees were hired each year; there were only 1,084 new hires in 1984, 331 in 1985, and 130 during the first six months of 1986. (Defendants' Ex. 11) This distinction lessens the reliability of the 1978-1981 era as a base period. Plaintiffs' actuarial expert, Mr. William A. Dreher, testified that fewer long-term employees are terminated either voluntarily or involuntarily. Thus, when an employer is continuously hiring large numbers of new employees, the turnover
Plan Termination Handbook § 252(7) and Examination Tip (4)(a) and case law place the burden on the employer to prove that terminations are voluntary. See Morales, 718 F.Supp. at 1302-03. Although defendants tendered a blizzard of numbers, they presented no evidence that the 8.59% normal turnover rate would have continued in the 1984 through 1986 period. Absent such evidence, and considering the dramatic reduction in new hires and the various programs undertaken by Gulf and Chevron to reduce the work force during this period,
The Court will, however, exclude from its calculation of affected employees the 2.43% normal retirement rate reflected on Defendants' Ex. 10. Retirement, unlike termination, is not a function of the rate of new hires. Under the Gulf Pension Plan any employee who had 75 points, which generally meant at least 20 years of employment, could retire. Logically, some retirements would have occurred from 1984 through June of 1986 even if Gulf and Chevron had not introduced new initiatives to reduce the size of the work force, and this rate would be unaffected by the low new-hire rate during this period.
The Court is not persuaded by plaintiffs' argument, based on § 252(7) of the Plan Termination Handbook, that only normal retirement at age 65 should be considered. Section 252(7) states that this is the general rule, but permits proof by the employer to the contrary. The evidence showed that Gulf employees could receive non-discounted early retirement at age 60, and that eligible Gulf employees could and did retire before age 60 with reduced benefits long before the Gulf/Chevron merger. However, since retirements were accelerated by the initiatives of Gulf and Chevron to reduce their work force, the Court will also treat the 2.43% normal retirement rate as a ceiling, and retirements in excess of that rate will be considered to be employer-initiated. In calculating the number of affected employees under the significant number and significant percent tests, the Court will exclude for each year a number of employees equal to the lesser of the actual number of retirements or 2.43% of Gulf Plan participants at the end of the year.
d. Time Period
Defendants argue that in determining whether a vertical partial termination occurred the Court should consider only the number of employees excluded within a single plan year. The Court does not find this position to be supported by logic or required by authority. Most reported vertical partial termination rulings and decisions did not involve massive corporate restructuring of the scale implemented by Gulf and Chevron. The facts in those decisions were therefore generally limited to a period of less than a year. There is nothing in the language of the rule itself, however, that requires that a significant corporate event occur within a year, and the ending of a calendar or plan year has no intrinsic relevance in making this evaluation. The IRS guidance found in § 252(7) of the Plan Termination Handbook instructs that "[t]he turnover rate is determined by dividing the employer-initiated terminations by the sum of the total participants at the start of the period and the participants added during the period." (emphasis added) Both the IRS, in its Technical Advice Memorandum Concerning The Employee's Retirement Plan of A & P Company, and the Second Circuit in Weil I, 750 F.2d at 12, have stated that a series of employer-initiated terminations related to the same event may be considered in determining whether a partial termination has occurred even if those terminations occur over a multi-year period. This Court likewise concludes that, assuming plaintiffs can prove it, a vertical partial termination
e. The Relevant Number and Percent
For purposes of the significant number test, the relevant number of terminations is the total number of plan members terminated, less: (1) those who were already vested, (2) those who voluntarily retired, including both discounted and undiscounted early retirees and disability retirees, (3) those who transferred to the Sohio and Cumberland Farms successor plans, and (4) those who died. To calculate the relevant percent the Court will divide the number obtained by the formula in the previous sentence by the sum of the non-vested plan participants at the start of each period and the non-vested participants added during that period. Application of these formulas to the facts yields the following chart, which the Court finds to be established by the evidence.
Jan.-June Total 1984 1985 1986 Total terminations 2.5 years 122,623 6,588 1,843 10,947 ===== ===== ===== ====== Deductions: (1) vested terminees 13263 1,372 472 (2) retirements 14483 531 187 (3) transfers to Sohio & Cumberland Farms 150 967 245 (4) deaths 1252 39 16 _____ _____ _____ Total Deductions 798 2,909 920 ===== ===== ===== Total relevant terminations 1,825 3,679 923 6,427 ===== ===== ===== ====== Non-Vested Members at Beginning of period 1612,688 11,034 7,520 New members added 171,084 331 130 1,545 Total non-vested members 13,772 11,365 7,650 14,233 ______ ______ _____ ______ Percentage Decrease 13.3% 32.4% 12.1% 45.2%
Alternatively, calculating the relevant number and percent by including vested plan participants in both the numerator and the denominator, yields the following chart:
Jan.-June Total 1984 1985 1986 Total terminations 2,623 6,588 1,843 10,947 ===== ===== ===== ====== Deductions: (1) retirements 483 531 187 (2) transfers to Sohio & Cumberland Farms 0 967 245 (3) deaths 52 39 16 _____ _____ _____ Total Deductions 535 1,537 448 === ===== === 2.5 years
Jan.-June Total 1984 1985 1986 Total relevant terminations 2,088 5,051 1,395 8,534 ===== ===== ===== ===== Members at beginning of period 2.5 years 1223,054 21,515 15,258 New members added 1,084 331 130 1,545 Total members 1224,138 21,846 15,388 24,599 ______ ______ ______ ______ Percentage Decrease 8.65% 23.12% 9.06% 34.7%
4. Significant Corporate Event
The parties differ over the number of significant corporate events that occurred between January 1, 1984, and June 30, 1986. Defendants contend that two distinct corporate events occurred during this period: the merger of Gulf and Chevron in 1984 and 1985, and then a drastic decline in oil prices with resulting layoffs, which began in late 1985 and culminated in 1986. Plaintiffs argue, and the Court finds, that the business decisions by Gulf and Chevron to reduce the work force all resulted in a single corporate event throughout this two-and-one-half-year period.
After the merger between Gulf and Chevron was announced in February 1984, Chevron and Gulf began a series of actions designed to reduce their partially redundant work force.
At the same time, and also as a result of the merger, Chevron began selling off various assets of Gulf and Chevron, both to reduce redundancies and to finance the enormous debt it had incurred to acquire Gulf. These divestitures, which eliminated thousands of additional Gulf employees, included the sale of Gulf's explosives group to Thermex, the sale of Gulf Oil Trading Company to GOTCO N.V., the sale of the Cedar Bayou polypropylene plant to Amoco Chemicals, the donation of the Harmarville
Chevron argues that in 1986 additional terminations occurred because of the steep decline in oil prices that began in late 1985 and that these terminations were not merger-related and should not be included as part of any "merger-related" significant corporate event. The evidence shows that Chevron's response to the decline in oil prices was to formulate, in the spring of 1986, a new retirement enhancement program known as the Special Retirement Allowance Program ("SRAP").
5. The Number and Percent are Significant
There were 6,427 employer-initiated terminations of non-vested Gulf employees during the single, merger-related, significant corporate event that occurred between January 1, 1984, and June 30, 1986. This represented a 45.2% reduction in the total number of non-vested Plan participants during the period. The Court finds that this number and this percent, and the 8,534 terminations and 34.7% decrease under the alternative analysis, are significant and resulted in a partial termination of the Gulf Pension Plan under both the significant number and the significant percent tests. The Court is led to the conclusion by the magnitude of this reduction in plan membership, by the fact that when these reductions were occurring defendants were planning to reduce the benefits available to those Gulf employees who remained,
6. The IRS Determination
Defendants argue that the Court should show deference to a determination
On September 2, 1987, PM & S received questions from the IRS regarding the determination request, which PM & S labeled as "very limited and quite innocuous." (Defendants' Ex. 15 at pp. 2 and 3) In a September 2, 1987, letter to Chevron, PM & S stated that in addition to the information sought by the IRS, Chevron's submission "will also include a request that the Service make a determination that there was no partial termination of the Gulf Plan during the years at issue in the Borst litigation. Generally speaking, reviewers like to move active cases along very quickly, so we should receive a prompt response to this filing." (Defendants' Ex. 15 at p. 1)
True to its word, on October 5, 1987, PM & S hand-delivered to the IRS District Director in San Francisco a letter responding to the IRS' questions. (Defendants' Ex. 16) In one paragraph, comprising a third of a page, PM & S also requested a determination that there was no partial termination of the Gulf Pension Plan during the years 1982 through June 30, 1986.
ERISA requires notice to interested parties each time the sponsor of a tax qualified plan requests an IRS determination letter. § 3001(a) of ERISA, 29 U.S.C. § 1201(a). The notice to interested parties must specify procedures by which interested parties
Chevron's failure to notify any Gulf Pension Plan participants that it was seeking a determination of the vertical partial termination issue was contrary to the IRS regulations and the underlying policy requiring notice. This failure also violates fundamental fairness and the reasonable claims procedure requirements of § 503 of ERISA, 29 U.S.C. § 1133. Apart from the serious procedural defect in the way Chevron obtained the IRS determination letter, the Court also finds that the IRS determination is due no deference because it evidences no investigation or legal analysis of the facts by the IRS. For both reasons the Court concludes that the IRS determination letter is entitled to no weight, and the Court has given it none.
C. Horizontal Partial Termination
The horizontal partial termination rule is found in Treas.Reg. § 1.411(d)-2(b)(2).
The rule has two elements: a cessation or decrease in future benefit accruals in a defined benefit plan and a resultant creation or increase of a potential reversion to the employer. The rule does not require that an employer actually attempt to achieve a reversion, only that a potential for reversion exist because of a cessation or decrease of future benefit accruals.
The partial termination claim arises because of changes in the benefits that were available to former Gulf employees under the Gulf Pension Plan and those available to them after the Gulf Pension Plan and the Chevron Annuity Plan were merged into the new Chevron Retirement Plan effective July 1, 1986. Plaintiffs argue that the effect of the plan merger was to reduce substantially future benefit accruals to former Gulf employees, thereby increasing the potential for a reversion to Chevron upon any final termination of the merged plan.
As evidence of this decrease in future benefit accruals, plaintiffs cite a September 25, 1985, presentation to the Chevron Executive Committee analyzing the prospective plan merger. (Defendants' Ex. 353) The presentation projected that the Chevron Retirement Plan would achieve a decrease
Another schedule presented to the Executive Committee at the same presentation (Plaintiffs' Ex. 529) showed that this $102 million decrease was achieved because the increase in the present value of the more favorable lump-sum death benefits to former Gulf employees under the merged plan (+ $30 million) was more than offset by four other changes:
Analyzing the same changes in pension plan benefits, plaintiffs' actuarial expert, William A. Dreher, independently calculated a reduction in pension liability of $118,563,000. (Plaintiffs' Ex. 1255 at p. 14) After considering improvements in SRAP benefits to former Gulf employees under the Chevron Retirement Plan, Dreher testified that the net reduction in future benefit accruals to former Gulf employees was $83,803,000.
Defendants mount both factual and legal defenses against the alleged horizontal partial termination. At trial Chevron witnesses Neil Darling, who in 1985 was responsible for financial affairs of all Chevron pension plans, and Alex Ross, who was then manager of the Chevron corporate benefits staff, attempted to deflate the size of the $102 million projected decrease and to disavow its importance in several ways. First, Darling sponsored a chart designed to show that the $102 million estimated decrease was inaccurate by $59 million and that the correct estimated decrease was only $43 million. (Defendants' Ex. 348) When other non-pension plan benefits available under the Chevron Profit Sharing/Savings Plan were also considered,
Ross reiterated Darling's contentions and testified that the $102 million decrease was not intended to represent a reduction in benefit accruals to Gulf Plan members. He also testified that because of a recently discovered oversight, the -$102 million figure was unreliable because it failed to include more favorable benefits under the Chevron Annuity Plan which, although carried forward into the merged Chevron Retirement Plan, were not considered in the 1985 presentation to the Executive Committee or in other contemporaneous Chevron documents.
The Court is not persuaded by Chevron's attempt at trial to disassociate itself with figures developed over a number of months and presented by the manager of its corporate benefits staff to the Chevron Executive Committee at the conclusion of extensive planning by Chevron to evaluate the cost and method of merging the Gulf Pension Plan and Chevron Annuity Plan. The Court does not find Defendants' Ex. 348 to be relevant because some of the offsetting adjustments used to moderate the $102 million decrease to a $43 million decrease, e.g., replacement of lump-sum death benefits with life insurance coverage and replacement of disability retirement benefits with a company-paid, long-term disability insurance plan, do not affect the liability of the Gulf Pension Plan or the Chevron Retirement Plan. Although these changes and the others discussed in the next two paragraphs may be relevant to the general effect of the plan merger on former Gulf employees, they are not relevant in determining whether there was a decrease in the present value of Gulf pension plan liability, which is the issue represented in defendants' 1985 documents (Plaintiffs' Ex. 529; Defendants' Ex. 353), or whether there was a decrease in future benefit accruals under the Chevron Retirement Plan within the meaning of the horizontal partial termination rule, Treas.Reg. § 1.411(d)-2(b)(2).
Nor is the Court persuaded by Ross' testimony that improved benefits to former Gulf employees under the Chevron Retirement Plan should be considered as offsetting any possible effect of the $102 million decrease presented to the Chevron Executive Committee. Defendants' Ex. 363 lists these additional improvements, some of which are also quantified in Defendants' Ex. 348. Some of these improvements, such as the ability of a former Gulf employee to retire from Chevron and elect a lump-sum payment instead of an annuity, were not considered to be plan benefits during the plan merger discussions because of their optional nature. (Plaintiffs' Ex. 212, October 17, 1985, Memo from Carter to Ross) There was even disagreement on the witness stand between Darling, who thought this option was not a benefit, and
Ross attempted to demonstrate the effect of five of the plan improvements listed in Defendants' Ex. 363 (and to refute Dreher's testimony) through exhibits showing the effect of the alleged Chevron improvements on five categories of former Gulf employees: Case A — Terminated Vested Benefits, Case B — Disability Benefits, Case C — Death Benefits, Case D — Early Retirement Benefits, and Case E — a different Early Retirement Benefit scenario. (Defendants' Exs. 361 and 362) Ross admitted, however, that if non-pension welfare benefits and benefits under the Chevron Profit Sharing/Savings Plan were not considered, and the focus was limited solely to improved pension benefits under the Chevron Retirement Plan, former Gulf employees who fell within Cases D and E would be better off under the Gulf Pension Plan. He also admitted that under that scenario it would not be possible to make an accurate comparison of benefits under the two plans for Cases A and B and that only under Case C — Death Benefits, would former Gulf employees be better off under the Chevron Retirement Plan. Ross acknowledged that very few employees would fall under Case C and, more importantly, he testified that none of the five cases compared normal retirement benefits under the two pension plans.
The most important factor in the Court's analysis of defendants' factual defense, however, is that Chevron's exhibits and supporting testimony are all admitted after-thoughts developed in the course of this litigation. Chevron documents from 1985 show that Ross and Darling then believed and told the Chevron Executive Committee that the new Chevron Retirement Plan would create a decrease of $102 million in the present value of benefits otherwise payable under the Gulf Pension Plan. Chevron's litigation position that this 1985 estimate was unreliable because of an oversight in the way it was calculated, or its failure to also address non-pension benefits or additional benefits under the Chevron Retirement Plan, does not ring true.
There was abundant evidence besides the documents prepared for the September 25, 1985, Executive Committee presentation that Chevron anticipated and planned for a reduction in Gulf pension benefits. In an August 8, 1985, memo to Ross (Plaintiffs' Ex. 190), Carter stated that "Gulf participant liability has been reduced $205.2 million while Chevron participant liability has increased $176.7. This reflects the deliberalization of some Gulf Plan provisions ..." The plan design described in this memo went through several modifications, e.g., Plaintiffs' Ex. 138, September 9, 1985, memo from Carter to Ross, and ultimately resulted in the benefit structure that achieved the $102 million reduction presented to the Executive Committee on September 25, 1985.
The March 5, 1984, corporate merger agreement between Gulf and Chevron limited to two years Chevron's obligation to continue pension benefits to former Gulf employees at the pre-merger level. (Plaintiffs' Ex. 497 at § 6.10) On July 1, 1986, less than three months after the expiration of this two-year period, Chevron merged the Gulf Pension Plan and the Chevron Annuity Plan into the Chevron Retirement Plan, and reduced benefits to former Gulf employees. Section 204(h)(1) of ERISA, 29 U.S.C. § 1054(h)(1), requires a plan administrator to give plan members written notice of any plan amendment that provides "for a significant reduction in the rate of future benefit accrual[s]." In June of 1986, shortly before the plan merger, Chevron filed a notice under § 204(h)(1) articulating seven ways in which the July 1, 1986, amendments to the Gulf Pension Plan resulted in such reductions of benefit accruals. (Plaintiffs' Ex. 552) Four of the reductions listed were those quantified in
In assessing defendants' factual defenses to plaintiffs' horizontal partial termination claim, the Court finds that defendants' contemporaneous belief, not a position developed for trial, is most probative of the truth. The contemporaneous evidence establishes that when Chevron was planning to merge the two plans it consistently considered reducing benefits available under the Gulf Pension Plan and ultimately concluded that these reductions would result in a $102 million decrease in Chevron's pension plan liability to former Gulf employees.
Defendants also argue that the Gulf Pension Plan changes quantified in Plaintiffs' Ex. 529, and in particular the change in disability retirement benefits, cannot be considered in determining if a horizontal partial termination occurred because the horizontal partial termination rule only protects "accrued benefits," and these four categories of reduced benefits are "non-accrued," or "ancillary benefits." This argument is premised upon the contention that the term "benefit accruals" in the rule refers to the rate at which an employee earns an "accrued benefit," which is defined, in the case of a defined benefit plan, by Code § 411(a)(7)(A)(i) as "the employee's accrued benefit determined under the plan and ... expressed in the form of an annual benefit commencing at normal retirement age...." According to defendants, none of the four benefits that were reduced meet this definition because they did not have a specified accrual rate and did not commence at normal retirement age.
The crux of defendants' argument is that because Code § 411 "protects only accrued benefits" (Defendants' Post-Trial Brief Regarding Horizontal and Vertical Partial Termination at p. 3), the horizontal partial termination rule adopted to implement this section of the Code must also be limited in scope to protecting future accruals of accrued benefits. Defendants argue that the rule does not prohibit an employer from prospectively eliminating or reducing ancillary benefits.
The Court is not persuaded by this argument for several reasons. Defendants have cited no authority, and the Court has found none, that would so circumscribe Code § 411 or the horizontal partial termination rule. Although § 411 is indeed full of references to "accrued benefits," the only reference in § 411(d)(3) to benefits, whether accrued or otherwise, occurs in addressing the remedy for a plan termination. Section 411(d)(3) provides that if a termination or partial termination has occurred, the remedy is to vest "all affected employees to benefits accrued to the date of such ... partial termination ... to the extent funded as of such date...." Given the repeated use of the term "accrued benefits"
Section 252 of the Plan Termination Handbook is also inconsistent with such a limited reading of the horizontal partial termination rule. It states:
Section 22.5 of the IRS Training Program, which deals with Employee Plans, also focuses on future benefit accruals, not curtailment of accrued benefits.
The Court concludes that the horizontal partial termination rule, although not a model of clarity, is intended to deter employers from adopting plan amendments that lessen accruals of future benefits, including ancillary benefits, if the effect of such an amendment would be to create or increase the likelihood that the employer would receive a reversion of plan assets in the future. This is a broader goal than the other provisions of § 411, which protect already accrued benefits. Many employers make plan contributions not only to keep pace with currently accrued benefits but also to fund future liabilities, which although they have not yet been incurred, will be incurred in the future if the employer's actuarial projections concerning future increases in time-in-service and salary prove correct. Those future benefit accruals (which are not protected by the anti-cutback rule) are protected by the horizontal partial termination rule.
Were an employer allowed to avail itself of such a source of funds by deliberalizing benefits that have been promised, but not yet accrued, the employer would have an economic motive for amending a pension plan to eliminate or reduce future accruals of benefits promised by the plan. This is exactly what happened here. Chevron adopted a new pension plan that substantially reduced future accruals of benefits to former Gulf (but not former Chevron) employees at a time when the Gulf Plan was overfunded on an ongoing basis by $125 million. When Chevron made these changes it was aware of the potential economic advantage of doing so through either a reversion of the surplus or by using the surplus to fund future benefit obligations.
In defining the scope of the horizontal partial termination rule it is important not to lose sight of the remedy it affords. Neither ERISA nor the Code expressly protects "unearned" benefits, i.e., benefits based on future service. See Blessitt v. Retirement Plan for Employees of Dixie Engine Co., 848 F.2d 1164, 1175 (11th Cir. 1988). Unlike breaches of ERISA's fiduciary provisions, which are remedied by damages, and violations of the anti-cutback rule of Code § 411(d)(6), which can result in disqualification of a plan, see Code § 401(a)(7), the remedy for a horizontal partial termination is merely to vest the affected
The Court does not find persuasive defendants' attempt to read into the horizontal partial termination rule a limitation that is not corroborated by the Code or its implementing regulations and that would disserve the policies underlying the rule.
The Court also concludes that even were these reductions in future benefit accruals insufficient to result in a finding of horizontal partial termination, they would nevertheless be additional "fact[s] and circumstance[s]" that would support the Court's finding of a vertical partial termination. See Plan Termination Handbook § 252(8)(a) and (10).
III. REMEDY FOR PARTIAL TERMINATION
The remedy provided by Code § 411(d)(3) for a partial termination is to vest all non-vested plan members in accrued benefits on the date of the partial termination. Plaintiffs argue that the Gulf Pension Plan also entitles them to an allocable share of surplus assets upon a partial termination. Analysis of this claim first requires some understanding of the history of the Gulf Pension Plan.
A. The Gulf Pension Plan
The Gulf Pension Plan was created in 1975 as an amendment, restatement and continuation of the Annuity and Benefits Plan of Gulf Oil Corporation ("A & B Plan"), the Supplemental Annuity Plan of Mene Grande Oil Company ("SAP") and the Contributory Retirement Plan of Gulf Oil Corporation ("CRP"). The A & B Plan, originally established in 1944 as the successor of a 1927 plan, contained only employer contributions. The SAP, established in 1957, covered employees in Venezuela who worked for the Mene Grande Oil Company. The CRP, established in 1963, was a continuation of the Employees' Savings Plan of Gulf Oil Corporation ("ESP"), which was created in 1950. Plaintiffs' Ex. 1249 depicts this history.
Both the SAP and the CRP contained employee and employer contributions. The SAP and CRP have never been terminated, although no additional employee contributions were made to these plans after December 31, 1970. Gulf made no contributions to either plan after they were amended
After the 1975 amendments Gulf generally administered the three plans as a single merged plan. However, the Gulf Plan acknowledged that the trust funds of the three plans would be separately maintained and not merged. (January 1, 1976, Gulf Plan Foreword, paragraph 1, and § 8.A.; Plaintiffs' Ex. 401 at pp. 1 and 51)
Defendants cite an IRS determination approving the 1975 plan merger (Defendants' Ex. 3) and a certification from Gulf's enrolled actuary (Defendants' Ex. 7) as evidence that the plans were merged in 1975. The Court does not find that the correspondence that defendants furnished between the IRS and Gulf supports defendants' first argument. In this correspondence Gulf stated that "the trust funds are being continued as separate trust funds" (June 2, 1976, letter, Defendants' Ex. 3 at p. G4B017104), but failed to mention that assets of one trust were unavailable to pay benefits due under other plans. An earlier letter made the same statement, and enclosed a number of documents, but not the trust agreements (December 29, 1975, letter, Defendants' Ex. 3 at p. G4B001055). Both IRS determinations contain less than a page of text and are largely form documents that evidence no awareness of the trusts' limitations and contain no legal or factual analysis. (Defendants' Ex. 3 at pp. G4B006896 and G4B001058) The actuarial certification only addressed the validity of the merger under § 208 of ERISA, 29 U.S.C. § 1058. Before the propriety of a proposed merger under § 208 of ERISA even becomes relevant, the plans must first qualify as a single plan under ERISA. See Treas.Reg. § 1.414(1)-1(b)(2), IRS Private Letter Rulings 7918014 (January 30, 1979), 7943126 (July 27, 1979), and 8725089 (March 27, 1987). The Court therefore accords little weight to the IRS determinations and the actuarial certification.
In determining whether a merger of plans has occurred, "the substance rather than form of a transaction controls." IRS Private Letter Ruling 8725089 at p. 2; see PBGC Opinion 85-2 (January 14, 1985). Although defendants met some of the formalistic requirements of a plan merger, and although defendants frequently refer to the 1975 "plan merger" (and the Court sometimes does so for ease of style), the Court finds that the three plans were not merged in 1975 into a "single plan" under ERISA because all of the assets of each plan were not available on an ongoing basis to pay benefits due under the other plans. See Treas.Reg. § 1.414(1)-1(b)(1).
B. Remedy Under the Gulf Pension Plan Upon a Partial Termination
Before July 1, 1986, when the Gulf Pension Plan was merged into the Chevron Retirement Plan, §§ 4.D and 10.A.2 of the Gulf Plan addressed the consequences of a
Plaintiffs argue that § 10.A.2 entitles them to a distribution of all surplus assets of the Gulf Plan upon a partial plan termination.
1. Standard of Review
ERISA fiduciaries are obligated to operate pension plans solely in the interest of participants in accordance with the instruments governing the plan. § 404(a)(1)(D) of ERISA, 29 U.S.C. § 1104(a)(1)(D). ERISA allows plan participants to sue to recover benefits provided them by the terms of a pension plan. § 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B). A § 502(a)(1)(B) action challenging benefit denials is reviewed under a de novo standard unless the plan gives the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 956, 103 L.Ed.2d 80 (1989). If so, the administrator's decisions are reviewed under an abuse of discretion standard.
Section 7.C of the Gulf Pension Plan made the Gulf Plan Benefits Committee the administrator of the Plan for purposes of ERISA. (After the plan merger this responsibility was assumed by Chevron Corporation.). Section 7.C.4 gave the Benefits Committee all powers necessary to carry out the provisions of the Plan including, but not limited to, "the powers necessary to ... construe and interpret the Plan and, subject to the provisions of the Plan, decide all questions of eligibility and determine the amount, time and manner of payment of any benefits hereunder."
Application of the abuse of discretion standard may involve a two-step process. First, the Court must determine the legally correct interpretation of the plan's provisions. If the administrator did not give the plan the legally correct interpretation, the Court must then determine whether the administrator's decision was an abuse of discretion. Jordan v. Cameron Iron Works, Inc., 900 F.2d 53, 56 (5th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 344, 112 L.Ed.2d 308 (1990).
2. The Legally Correct Interpretation
In determining the legally correct interpretation of a plan provision the Court must consider (1) whether the administrator has given a uniform construction to the plan, (2) whether the interpretation is consistent with a fair reading of the plan, and (3) whether the interpretation results in any unanticipated costs. Jordan, 900 F.2d at 56.
a. Uniformity of Construction
There was no evidence that before this action the Benefits Committee had ever determined whether § 10.A.2 required allocation of surplus assets to Gulf employees upon a partial termination of the Gulf Pension Plan.
b. Fair Reading of § 10.A.2
Defendants advance three arguments why § 10.A.2 prohibits a distribution of surplus assets to plaintiffs: (1) § 10.A.2 was intended to apply to partial terminations only if the Plan was underfunded at the time of the partial termination, and does not apply when, as here, there is a surplus; (2) § 10.A.2 was amended by § 18.d of the Chevron Retirement Plan, which states that all surplus assets belong to Chevron, not to plan participants; and (3) even were § 18.d held to be invalid with respect to CRP or SAP assets, and even assuming that plaintiffs were entitled to surplus assets from those plans, as a matter of law and under the terms of § 10.A.2, such a right would only accrue when the assets are distributed upon complete plan termination. The Court will examine each of these arguments in turn.
(1) Does § 10.A.2 Apply When the Plan is Overfunded at the Time of a Partial Termination?
Defendants offer a complex explanation why § 10.A.2 does not apply to partial terminations when the Plan is overfunded. Defendants begin this argument with an attempt to reconcile the last two paragraphs of § 10.A.2, which state:
At trial Barbara Creed, the head of the Employee Benefits and Deferred Compensation section of PM & S, agreed that the language of the first paragraph quoted above required that § 10.A.2 apply to partial as well as complete Plan terminations. Creed also testified that the first and last paragraphs of § 10.A.2 permitted an employer reversion of any surplus Plan assets upon a complete Plan termination. Creed testified that to determine Gulf's intent with respect to the effect of § 10.A.2 upon a partial termination, the Court must first determine the consequences under § 10.A.2 of a complete Plan termination. According
The next to last paragraph of § 10.A.2 does not say that the treatment of partial terminations under § 10.A.2 is dependent upon the funding status of the Plan. The Plan makes no distinction between overfunded, fully funded, and underfunded Plan status. Given the plain language of § 10.A.2 and the failure of defendants to produce any contemporaneous evidence that § 10.A.2 was to apply to partial terminations only if the Plan were underfunded, the Court will not read such an intent into § 10.A.2. The Court concludes that § 10.A.2 was intended to apply to partial terminations regardless of the level of Plan funding. Furthermore, the underlying problem on which Creed's analysis is premised — potentially illegal reversions to Gulf upon a partial termination — does not exist if, as the Court finds in part III.B.2.(b)(3), infra, no surplus assets are distributable under § 10.A.2 upon a partial termination.
(2) Does § 18.d of the Chevron Retirement Plan Bar Plaintiffs' Claims to Surplus Gulf Plan Assets?
Defendants argue that because § 10.A.2 of the Gulf Plan was amended by § 18.d of the Chevron Retirement Plan, plaintiffs have no right to any surplus Gulf Plan assets. Section 18.d expressly states that upon a plan termination surplus assets are to revert to Chevron.
Plaintiffs reply that § 18.d is invalid with regard to Gulf Plan assets for three reasons.
(a) Validity of § 18.d Under ERISA's Exclusive Benefit Rule
Prior to ERISA the common law of trusts allowed employers to retain surplus assets. Washington-Baltimore Newspaper Guild Local 35 v. Washington Star Co., 555 F.Supp. 257, 260 (D.D.C. 1983), aff'd, 729 F.2d 863 (D.C.Cir.1984). At common law when a trust had fully performed its purpose without exhausting the trust estate, a resulting trust arose by operation of law for the benefit of the creator of the trust unless he had manifested a different intention. Pollock v. Castrovinci, 476 F.Supp. 606, 616 (S.D.N.Y.1979), aff'd mem., 622 F.2d 575 (2d Cir.1980); Wilson v. Bluefield Supply Co., 819 F.2d 457, 464 (4th Cir.1987). Under ERISA employers may recapture surplus assets or amend plans to permit a reversion of such assets as long as the reversion does not violate ERISA and is not prohibited by the plan's language. Wright v. Nimmons, 641 F.Supp. 1391, 1406 (S.D.Tex.1986); Washington-Baltimore Newspaper Guild, 555 F.Supp. at 259. Section 403(c)(1) of ERISA, 29 U.S.C. § 1103(c)(1), sets forth the general rule regarding the use and purpose of pension plan assets. Known as the exclusive benefit rule, this section states in pertinent part:
Despite its "exclusive benefit" language concerning the use of plan assets, § 403 of ERISA does not prohibit employer reversions. Section 4044(d)(1) of ERISA, 29 U.S.C. § 1344(d)(1), outlines the circumstances under which employers may recapture surplus assets.
Allowing an employer to recover surplus assets if these conditions are met is consistent with the policies underlying ERISA.
In re C.D. Moyer Co. Trust Fund, 441 F.Supp. 1128, 1132-33 (E.D.Pa.1977), aff'd, 582 F.2d 1273 (3d Cir.1978); Washington-Baltimore Newspaper Guild, 555 F.Supp. at 260. Consistent with § 4044(d) of ERISA, Code § 401(a)(2) allows a plan to qualify if it prohibits diversion of plan assets prior to the satisfaction of employees' liabilities.
These statutes "are clearly intended to ensure that while an employer is obligated to provide defined benefits to plan participants, the participants should not be able to claim a windfall stemming from the employer's accidental overfunding of a defined
(b) Validity of the 1986 Plan Merger Under § 208 of ERISA
Plaintiffs argue that before the 1986 merger of the Gulf and Chevron plans, Gulf Plan participants would have received surplus Plan assets upon a termination of the Gulf Plan. After the merger, however, § 18.d expressly provided that any residual assets would revert to Chevron. According to plaintiffs, § 18.d therefore violates § 208 of ERISA because under § 18.d plaintiffs would not receive everything they would have received had the Gulf Plan terminated immediately prior to the 1986 plan merger. Section 208 of ERISA, 29 U.S.C. § 1058, provides in relevant part:
Code § 414(l) sets forth a similar rule for plan qualification.
Under these statutes the benefits a plan participant would have received prior to a merger, upon a hypothetical plan termination, must be at least equivalent to the benefits the plan participant would receive after the merger, upon a hypothetical plan termination. Treasury Regulations promulgated pursuant to § 208 of ERISA limit the protections afforded by § 208 to accrued benefits, and provide that benefits other than accrued benefits may be modified, reduced, or eliminated in a plan merger without violating § 208 of ERISA or Code § 414(l). Treas.Reg. § 1.414(1)-1(e)(1) states:
Plaintiffs concede that an entitlement to the actuarial surplus that may exist at any given time in an ongoing pension plan is not an "accrued benefit" for the purposes of regulations promulgated pursuant to § 208 of ERISA. (E.g., Plaintiffs' Corrected Trial Brief at pp. 87-88) Accord, Van Orman v. American Insurance Co., 608 F.Supp. 13, 25-26 (D.N.J.1984) ("Van Orman II"); Walsh v. Great Atlantic & Pacific Tea Co., 96 F.R.D. 632, 651-52 (D.N.J.), aff'd, 726 F.2d 956 (3d Cir.1983). The Court therefore concludes that the merger of the Gulf and Chevron Plans did not violate § 208 of ERISA or IRS regulations governing plan mergers.
(c) Validity of § 18.d Under the A & B Plan, the CRP and the SAP
Whether a pension plan permits a reversionary amendment turns on the documents
(i) The A & B Plan
Plaintiffs argue that § 10 of the 1944 A & B Plan prohibited both employer reversions and reversionary amendments by stating that all employer contributions were to be "irrevocable" and would be used for the "exclusive benefit" of plan participants. Section 10 provided in pertinent part:
However, §§ 1 and 9 of the accompanying trust agreement created an implied reversion of surplus plan assets to Gulf.
In 1975 when the A & B Plan was amended and restated as the Gulf Pension Plan, Gulf's implied right of reversion was preserved in § 10.A.2, which stated in the last paragraph:
Similar language appeared in the first paragraph of § 10.A.2.
The original A & B trust agreement gave Gulf unilateral power to amend the plan and the trust agreement and did not prohibit an amendment that would allow a reversion to Gulf.
This amendment authority was confirmed in § 8 of the Plan.
Notwithstanding the implied right of reversion of surplus assets and the absence of any prohibition of an amendment allowing such a reversion, plaintiffs argue that amendments allowing reversions to Gulf were prohibited by exclusive benefit language found in the amendment provisions of the 1961 amended A & B Plan and the 1975 Gulf Plan. Sections 11(8) and (9) of the 1961 A & B Plan stated:
Section 9.9 of the 1975 Gulf Pension Plan did not substantially change the amendment authority of the 1961 amended A & B Plan. It stated:
If ERISA or the Code do not bar a contemplated asset distribution, judicial review of plan language concerning
A court must therefore look for additional language reflecting the employer's intent in using exclusive benefit language. A significant factor in determining the employer's intent in using such language is whether the plan contained a provision for the distribution of surplus assets to participants before the challenged amendment. Wright, 641 F.Supp. at 1406. Another factor is employer communications about asset distributions. While such communications are not part of the plan and cannot be used to modify plan provisions, they do provide an indication of the employer's intent. Bryant, 793 F.2d at 123.
In addition to the exclusive benefit language, the A & B Plan stated that all employer contributions would be "irrevocable." This language is not boiler plate required either by ERISA or Code § 401(a) and is relevant in discerning Gulf's intent. While the predecessor to § 401(a) may have mandated the exclusive benefit language of the A & B Plan, it did not require that employer contributions to a plan must be irrevocable. The legislative history of § 401(a) reflects that Congress expressly considered and rejected an irrevocability requirement for qualified plan status. See IRS General Counsel Memorandum 35351, May 29, 1973, at p. 4. Nor, as defendants argue, was the "irrevocable contribution" language of the A & B Plan required by Treas.Reg. § 1.404(a)-2(a)(2). This regulation, entitled "Information to be furnished by employer claiming deductions ...," merely lists the information that an employer must furnish the IRS in the first taxable year in which a deduction is taken in order to justify the deduction. The regulation imposes no substantive requirements on the contents of the plan. See IRS Technical Advice Memorandum 7002206860A, February 20, 1970 (National Office of the IRS rejects use by a district office of § 1.404(a)-2 for substantive support).
Nevertheless, the Court finds that the "irrevocable" language in the A & B Plan did not prohibit a Plan amendment allowing a reversion to Gulf. At common law a trust is irrevocable if the written instrument creating the trust was adopted by the settlor as the complete expression of his intent and did not allow the settlor to revoke the trust. RESTATEMENT (SECOND) OF TRUSTS § 330, Comment b (1959). Conversely, where the settlor reserved a power of revocation in the terms of the trust, he could revoke the trust in the manner and to the extent that he reserved such a power. A. Scott & W. Fratcher, THE LAW OF TRUSTS, § 330 (4th ed. 1987). The intention to reserve a power of revocation need not be stated in exact terms; it may be indirectly expressed or inferred from plan language. Id. at § 330.1. A statement that the trust is intended to be irrevocable will control to prohibit revocation unless this term is contradicted by other terms of the trust. G.G. Bogert & G.T. Bogert, TRUSTS & TRUSTEES, § 1000 (2d ed. 1983). If the meaning
The A & B Plan contained conflicting language about revocation. Although the plan and trust language cited by plaintiffs stated that all Gulf contributions were "irrevocable," that language was contradicted by §§ 1 and 9 of the Agreement of Trust in which Gulf impliedly reserved the right to take a reversion of surplus assets. The most logical way to harmonize this apparent conflict, and to give meaning to all of these provisions, is to conclude that Gulf intended that it could not withdraw its contributions from the trust until all plan liabilities had been satisfied.
The circumstances surrounding the creation of the A & B Plan and Agreement of Trust also indicate that the "irrevocable" language was not intended to prohibit a reversion by Gulf. Although the A & B Plan and the CRP and SAP all contained "irrevocable" language, there were material differences in the context in which this language appeared. Unlike the irrevocable language in the CRP and SAP, discussed infra, the irrevocable language in the A & B Plan and Agreement of Trust was accompanied by language, sometimes in the following sentence, implying a right of reversion to Gulf after all Plan liabilities had been satisfied.
The Court does not find, as urged by plaintiffs, that § 14.4 of the 1976 Agreement of Trust (Plaintiffs' Ex. 390 at p. 19), which then governed only the A & B portion of the Gulf Pension Plan, required that surplus assets be distributed to Plan participants. That provision merely instructed the trustee that if the Plan were silent as to the distributions to be made upon a termination, or if the terms of the Plan were inconsistent with then applicable law, the trustee "shall distribute the Fund to the participants and their beneficiaries in an equitable manner that will not adversely affect the qualified status of the Plan [and will be legal]." The Court finds that this provision was intended to give the trustee authority to completely distribute assets in an equitable manner upon a Plan termination if the Plan itself gave the trustee no guidance, or if that guidance was then unlawful.
Also, unlike the CRP, discussed infra, no evidence was presented of communication to Gulf employees regarding their right to surplus assets from the A & B Plan or the Gulf Plan.
Earlier SPDs use the same language. (E.g., Plaintiffs' Ex. 424, 1977 SPD at p. 21)
Were the language of the Gulf Pension Plan free from doubt this lawsuit probably would not have consumed the time devoted to it by the litigants and the Court. Having carefully weighed the arguments of plaintiffs and defendants, the Court concludes that the Gulf Pension Plan, and its predecessor, the A & B Plan, did not prohibit the amendment allowing the right of reversion contained in paragraph 18.d of the Chevron Retirement Plan. Although the Court is somewhat troubled by the use of the word "irrevocable" in the A & B Plan and Agreement of Trust, the Court is nevertheless led to this conclusion because (1) the A & B Plan and the Gulf Plan and their accompanying trust agreements have always contained an implied right of a reversion to Gulf of surplus assets after all plan liabilities were satisfied, (2) these plans and trust agreements never prohibited an amendment allowing a reversion to Gulf, (3) unlike the CRP and SAP, no version of the A & B Plan ever contained a schedule or other provision for distributing residual assets to Plan participants, and (4) unlike the CRP and SAP, all contributions to the A & B Plan were made by Gulf.
This construction of the Gulf Plan is consistent with the policies underlying ERISA. It guarantees that the plaintiffs will receive all benefits accrued under the A & B Plan and the Gulf Plan. However, it also allows the employer, which made all of the plan contributions, to recover any remaining surplus after all plan liabilities have been satisfied. A contrary construction could deter employers from fully funding plans, or from erring on the side of plan members in making funding projections, out of fear that the penalty for making a mistake in funding calculations would be to forego an eventual right to receive any surplus upon termination of the plan. This consideration should not be understated. Underfunded pension plans can seriously prejudice members' rights to receive benefits provided to them by the plan and, even when those benefits are insured, can require the Pension Benefit Guaranty Corporation, and ultimately the taxpayers, to assume responsibility for them. From a policy standpoint, allowing an employer to obtain a reversion of a surplus attributable to overfunding is a better alternative, especially since as discussed in part II.B.3(a), supra, the substantial excise tax on reversions deters employers from terminating plans and taking reversions.
(ii) The CRP
Plaintiffs argue that in § 8 of the ESP, Article II of the accompanying ESP Agreement of Trust, and Article II of the CRP Amended Agreement of Trust made all CRP contributions irrevocable and prohibited reversions of surplus assets to Gulf. These provisions stated in pertinent part:
In contrast to the A & B Plan, the ESP and CRP contained schedules for the distribution of all assets, including any surplus assets, to plan participants and beneficiaries upon a complete plan termination.
Plaintiffs also argue that Gulf's intent to prohibit reversionary amendments to the CRP is evidenced by the ESP and CRP amendment authority provisions.
The features of the ESP were reiterated in the Questions and Answers that Gulf included in the ESP booklet "as a convenient aid to its understanding." (Plaintiffs' Ex. 428 at p. 22) Questions and Answers 19 and 52 stated:
Like the A & B Plan, the ESP and CRP stated that employer contributions were to be "irrevocable" and that plan assets were to be used solely for the "exclusive benefit" of plan participants, and reserved the right of Gulf to amend the plan. However, unlike the A & B Plan, the ESP and CRP (1) contained no language impliedly reserving a right of reversion by Gulf, (2) barred an amendment that would permit a reversion to Gulf, and (3) allocated surplus assets to plan participants upon a complete plan termination.
Defendants respond that assuming arguendo that the original ESP and CRP prohibited reversions and reversionary amendments, such a right was nevertheless provided in the 1974 amended CRP. Section 7.2 of the 1974 Amended CRP deleted the earlier language that allocated any surplus to plan participants and substituted the following language:
The Court is not persuaded by defendants' argument. Even after this amendment,
Also, despite the fact that the CRP was amended in 1974 and the CRP trust agreement was amended in 1976 to include implied reversion language similar to that of the Gulf Plan and to delete the "irrevocable" language, under the original terms of the CRP and trust no right of reversion was reserved by Gulf. Changes in 1974 and 1976 could not create a right of reversion in the face of explicit language of the ESP and CRP trust agreements that trust funds were irrevocable and could not revert to Gulf. In fact, paragraph 3 of the 1976 amended Agreement of Trust stated that "[t]his Amendment and Restatement shall not increase or decrease any rights an employee may have had under the prior Trust, as amended." (Plaintiffs' Ex. 443 at p. 2)
Furthermore, even assuming arguendo that Gulf had a right of reversion after the 1974 amendment to the CRP or the 1976 amendment to the CRP trust agreement, that right would only apply to a surplus due to future employer contributions to the CRP trust. Gulf had no right to the CRP assets at the time of the amendment because those assets existed before the CRP or its trust agreement contained any implied right of reversion. See Audio Fidelity Corp. v. Pension Benefit Guaranty Corp., 624 F.2d 513, 517 (4th Cir. 1980). Although defendants presented evidence that Gulf's actuaries recommended that Gulf make additional contributions to the CRP after 1970, when employee contributions ceased, defendants offered no evidence at trial that Gulf actually made any contributions to the CRP (or SAP) after 1970. Based upon an extensive analysis of the reports of Gulf's actuaries and the IRS Form 5500's filed by Gulf and Chevron (see, e.g., Plaintiffs' Ex. 1330), which the Court finds persuasive, Dreher testified that it was highly unlikely that such contributions were ever made by Gulf.
Lastly, defendants argue that despite the language of the CRP and its trust agreements, the last paragraph of § 10.A.2 of the 1975 Gulf Pension Plan amended the CRP (and the SAP) to afford Gulf a right of reversion, and that the "irrevocable" language in the CRP and SAP trust agreements was deleted when these trusts became part of the "Master" Trust Agreement of the Gulf Pension Plan in 1979. The Court is not persuaded by these arguments for two reasons. First, neither § 10.A.2 nor the 1979 Master Trust Agreement could create a right of reversion because under the original terms of the CRP and SAP no right to revert trust contributions was reserved by Gulf. Second, even if Gulf had a right of reversion after 1975 or 1979, that right would only apply to a surplus due to subsequent Gulf contributions to the CRP or SAP, and there is no evidence that Gulf made contributions to the CRP or SAP after 1970.
While precedent is of limited value because the construction of a plan turns primarily on its unique language, two cases involving analogous plan language support the Court's conclusion that Gulf and Chevron could not amend the Gulf Plan to obtain a reversion of CRP or SAP assets. In Re Reevie & Montreal Trust Co., 25 D.L.R. 4th 312 (Ont.App.1986), the Court analyzed language in a Canada Dry pension plan very similar to the language of the CRP and SAP. Like these plans, all contributions to the Canada Dry plan were irrevocable and the employer reserved the right to amend the plan. Section 11.1 of the original Canada Dry plan adopted in 1973 stated in pertinent part:
Id. at 314. In 1981 § 11.1 was amended to delete the "irrevocable" language and § 11.4 was added to provide:
Id. at 315. In a suit over the employer's right to revert surplus plan assets, the Court observed:
Id. at 317. Because in the original plan the employer had stated that trust assets were irrevocable and that upon the plan termination all assets would be distributed among the plan members, the Court held that, notwithstanding the broad amendatory power contained in the original plan, the employer could not exercise that amendatory power to create a reversion of surplus funds to itself. Id. at 317-18.
In Bryant v. International Fruit Products Co., 793 F.2d 118 (6th Cir.), cert. denied, 479 U.S. 986, 107 S.Ct. 576, 93 L.Ed.2d 579 (1986), although the original plan did not provide for allocation of any post-termination surplus among plan members, the plan's amendatory language stated that "no such amendment shall cause or permit any part of the Trust Estate to revert to or be repaid to the Employer or be diverted to any purpose other than the exclusive benefit of the participants or their beneficiaries or estate...." Id. at 120. The Sixth Circuit held that this provision went beyond traditional ERISA exclusive benefit language and prohibited a subsequent amendment allowing an employer reversion. Although the amendatory language in the CRP and SAP is not as strict as the amendatory language of the International Fruit Products plan, Gulf's interpretation of the CRP amendatory language in Answer 52, when read in tandem with the CRP and SAP provisions allocating surplus assets to participants upon a complete plan termination, leads to the same holding as in Bryant.
The Court concludes that the CRP prohibited both reversions and reversionary amendments and that § 18.d is therefore invalid as to that part of the Gulf Pension Plan surplus attributable to the CRP.
(iii) The SAP
Like the CRP, the SAP and its trust agreement (1) contained "irrevocable" and "exclusive benefit" language, but no language impliedly allowing a reversion to Gulf, (2) barred an amendment that would allow such a reversion, and (3) allocated surplus assets to plan participants upon a complete plan termination. Section 7 of the SAP and Article II of its accompanying
Upon a complete plan termination, the SAP provided the following scheme for distributing plan assets:
The authority to amend SAP was stated in § 8 of the SAP and § 4.09 of the Agreement of Trust:
Defendants' responses concerning the SAP mirror their arguments about the CRP. Defendants respond that assuming arguendo that the original SAP language prohibited reversions and reversionary amendments, such a right was nevertheless provided in the 1973 amended SAP. Section 6.7 of the 1973 amended SAP deleted the earlier language that allocated any surplus to plan participants and substituted the following language:
The Court is not persuaded by this argument. Even after this amendment the SAP trust agreement still stated that all contributions were to be irrevocable and that no trust assets could revert to Gulf. (SAP Agreement of Trust, Article II; Plaintiffs' Ex. 409 at pp. 16-17) This language was not deleted from the SAP trust agreement until 1976 when it was amended to adopt language similar to the Master Trust Agreement of the Gulf Pension Plan, which did not require that contributions be irrevocable. (SAP Agreement of Trust as amended October 8, 1976, § 2.6; Plaintiffs' Ex. 419 at pp. 3-4) (The amended SAP Agreement of Trust was identical in all material respects to the 1976 amended CRP Agreement of Trust.)
Also, despite the fact that the SAP was amended in 1973 and the SAP trust agreement was amended in 1976 to include implied reversion language similar to that of the Gulf Plan and to delete the "irrevocable" language, under the original terms of the SAP trust agreement no right of reversion was reserved by Gulf. Changes in 1973 and 1976 could not create a right of reversion in the face of explicit language of the original SAP trust agreement that trust funds were irrevocable and could not revert to Gulf. Like the 1976 amended CRP Agreement of Trust, Paragraph 3 of the 1976 amended SAP Agreement of Trust stated that "[t]his Amendment and Restatement shall not increase or decrease any rights an employee may have had under the prior Trust, as amended." (Plaintiffs' Ex. 419 at p. 2)
Furthermore, assuming arguendo that Gulf had a right of reversion after the 1973 amendment to the SAP or the 1976 amendment to the SAP Agreement of Trust, that right would only apply to a surplus due to future employer contributions to the SAP trust. Gulf had no right to the SAP assets at the time of the amendment because those assets existed before the SAP or its trust agreement contained any right of reversion, and there was no evidence that Gulf made contributions to the SAP after 1970.
The Court concludes that the SAP prohibited both reversions and reversionary amendments, and that § 18.d is therefore invalid as to that part of the Gulf Pension Plan surplus attributable to the SAP.
(3) Can Surplus CRP and SAP Assets be Distributed Under § 10.A.2 Upon a Partial Termination?
Defendants argue that even if plaintiffs are entitled to surplus assets attributable
Complete plan terminations are governed by § 4041 of ERISA, 29 U.S.C. § 1341, which, prior to the Single-Employer Pension Plan Amendments Act of 1986, provided two methods of terminating an ERISA plan. First, a plan administrator could file a notice of termination with the PBGC and await its approval that plan assets were sufficient to discharge plan obligations. Upon receiving a sufficiency notice, the plan could be terminated. (The 1986 Act now requires 60 days' notice to participants, and no notice of sufficiency is issued.) Second, a plan administrator may terminate a plan by adopting an amendment that transforms the plan into an individual account plan under ERISA. The distribution of assets upon a plan termination is governed by § 4044 of ERISA, 29 U.S.C. § 1344. Neither the language of this statute nor its legislative history indicates that Congress intended plan participants to receive surplus plan assets prior to a complete plan termination. Van Orman v. American Ins. Co., 680 F.2d 301, 313 (3d Cir.1982). Nor does the Code create an entitlement to a distribution of plan assets before a complete plan termination. Code § 411(d)(3) only requires that upon a partial termination accrued employee benefits be vested and employee accounts be nonforfeitable. "[T]he purposes and policies of partial terminations under the tax code do not apply in the context of vested employees attempting to gain plan surplus." Chait, 835 F.2d at 1021.
Although neither ERISA nor the Code creates a right to a distribution of surplus assets before a complete plan termination, such a right can exist under the law of contract if provided by a plan. Plaintiffs argue that § 10.A.2 of the Gulf Plan provides such a right. The Court is not persuaded by this argument. Section 10.A.2 is an amalgamation of the language found in or required by Code § 411(d)(3) and § 4044(a) of ERISA, 29 U.S.C. § 1344(a). The first paragraph of § 10.A.2 is very similar to Code § 411(d)(3). This paragraph states: "Upon termination of the Plan the rights of members to the benefits accrued under the Plan to the date of such termination, to the extent then funded, shall be nonforfeitable." This language and the policies of the Code requiring it do not entitle a plan participant to surplus plan assets. See Chait, 835 F.2d at 1021.
The next to last paragraph of § 10.A.2, upon which plaintiffs' argument is primarily based, also appears intended to comply with Code § 411(d)(3) and not to grant Gulf Plan participants a right to surplus assets upon a partial termination. Although this paragraph states that § 10.A.2 is to apply to partial as well as complete terminations, no other language in the Gulf Plan, or in any of the three predecessor plans, evidences that a plan participant is entitled to receive surplus assets upon a partial termination. The only provision in § 10.A.2 for distributing assets to Plan participants is the six-tier scheme mandated by § 4044(a) of ERISA.
Although § 10.A.2 is as far from a paradigm of clarity, the Court concludes that it does not provide CRP or SAP participants a current right to surplus plan assets. This conclusion is consistent with the policies of ERISA and with the language of all of § 10.A.2 when read both in the context of the Gulf Plan as a whole and in juxtaposition to the three predecessor plans.
(4) Consequences of a Fair Reading of § 10.A.2
Plaintiffs are not entitled to a share of surplus Gulf Pension Plan assets attributable to the A & B Plan, and § 18.d of the Chevron Retirement Plan is therefore valid as to any Gulf Plan surplus attributable to the A & B Plan. Plaintiffs are entitled to surplus assets attributable to the CRP and SAP, and § 18.d is invalid to the extent that it contravenes that right. However, plaintiffs' rights to CRP and SAP surpluses do not vest, and such assets cannot be distributed, until a complete termination of these plans.
c. Unanticipated Costs
The third criteria for determining whether defendants' denials of plaintiffs' surplus claims was an abuse of discretion considers whether the denials resulted in unanticipated costs to the plans. Defendants' denials of plaintiffs' claims to surplus assets did not impose increased costs on the three plans since the surplus remains in the plans' (now Chevron Retirement Plan) trust.
3. Abuse of Discretion
Because the Court has found that defendants incorrectly denied CRP and SAP participants the right to surplus assets attributable to these plans, the Court must determine whether defendants' denials amounted to abuses of discretion. Three factors are important in this analysis: (1) the internal consistency of the plans under the defendants' interpretation, (2) any relevant regulations formulated by the appropriate administrative agencies (the IRS, the Department of Labor and the PBGC), and (3) the factual background of the determination and any inferences of lack of good faith. Batchelor v. International Brotherhood of Electrical Workers Local 861 Pension & Retirement Fund, 877 F.2d 441, 445-48 (5th Cir.1989). Although the fact that an administrator's interpretation is not the correct one does not in itself establish that the administrator abused his discretion, "[w]hen [his] interpretation of a plan is in direct conflict with express language in a plan, this action is a very strong indication of arbitrary and capricious behavior." Id. (quoting Dennard v. Richards Group, Inc., 681 F.2d 306, 314 (5th Cir.1982)).
a. Internal Consistency
Defendants' denials of plaintiffs' surplus claims were inconsistent with the express language of CRP and SAP, which entitled CRP and SAP participants to an allocable share of surplus assets upon plan termination. Although § 18.d of the Chevron Retirement Plan states that surplus assets will revert to Chevron, and § 10.A.2 of the Gulf Plan impliedly reserves Gulf's right to take such a reversion, the CRP and SAP
b. Relevant Regulations
Because defendants' denials of plaintiffs' surplus claims precluded CRP and SAP plan participants from obtaining surplus assets of those plans, the Court finds that these denials were contrary to § 4044(d) of ERISA, 29 U.S.C. § 1344(d) and PBGC regulation implementing this statute. Section 4044(d)(1) allows an employer to recapture surplus assets upon a complete plan termination if three conditions are met. The third condition is that the plan provide for such a distribution. § 4044(d)(1)(C) of ERISA, 29 U.S.C. § 1344(d)(1)(C). PBGC Regulation § 2618.30 restates this section of ERISA. Not only did the CRP and SAP not provide for employer reversions of surplus assets, their trust agreements expressly prohibited reversions, and the plans allocated surplus assets to their participants. Accordingly, because defendants' denials of plaintiffs' surplus claims necessarily included a determination that surplus CRP and SAP assets belonged to Gulf and Chevron, they contravened § 4044(d)(1)(C) of ERISA and PBGC Regulation § 2618.30.
c. Factual Background and Inference of Lack of Good Faith
A pension plan administrator is entitled to less discretion if he labors under a conflict of interest. As the Fifth Circuit explained in Lowry v. Bankers Life & Casualty Retirement Plan, 871 F.2d 522, cert. denied, ___ U.S. ___, 110 S.Ct. 152, 107 L.Ed.2d 111 (1989):
Id. at 525 n. 6. Consistent with this analysis the Eleventh Circuit has stated that "a wrong but apparently reasonable interpretation is arbitrary and capricious if it advances the conflicting interest of the fiduciary at the expense of the affected beneficiary or beneficiaries unless the fiduciary justifies the interpretation on the ground of its benefit to the class of all participants and beneficiaries." Brown v. Blue Cross & Blue Shield, 898 F.2d 1556, 1566-67 (11th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 712, 112 L.Ed.2d 701 (1991).
There was substantial evidence that Chevron considered how to revert the surplus Gulf Plan assets claimed by plaintiffs for its general corporate uses. In a confidential May 2, 1984, memorandum to Chevron Deputy Comptroller R.G. Williamson entitled "Cash Surplus Utilization SOCAL/Gulf Pension Plan," Comptroller G.K. Carter wrote that:
Six days later Carter wrote Chevron Vice President J.N. Sullivan that: "[i]t is important that the company capture this overfunding either in the form of a higher purchase price to the buyer [of divested Gulf operations] or retention of the excess funding by the Gulf Plan (which ultimately can be used by Chevron)." (Plaintiffs' Ex. 51) Chevron's intent to revert the Gulf Plan surplus is also evidenced in an internal memorandum concerning negotiating strategies for the sale of Gulf operations. In a July 6, 1984, memorandum to Charles Mackdanz, manager of Chevron's benefits staff, Williamson wrote that "[t]he most important overall objectives are that ... no precedents be set that might be onerous for the divestiture negotiations or ultimate merger of Gulf and Socal plans in a fashion that allows excess asset reversion." (Plaintiffs' Ex. 86)
Chevron's planning to revert surplus Gulf Plan assets occurred despite concerns expressed by PM & S to Chevron that "the reversionary authority in the present Gulf Plan is weak and a serious legal question exists as to whether it can be amended to provide the desired language." (May 18, 1984, memo re "Gulf Asset Disposal" to Mackdanz from T.M. McNamara, managing partner of PM & S; Plaintiffs' Ex. 67 at p. 3) Subsequent legal analysis by PM & S did not quell this concern. Frank Roberts, a PM & S partner and former General Counsel of Chevron, advised Chevron in April 1985 that no reversions of Gulf Pension assets could be accomplished without adding an explicit reversion provision. After citing the statutory requirements of § 4044(d) of ERISA, Roberts wrote:
In spite of the concerns raised by PM & S attorneys about the ability to take a reversion, Chevron continued to plan how best to benefit from the surplus assets of the Gulf Plan. The primary consideration whether to take a reversion was not the Gulf Plan language but rather whether a reversion would be profitable under tax laws. In a confidential May 1, 1985, memorandum to Sellers Stough, Chevron's Vice-President of Finance, Carter wrote that the Gulf Plan needed to be amended before the tax considerations could be resolved, but cautioned that the amendments should be done in a manner that would not be detected by Gulf Plan members.
The ultimate decision not to seek a reversion of Gulf (or Chevron) pension plan assets before the merger of the plans on July 1, 1986, was not based on the uncertainties expressed by PM & S lawyers regarding the Gulf Plan language, but on a cost, benefit analysis weighing potential tax savings against the negative employee relations and publicity surrounding a reversion of pension plan assets. (May 2, 1986, memo from Carter to Stough, Plaintiffs' Ex. 54)
Although this abbreviated summary of the evidence of Chevron's lack of good
Defendants' implicit denials of plaintiffs' claims to surplus CRP and SAP assets upon a complete termination of these plans were contrary to a fair reading of the CRP and SAP. Since these denials were also inconsistent with the language of the CRP and SAP and were contrary to § 4044(d)(1)(C) of ERISA and PBGC Regulation § 2618.30, the Court finds that these denials, albethey implicit, were abuses of defendants' discretion. However, also implicit in defendants' denials of plaintiffs' surplus claims was defendants' determination that any rights of plaintiffs to CRP or SAP surplus assets did not vest, and such assets could not be distributed, until a complete termination of those plans. Because that determination is consistent with a fair reading of the CRP and SAP, as amended by the Gulf Plan, and with ERISA, defendants' refusal to pay surplus assets to CRP and SAP participants was not an abuse of discretion.
IV. TERMINATION OF THE CRP AND SAP AS WASTING TRUSTS
Plaintiffs allege that when the Gulf Pension Plan and Chevron Annuity Plan were merged into the Chevron Retirement Plan on July 1, 1986, the CRP and SAP trusts were "dry" or "wasting" trusts whose material purposes had been accomplished. Therefore, regardless of the Court's ruling on their claims to the Gulf Plan surplus, plaintiffs allege that under the common law of trusts the CRP and SAP trusts should be terminated as of June 30, 1986, and all surplus assets distributed to CRP and SAP participants. Plaintiffs argue that this remedy would provide two additional benefits. First, it would give full effect to the CRP and SAP language that assets can never revert to Gulf, and upon plan termination any remaining assets are to be distributed to plan participants. Second, it would prevent any future misuse of CRP and SAP surplus assets to fund benefits of Chevron employees who were not participants in the CRP or SAP.
Courts may apply federal common law to employee benefit plans to supplement ERISA. Cefalu v. B.F. Goodrich Co., 871 F.2d 1290, 1297 (5th Cir.1989). However, a federal court does not have unlimited power to apply any legal doctrine it chooses in ERISA actions. ERISA is a "`comprehensive and reticulated statute' which Congress adopted after careful study of private retirement pension plans." Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510, 101 S.Ct. 1895, 1899, 68 L.Ed.2d 402 (1981). It establishes standards governing the "conduct, responsibility, and obligation for fiduciaries of employee benefit plans ... and [provides] for appropriate remedies, sanctions, and ready access to the Federal courts." § 2(b) of ERISA, 29 U.S.C. § 1001(b). ERISA also contains a broad preemption clause, § 514(a) of ERISA, 29 U.S.C. § 1144(a), and generally supersedes state law as it relates to pension plans. In this statutory environment, a court may apply federal common law to an ERISA plan only if ERISA does not expressly address the issue and the common law rule is consistent with the underlying purposes of ERISA. Cefalu, 871 F.2d at 1297. See generally United States v. Little Lake Misere Land Co., 412 U.S. 580, 593, 93 S.Ct. 2389, 2397, 37 L.Ed.2d 187 (1973).
Both of these requirements are met in this case. ERISA's plan termination provisions do not address the issue of trusts that are wasting because their objectives have been satisfied. See § 4041 of ERISA, 29 U.S.C. § 1341. While the trusts associated with a "frozen" or "terminating" plan have been described as wasting trusts, neither the Code nor IRS rules address a trust that is wasting because its material purposes have been achieved. See Revenue Ruling 89-87, 1989-2 C.B. 81.
Resort to the common law of trusts is also consistent with the underlying purpose of ERISA, which is rooted in the common law of trusts and incorporates the core principles of several areas of trust law. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 954-55, 103 L.Ed.2d 80 (1989). "Congress ... intended that the courts `draw on principles of traditional trust law' in formulating remedies for violations of ERISA's fiduciary standards." Nieto v. Eker, 845 F.2d 868, 872 (9th Cir.1988). In formulating equitable remedies under §§ 409(a) and 502(a)(3) of ERISA, 29 U.S.C. §§ 1109(a) and 1132(a)(3), courts have therefore looked to the law of trusts. E.g., Eaves v. Penn, 587 F.2d 453, 462 (10th Cir.1978).
At common law if a trust did not state a definite term, it was deemed to last until its purpose was accomplished. Once the object of the settlor had been achieved, the trust was deemed to end since its continuation would be useless and might frustrate the intent of the settlor to a beneficiary or remainder interest. See Brine v. Paine Webber, Jackson & Curtis, Inc., 745 F.2d 100,
These objectives have been accomplished and there is no material purpose or further benefit to the CRP and SAP or their participants in continuing these trusts. Since membership in the CRP and SAP has been closed since December 31, 1970, and no employee contributions have been made since then, these plans and their trusts no longer serve the purpose of encouraging employee savings through contributions. Employed participants no longer earn significant additional benefits from service, and the trusts have more than enough assets to provide all future benefits due active and retired plan members and their beneficiaries.
Extrapolating from Plaintiffs' Ex. 1275, a January 1, 1985, report prepared by Gulf's actuary, plaintiffs' expert Dreher testified that there were 2,900 active and 16,000 retired and other inactive members of the CRP and SAP as of June 30, 1986. The average active member was in his 50's and would retire in 15 years or sooner, and the youngest plan member had a life expectancy of 32 years. The average age of the 16,000 inactive CRP and SAP participants was 68. Retired and other inactive plan participants accounted for approximately 94% of the liabilities of the CRP and SAP. (E.g., Plaintiffs' Ex. 1325) On June 30, 1986, the CRP trust had assets of $279.3 million and a surplus after accounting for all present and future liabilities of $122 million. (Plaintiffs' Ex. 1325) The SAP trust had assets in excess of $4 million and a surplus in excess of $2 million. (Plaintiffs' Ex. 1255 at p. 9) Because most active CRP and SAP participants were close to retirement, their projected benefits from future service had a present value of only $4 million, which was de minimis in relation to the surplus assets in the plans. Id.
Defendants admit that since June 30, 1986, these assets and surpluses have increased as benefit payments have declined. (See Defendants' Ex. 285.) Current earnings on the trust assets alone are more than sufficient to pay all benefits and still add money to the surpluses. According to Dreher, if the CRP and SAP are not terminated, when the last pensioner or widow or widower dies these plans will have assets of $1.3 billion with no liabilities assuming an 8%, below normal, annual growth rate.
Because the goals of the CRP and SAP have been accomplished, continuance of the CRP and SAP trusts would unnecessarily frustrate the intent of the settlors as to the disposition of surplus trust assets. The CRP and SAP state that Gulf intended all surplus assets to be allocated to plan participants, not the employer.
Relying principally on Walsh v. Great Atlantic & Pacific Tea Co., 96 F.R.D. 632 (D.N.J.), aff'd, 726 F.2d 956 (3d Cir.1983), and Van Orman v. American Ins. Co., 680 F.2d 301 (3d Cir.1982), defendants argue that the existence of a plan surplus does not require termination of the plan or its trust under ERISA. Although this is a correct statement of the law, defendants' reliance on these cases is misplaced. In Walsh the court found that neither ERISA nor the plan language required termination of an overfunded plan. Not only did the court not address the wasting trust argument advanced in the case, but the court's discussion of the facts makes Walsh easily distinguishable on its facts. The Walsh court found that:
96 F.R.D. at 650. Unlike the plan in Walsh, CRP and SAP membership has long been closed and the plans are substantially overfunded as to all future liabilities. The CRP and SAP are not accruing significant benefit obligations that could potentially eliminate their surpluses. Nor could the surpluses be used to eliminate or reduce future employer contributions since none have been made since 1970. Therefore, unlike the facts of Walsh, delaying termination of the CRP and SAP trusts would benefit neither the plans nor their participants in the future.
Van Orman merely holds that members of a defined benefit pension plan have no general right under ERISA or common law to a surplus upon a plan termination. This is a correct statement of the law, but like Walsh it does not address the present inquiry, which is whether under the facts of this case, the CRP and SAP trusts should be terminated and the surpluses distributed to plan participants under trust law.
Defendants also argue that the CRP and SAP cannot be wasting trusts because the 1975 Gulf Plan merger and the 1986 merger of the Gulf Pension Plan into the Chevron Retirement Plan did away with the CRP and SAP as separate plans. As discussed in part III.A. supra, the Court has found that the amendment, restatement and continuation of the three predecessor plans in 1975 did not result in their merger into a single ERISA plan. Furthermore, as discussed in part III.B.2.b.(2)(c)(ii) and (iii), the Court has found that § 18.d of the Chevron Retirement Plan is invalid as to that part of the Gulf Pension Plan surplus attributable to the CRP and SAP. For the reasons discussed above, the Court also finds that the CRP and SAP trusts were wasting trusts on June 30, 1986, before the merger of the Gulf Plan into the Chevron Retirement Plan. Under these facts, the CRP and SAP should not have been merged into the Chevron Retirement Plan.
The Court finds that as of June 30, 1986, before the effective date of the Chevron plan merger, the CRP and SAP were wasting trusts that should have been terminated. Pursuant to the authority granted by § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), to order "appropriate equitable relief" to enforce the rights of members and beneficiaries of the CRP and SAP, and the authority granted by § 409(a) of ERISA, 29 U.S.C. § 1109(a), to reform the Chevron Retirement Plan to bar Chevron
V. FIDUCIARY CLAIMS
A. Pension Plan Expenses
Plaintiffs allege that Gulf and Chevron improperly caused the Gulf Pension Plan to pay expenses of outside investment managers that should have been paid by Gulf and Chevron under the Plan. Section 7.D.2 and .3 of the Plan (Plaintiffs' Ex. 29) provided that the Pension Fund Investment Committee had the sole responsibility for the appointment of investment managers and other outside consultants to assist in supervising and managing plan assets. Section 7.A.4 of the Gulf Pension Plan states:
Before 1982 Gulf paid outside investment management fees and expenses. From 1982 through the end of June 1986 Gulf and Chevron caused the Gulf Pension Plan to pay investment management fees and expenses in the following amounts:
1982 $ 2,078,000 1983 $ 2,759,000 1984 $ 3,844,000 1985 $ 3,766,000 1986 (first six $ 2,778,000 months) ___________ Total $15,225,000
(Plaintiffs' Ex. 1228)
Relying on Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), defendants argue that Gulf, Chevron, and the Gulf Pension Plan Benefits Committee are fiduciaries, that their decisions to pay these expenses from Plan assets should be reviewed under an abuse of discretion rather than a de novo standard, and that under this standard their payment decisions were not abuses of discretion. Defendants contend that Firestone is satisfied by § 7.C-4(a) of the Plan, which gave the Gulf Benefits Committee authority to "construe and interpret the Plan and, subject to the provisions of the Plan, decide all questions of eligibility and determine the amount, time and manner of payment of any benefits."
In Firestone the Court went out of its way to emphasize that its holding and analysis was very limited. The Court stated:
109 S.Ct. at 953. Although the Court permitted an exception to de novo review when an ERISA plan expressly delegated to the plan fiduciary the authority to determine benefits and interpret the plan, the Court emphasized that "wholesale importation of the arbitrary and capricious standard into ERISA is unwarranted." Id. (emphasis in original)
Plaintiffs' claim is not premised upon an erroneous denial of benefits under § 502(a)(1)(B) of ERISA, but is grounded instead upon breaches of fiduciary obligations
Except as provided in section 1108 of this title:
Employers such as Gulf and Chevron are parties-in-interest with respect to a plan covering their employees. § 3(14)(C) of ERISA, 29 U.S.C. § 1002(14)(C). Section 502(a)(3) of ERISA states:
When a plaintiff sues to enforce an express statutory fiduciary duty under § 406(a)(1)(D) and to challenge acts of the employer, as a fiduciary, that advance the employer's own economic interest, the abuse of discretion standard does not apply. See Struble v. New Jersey Brewery Employees' Welfare Trust Fund, 732 F.2d 325, 333 (3d Cir.1984). Instead, the Court will apply the strict standards imposed by ERISA, which mandate that fiduciaries act "solely in the interests of the participants and beneficiaries" [the duty of loyalty] and with the "care, skill, prudence, and diligence ... that a prudent man acting in a like capacity ... would use ..." [the duty of care]. § 404(a)(1) of ERISA, 29 U.S.C. § 1104(a)(1).
Moreover, even if the Firestone analysis were applicable to this claim, the Court finds that defendants have failed to satisfy the express language test with respect to the payments at issue. Under this test discretion cannot be implied from an instrument's language.
Cathey v. Dow Chemical Co. Medical Care Program, 907 F.2d 554, 559 (5th Cir. 1990), cert. denied, ___ U.S. ___, 111 S.Ct. 964, 112 L.Ed.2d 1051 (1991), citing Moon v. American Home Assurance Co., 888 F.2d 86, 88 (11th Cir.1989). Although § 7.C.4(a) of the Gulf Plan gave the Benefits Committee the power to construe and interpret the Plan, the last sentence of § 7.C.4 stated:
Since § 7.A.4 of the Plan required that the expenses in issue "shall be paid by the Company," any discretion afforded the Benefits Committee by § 7.C.4 could not "subtract from, or modify [this expressed term] of the Plan."
Even were the Court to apply an abuse of discretion standard, the Court would reach the same result. Jordan v. Cameron Iron Works, Inc., 900 F.2d 53 (5th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 344, 112 L.Ed.2d 308 (1990), teaches that the threshold determination in an abuse of discretion review is whether the plan fiduciary has "given a plan the legally correct interpretation." Id. at 56. If not, then a three-factor analysis is applied to determine whether the fiduciary's error rises to an abuse of discretion. Id.
To explain their departure from Gulf's long-standing policy of paying these expenses directly, defendants point to an April 29, 1983, letter from Gulf attorney William Bowman to R.A. McKean III, secretary of the Gulf Pension Fund Investment Committee. (Defendants' Ex. 338) After quoting § 7.A.4 of the Plan, Bowman stated that "this section does not support the position that these kinds of services must be paid for by the Company." Bowman then stated that the real question was one of policy — whether Gulf wanted all Plan expenses to be paid out of Plan assets. He concluded that there would be no net benefit to Gulf if such expenses were paid out of Plan assets since ultimately Gulf would have to make larger contributions to the Plan to compensate for such expense payments from Plan assets. The Court finds that Bowman's interpretation and defendants' reliance on it is not legally correct. Applying the Jordan three-factor analysis, the Court also finds that defendants' determinations to pay these expenses from Plan assets rather than corporate funds were (1) inconsistent with prior practices and therefore were not part of any uniform construction of the Plan, (2) inconsistent with a fair reading of § 7.A.4 of the Plan, and (3) resulted in unanticipated costs to the Plan.
Defendants also seek to justify payment of these expenses from Plan assets by citing to §§ 9.1, 4.1, and 9.2 of the July 9, 1979, Gulf Agreement of Trust (Plaintiffs' Ex. 391). Section 9.1 provided for reimbursement of reasonable expenses incurred by the Master Trustee. Section 4.1 allowed the Master Trustee to pay trust expenses from the trust, as directed by the plan administrator. These two sections do not support defendants' argument because the expenses in issue were not incurred by the Master Trustee. The Investment Management Agreements pursuant to which these expenses were incurred were between the various investment managers and Gulf. (See Defendants' Exs. 342, 344 & 345.) In paragraph 16 of each of these agreements, Gulf agreed to pay the investment managers' fees.
Section 9.2 stated that "[a]ll compensation, expenses, taxes and assessments specified herein, to the extent that they are not paid by the Companies, shall constitute a charge upon the Trust and be paid by the Master Trustee from the Trust upon written notice from the Master Trustee to the Company." Defendants argue that this language is broad enough to permit payment of fees and expenses from the Trust and from the Gulf Pension Plan. The Court is not persuaded by this argument. Section 7.A.4 of the Gulf Pension Plan expressly required that such expenses be paid by Gulf, not the Plan. Nothing in the Agreement of Trust contradicted this, and the quoted language from § 9.2 of the Agreement of Trust appears to have been included only to protect the trustee in the event that expenses incurred by the trustee
Having concluded that defendants' decisions to pay expenses from Plan rather than corporate assets were not legally correct, the Court must next look to whether the decisions were abuses of discretion under the three factors articulated in Batchelor v. International Brotherhood of Electrical Workers Local 861 Pension & Retirement Fund, 877 F.2d 441, 445 (5th Cir.1989). These payments were inconsistent with both § 7.A.4 of the Gulf Plan and Gulf's prior interpretation of it. Section 404(a)(1)(D) of ERISA, 29 U.S.C. § 1104(a)(1)(D), requires that a plan fiduciary "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and ... in accordance with the documents and instruments governing the plan ..." Because these payments were inconsistent with § 7.A.4 they were also inconsistent with this statutory obligation. Finally, because of the conflict of interest affecting these decisions, the Court must gauge narrowly the good faith component of this analysis. Lowry v. Bankers Life & Casualty Retirement Plan, 871 F.2d 522, 525 n. 6 (5th Cir.), cert. denied, ___ U.S. ___, 110 S.Ct. 152, 107 L.Ed.2d 111 (1989). Having considered these three factors, the Court finds that defendants abused their discretion in paying these expenses from Plan assets.
The Court will order that Chevron pay $15,225,000 to the Chevron Retirement Plan, to be held in trust for the use and benefit of class members who are beneficiaries of the Gulf Pension Plan. Because Gulf and Chevron, and not the Gulf Plan, have had the use and benefit of this money, the Court in the exercise of its equitable discretion will also order that Chevron pay prejudgment interest on this amount at the rate of 10%, compounded annually.
B. Self-Dealing by Chevron
The Asset Purchase Agreement between Chevron, as Seller, and Cumberland Farms, as Buyer, required Cumberland Farms to establish a pension plan for former Gulf employees who went to work for it. The Agreement also included a provision through which Chevron, prior to closing, fixed by means of actuarial assumptions, an amount of pension assets that Chevron would cause the Gulf Pension Plan to transfer to the Cumberland Farms' plan. (Cumberland Farms Asset Purchase Agreement, para. 3.2.e; Plaintiffs' Ex. 118 at p. 16) The Agreement provided that after the closing:
(Id. at para. 3.2.f; Plaintiffs' Ex. 118 at p. 18.)
Among the applicable law encompassed by paragraph 3.2.f was Code § 414(l), which required that a trust have sufficient assets to fund the present value of accrued benefits under the plan calculated on an ongoing basis as a condition for qualification under § 401. If the Gulf Plan assets calculated under paragraph 3.2.e of the Asset Purchase Agreement were not sufficient to satisfy the requirements of § 414(l), Chevron, as Seller, agreed in paragraph 3.2.f to require the Gulf Pension Plan to transfer additional Plan assets to Cumberland Farms, and Cumberland Farms agreed to reimburse Chevron for such excess payments.
Chevron intentionally designed the actuarial assumptions upon which the initial transfer of Gulf Plan assets was to be calculated so there would not be a sufficient transfer of assets to satisfy Code § 414(l). Although Chevron knew that many Gulf employees would elect to take
The motivation for this negotiating posture was Chevron's desire to maximize its ultimate gain from divestitures by taking advantage of the overfunded status of the Gulf Pension Plan. As outlined in Plaintiffs' Ex. 51, a May 8, 1984, memo from Chevron Comptroller G.K. Carter to Chevron Vice-President J.N. Sullivan:
After the Cumberland Farms divestiture, in return for requiring the Gulf Pension Plan to transfer assets to Cumberland Farms that would satisfy Code § 414(l), Chevron received an $8,272,566 promissory note from Cumberland Farms.
Section 406(b)(1) of ERISA, 29 U.S.C. § 1106(b)(1), prohibits a plan fiduciary from dealing with plan assets in its own interest or for its own account, and § 406(b)(3) of ERISA, 29 U.S.C. § 1106(b)(3), forbids a plan fiduciary from receiving any consideration for the fiduciary's own account from any party dealing with the plan in connection with a transaction involving plan assets. A transaction prohibited by § 406 is per se illegal regardless of whether the plan suffers an injury or the fiduciary profits from the transaction. Donovan v. Cunningham, 716 F.2d 1455, 1464-65 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984); Leib v. Commissioner, 88 T.C. 1474, 1480-81 (1987). In addition, § 409(a) of ERISA, 29 U.S.C. § 1109(a), requires a fiduciary who breaches a fiduciary obligation of ERISA to restore to the plan any losses resulting from the breach.
When Chevron negotiated and benefited from the Cumberland Farms Asset Purchase Agreement, it was a fiduciary of the Gulf Pension Plan, and the Agreement negotiated by Chevron was a transaction involving Gulf Plan assets. In negotiating the Agreement Chevron used its fiduciary status to obtain a quid pro quo for its own corporate benefit.
567 F.Supp. at 1201. (emphasis added)
This case is easily distinguishable from Sutton and the other authorities cited by defendants because Chevron did more than merely negotiate a sale of assets to Cumberland Farms with resultant effects upon future pension benefits of transferring Gulf employees. Chevron's negotiations with Cumberland Farms also resulted in the payment of substantial funds from the Gulf Pension Plan to the Cumberland Farms' plan with a dollar-for-dollar payback, not to the Gulf Pension Plan, but to Chevron. The Court asked every Chevron witness who testified about this transaction why the Cumberland Farms Asset Purchase Agreement was not structured to provide for reimbursement to the Gulf Pension Plan, instead of Chevron, should additional asset transfers be required to satisfy Code § 414(l). The only answer the Court received was the tautological statement that it was a negotiated business transaction.
The fiduciary duty imposed by ERISA encompasses both a duty of loyalty and a duty of care. As this Court explained in Wright v. Nimmons, 641 F.Supp. 1391 (S.D.Tex.1986):
Id. at 1402. (emphasis in original) In scrutinizing this transaction under the fiduciary lens of ERISA, the Court must look at the intent, rather than the form, of what was done. See 1 J. Pomeroy, EQUITY JURISPRUDENCE § 378 (4th ed. 1918). Here, as in Wright, the Court concludes that Chevron, as a fiduciary of the Gulf Pension Plan, breached its duty of loyalty by treating the Gulf Pension Plan Trust as if it were Chevron's property. In doing so, Chevron violated § 406(b)(1) and (3) of ERISA. To remedy this fiduciary breach, the Court will order that Chevron pay $8,272,566 to the Chevron Retirement Plan, to be held in trust for the use and benefit of class members who are beneficiaries of the Gulf Pension Plan. Because Chevron, rather than the Plan, has had the use and benefit of this money, the Court in the exercise of its equitable discretion will also order that Chevron pay prejudgment interest
The Court is not persuaded by plaintiffs' argument that a constructive trust should be established in favor of former Gulf Pension Plan members to be used exclusively to provide them with additional benefits beyond their benefits under the Gulf Plan. In the principal authority cited by plaintiffs to support such relief, Amalgamated Clothing & Textile Workers Union v. Murdock, 861 F.2d 1406, 1411-12 (9th Cir.1988), all of the plan participants and beneficiaries had been paid their actuarially vested benefits. Thousands of former Gulf Pension Plan participants, however, have not yet retired and thousands of those who have retired are still receiving Plan benefits. The Court's remedy will require Chevron to restore to the Chevron Retirement Plan the consideration that Chevron received from its fiduciary breach. Plaintiffs' concern that Chevron might some day receive this money back by terminating the Chevron Retirement Plan and receiving any plan surplus is conjectural at this point. Furthermore, the Court's remedy will have sufficient deterrent effect to satisfy the purposes of § 409(a) of ERISA. Chevron's reimbursement will not be a tax-deductible contribution under ERISA, but a reimbursement for funds improperly diverted from the Gulf Plan, and any future reversion of such funds by Chevron will be subject to the federal excise tax on employer reversions.
In response to the decline in oil prices that began late in 1985, Chevron adopted the Special Retirement Allowance Program ("SRAP") effective July 7, 1986. SRAP was a window program designed to encourage early retirement. Eligible employees received SRAP benefits in addition to their normal accrued pension benefits under the then merged Chevron Retirement Plan. SRAP benefits were available to all employees in eligible positions who met certain age and service requirements if they voluntarily retired between July 7, 1986, and November 30, 1986, and to all employees with one or more years of service who were involuntarily terminated for reasons other than cause during this period.
Employees who received SRAP benefits were entitled to the greater of: (1) a recalculated benefit taking into consideration four additional years of age and four additional years of credited service, or (2) a minimum enhancement, in the form of a lump-sum benefit, of the employee's highest average earnings over a period of two-to-ten months, depending upon the employee's length of service with Gulf or Chevron. Employees who were not eligible for an early retirement benefit under the Chevron Plan after this additional crediting of age and service received an accrued benefit, including the enhancement, which was calculated using the Chevron Retirement Plan's early retirement factor (5% per year reductions from age 62). The entire benefit, including the enhancement, was available to employees in either a lump-sum or an annuity, regardless of the employee's age. Approximately 2,908 former Chevron employees and 929 former Gulf employees received SRAP benefits.
Plaintiffs allege that by paying a disproportionate amount of SRAP benefits to former Chevron employees who had never been members of the Gulf Pension Plan, Chevron breached its fiduciary duty to former Gulf Plan members and violated provisions of the Gulf Pension Plan and the Master Trust dealing with contributions to the CRP and SAP. Section 8.A of the Gulf Pension Plan stated:
Section 2.6 of the Master Trust in effect at the time of the July 1, 1986, plan merger stated:
Furthermore, as discussed in part III.A, supra, the CRP and SAP trust agreements and the 1979 Master Trust Agreement prohibited use of CRP or SAP assets for benefits and liabilities not provided by those plans.
As a factual matter, however, plaintiffs have failed to prove that SRAP benefits were paid from CRP or SAP assets. There was no evidence of which trust assets these benefits were paid from; SRAP benefits could just as likely have been paid from the surplus attributable to the A & B component of the Gulf Pension Plan trust or from the surplus attributable to the former Chevron Annuity Plan.
Nor does the Court conclude that Chevron breached any fiduciary duty by paying SRAP benefits from the assets of the merged Chevron Retirement Plan. Any economic benefit that Chevron derived from the manpower reductions that resulted from implementing SRAP did not violate ERISA's exclusive benefit rule, § 403(c)(1) of ERISA, 29 U.S.C. § 1103(c)(1). This rule states that "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan." However, the rule does not prohibit implementation of SRAP merely because it provided an indirect benefit to Chevron.
The exclusive benefit rule prohibits an employer from using plan funds for the direct, primary benefit of the employer. The rule "cannot be read as a prohibition against any decisions of an employer with respect to a pension plan which have the obvious primary purpose and effect of benefiting the employees, and in addition the incidental side effect of being prudent from the employer's economic perspective." Holliday v. Xerox Corp., 732 F.2d 548, 551 (6th Cir.), cert. denied, 469 U.S. 917, 105 S.Ct. 294, 83 L.Ed.2d 229 (1984); see Bass v. Retirement Plan of Conoco, Inc., 676 F.Supp. 735, 748-49 (W.D.La.1988) (upholding validity of employer's implementation of an early retirement program after Conoco sold plaintiffs' division despite plaintiffs' claims that Conoco benefited from the work force reduction and that current Conoco employees received benefits that plaintiffs did not receive). Because the Court finds that the benefits Chevron received from implementing SRAP were incidental to the primary purpose of providing early retirement benefits to Chevron employees, the Court concludes that SRAP was not a breach of Chevron's fiduciary duties to former Gulf Plan members.
To partially offset the effects of inflation after the July 1, 1986, plan merger, Chevron paid Annuitant's Voluntary Income Supplements ("AVIS") to employees who had retired under the Gulf Pension Plan, the Chevron Annuity Plan, and Chevron Retirement Plan. Before the July 1, 1986, plan merger, Gulf had paid AVIS-type supplements from the Gulf Plan, but Chevron had paid AVIS supplements out of its corporate till. After the plan merger Chevron adopted the Gulf approach and paid all AVIS benefits from the newly merged plan. Plaintiffs level the same objections to the AVIS payments that they do to SRAP benefits.
E. Defendants' Promises to Set Aside Gulf Plan Assets for Plaintiffs' Benefit
Plaintiffs allege that Chevron promised orally and through correspondence with plaintiffs (e.g., Plaintiffs' Exs. 1 and 620) and through company newspapers (Plaintiffs' Ex. 494) to set aside part of the Gulf Plan assets to provide reserves sufficient to secure benefits in the event that the Gulf Plan were ever merged with the Chevron Annuity Plan. Because no reserves were set aside, plaintiffs allege that Chevron breached its duty of loyalty under § 404(a) of ERISA, 29 U.S.C. § 1104(a) and common law. To cure these breaches, plaintiffs request the equitable remedy of specific performance.
While no specific reserves were ever established, plaintiffs' expert, Mr. Dreher, testified that the merged Chevron Retirement Plan has a surplus in excess of accrued benefits of more than $800 million and that this surplus is likely to remain above the full funding limit for a considerable time. Furthermore, § 16(c) of the Chevron Retirement Plan (Defendants' Ex. 21) obligates Chevron to cause the participating companies to contribute to the plan each year an amount necessary to satisfy minimum funding standards for that year.
Although Chevron made the promises alleged by plaintiffs and did not establish a specific reserve for Gulf Plan members, the Court concludes that plaintiffs cannot prevail on this claim for several reasons. First, these promises were not contained in a written plan document as required by § 402(a)(1) of ERISA, 29 U.S.C. § 1102(a)(1). Plaintiffs admit that the writings that contained these representations were not plan documents. (Plaintiffs' Post-Argument Brief on Defendants' Promise to Set Aside Plan Assets for Plaintiffs' Benefit at p. 4) Since these claims do not arise out of an ERISA plan, they are not actionable under ERISA. Cefalu v. B.F. Goodrich Co., 871 F.2d 1290, 1296-97 (5th Cir.1989); Degan v. Ford Motor Co., 869 F.2d 889, 895 (5th Cir.1989).
The mere fact that some of these representations were made in writing does not lead to a different result; the test is whether the claim is based on plan documents, not whether non-plan representations were oral or written. In Alday v. Container Corp. of America, 906 F.2d 660 (11th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 675, 112 L.Ed.2d 668 (1991), the plan documents allowed the administrator to "terminate, suspend, withdraw, amend or modify the Plan in whole or part at any time." 906 F.2d at 662. Forms and correspondence sent to individual plan members stated that health insurance was available to members and their dependents upon retirement at a modest cost. When the employer later amended the plan to modify these benefits and substantially raise employee contributions for retiree health benefits, the plaintiff class alleged that the employer had breached its fiduciary duty under ERISA and was promissorily estopped from rescinding the representations contained in these non-plan written communications.
Furthermore, even were plaintiffs' fiduciary and estoppel claims actionable, plaintiffs have not shown that they have suffered any injury that would create a ripe controversy in either the jurisdictional or prudential sense. Although a separate reserve for Gulf Plan benefits was not established, the Chevron Retirement Plan from which benefits are to be paid is substantially overfunded and will be for some time according to plaintiffs' own expert. Plaintiffs' benefits are further guaranteed by Chevron. The Court concludes that plaintiffs have therefore failed to show that the challenged action of defendants will have any direct and immediate impact on them that would warrant judicial consideration at this time. See Abbott Laboratories v. Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, 1515, 18 L.Ed.2d 681 (1967); Toilet Goods Ass'n v. Gardner, 387 U.S. 158, 164, 87 S.Ct. 1520, 1524-25, 18 L.Ed.2d 697 (1967). Similarly, with respect to their promissory estoppel claim, plaintiffs have not established either that they relied detrimentally on defendants' representations or if they did so, that they have suffered any cognizable harm.
F. Other Alleged Fiduciary Breaches
Plaintiffs allege that because Pillsbury, Madison & Sutro, the outside law firm that provided legal advice to the Gulf Plan fiduciaries after February of 1984, also had a long-standing and close relationship with Chevron, the Gulf Pension Plan Benefits Committee and Chevron should have retained separate law firms to represent their interests with respect to the plan merger. Plaintiffs have cited no authority for this proposition,
The Court has considered other fiduciary breaches alleged by plaintiffs in various places in the Joint Pretrial Order, trial briefs, proposed findings of fact, and numerous post-trial briefs. To the extent they have not been expressly addressed in this Opinion, the Court finds that those allegations are not legally or factually supportable and denies any relief based upon them.
1. The significant corporate event that occurred between January 1, 1984, and
2. A horizontal partial termination of the Gulf Pension Plan occurred as a result of the reduction in future benefit accruals from the merger of the Gulf Pension Plan into the Chevron Retirement Plan on July 1, 1986, and all members of the class employed by Chevron on that date will be vested in all Gulf Pension Plan benefits accrued as of that date.
3. Defendants' denials of plaintiffs' claims to surplus CRP and SAP assets were an abuse of discretion. However, defendants' refusal to pay surplus CRP and SAP assets to plan participants prior to complete terminations of the plans was not an abuse of discretion.
4. Because the CRP and SAP trusts were wasting trusts on June 30, 1986, the day before the CRP and SAP were merged into the Chevron Retirement Plan, all CRP and SAP assets and liabilities will be spun-off from the Chevron Retirement Plan effective June 30, 1986, and segregated in separate trusts.
5. Defendants abused their discretion in paying the expenses of outside investment managers from the Gulf Pension Plan from January 1, 1982, through June 30, 1986, and have thereby caused damage to the Gulf Pension Plan of $15,225,000, plus pre-judgment interest at the rate of 10% compounded annually.
6. Chevron, as a fiduciary under the Gulf Pension Plan, breached its fiduciary duty by requiring that the Cumberland Farms Asset Purchase Agreement contain a pay-back provision to Chevron, and has thereby caused damage to the Gulf Pension Plan of $8,272,566, plus pre-judgment interest at the rate of 10% compounded annually.
7. Chevron's payment of SRAP benefits did not breach its fiduciary duty or violate the provisions of the Gulf Pension Plan or the Master Trust.
8. Chevron's payment of AVIS benefits did not breach its fiduciary duty or violate the provisions of the Gulf Pension Plan or the Master Trust.
9. Defendants' failure to set aside a part of the Gulf Plan assets as reserves to secure benefits under the Gulf Pension Plan did not violate their duty of loyalty under ERISA or common law.
10. To the extent not expressly addressed in this Opinion, all other claims and relief sought by plaintiffs are denied.
In accordance with the Court's Opinion, the Court ORDERS, ADJUDGES and DECREES that:
1. All members of the class who were employed by Chevron Corporation on July 1, 1986, are vested in all Gulf Pension Plan benefits accrued as of that date.
2. Chevron Corporation shall pay to the Chevron Retirement Plan, to be held in trust for the use and benefit of class members who are beneficiaries of the Gulf Pension Plan, $23,497,566, together with pre-judgment interest at the rate of 10% compounded annually, and post-judgment interest at the rate of 6.26%.
3. The assets and liabilities of the Contributory Retirement Plan of Gulf Oil Corporation ("CRP") and the Supplemental Annuity Plan of Mene Grande Oil Company ("SAP") shall be spun off from the other assets and liabilities of the Chevron Retirement Plan as soon as practicable following the date of this Judgment, and segregated in separate trusts according to the following terms:
4. The Court will maintain jurisdiction over this action to ensure compliance with the relief ordered in paragraph 3 of this Judgment and to determine whether plaintiffs' counsel are entitled to additional attorneys' fees and expenses, and if so, the reasonable and necessary amount of such fees and expenditures.
This is a FINAL JUDGMENT.
PROCEDURE FOR UNMERGING CRP AND SAP FROM CHEVRON RETIREMENT PLAN, TERMINATING THE CRP AND DISTRIBUTING ASSETS TO PLAN MEMBERS AND BENEFICIARIES
I. ESTABLISH CURRENT MARKET VALUE OF CRP AND SAP ASSETS BY ________.
II. ESTABLISH SEPARATE TRUST ACCOUNTS BY ________.
III. TERMINATION OF CRP AND SAP UNDER § 4041 OF ERISA AND IRS APPROVAL.
IV. ACTUARIAL VALUATION OF CRP AND SAP PLAN LIABILITIES ON TERMINATION BASIS AS OF TERMINATION DATE BY ________.
V. ALLOCATION OF SURPLUS.
VI. DISTRIBUTE BENEFITS AND SURPLUS BY ________.
VII. PREPARE FINAL REPORT OF ASSET DISTRIBUTION FOR COURT (JOINT EFFORT BY COUNSEL, TRUSTEE(S), ACTUARIES AND ANY CONSULTANTS) BY ________.
The Court does not glean the inference urged by plaintiffs from this letter. To do so would be analogous to concluding that a court's denial of relief on the merits leads to an inference that a plaintiff would have been entitled to damages requested had the court not found against the plaintiff on the merits.