McMahon v. McDowellMcMahon v. McDowell
- Reporters:
- Before:
- Stapleton, Adams, Gibbons
OPINION OF THE COURT
STAPLETON, Circuit Judge:
This action was brought
The parties, after stipulating to certain facts, filed cross-motions for summary judgment. According to these stipulations, the following claims are still at issue in this case:
--Claims of salaried workers for unpaid wages under state
--Claims of hourly and salaried workers for unpaid fringe benefits under state law1
Claims of hourly and salaried workers for unpaid pension plan contributions under ERISA and state law.
The defendant officers and directors asserted, inter alia, that ERISA had preempted plaintiffs’ state law claims for pension contributions and fringe benefits and that no ERISA violation had been shown. The district court agreed with defendants as to the preemption of state law and the absence of an ERISA violation. The court then exercised its discretion to refrain from hearing plaintiffs’ remaining pendent state claims and also did not resolve Mesta‘s claim that its discharge in bankruptcy insulated it from liability. The plaintiffs appealed these rulings.
This Court has plenary review upon the appeal from the grant of summary judgment upon stipulated facts. Solomon v. Klein, 770 F.2d 352, 353 (3d Cir.1985); Goodman v. Mead Johnson & Company, 534 F.2d 566, 573-74 (3d Cir.1976), cert. denied 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977).
II
A. The Pension Plans
Mesta maintained separate pension plans for its hourly and salaried workers. These plans were non-contributory, defined-benefit plans, under which the employees were to receive pensions in specified amounts after retirement and upon reaching a certain age. The terms of the hourly workers’ plan were reached through collective bargaining while those of the salaried workers’ plan were set by Mesta alone. The required level of contribution to both plans was determined by reference to ERISA‘s funding requirements and the level of benefits promised to the employees. Both pension plans were approved by the Internal Revenue Service (“IRS“) as qualified under under
Mesta‘s annual pension contributions were due by September 15 of the year following the plan year to which the contributions applied. Until plan year 1980, Mesta contributed the amounts recommended by the plans’ actuaries and was in compliance with the plans and ERISA. However, between 1977 and 1981, Mesta‘s financial condition took a severe turn for the worse. During that period, its operating results dropped from an $8.8 million profit to a $23.9 million loss. At the same time, the notes payable by Mesta to its banks increased from $1.3 million to $25 million, and Mesta defaulted on several of these notes. As a condition of the banks’ waiver of default on notes and the continued extension of credit, in March 1981, Mesta and the banks entered into a revolving credit agreement. Under this agreement, Mesta pledged all its assets, including real estate, plants, equipment, inventory, accounts receivable, stock in subsidiaries, and most contract rights, to the banks.
As a result of its financial difficulties, in 1981, when the 1980 plan year contributions were due, Mesta “did not have cash
Mesta therefore applied to the IRS for a waiver of the minimum funding standards pursuant to
In September 1983, Mesta sought to terminate the pension plans. With the approval of the Pension Benefit Guaranty Corporation (“PBGC“), the plans were terminated as of June 16, 1983. When the pension plans were terminated, the plans did not have sufficient assets to pay all beneficiaries their full pension benefits. PBGC, as successor trustee of the plans, took custody of all their assets and filed claims against Mesta to recover contributions owed by Mesta to the plans. In Mesta‘s bankruptcy reorganization, PBGC acquired various assets of Mesta on behalf of the pension plans.
PBGC continues as successor trustee to the pension plans and is paying the former Mesta employees the portion of their vested benefits that is guaranteed by ERISA and the plans.
B. Preemption of State Law by ERISA
Plaintiffs seek unpaid wages, fringe benefits, and pension plan contributions from the individual defendants pursuant to state common-law and the WPCL,
ERISA contains an explicit and broad preemption provision. ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in Sec. 1003(a) of this title and not exempt under Sec. 1003(b) of this title.” Section 514(a),
The phrase “relate to” [is] given its broad common-sense meaning, such that a state law “relate[s] to” a benefit plan “in the normal sense of the phrase, if it has a connection with or reference to such a plan.” [Shaw, 463 U.S. at 97, 103 S.Ct. at 2900]. The preemption provision was intended to displace all state laws that fall within its sphere, even including state laws that are consistent with ERISA‘s substantive requirements. “[E]ven indirect state action bearing on private pensions may encroach upon the area of exclusive federal concern.”
Metropolitan Life Insurance Co. v. Mass., --- U.S. ----, ----, 105 S.Ct. 2380, 2389, 85 L.Ed.2d 728 (1985) (emphasis added and some citations omitted). In Shaw, the Supreme Court turned to Black‘s Law Dictionary 1158 (5th ed.1979) for its a common-sense definition of “relate“: “To stand in some relation; to have bearing or concern; to pertain; refer; to bring into association with or connection with.” Shaw, 463 U.S. at 97 n. 16, 103 S.Ct. at 2900 n. 16.
The WPCL and other state law claims are therefore preempted--insofar as they authorize the recovery of the pension contributions and fringe benefits from the individual defendants--if they “relate” to the Mesta employee benefit plans.
We believe that the WPCL, as employed by plaintiffs, plainly relates to the Mesta pension plans and therefore is preempted by Section 514(a),
The plaintiffs implicitly recognize the close relation between the ERISA-governed benefit plans and the remedy they seek under state law. In their principal brief, plaintiffs assert that the WPCL is consistent with and even “supplements ERISA, ... making the payment of employee creditors a priority over the payment of other creditors.” This argument does not help plaintiffs, for as the Supreme Court has observed, the absence of a direct conflict will not save a state law that relates to a covered employee benefit plan. Metropolitan Life; Shaw.
Moreover, the WPCL, as invoked by plaintiffs, does not merely relate to Mesta‘s pension plans, it competes with the mechanism that Congress carefully established in ERISA itself. Congress set in place particular processes for the recovery of delinquent contributions:
[ERISA] places the obligation for funding and the penalty for underfunding on the person on whom it belongs--namely, the employer. This is achieved by imposing an excise tax where the employer fails to meet the funding standards, which starts out at a relatively modest level and increases sharply where there is continued failure to make the indicated contributions. More specifically, if an employer fails to contribute sufficient amounts to meet the new funding requirements, he will be subject to a nondeductible excise tax of 5 percent per year on the amount of the underfunding for any year. If the employer fails to make
up the underfunding by 90 days after original notification by the Internal Revenue Service, ... then the employer is subject to a second level excise tax amounting to 100 percent of the underfunding....
S.Rep. No. 93-383, 93d Cong., 1st Sess. 24, reprinted in 1974 U.S.Code Cong. & Ad.News at 4639, 4890, 4909-10, and in 1 Legislative History of the Employee Retirement Income Security Act of 1974, at 1063, 1092 (1976) (hereinafter cited as Legislative History).
If an employer nonetheless refuses to make the required plan contributions, ERISA also permits a civil action to be brought in order to enforce the provisions of the statute and of the plan. Sections 501(a) and 4068(d),
Furthermore, the statute, Sections 4001-4068,
We find additional support for our analysis in the explanation of Senator Harrison Williams, one of ERISA‘s principal sponsors: “State laws compelling disclosure from private welfare or pension plans, imposing fiduciary requirements on such plans, imposing criminal penalties on failure to contribute to plans--unless a criminal statute of general application--establishing state termination insurance programs, et cetera, will be superseded.” (Sen. Debate, August 22, 1974; Legis.Hist. at 4770-71).5
The conclusion is inescapable that the WPCL relates to the Mesta benefit plans in a way that Congress sought to foreclose by Section 514(a),
Plaintiffs argue that Carpenters Health & Welfare Fund v. Ambrose, 727 F.2d 279 (3d Cir.1983), precludes this conclusion. Ambrose involved a suit for delinquent pension funds contributions. The fund trustees sued under Section 301 of the LMRA,
When Ambrose was submitted to this court, the Supreme Court‘s decision in Shaw had not yet been announced and there is no reference to it in the Ambrose opinion. Moreover, subsequent to the issuance of the Ambrose opinion, the Supreme Court decided Metropolitan Life Insurance, 105 S.Ct. 2380 (1985). Shaw and Metropolitan Life make it very clear that state laws relating to a covered plan, even those that are arguably consistent with the goals of ERISA, are preempted by Section 514(a),
The district court‘s holding that plaintiffs’ state law claims for fringe benefits and pension contributions are preempted by ERISA is correct and must be affirmed.
C. Breach of Fiduciary Duty
The plaintiffs’ ERISA claim seeks to impose liability on the pension plan fiduciaries for their failure to collect delinquent pension plan contributions and on Mesta for its failure to make those contributions.7 Plaintiffs allege that this was a breach of the fiduciaries’ duties under Section 409,
As to any director or officer who may have been a fiduciary ... the sole issue as to plaintiffs’ claims that the directors and officers breached fiduciary duties under ERISA or otherwise violated ERISA is whether or not any director or officer breached such a duty in failing to collect pension contributions or in failing to cause pension contributions to be collected by or for the pension trusts.
Plaintiffs do not assert that the fiduciaries engaged in self dealing or prohibited transactions within the meaning of Sections 404 and 406,
The district court believed that the defendants’ failure “to collect certain pension contributions [does not] constitute a breach ... since the defendants’ alleged failure was pursuant to the provisions of Sec. 1083 of ERISA.” The plaintiffs except to this analysis and argue that while a Section 303 waiver may prevent a plan from losing its qualified status under the Internal Revenue Code, it “did not excuse the alleged obligations of Mesta and/or the Directors and officers to make Pension Contributions to the Pension Trusts“.
Plaintiffs attempt to characterize their federal claim against Mesta and the individual defendants as one brought by a participant or beneficiary “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” ERISA Section 502(a)(1)(B),
As the Supreme Court has held, a recovery under Section 409 for damages for breach of fiduciary duty does not go to any individual plan participant or beneficiary, but inures to the benefit of the plan as a whole. Massachusetts Mutual Life Insurance Company v. Russell, --- U.S. ----, ----, 105 S.Ct. 3085, 3089, 87 L.Ed.2d 96 (1985). Section 409 does not authorize a private right of action for compensatory relief. Id. Since plaintiffs’ sole ERISA claim is that the fiduciaries breached their fiduciary obligations, which is a violation of Section 409, they cannot characterize their ERISA claim as one to recover benefits due to them. Accordingly, this claim is not appropriately brought under Section 502(a)(1)(B),
However, this suit is proper under ERISA Section 502(a)(2),
Furthermore, if a beneficiary or participant can show that the plan fiduciaries breached their duties, he may also be able to recover damages, for the benefit of the plan, directly from the employer. Struble v. New Jersey Brewery Employees Welfare Trust Fund, 732 F.2d 325 (3d Cir.1984). However, the employer cannot be sued by the participants or beneficiaries under Section 502(a)(2),
Therefore, to recover damages from the employer, Mesta, or from the pension plans’ fiduciaries, plaintiffs must first demonstrate that the fiduciaries have breached their fiduciary duties. Struble, 732 F.2d at 336-37.
Section 404,
This standard, based upon the common-law conception of a trustee, is quite rigorous. See Raymond, ERISA Trusts and Tender Offers, 13 Sec.Reg.L.Rev. 253, 257-59 (1985). It requires a trustee to “exclude all selfish interest and all consideration of the interests of third persons.” 7 G. Bogert, The Law of Trusts and Trustees Sec. 543 at 197-98 (2d rev.ed 1978). Although ERISA‘s fiduciary duty requirements are based on the common law of trusts, the federal scheme departs from the common-law rule in at least one significant area. ERISA does not absolutely bar a plan fiduciary from simultaneously serving as a director or officer of the employer or of another “party in interest.” Section 408(c)(3),
Moreover, fiduciaries have a Section 404 obligation “to avoid placing themselves in a position where their acts as directors or officers of the corporation will prevent their functioning with the complete loyalty to participants demanded of them as trustees.” Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir.) cert. denied 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1982). This duty may, in some circumstances, require the fiduciary to step aside in favor of a neutral referee, or at the least, to conduct an explicit inquiry into the potential for a conflict of interest. See Id.; Raymond, 13 Sec.Reg.L.Rev. at 272-73. However, plaintiffs have stipulated that the only issue with regard to their claim that the trustees breached their fiduciary duties concerns the failure to collect pension loan payments. There is thus no allegation that the trustees breached their duties by failing to investigate alternative courses of action or to seek the guidance of a neutral third party.
Under traditional trust law doctrine, incorporated into ERISA, if a “trustee holds in trust a contract right against a third person and the trustee improperly refuses to bring an action to enforce the contract, the beneficiaries can maintain a suit ... against the trustee joining the obligor as co-defendant.” 4 A. Scott, Law of Trusts Sec. 282.1 at 2339 (3d ed.1967) (citation omitted); See Struble, 732 F.2d at 336-37. However, if under the circumstances it is prudent to refrain from bringing an action, so that the trustee does not violate his duty in so refraining, the beneficiaries can neither compel him to sue nor can they themselves maintain a suit against the third party. Scott, supra. Furthermore, although “a trustee should not without sufficient reason fail to take steps to enforce a claim, yet he can properly abandon a claim where it appears that a suit would be futile ... and there is no other method of enforcing the claim.” 3 Scott Sec. 192 (footnote omitted). We believe that, on the stipulated facts of the case at bar, the plan fiduciaries here have not been shown to have acted imprudently in refraining from seeking to collect the pension plan contributions.
ERISA sets minimum funding standards for anticipated pension liabilities incurred by employees’ service prior to ERISA‘s effective date of January 1, 1975. These liabilities are known as “past service liabilities” and employers generally have up to forty years fully to fund them. Section 302(b),
Section 303(a),
In deciding whether to grant such a waiver, the IRS must consider whether:
(1) the employer is operating at an economic loss,
(2) there is substantial unemployment or underemployment in the trade or business and in the industry concerned,
(3) the sales and profits of the industry concerned are depressed or declining, and
(4) it is reasonable to expect that the plan will be continued only if the waiver is granted.
Section 303(b),
The plaintiffs admit that the Section 303 waiver insulated Mesta from the penalty tax and from the loss of the qualified status of the plans. Plaintiffs argue, however, that the waiver did not excuse Mesta‘s obligations imposed by Section 302 to make the contributions to the pension plans. We find the conclusion unavoidable that Congress also intended Section 303 to excuse the employer from the obligation to make a current contribution in cases of financial hardship.
The legislative history gives no hint that Congress intended a Section 303 waiver to have the limited effect suggested by plaintiff. On the contrary, it clearly indicates that once such a waiver is obtained, the employers’ obligation to pay is deferred. As one of the House Reports states, “Within limits, employers who are financially unable to meet the funding requirements should be allowed to postpone paying contributions to their plans.” H.Rep. No. 93-779, 93rd Cong., 2d Sess. 73 (1974), reprinted in 2 Legislative History at 2662. See Sen.Rep. No. 93-383, 93rd Cong., 1st Sess. 25 (1974), reprinted in 1974 U.S.Code Cong. & Ad.News 4890, 4910, and in 1 Legislative History at 1093; Id. at 57, 61-63, reprinted in 1974 U.S.Code Cong. & Ad.News at 4942, 4946-47, and in 1 Legislative History at 1125, 1129-31; H.Rep. No. 93-779, 93rd Cong. 2d Sess., 5, 25 (1974), reprinted in 2 Legislative History at 2594, 2614.
Moreover, the rationale for the Section 303 waiver cannot be limited as plaintiffs suggest. Congress adopted the waiver provision out of concern that, without such a mechanism, employers would terminate their employee benefit plans rather than risk exposure to ERISA liability.
An employer is under no obligation to initiate or continue his ERISA plan. Thus, in instances of financial hardship, if the employer was obligated to continue funding the plan at a level higher than
he could afford, he might instead choose to terminate the plan. Congress did not believe that in such a situation of financial hardship an employer should be forced to abandon his plan. This is the reason for the variance rule of Section 303.
Sen.Rep. No. 93-383, 93rd Cong., 1st Sess. 61-63 (1973), reprinted in Legislative History at 1129-31.
Congress, by permitting hardship variances, sought to discourage employers from terminating plans in times of financial difficulty. This rationale applies equally to Section 409 liability,
We therefore disagree with plaintiffs’ suggestion. As the purpose of Section 303 is to discourage premature plan terminations, it temporarily waives the employer‘s obligation to contribute to a plan, and thus insulates the employer from the penalties of a lower funding level, including suits by trustees seeking to enforce Section 302. Accordingly, the trustees breached no fiduciary duty in failing to bring suit against Mesta to enforce the minimum funding obligations that had been waived.
Moreover, we believe the existence of the Section 303 waiver has additional significance in this case. That waiver demonstrates that a neutral party, the Secretary, decided that, given Mesta‘s financial position in 1981, requiring the Section 302 contribution would create a significant potential of harm to the interests of the plan participants and make it likely that the plan would be terminated. This fact is significant in the context of the later period during which Mesta‘s second Section 303 waiver request was pending because the stipulated facts relating to that period show no change of circumstance which would support a contrary conclusion.
It normally will be reasonable for plan fiduciaries to refrain from action which might send the employer into bankruptcy or lead to the termination of the plan. On the facts stipulated here, we believe this explains and justifies the failure of the plan fiduciaries to institute collection litigation. In short, we agree with the district court that the fiduciaries’ inaction during the period from the granting of the first waiver in December 1981 until the February 1983 bankruptcy filing was reasonable.10
We do not, of course, suggest that pension trustees will always be justified in declining to bring suit against an employer who has applied for a Section 303 waiver of its minimum funding requirements. Indeed, whenever an employer seeks to avoid making its pension plan payments, whether pursuant to Section 303 or in any other manner, trustees have a duty to investigate the relevant facts, to explore alternative courses of action and, if in the best interests of the plan participants, to bring suit against the employer. See Struble, 732 F.2d at 335; Donovan, 680 F.2d at 271. These duties, and the overriding obligation to maintain a primary loyalty to the fund, are heightened, if anything, when the trustees also serve as officers of the employer company, as here.
Nonetheless, the parties in this action have stipulated that the employer was in dire financial straits, and there is no allegation that its application for a Section 303
III
Therefore, the district court‘s grant of summary judgment in favor of defendants on the ERISA claim will be affirmed. As the plaintiffs’ federal claims against Mesta and the trustees were properly disposed of, the district court‘s dismissal of plaintiffs’ pendant state law claims will also be affirmed. See Greenfield v. Heublein, Inc., 742 F.2d 751, 760 (3d Cir.1984).
Notes
The district court, in granting summary judgment for defendants, stated that all the pension and fringe benefits plans “appear[ ] [to] ... come under the scope of ERISA.” The plaintiffs do not contest that ruling and we express no opinion on the district court‘s observation regarding ERISA coverage of the fringe benefits. Compare California Hospital Assoc. v. Henning, 770 F.2d 856 (9th Cir.1985) (upholding
Every employer shall pay all wages, other than fringe benefits and wage supplements, due to his employees on regular paydays designated in advance by the employer....
Every employer who ... agrees to pay or provide fringe benefits or wage supplements, must remit the deductions or pay or provide the fringe benefits or wage supplements ...
The WPCL defines “wages” and “fringe benefits” broadly: “Wages” include
all earnings of an employee ... [and] also includes fringe benefits or wage supplements whether payable by the employer from his funds or from amounts withheld from the employees’ pay by the employer.... [Fringe benefits include] all monetary employer payments to provide benefits under any employee benefit plan, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
Section 260.2a. (emphasis added)