Harold SAGE, Georgianna Wong, Lonnie Lawton, Mae Dyer,
Dianne Berroth, Jean Alden, and Richard Dominguez,
Plaintiffs-Appellants and Cross-Appellees,
v.
AUTOMATION, INCORPORATED PENSION PLAN AND TRUST;
Automation, Incorporated Profit Sharing Plan and Trust;
Harold M. Goodman, as Trustee of Automation, Incorporated
Profit Sharing Plan and Trust; Harold M. Goodman,
individually; Janice M. Finley, as member of Advisory
Committee of Automation, Incorporated Pension Plan and
Trust; Janice M. Finley as member of Advisory Committee of
Automation, Incorporated Profit Sharing Plan and Trust;
Harold M. Goodman, as member of Advisory Committee of
Automation, Incorporated Pension Plan and Trust; Harold M.
Goodman, as member of Advisory Committee, of Automation,
Incorporated Profit Sharing Plan and Trust; and Automation,
Incorporated, a Kansas corporation, Defendants-Appellees and
Cross-Appellants.
Nos. 85-2036, 85-2136.
United States Court of Appeals,
Tenth Circuit.
April 28, 1988.
Donna M. Dill, Topeka, Kan. (Henry L. Hiebert, Topeka, Kan., Jay W. Vander Velde, Atherton, Sanderson and Vander Velde, Emporia, Kan., with her on the brief), for plaintiffs-appellants and cross-appellees.
Michael G. Norris, Niewald, Waldeck, Norris & Brown, Overland Park, Kan., for defendants-appellees and cross-appellants.
Before McKAY, TACHA and BALDOCK, Circuit Judges.
BALDOCK, Circuit Judge.
This appeal and cross-appeal concern the legal characterization, under the Employment Retirement and Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1001 to 1461, and the Internal Revenue Code, of various events that occurred at the former employer of appellants, Autоmation, Inc. (Automation). Employer pension and profit-sharing plans must comply with ERISA and also must conform to various Code requirements to qualify for favorable tax treatment. Appellants contend that the pension and profit sharing plans of Automation did not comply with either. Specifically, appellants maintain that their departure from the firm was a partial termination of the pension and profit sharing plans, entitling them to full vesting of amounts credited to their plan accounts with interest. See I.R.C. Sec. 401(a)(7) and Sec. 411(d)(3)1 (plan must provide that accrued benefits, to the extent funded, or amounts credited to employees' pension and profit sharing accounts, are nonforfeitable upon termination or partial termination of the plan). They also maintain that the plans failed to provide an adequate claims denial procedure and that such a failure constitutes a breach of fiduciary duty on the part of the plans' trustee. See 29 U.S.C. Secs. 1133 & 1104(a)(1)(A)(i), (a)(1)(B) & (D). Appellants sought compensatory and punitive2 damages based on the appellees' failure to provide an adequate claims procedure and also sought costs and attorney's fees. Appellees contended that appellants' claims were without merit and barred by the three year limitations period contained in 29 U.S.C. Sec. 1113(a)(2). Appellees also sought costs and attorney's fees necessitated by this action.
Appellee Automation performed various accounting services for several clients. Appellee Harold Goodman was the sole shareholder and president of the firm and the sole trustee of the company's pension and profit-sharing plans. Appellees Goodman and Janice Finley also were on the advisory boards of the plans, which were adopted in April 1972, and provided for vesting of an employee's interest in a contribution account at a rate of 10% per year, beginning on the third year of employee participation. The appellants were all plan participants. In December 1975, all but one of the appellants left Automation and obtained other employment with Volume Shoe, a major client of Automation, when Volume Shoe decided to develop in-house accounting capability. The trial court specifically found that all of the appellants were offered the opportunity to stay with Automation, rather than seek employment with Volume Shoe. By February 1976, appellant Dominguez had left the employ of Automation.
On the advice of an accounting firm, the plans' trustee did not characterize the departure of these employees as a partial termination of the plans; rather, the appellants were considered partially vested for 10% of their proportionate interests, with the exception of appellant Wong, who was considered partially vested for 20%. The plans' trustеe wrote the appellants, informing them of the decision to grant partially vested benefits and including checks for partially vested amounts.
Shortly thereafter, appellee Goodman sold the assets of Automation and terminated the plans. He had been attempting to sell Automation since 1973. Upon termination of the pension and profit sharing plans, the 16 remaining employees were to receive 100% vesting. I.R.C. Sec. 401(a)(7) and Sec. 411(d)(3). In late 1976, appellants learned of this and inquiry was made by one of the appellants concerning further benefits for the former employees. Upon the advice of the plans' accounting firm, the trustee responded that the former employees would not be recеiving further benefits. Thereafter, the appellees sought, and ultimately received, a determination from the Internal Revenue Service that the circumstances under which the plans were terminated did not affect the qualified status of the plans. In making this determination, the IRS apparently concluded that a partial termination had not occurred when the appellants left the employ of Automation. This determination was based on four days of field work by a revenue agent, including two days of interviews with the appellants.
Prior to that determination, appellants were represented by counsel. Appellants' counsel sought and received copies of the plans from the trustee's counsel, but not the application for determination submitted to the IRS. Appellants' counsel wrote the IRS explaining the appellants' position that a partial termination of the plans had occurred with the loss of the Volume Shoe account. Thereafter, the trustee's accounting firm forwarded an opinion letter to the IRS explaining why a partial termination had not occurred. Appellants' counsel received a copy and drafted a response, which was sent to the IRS.
Shortly thereafter, a meeting was held in the office of the plans' trustee concerning the issue of partial termination. Two of the appellants were present together with their counsel. The trustee was represented by counsеl and an accountant. The trustee's representatives restated the position that no partial termination had occurred. Appellants requested that they be provided a copy of all correspondence with the IRS concerning the application for determination. This request was denied by the trustee's counsel, and appellants were unable to convince the IRS to disclose the information.
After a bench trial, the trial court concluded that a partial termination of the plans, which would have entitled appellants to full vesting, had not occurred. Underlying this conclusion is the factual finding that appellants voluntarily left their employment with Automation. On appeal, appellаnts do not contest the trial court's factual findings on this issue, but renew their contention that partial termination of a qualified plan occurs as a matter of law whenever a substantial reduction in plan participants occurs in connection with a significant corporate event. Under appellants' approach, whether an employee voluntarily left an employer would not be considered. Rather, the focus would be on whether there was a significant reduction in the work force over a short period of time, without regard to the cause of that reduction. The trial court rejected this approach, relying on pertinent authority.
Although partial termination is not defined in the Code, the rеgulations and revenue rulings of the Commissioner are entitled to important consideration. Babb v. Olney Paint Co.,
Thus, the applicable regulation concerning partial termination in this case is former Treas.Reg. Sec. 1.401-6(b)(2) (1963) which provides:
(b) Termination defined.
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(2) ... Whether or not a partial termination of a quаlified plan occurs when a group of employees who have been covered by the plan are subsequently excluded, either by reason of an amendment to the plan or by reason of being discharged by the employer, will be determined on the basis of all the facts and circumstances. Similarly, whether or not a partial termination occurs when benefits or employer contributions are reduced, or eligibility or vesting requirements under the plan are made less liberal, will be determined on the basis of all the facts and circumstances.
Because the difference between the current and former regulation is slight, the current regulation and the cases interpreting it are of considerable assistancе. We begin with the proposition that whether a partial termination occurred is a question of law, one which we review de novo. Bruch v. Firestone Tire and Rubber Co.,
We agree with the trial court that under this regulation, a partial termination did not occur. The exclusion of appellants from the plan was not due to "an amendment to the plan or by reason of being discharged by the employer." Id.; see, e.g., Rev.Rul. 72-510, 1972-
Appellants contend that a partial termination of a qualified plan takes place as a matter of law when a substantial reduction in plan participants occurs in connection with a significant corporate event. This contention is incomplete for two reasons. First, the substantial reduction in plan participants must be attributable to "involuntary exclusions" or "employee terminations" from the plan. Kreis v. Charles Townley, M.D. & Associates,
Even assuming the appellants and others similarly situated constituted a significant percentage, the second reason why a substantial reduction of plan participants does not automatically work a partial termination is because such a reduction must be considered along with the other facts and circumstances. Kreis,
Somewhat less apposite are the cases cited by the parties. Appellants rely on Wishner v. St. Luke's Hospital Center,
Appellants' reliance on two other cases is unavailing. In Ehm v. Phillips Petroleum Co.,
Appellants next contend that the claims procedures of the plans were inadequate. This is the more difficult issue on appeal. 29 U.S.C. Sec. 1133 provides:
Claims procedure
In accordance with regulations of the Secretary, every employee benefit plan shall--
(1) provide adequate notice in writing to any participant or beneficiary whose claim for benеfits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and
(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.
At times relevant to this decision, regulations had not been adopted to carry out the purpose of this section. Those regulations became effective for claims filed on or after October 1, 1977. 29 C.F.R. Sec. 2560.503-1. In Wolfe v. J.C. Penney Co.,
29 C.F.R. Sec. 2560.503-1(f) provides:(f) Content of notice. A plan administrator or, if paragraph (c) of this section is applicable, the insurance company, insurance service, or other similar organization, shall provide to every claimant who is denied a claim for benefits written notice setting forth in a manner calculated to be understood by the claimant:
(1) The specific reasons for the denial;
(2) Specific reference to pertinent plan provisions on which the denial is based;
(3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material is necessary; аnd
(4) Appropriate information as to the steps to be taken if the participant or beneficiary wishes to submit his or her claim for review.
Application of this section to the facts of this case leads us to conclude that there was substantial compliance with the first two factors, but not with the latter two. Appellees contend that appellants were informed on three different occasions about their treatment under the plans. This characterization is too generous. The initial letters to the appellants informing them of partial vesting predated appellants' claims for full vesting and could not serve as notice that claims for full vesting had been denied. Nor could a letter addressed tо one of the appellants which denied her full vesting serve as notice to all of the appellants that their claims would be denied. At best, the opinion letter prepared by the trustee's accountant and provided to appellants' counsel was sufficient to comply with 29 C.F.R. Secs. 2560.503-1(f)(1) & (2).
Appellants contend that the opinion letter was inadequate to provide notice of denial of appellants' claims. They point out that their request for a formal denial of benefits from the trustee and representatives of the plan went unanswered. We have reviewed the opinion letter and have determined that while it may have provided sufficient notice to appellants concerning rejеction of their claim for additional benefits, it did not set out an adequate review procedure, and there is no other evidence of an adequate review procedure once the initial claim of appellants had apparently been rejected.
We acknowledge that the opinion letter falls short of the notice requirements now in effect. It is an opinion letter addressed to the trustee of the plans, not a letter to plan participants denying additional benefits. It advances two independent theories for denying full benefits to the employees: the voluntary departure of the employees and the lack of a "significant percentage" of employees dеparting. By its nature it is somewhat adversarial. But given the trial court's decision on the partial termination issue, the letter was sufficiently accurate to inform the beneficiaries of why their initial claim for additional benefits was denied.
While the letter does not mention any specific provisions in the plans, it explains the partial termination concept, on which the denial of additional benefits was based. Nonforfeiture of contributions in employee accounts on partial termination was a statutory prerequisite for a qualified plan and was determined in part by applying former Treas.Reg. Sec. 1.401-6(b)(2), and the pertinent revenue rulings, to the facts of this case. The opinion letter cited some applicable authority for the denial and accomplished partially the purpose served by referencing pertinent plan provisions. In sum, the letter complies with 29 U.S.C. Sec. 1133(1) and substantially complies with 29 C.F.R. Secs. 2560.503-1(f)(1) and (2).
We cannot say that the letter or the procedure followed by the trustee in this case complied with 29 U.S.C. Sec. 1133(2) or substantially complied with 29 C.F.R. Sec. 2560.503-1(f)(3) & (4). Although the statute, 29 U.S.C. Sec. 1133(2), may not literally require a written claims review procedure, it does require a reasonable opportunity for a full and fair review of the denial of a claim. Brown v. Retirement Comm. of Briggs & Stratton Retirement Plan,
Judged against these standards, the claims review procedure in this case was deficient. The opinion letter did not describe any additional information needed to perfect the claim, nor did it elaborate on any sort of review process for the claims of the appellants. The meeting between the trustee, his representatives, and appellants and their counsel, which appellees have characterized as a claims review hearing, was not preceded by notice identifying it аs such. Appellants were not given clear direction as to whether the decision on review of their claims would be decided by the plans' trustee, or by his agents or be based solely on the IRS determination. When the trustee and his representatives indicated that the decision on appellants' claims would be based on the IRS determination, they did not provide appellants with the application for determination nor did they provide, in a timely fashion, the supplementary information requested and provided to the IRS.4 There simply was no established claim procedure, indeed, an accountant for the plans testified that "we were of the position that there was no direction as to what the claims procedure was. So everyone just had to use their own imagination as to what types of claims procedure existed." Rec. vol. VII at 118. Although the sole trustee of the plans delegated these matters to the lawyers and accountants servicing the plans, the trustee is responsible for insuring that there is a full and fair review of the decision denying a claim. 29 U.S.C. Secs. 1133(2), 1132(d). The persistence of the appellants' counsel was responsible for the consideration accorded appellants' position during this ad hoc process.
The district court was entitled to consider these matters in determining whether the trustee's actions surrounding the termination of the plan were consistent with his duty of loyalty to plan participants. 29 U.S.C. Sec. 1104. The trial court recognized the deficiencies concerning compliance with 29 U.S.C. Sec. 1133, but found that appellants' position had been evaluated and that the claims were processed in good faith. Rec. vol. III at 631-32. We will not set aside these essentially factual findings. It must be remembered that the trustee was required to represent not only the interests of the departing participants, but also the present participants, namely the 16 remaining employees who would benefit from a determination that no partial termination had occurred. Although the trustee was in a position to benefit from the decision that no partial termination occurred, the trial court found no evidence of an improper motive after hearing the testimony and observing the witnesses. As the trial court observed, the trustee consistently sought legal and accounting advice concerning a proper resolution of the issue.
While these deficiencies in the claim procedure cause us concern, the question of whether such omissions were prejudicial to the appellants must be addressed. Wolfe,
Even though we cannot agree with the trial court that the claims procedure was legally adequate, its procedural defects do not require reversal in light of the trial court's decision, with which we agree, on the partial termination issue. Not every procedural defect will upset the decision of plan representatives. Wolfe,
On appeal, both parties contend that the trial court should have awarded attorney's fees and costs pursuant to 29 U.S.C. Sec. 1132(g). The trial court declined to award such costs and attorney's fees to the appellees, finding that the appellants' position was in good faith and not without merit. The trial court did not abuse its discretion. Hope v. Int'l Bhd. of Elec. Workers,
AFFIRMED IN PART, REVERSED IN PART and REMANDED.
Notes
Technically, the following Code section, which has been amended, governs this appeal:
I.R.C. Sec. 401(a)(7). A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts then credited to employees accounts are nonforfeitable.
Pub.L. No. 87-792, Sec. 2(2), 76 Stat. 809 (1962).
The present Code sections provide:
I.R.C. Sec. 401(a)(7). A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part satisfies the requirеments of section 411 (relating to minimum vesting standards).
I.R.C. Sec. 411(d)(3). Termination or partial termination; discontinuance of contributions.--Notwithstanding the provisions of subsection (a), a trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that--
(A) upon termination or partial termination,
* * *
the rights of all affected employees to benefits accrued to the date of such termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees' accounts are nonforfeitable.
* * *
We agree with the Fifth Circuit that punitive damages are not available in an ERISA action. Sommers Drug Stores v. Corrigan Enter.,
Treas.Reg. Sec. 1.411(d)-2, effective for plan years beginning after December 31, 1975, Treas.Reg. Sеc. 1.411(a)-(2)(b), currently provides:
(b) Partial Termination--(1) General rule. Whether or not a partial termination of a qualified plan occurs (and the time of such event) shall be determined by the Commissioner with regard to all the facts and circumstances in a particular case. Such facts and circumstances include: the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan; and plan amendments which adversely affect the rights of employees to vest in benefits under the plan.
The district court determined that under this current regulation, appellants would not prevail on the partial termination issuе. We agree.
Appellees maintain that the application for determination was withheld because it contained the compensation figures of all of the employees and that the relevant information contained in it had already been provided to the appellants. The trial court determined that the reason for non-disclosure was to maintain confidentiality. We are unconvinced that the appellees handled this matter correctly. Even assuming the compensation figures of all the employees were not relevant, the appellees could have redacted the figures. An IRS decision on the application for determination, which is not accompanied by аny discussion of the partial termination issue, in no way constrains a district court's decision on the issue. Bruch,