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VAN ORMAN v. AMERICAN INS. CO.

March 26, 1984

Francis VAN ORMAN, on his own behalf and on behalf of all participants and beneficiaries similarly situated, Plaintiff,
v.
The AMERICAN INSURANCE COMPANY, et al., Defendants; Nellie TAYLOR and Andrew Marsh, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. FIREMAN'S FUND INSURANCE COMPANY, et al., Defendants



The opinion of the court was delivered by: DEBEVOISE

 A number of motions are pending in this action. Critical to the ultimate resolution of this controversy are the parties' cross-motions for summary judgment testing the validity of the reactivation of The American Retirement Plan ("TARP"). These summary judgment motions will be dealt with first.

 I. Background

 A. Facts and History of the Litigation : The history of this litigation and a recital of the facts which give rise to it are set forth in the opinion of the Hon. H. Curtis Meanor, filed October 27, 1980, as supplemented by an opinion filed February 18, 1981 and in an opinion of the Court of Appeals, Van Orman v. American Ins. Co., 680 F.2d 301 (3d Cir. 1982). Certain of these facts must be repeated here, and events which have taken place since the filing of these opinions must be described.

 TARP was established in 1957 by The American Insurance Company for eligible employees of American and two of its subsidiaries, the American Automobile Company and the Associated Indemnity Corporation (the "Affiliated Companies"). The plan was a defined benefit plan funded by contributions from both employees and employers. Participants contributed a fixed percentage of their salaries, and the employer paid the remaining cost of the Plan in such amounts as "necessary on the basis of actuarial calculations to carry out the purposes" of TARP.

 In 1963 Fireman's Fund Insurance Co. acquired the Affiliated Companies. To provide a uniform pension plan for all its employees, Fireman's Fund made the Affiliated Companies' employees eligible to participate in the Fireman's Fund Retirement Plan ("FARP"), which was funded entirely by employer contributions. Simultaneously TARP was amended so that no further benefits accrued and so that no further contributions were made by either the employer or the employees after May 31, 1964. It was computed that on that date, as a result of "freezing" the fund, the market value of the fund's actuarial surplus exceeded $3 million.

 When the employees of the Affiliated Companies were transferred into FARP, they became eligible for the generally higher FARP benefits, which were paid for entirely by Fireman's Fund. Between 1964 and 1979 the FARP benefit provisions were improved from time to time.

 By 1975 the surplus in TARP was estimated to be $12 million. Fireman's Fund notified employees who participated in TARP that it had tentatively decided to terminate TARP on December 11, 1975 and purchase a group annuity contract to provide for their retirement benefits. Section 9.3 of TARP provides:

 
Notwithstanding any provisions of this Plan to the contrary, upon termination of the Plan, but only after all liabilities under the Plan shall have been satisfied, the Affiliated Companies shall be entitled to any balance of the net assets of the Trust Fund which shall remain by reason of erroneous actuarial computation during the life of the Plan.

 Fireman's Fund advised the TARP participants that, pursuant to Section 9.3, the Affiliated Companies intended to retain the surplus. Several employees objected to the termination and the Affiliated Companies' appropriation of the surplus, claiming that the booklets and letters describing TARP which had been distributed to them between 1957 and 1963 established their right to the TARP surplus upon termination. This litigation ensued.

 It is unnecessary to describe the procedural developments which led to the present alignment of the parties. It is sufficient to note that plaintiff class consists generally of retired and former employees of the Affiliated Companies. Defendants are Fireman's Fund, the Affiliated Companies, Fireman's Fund American Life Insurance Company ("FFALIC"), TARP, FARP and two members of the Employee Benefit Administration Committee of Fireman's Fund. Plaintiffs' Complaint (the "complaint") asserted claims under the Employee Retirement Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1381, state contract law, and under federal and state securities laws.

 It is apparent that after this litigation had been underway for some years defendants suffered doubts about the right of the Affiliated Companies to acquire TARP's surplus upon termination of TARP. In consequence Fireman's Fund "reactivated" TARP as of January 1, 1979. TARP was amended to provide that all TARP participants would be retransferred into the plan from FARP, that no further FARP benefits would accrue to these employees after December 31, 1978, and that the retransferred participants would accrue benefits under TARP beginning January 1, 1979. The employees who were thus transferred continued to have the same benefits they had had when they were covered by FARP. Fireman's Fund no longer had to pay into FARP to fund those benefits. Instead it expected to look to the TARP surplus, saving itself very substantial annual pension fund payments. Fireman's Fund applied to the IRS and received a determination that the reactivated TARP would be a qualified plan under the Internal Revenue Code.

 Plaintiff class moved to enjoin defendants from reactivating TARP. This court denied the motion, but required defendants to post a surety bond to cover any funds withdrawn from TARP as a result of reactivation.

 B. Prior Motions and Appeal : In 1980 earlier cross-motions of plaintiffs and defendants for partial summary judgment were heard, resulting in Judge Meanor's October 27, 1980 opinion. In order to understand the scope of the issues which remain in the case, it is necessary to review briefly the matters disposed of in that opinion and in the opinion of the Court of Appeals on the resulting interlocutory appeal.

 Count II of plaintiffs' complaint claimed that the TARP document included the booklets and letters distributed to employees and that these booklets and letters provided that the employees were entitled to any surplus which existed upon TARP's termination. Judge Meanor ruled that the provisions of TARP constituted the contract and that those provisions were not modified by the booklets and letters. He further ruled that the provisions of Section 9.3 of TARP permitting the employers to recapture on termination surplus due to erroneous actuarial computation is permitted by the applicable statute and regulations. ERISA § 4044(d)(1), 29 U.S.C. § 1344(d)(1); Treas. Reg. § 1.401-2(b)(1). However, he held that recapture is limited to the amount attributable to employer contributions. Judge Meanor summarized his conclusions about Count II as follows:

 
. . . I hold that the TARP contract was the TARP document and does not include the booklets and letters cited by plaintiffs. I hold that § 9.3 is validly included within TARP. However, as a matter of law, the right of recapture given therein to the employer cannot extend to surplus sums attributable to employee contributions. Finally, there remains a genuine issue of material fact as to whether the remainder of the "surplus" is attributable in whole or in part to erroneous actuarial computations, made during the life of TARP.

 Slip Op. at 30.

 This part of the opinion was implemented by paragraphs 2 and 3 of an August 25, 1981 Order on Motions for Partial Summary Judgment. These paragraphs denied both the plaintiffs' and defendants' motions for summary judgment on Count II. The Court of Appeals affirmed this part of the Order.

 Plaintiffs and defendants both moved for summary judgment on Count III of the complaint which alleged that Section 4044 of ERISA 29 U.S.C. § 1344, governs the distribution of TARP. Section 4044 concerns allocation of assets on "termination of a defined benefit plan." Subsection (d)(2) of Section 4044 requires that "after all liabilities of the plan have been satisfied" any residual assets must be "equitably distributed to the employees who made such contributions . . . in accordance with their rate of contributions." Judge Meanor noted that plaintiffs had requested as one form of relief a judicially-ordered termination of TARP and held "that § 4044(d) would apply in the event that this relief is granted." He denied defendants' motion for summary judgment declaring Section 4044 inapplicable on a judicial termination of TARP; conversely he granted plaintiffs' application for summary judgment declaring the applicability of Section 4044 in the event of a judicial termination of TARP and that on termination plaintiffs are entitled to surplus funds attributable to employee contributions. These rulings were implemented in paragraphs 4 and 5 of the August 25, 1981 Order.

 The Count III rulings were not the subject of the interlocutory appeal, but it is clear that the Court of Appeals agreed with Judge Meanor's conclusions in this regard. In its discussion of Count II it stated:

 
We agree that the regulation permitting employers to recapture surplus caused by erroneous actuarial computation must be limited by the provisions of section 4044(d). To hold otherwise would nullify an express statutory intent that the portion of the surplus attributable to employee contributions be distributed to employees upon termination.

 680 F.2d 301, 307-308.

 Paragraph 7 of the August 25, 1981 Order denied plaintiffs' motion for summary judgment in Count IV. However paragraph 8 denied defendants' motion for summary judgment in that Count since "there is a genuine issue of material fact as to whether defendant can establish that the 'surplus' resulting from employer contributions, or any part thereof, is attributable to erroneous actuarial computations during the life of the plan." On appeal the Court stated that "we do not believe that the district court improperly applied the reasonable expectations doctrine."

 In Count V plaintiffs sought recovery of the TARP surplus on the basis of a quantum meruit theory arising out of their "continued employment by defendant." Paragraph 9 of the August 25, 1981 Order implemented Judge Meanor's award of summary judgment in favor of defendants on that Count. This was not a subject of the interlocutory appeal.

 In Count VI plaintiffs sought recovery of the TARP surplus on an unjust enrichment theory, claiming that "transfer of TARP funds to FARP or any other application of [TARP] other than for the sole and exclusive . . . benefit of the class will result in the unjust enrichment of the . . . companies making contributions to FARP, to the detriment of plaintiffs." Concerning the question of "enrichment", Judge Meanor observed:

 
Thus, in whatever form proposed by defendants (termination, merger, reactivation), Fireman's Fund would reap benefits which exceed employer contributions to TARP, either by way of income, by reducing Fireman's Fund contributions to FARP or by paying newly-accrued benefits in TARP without further employer contributions. In any form, Fireman's Fund would be "enriched" by recovery of the TARP surplus.

 Slip Op. at 44-45.

 Turning to the question whether the enrichment was "unjust", Judge Meanor observed:

 
Elsewhere I have held that § 4044(d)(2) of ERISA mandates that, upon TARP's termination, surplus funds attributable to employee contributions must be distributed to the plan's beneficiaries. Alternatively, I believe the above considerations require me to conclude that retention of surplus funds attributable to employee contributions would result in the unjust enrichment of defendants.
 
Thus, with respect to TARP funds attributable to employee contributions plaintiffs' motion for summary judgment will be granted and defendants' denied. This holding extends to any transfer of TARP assets to FARP, since the beneficiaries of the two plans are not coextensive. Defendants have been aware, since 1964, that TARP was in a surplus position. It would, in my estimation, unjustly enrich defendants to permit transfer of TARP surplus attributable to employee contributions for the benefit of FARP participants and to reduce defendants' contractual obligation to fund FARP.
 
For similar reasons, I believe that use of surplus attributable to employee contributions to fund additional liabilities in a reactivated TARP is impermissible on unjust enrichment grounds. These obligations would have otherwise required contributions to FARP. Only a small percentage of TARP participants would accrue new benefits thereby benefiting from the TARP surplus. In effect, funds generated by employee contributions from 1957 to 1964 are being used to reduce Fireman's Fund's liability to FARP. I believe this use of funds to be impermissible on unjust enrichment grounds.
 
Different considerations pertain to the surplus funds attributable to employer contributions. Although the statutes and regulations clearly require pension funds to be held for the exclusive benefit of the plan's beneficiaries, the regulations also permit the employer to include a plan provision, such as § 9.3, permitting recapture in certain defined circumstances. Implicit in these regulations is the determination that employer recovery in such circumstances does not violate the spirit of the "exclusive benefit" rule and would not be equitable. See ERISA § 4044(d)(1). 29 U.S.C. § 1344(d)(1); Treas. Reg. § 1.401-2(b). In discussion of Count II, I have determined that there is a factual issue as to whether the conditions prescribed in the statute and regulations have been met. Additionally, the New Jersey courts have indicated that unjust enrichment theory is inapplicable to a noncontributory pension plan. See Crinnion v. The Great Atl. & Pac. Tea Co., 156 N.J. Super. 479, 485 [384 A.2d 159] (App.Div.1978). Assuming the factual prerequisites of the statute and regulations are met, I believe Crinnion provides a persuasive analogy concerning applicability of unjust enrichment theory to the employer portion of the TARP surplus. I believe, however, that the presence of the factual issue set forth in discussion of Count II, supra, mandates that both plaintiffs' and defendants' motions for summary judgment be denied with respect to TARP surplus funds attributable to employer contributions.

 Slip Op. at 48-50.

 Judge Meanor's rulings on Count VI were reflected in paragraphs 10-12 of the August 25, 1981 Order:

 
(10) that with respect to the funds in TARP attributable to employee contributions, plaintiffs' motion for summary judgment on Count VI of the Second Amended Consolidated Complaint is granted and defendants' motion for summary judgment is denied;
 
(11) that the use of surplus funds attributable to employee contributions to fund additional liabilities in a reactivated TARP is impermissible on unjust enrichment grounds;
 
(12) that there exist genuine issues of material fact as to the surplus attributable to employer contributions and, therefore, both plaintiffs' and defendants' motions for summary judgment on Count VI of the Second Amended Consolidated Complaint as to the surplus funds in TARP attributable to employer contributions are denied;

 This portion of the Order was a subject of the interlocutory appeal. The Court of Appeals held that the doctrine of unjust enrichment is inapplicable under New Jersey law when, as here, a valid, unrescinded contract governs the rights of the parties.

 The Court of Appeals stated that "it is clear that Congress intended federal courts to fashion a federal common law concerning pension plans under ERISA" and that "we thus must determine whether employees have a right, based on a federal common law doctrine of unjust enrichment emanating from ERISA, to any portion of the surplus." 680 F.2d at 311. Noting the extensive regulatory network which Congress established in ERISA, the Court stated:

 
We are particularly reluctant to fashion a federal common-law doctrine of unjust enrichment when such a right would override a contractual provision. The district court found that section 9.3 of the TARP document, as modified by section 4044(d)(2) of ERISA, governed the distribution of the surplus upon termination. The contract does not afford plaintiffs any pre-termination right to the surplus and, in fact, expressly states that employees have no rights to the fund other than those provided in the contract. The existence of a contract, in our view, requires a particularly strong indication that the unjust enrichment doctrine will vindicate an important statutory policy.

 680 F.2d at 312.

 The Court of Appeals held that with respect to the employees' entitlement to a portion of the surplus on termination, the unjust enrichment remedy "is entirely duplicative of employees' statutory rights" under Section 4044(d)(2) of ERISA and Section 9.3 of the TARP contract, stating, "In light of the express statutory and contractual entitlement to the surplus, we see little reason for the creation of this right as ...


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