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Chait v. Bernstein

as amended january 29 1988.: December 18, 1987.


On Appeal from the United States District Court for the District of New Jersey, D.C. Civil No. 85-2090.

Author: Becker


BECKER, Circuit Judge.

The ERISA appeal arises from a dispute between the principal of a hopelessly insolvent property and casualty insurance company and the receiver of that company appointed upon petition of the State Insurance Commissioner. Each party claims the surplus assets of the company's defined benefit pension plan that remain after payment of vested benefits. After the company sponsoring the Plan entered Chapter 7 liquidation, the receiver in bankruptcy froze the assets of the Plan. The receiver then attempted to amend the Plan so that any surplus assets of the Plan, after payment of accrued benefits to vested employees, would revert to the employer's estate in bankruptcy. The principal sued the receiver for the surplus in the United States District Court for the District of New Jersey claiming that the surplus belongs to him and the other employees of the company whose pension have become vested. The receiver claimed the surplus for the benefit of the company (and its creditors). The district court granted summary judgment for the receiver.

Resolution of the dispute requires that we consider two technical ERISA questions in connection with the winding up of a plan. First, we must decide whether a freeze on the accrual of further benefits (and of the plan's assets) effectively terminates a plan, thereby preventing subsequent plan amendment. Second, and more difficult, we must determine whether the language in a plan providing that all plan assets must be used "exclusively for the benefit" of the plan's beneficiaries precludes an amendment returning surplus assets to the employer. In addressing the second question we must examine the complicated relationship between ERISA § 403 (the "exclusive benefit" requirement) and ERISA § 4044 (the provision for surplus reversion in single-employer plans). We must also grapple with the significance of the "exclusive benefit" language under the facts of this case, in which the vested employees have received all their anticipated benefits and the company is bankrupt.

For the reasons that follow, we answer both of the above-stated questions in the negative, and therefore affirm the district court's summary judgment grant in favor of the defendant, the receiver in bankruptcy. With respect to the vexing second question, we hold that a vested employee who has fully received who has fully received his vested benefits cannot rely on the "exclusive benefit" language, standing alone, to prevent an amendment reverting surplus plan assets to the bankrupt company.


Arnold Chait, the plaintiff-appellant in this case, was chairman of the board, chief executive officer, [Text Deleted by Court Emendation] and president of the Ambassador Insurance Company, a Vermont chartered property and casualty insurance company. Chait is also a major stockholder of Ambassador Group, Inc., which wholly owns the Ambassador Insurance Company. Defendant-appellee George K. Bernstein is the receiver in bankruptcy of Ambassador, appointed by a Vermont court upon petition of the Vermont Commissioner of Banking and Insurance. Although Bernstein was initially charged with the task of rehabilitating Ambassador, the Vermont Supreme Court has since affirmed an order to liquidate the company. Ambassador has been adjudged in Vermont state court to be insolvent by at least $45.6 million. See In re Ambassador Insurance Co. Inc., 147 Vt. 344, 515 A.2d 1074 (Vt. 1986).

Ambassador provided its employees with a defined benefits plan, funded entirely by employer contributions.*fn1 On April 4, 1984, as part of Ambassador's reorganization while in receivership, Bernstein amended the Plan to prevent the accrual of benefits after December 31, 1983. This amendment effectively froze the benefits of the Plan and prohibited any further accrual for the skeleton work force that remained upon reorganization. The effects of this amendment on unvested employees is the subject of a potential separate action between the IRS and Bernstein.

On December 9, 1984, Bernstein amended the Plan to provide for the reversion to Ambassador of all surplus assets -- those remaining after all vested benefits had been paid. The surplus assets total approximately $500,000. The parties disagree as to the source of surplus, and to what extent the benefit freeze of April 4, which stripped some employees of unvested accrued benefits, may have enlarged it. Bernstein has asserted, and Chait has not disputed, that only approximately $26,000 of the surplus derived directly from the freeze, which recaptured funds set aside for unvested employees for Ambassador. The record contains actuarial information filed with the Internal Revenue Service that corroborates Bernstein's assertion. See Schedule B (Form 5500) filed as required under ERISA § 104 (J.A. 239).

On December 14, 1984, Bernstein filed a Notice of Termination with the Pension Benefit Guaranty Corporation (PBGC). In May 1985, Chait sued in the district court, as trustee, on behalf of all Plan beneficiaries, attempting to prevent Ambassador from recapturing the Plan's surplus assets. Essentially, Chait argued that the vested employees deserved whatever surplus assets remained in the Plan. In June 1985 Bernstein ordered Chait removed as trustee of the Plan and Chait subsequently challenged Bernstein's order in the district court. The district court did not reinstate Chait as trustee but found that he had standing to sue as a Plan beneficiary even if he were not a trustee. See ERISA § 502, 29 U.S.C. § 1132 (1982). Indeed, Chait stands to receive over half the surplus himself should he prevail in this litigation. Chait does not appeal the district court decision as to his standing as trustee and hence we treat him as representing his own interest in this appeal. The parties stipulated to all relevant facts and cross-moved for summary judgment, which the district court granted in Bernstein's favor. This appeal followed.


Chait contends that after the April 4 benefit freeze, no further amendment of the Plan was permissible. He believes that the benefit freeze effected a termination of the Plan, and relies on ERISA § 4044, 29 U.S.C.A. § 1344 (West Supp. 1987), for the proposition that upon termination, unless otherwise indicated by the Plan, all surplus assets revert to the employees. Because the benefit freeze occurred on April 4, 1984, before the Plan was amended to include a revision to the employer, Chait argues that the surplus assets reverted to the employees on that date. Alternatively, Chait argues that even if the Plan did not undergo a full termination, it underwent a partial termination under I.R.C. § 411(d)(3) (1982), and that this partial termination prevented any further amendment of the Plan. At oral argument, Chait apparently abandoned his contention that a full termination had been effected on April 4. Instead, he pursued his alternative argument that a partial termination had occurred which, in and of itself, precluded any further amendment of the Plan.

Bernstein argues that the Plan was not fully terminated until December 19, 1984 when the Receiver filed a notice of intent to terminate with the PBGC, and that until that point he was free to amend the Plan to return surplus assets to the employers. Without debating whether a partial termination occurred, or projecting the possible consequences for unvested employees,*fn2 Bernstein argues that the tax definition of partial termination has no relevance to the distribution of surplus assets, but only applies to protect the interests of vulnerable unvested employees.

The district court held that the Plan had not been fully terminated in accordance with ERISA. In addition it held that the existence of a partial termination for tax purposes does not control whether such a termination has taken place for ERISA purposes. The court concluded that because no termination had taken place for ERISA purposes, amendment after the April 4 freeze was permissible. We agree. There is no question that had the Plan been terminated under ERISA, Bernstein could not have amended the Plan and the surplus would have reverted to the employees. See Audio Fidelity Corp. v. Pension Benefit Guaranty Corp., 624 F.2d 513 (4th Cir. 1980). Because, for the reasons that follow, we believe no termination for ERISA purposes occurred on April 4, Bernstein was free to amend the Plan.

Although the issues of full and partial termination are linked, it is useful at the outset to distinguish the two. As to full termination, we must look to ERISA itself to determine whether a termination has occurred. Terminations are governed by ERISA § 4041, 29 U.S.C.A. § 1341 (West Supp. 1987). That section provides that the plan administrator must file notice of termination with PBGC and await its notice that the plan's assets are sufficient to ...

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