Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 87-0506.
Gibbons, Chief Judge, Mansmann and Aldisert, Circuit Judges.
In this ERISA*fn1 case we are faced with the question of whether the district court properly issued a preliminary injunction against corporate and individual defendants prohibiting them from transferring, selling or in any way dissipating their property except in the ordinary course of business pending the final outcome of a lawsuit in which pension plan participants seek the return of a portion of the distribution of excess assets from the termination of the plan. Because we found the injunction against the personal assets of the individual defendants to be improper, we vacated it by order dated May 18, 1989. In addition, because corporate defendant Hamilton Technology has satisfied its liability to the pension plan as determined by the Pension Benefit Guaranty Corporation and since it is not the plan administrator, we will vacate the preliminary injunction against it. As to the remaining two corporate defendants (Clabir Corporation, HMW Industries, Inc.) however, we will uphold the district court's issuance of the preliminary injunction because the plaintiffs demonstrated a reasonable likelihood of success on the merits of Count II of the complaint, demonstrated an irreparable harm through the possible loss of a statutorily guaranteed cause of action and the equities balanced in their favor.
Edward C. Fechter represents the plaintiffs, a certified class consisting of approximately 650 current and former employees of the Hamilton Watch Co., HMW Industries Inc., and Hamilton Technology, who participated in the HMW Pension Plan. The defendants consist of three corporate defendants: Clabir Corporation, Hamilton Technology, Inc. (HamTech), and HMW Industries, Inc. (HMW), as well as three individual defendants: Gloria Strantz, former manager of benefits at HMW Industries, Henry D. Clarke, president of Clabir Corporation, and Kenneth R. Bernhardt, president of HamTech. Fechter brought suit after the HMW Plan, which was terminated in March 1984,*fn2 was distributed mostly to the employer HMW to the detriment of the plan participants allegedly in violation of several ERISA sections.
The HMW Plan was an employee contribution plan where each participating employee paid between 2% and 4% of his salary to the Fund. Employer contributions were made only when necessary to keep the Fund actuarially sound, i.e., sufficiently funded. Because the Plan was overfunded, HMW did not have to make any contributions for the last five plan years. After termination of the Plan, Connecticut General Life Ins. Co. ("CG"), with whom NM had a contract for investment purposes of the Fund, calculated the surplus of assets over liabilities to be over $9 million. After approval of the termination by the Pension Benefit Guarantee Corporation ("PBGC"), CG calculated the distribution of the surplus and determined that the 650 employee participants would share in 17% of the surplus while HMW, and its parent corporation Clabir, would recover 83% of the surplus.
Count I of the complaint alleged that HMW violated 29 U.S.C.A. § 1344(d)(1) which prohibits the reversion of surplus assets to an employer where the plan language does not provide for such a reversion.*fn3 In addition, Count I alleged that the individual defendants breached their fiduciary duty by failing to act solely for the benefit of plan participants in violation of 29 U.S.C.A. § 1104.
Fechter alleged in Count II of the complaint that HMW's inclusion of retirees in the formula to distribute surplus assets was a violation of ERISA, specifically of 29 U.S.C.A. § 1344(3)(b)(ii). The method CG used to determine the percentage of surplus distributed to the participants was to multiply the $9 million surplus by a fraction which consisted of a numerator composed of (a), the total contributions by plan participants, and the denominator composed of that number (a) and (b), the cost of benefits to be purchased upon termination, and (c) the cost of retirees benefits:
(a) $2,954,025 (b) 2,815,314 (c) 11,653.007
Thus, $1.7 million wa6 distributed to Fechter, et al.
Under the pre-ERISA HMW Plan, when an individual chose to retire, the benefits allocated to him as a result of both his and HMW's contributions (plus interest) were transferred to a trust -- known as the Retired Lives Account -- for the purchase of individual annuities which guaranteed the retiree's monthly pension. These "irrevocable commitments," as Fechter refers to them, essentially resulted in a lessening of liability of the Fund because, once bought and paid for, the Fund no longer had to guarantee the individual's benefits. Instead, the annuity contract with CG did so. It is apparent that both pre -- and post -- ERISA contracts between CG and HMW provided for the purchase of annuities.*fn4 Fechter contends that if the (c) figure for retiree liability is removed from the formula for the distribution of assets, the percentage changes:
(a) $2,954,025 (b) $2,815,314
Under the proposed calculation, $5,254,391 would be distributed ...