Harris Trust and Sav. Bank v. John Hancock Mut.

Decision Date20 August 2002
Docket NumberDocket No. 01-7608.
Citation302 F.3d 18
PartiesHARRIS TRUST AND SAVINGS BANK, as former Trustee of the Sperry Master Retirement Trust No. 2 (and its successor, the Unisys Master Trust) and The Bank of New York, as Trustee of the Unisys Master Trust, Plaintiffs-Appellees, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant-Third-Party Plaintiff-Appellant, v. Sperry Corporation and The Retirement Committee of Sperry Corporation, Third-Party Defendants-Appellants, Chase Manhattan Bank, N.A., Counterclaim Defendant-Appellee.
CourtU.S. Court of Appeals — Second Circuit

Edwin G. Schallert, Debevoise & Plimpton, New York, N.Y. (Donald W. Hawthorne, Frances L. Kellner, Christopher J. Klatell, Debevoise & Plimpton, New York, NY, Howard G. Kristol, Robert M. Peak, Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, NY, of counsel), for Defendants-Appellants.

Lawrence Kill, Anderson Kill & Olick, P.C., New York, N.Y. (John B. Berringer, Ann V. Kramer, Anderson Kill & Olick, P.C., New York, NY, Brian C. Lucas, Unisys Pension Plan, of counsel), for Plaintiffs-Appellees.

Before: MINER and SACK, Circuit Judges, and BERMAN, District Judge.*

MINER, Circuit Judge.

Defendant-appellant John Hancock Mutual Life Insurance Company ("Hancock") appeals from a judgment entered in the United States District Court for the Southern District of New York (Chin, J.), awarding to plaintiffs-appellees Harris Trust and Savings Bank and The Bank of New York ("Harris") $84.88 million, including attorneys' fees and interest, the court having found that Hancock violated the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq., by breaching in various ways its fiduciary duties of loyalty and avoidance of self-dealing.

In 1941, Hancock and Sperry Rand Corporation ("Sperry"), one of Harris' predecessors as trustee,1 entered into Group Annunity Contract No. 50 ("the Contract"), which established a retirement plan for the benefit of Sperry's employees ("the Plan"). As originally conceived, the Contract was a deferred annuities form of contract whereby Sperry purchased from Hancock deferred annuities to be paid to Sperry employees upon retirement. The premiums paid by Sperry for the annuities became part of Hancock's General Account and Hancock issued the guaranteed annuities at purchase rates fixed by the Contract. By a 1968 amendment, the Contract was modified to make it a Retrospective Intermediate Participation Guarantee form of contract. This meant that the premiums paid in by Sperry were credited to a "Pension Administrative Fund," which is an account maintained for Sperry on Hancock's books. As had been the case prior to the amendment, the premiums paid went into Hancock's General Account, from which Hancock made investments on behalf of many different clients, and from which every year it allocated investment income and expenses to the Plan. The parties agreed that Hancock would hold in reserve 105% of the liabilities of the guaranteed annuities portion of the Plan; the amount in excess of that reserve is referred to as "free funds." The 1968 amendment also provided a mechanism whereby Sperry could withdraw, or "roll over," free funds through a lump-sum transfer of free funds. Exercise of this provision would trigger the reversion of the Contract to a deferred annuity contract as it was prior to the 1968 amendment.

Due to the high interest rates of the late 1970s and early 1980s, the value of the Plan increased significantly, and Sperry sought to remove free funds without suffering the paper losses that would have resulted if Sperry withdrew free funds in accordance with the terms of the Contract. On three occasions, Hancock permitted Sperry to roll over free funds in a manner that would not result in these paper losses but, citing cash flow problems, Hancock refused Sperry's fourth request.

In the early 1980s, Sperry also requested at various points that Hancock alter the method by which it valued the liabilities for the guaranteed portion of the Plan's assets because the interest rate assumptions provided by the Contract caused the Plan's liabilities to be significantly overstated. Hancock refused this request as well.

Frustrated but unwilling to terminate the Contract, Sperry sued Hancock in 1983, alleging breach of contract, unjust enrichment, professional malpractice, and breach of fiduciary duty and other violations of ERISA. Following years of appeals, a bench trial eventually took place in the Southern District of New York and was concluded on November 22, 2000. The district court found that Hancock had breached its fiduciary duties under ERISA and awarded Sperry $84.88 million in damages, attorneys' fees, and interest.

For the reasons that follow, we affirm in part, reverse in part, and vacate in part and remand the case for further proceedings consistent with this opinion.

BACKGROUND
I. Factual History

The factual background of this litigation, which is now in its nineteenth year, is set forth in the numerous opinions issued prior to the present appeal. The most detailed factual summaries are contained in the decision of the district court from which this appeal was taken, Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 122 F.Supp.2d 444 (S.D.N.Y.2000) ("Judgment Opinion"), and the decision by this Court when the case was last before us, Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 970 F.2d 1138 (2d Cir.1992) ("Second Circuit"), aff'd sub nom. John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 114 S.Ct. 517, 126 L.Ed.2d 524 (1993) ("Supreme Court"). Familiarity with those decisions is assumed and only the facts necessary to the disposition of this appeal are recounted here.

A. The Contract

The Contract to which Sperry and Hancock were parties, entered into in 1941, was a deferred annuities form of contract under which Sperry purchased from Hancock deferred annuities to be paid to Sperry employees upon retirement. Second Circuit, 970 F.2d at 1141. In 1968, the Contract was amended to provide that the money paid in by Sperry was credited to the Plan, which was part of Hancock's General Account. Id. From this account, Hancock made investments on behalf of many different clients, and every year it allocated investment income and expenses to the Plan. Id.

In addition to what was effectively an investment management service, Hancock provided several other benefits under the Contract. First, Hancock guaranteed that Sperry's beneficiaries would receive upon retirement a certain fixed annuity regardless of the performance of the Plan. Id. The post-1968 Contract thus preserved its essential pre-1968 feature.

Second, Hancock provided Sperry access, with certain restrictions, to the free funds generated by its payments into the General Account. The free funds were calculated as follows. Every year Hancock calculated its forecasted Liabilities of the Fund ("LOF"). Id. Under the Contract, the Plan had to be maintained at a Minimum Operating Level ("MOL"), which was 105% of the LOF. Id. Free funds constituted any amount in the Plan in excess of the MOL.2

At all times under the post-1968 Contract, Sperry had the option of ordering a return of free funds, at which point the Contract would revert to a deferred annuity contract (i.e., the way it was before 1968). In accordance with state law, Hancock had to account for the Plan, the LOF, and the free funds using the book value of assets. However, the Contract provided that free funds be returned only at market value, which would require a "mark-to-market" calculation. In an environment of rising interest rates, the mark-to-market adjustment generally would have reduced the value assigned to the funds released, as the high interest rates would have caused the market value of bonds and some other assets in Hancock's General Account to fall below their book value. Judgment Opinion, 122 F.Supp.2d at 450.

A contractual benefit for Sperry created by the 1968 amendments was a provision allowing Sperry to designate additional employees, beyond those whose annuities Hancock had originally guaranteed, to receive benefits from the Plan. Second Circuit, 970 F.2d at 1142. So long as the Plan amount was sufficient to cover the corresponding increase in the LOF and thus the MOL, Hancock would add these employees to the guaranteed beneficiaries list. Id. However, in 1977, the parties amended the Contract to provide that, while Sperry could continue to designate new employees to receive benefits from the free funds, these benefits would no longer be guaranteed in case of a reversion to a deferred annuity contract. Id. at 1142. In addition, Hancock reserved the right to stop accepting such new non-guaranteed employees upon notice, an option it exercised in 1982. Id. Sperry could always buy new guaranteed benefits, although it never did so.

At several points Hancock consented to a benefit not specified in the Contract by allowing Sperry to withdraw free funds at their book value, i.e., without applying the mark-to-market adjustment. These rollovers occurred in 1977, 1979, and 1981. Judgment Opinion, 122 F.Supp.2d at 451. However, Sperry's fourth request for a rollover, in 1982, was rejected by Hancock. Id.

Prior to 1981 Sperry had been requesting that Hancock consider changing the way it valued the LOF because higher interest rates had caused the liabilities to be greatly overstated. Id. at 452-53. Internal memoranda demonstrate that Hancock recognized that the LOF was overstated. Nonetheless, Hancock declined to alter the method for calculating the LOF, stating that its policy was to value annuities according to the method initially established by contract. Id. at 452.

In December 1981, Hancock presented to Sperry possible changes to the Contract, including a revised method for calculating the LOF that would...

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