Howe v. Varity Corp.

• Decision Date: 29 September 1994
• Docket Number: 93-2111,Nos. 93-2056,s. 93-2056
• Citation: 36 F.3d 746
• Parties: , 18 Employee Benefits Cas. 2121 Charles HOWE; Robert Wells; Ralph W. Thompson; Charlotte Chiles; Patrick Mousel, on Behalf of Themselves and as Representatives of a Class of Persons Similarly Situated; John Altomare, to the extent of his claims arising from becoming disabled while working for Massey Ferguson, Inc.; Charles Barron; Alexander Charron; Anita Crowe; Ray Darr; Doris Guidicessi; Barnett Lucas; Robert Skromme; and Estate of Walter Smith, individually, Appellees/Cross-Appellants, v. VARITY CORPORATION and Massey Ferguson, Inc., Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 746

36 F.3d 746

63 USLW 2209, 18 Employee Benefits Cas. 2121

Charles HOWE; Robert Wells; Ralph W. Thompson; Charlotte

Chiles; Patrick Mousel, on Behalf of Themselves and as

Representatives of a Class of Persons Similarly Situated;

John Altomare, to the extent of his claims arising from

becoming disabled while working for Massey Ferguson, Inc.;

Charles Barron; Alexander Charron; Anita Crowe; Ray Darr;

Doris Guidicessi; Barnett Lucas; Robert Skromme; and Estate of Walter Smith, individually, Appellees/Cross-Appellants, v. VARITY CORPORATION and Massey Ferguson, Inc.,

Appellants/Cross-Appellees.

Nos. 93-2056, 93-2111.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 19, 1994.

Decided Sept. 29, 1994.

Floyd Abrams, New York City, argued (Thomas J. Kavaler and Howard G. Sloane, New York City, William J. Koehn and Deborah M. Tharnish, Des Moines, IA, Gerald P. Greiman and H. Todd Iveson, St. Louis, MO, on the brief), for appellants.

H. Richard Smith, Des Moines, IA, argued (Robert J. Schmit and William A. Gengler, Minneapolis, MN, on the brief), for appellees.

Before RICHARD S. ARNOLD, Chief Judge, HANSEN, Circuit Judge, and STOHR, ^* District Judge.

RICHARD S. ARNOLD, Chief Judge.

This case arises under the Employee Retirement Income Security Act, 29 U.S.C. Secs. 1001 et seq. (ERISA). The plaintiffs are two classes of former employees of Massey Combines Corporation (MCC) and ten individual former employees of Massey-Ferguson, Inc. (M-F). The defendants are Varity Corporation, which controlled MCC, and M-F, Varity's wholly owned subsidiary. The District Court ¹ held in favor of one class and the ten individual plaintiffs, and against the other class. We affirm, with some modification of the remedy. We hold, among other things, that individual plan beneficiaries have a right of action under ERISA, 29 U.S.C. Sec. 1132(a)(3), for breach of fiduciary duty.

I.

We state the principal facts as found by the District Court. It is appropriate to use these findings as a predicate because the defendants do not contend that any of the findings are clearly erroneous.

M-F is a wholly owned subsidiary of Varity. It sells farm implements and related parts manufactured by other subsidiaries of Varity. On May 9, 1986, Varity formed MCC, a new entity, and transferred to MCC certain lines of business. This reorganization was given the name "Project Sunshine." MCC took over the manufacture and sale of self-propelled combines and four-wheel-drive tractors. Both of these product lines had been declining during the 1980s. The year 1986 was the all-time low for sales of self-propelled combines. Varity's purpose in forming the new concern was to put its bad eggs into one basket, so to speak. It would not have to show the large losses associated with the combines and tractors on its own financial statement, and it hoped to rid itself of substantial obligations for employee benefits due or to become due to workers in the transferred lines of business.

In order to accomplish the latter objective, Varity needed to get the employees of M-F who had been engaged in selling self-propelled combines and four-wheel-drive tractors to transfer to MCC and become employees of the new corporation. M-F maintained for its employees and retired employees a number of benefits, including basic health, major medical, life insurance, vision care, hearing care, and dental benefits. These benefits were described in an "employee welfare benefit plan" within the meaning of 29 U.S.C. Sec. 1002(1) and (3). (The term "welfare benefits" is used in contradistinction to "pension benefits." No issue regarding pension benefits is raised on this appeal. All claims concerning pension benefits have been settled.) M-F's welfare-benefit plan is still in existence, but the plaintiffs, in the view of defendants, are no longer members of it, because, as we shall shortly see, they were transferred from M-F to MCC under circumstances that have given rise to this case.

Employees who had already retired from M-F (ten of whom are individually named plaintiffs) were simply transferred to MCC. They were not asked to agree to this transfer, nor were they even aware of it at the time it occurred. M-F and Varity simply purported to substitute the new entity, MCC, as the party obligated to provide welfare benefits to employees in the transferred product lines who had previously retired from M-F. Current employees of M-F, however, were asked to consent, and did consent, to leaving M-F and signing up with MCC. In order to obtain this consent, M-F and Varity made various representations to the M-F employees in question. They told the employees, among other things, that the new company had a bright future, and that the "financial restructuring [that] created Massey Combines Corporation ... will provide the funds necessary to ensure its future viability." Charles Howe et al. v. Varity Corp. et al., No. 4-88-CV-1598, p. 21 (S.D.Iowa, Findings of Fact and Conclusions of Law filed March 26, 1993), quoting the transcript of the video shown to the M-F employees made by an officer of Varity who became president and chief executive officer of MCC.

The District Court's findings about what the employees were told continue, describing a sheet distributed by management:

64. The question and answer sheet ("Q & A sheet") in Exhibits A and B contained eight questions and answers. Defendants developed these questions and answers in anticipation of the "many concerns" by the employees. Defendants purposefully made the questions and answers incomplete, confusing, evasive, and deceptive. Defendants developed more forthright questions and answers, but they opted not to publish them. (Exs. 42, 46, 47.)

65. Information in Exhibits A and B concerning benefits was very limited. That information included a side-by-side comparison showing that M-F's and MCC's benefits were identical. The only question dealing with benefits was number three. The answer simply stated that "benefit programs will remain unchanged." Defendants considered telling the employees that "initially" benefits would remain the same but that MCC would be reviewing the benefits and would notify the employees of any changes. Defendants rejected this disclosure because they believed it would cause the employees to reject the acceptance forms. Soon after the employees transferred to MCC, Varity began to develop "creative and innovative ways" to reduce employee benefits. (Ex. 67.)

66. Defendants did not include in the Q & A sheet certain questions that they knew the employees wanted answered. For example, the employees wanted to know whether they were eligible for termination pay from M-F. The employees also wanted to know if they could take early retirement from M-F. Defendants purposefully did not provide answers to these and other questions because they wanted the employees to transfer to MCC in order to avoid the liabilities associated with severance pay and retirement benefits. (Ex 47.) Defendants' failures to make these disclosures were to the detriment of the Retired and Terminated Classes.

67. Defendants knew they should tell the employees that they claimed the right to amend or terminate benefits in retirement. [One Varity official wrote to another] on April 15, 1986, as follows:

The following proposal results because of the govt's and lenders insisting that in communicating with employees in the formation of MCC, that we are very explicit about maintaining our rights to modify benefits in the future, i.e., that there is no promise that the present benefits will be guaranteed forever. As a result we are faced with the awkward situation that the letter may not attract those employees who we would like to join MCC.

(Ex. 42.) Defendants ultimately decided to ignore the above set out proposal and not make the disclosure to the employees.

68. The representations made ... regarding the potential financial viability of MCC, MCC's business outlook, and the employee benefits were materially misleading. Defendants knew the representations were materially misleading when they were made. Plaintiffs relied on these representations to their detriment.

69. Project Sunshine was, as mentioned above, a scheme designed, in part, to rid defendants of the obligations to pay benefits to retirees and employees of M-F.

Id. at 22-24.

In fact, when MCC was formed, it was "essentially bankrupt...." Id. at 11. "The fair market value of the MCC common stock was zero or nominal. As of May 9, 1986, MCC had incurred on its books approximately $54 million in losses even though it had not been in operation. Inventory, receivables, and other assets that were transferred to MCC were overvalued by $46 million.... Similarly, MCC's liabilities, including unrecorded pension liabilities, were underestimated. In sum, MCC had a negative net worth on the day it was created (May 9, 1986), with liabilities exceeding assets by at least $46 million. MCC started on May 9, 1986, with only $15,000 cash. It immediately drew on a line of credit and began liquidating assets to generate cash. MCC had little or no chance of survival from its onset.... All of MCC's officers ... agreed that MCC's chances of survival were not good." Id. at 11-12.

It is no wonder, therefore, that Varity's chairman and chief executive officer bragged that he had "unloaded his losers all in one wagon" through Project Sunshine. Tr. 2652. This official also declared that "he was shifting several thousand retirees and their pension obligations into [MCC] and was delighted to be out from under all those obligations.... He also [said] that he got the lenders to agree to shove about $200 million worth of debt over into [MCC] off of [Varity]." Id. at 2652.

As expected by its principals, but not by the transferred employees, MCC failed. It went into receivership on March 4, 1988. As a result, employees of MCC stopped receiving welfare benefits. Retired employees of M-F who had been...