Dennard v. Richards Group, Inc.
| Citation | 681 F.2d 306 |
| Decision Date | 26 July 1982 |
| Docket Number | No. 81-1181,81-1181 |
| Parties | 3 Employee Benefits Ca 1769 Robert DENNARD, Plaintiff-Appellant Cross-Appellee, v. The RICHARDS GROUP, INC., its Employee Profit-Sharing Plan, and Stanford H.Richards, Trustee and Administrative Retirement Committee Member,Defendants-Appellees Cross-Appellants. Summary Calendar. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Vial, Hamilton, Koch, Tubb, Knox & Stradley, Byron L. Falk, James C. Ash, Jr., Dallas, Tex., for plaintiff-appellant cross-appellee.
Durant, Mankoff, Davis, Wolens & Francis, Bruce A. Budner, Dallas, Tex., for defendants-appellees cross-appellants.
Appeals from the United States District Court for the Northern District of Texas.
Before BROWN, POLITZ and WILLIAMS, Circuit Judges.
This action arises from the denial of certain pension benefits under The Richards Group, Inc. Employees' Profit-Sharing Plan (Plan). On cross motions for summary judgment, the District Court granted summary judgment in favor of the Plan but denied the Plan's counterclaim for attorney's fees. The court, after reviewing both parties' interpretation of the Plan, determined that the interpretation of the Plan's Administrative Retirement Committee (Committee) was not arbitrary and capricious and thus, under the standard of review applied, upheld its interpretation. To reach this conclusion the court focused on the fact that the Plan had been uniformly construed in other cases of similarly situated employees and the Committee interpretation could be "fairly implied" and was "rationally related to the purposes of the Plan and performs a necessary function in the implementation of the Plan." For the reasons explained in much greater detail below, we are not convinced that the District Court properly considered what factors would indicate that the Committee had acted arbitrarily and capriciously or that it correctly interpreted the Plan as a whole. Where, as here, one party is arguing that the Plan's provisions are not ambiguous and that the Committee has applied the provisions of the Plan in direct contradiction to its terms, the District Court should have determined first the correct interpretation of the Plan. From that finding, the court should have proceeded to determine if the Committee, even if incorrect in its interpretation, acted arbitrarily or capriciously as that term has been used in other ERISA cases. Specifically, the Committee's actions should be viewed in light of relevant Internal Revenue Service regulations, not mentioned by the District Court, internal plan consistency, and the separate and distinct nature of vesting, allocation, gains, and participation. Given the dominant role of the major shareholder of the Company as Chairman of the Board of the Company, Chairman of the Committee, and Trustee of the Plan, along with other factors, many raising factual issues which were in the control of the Company and the Plan and of which discovery had not been completed, we find that the participant's challenge to the good faith of the Committee's interpretation should not have been disposed of by summary judgment at that point without the employee being allowed an opportunity to prove bad faith on the part of the Committee. We therefore reverse and remand for action in conformity with our opinion.
Robert Dennard worked for The Richards Group from February 1966 until September 1977, except for a three month break during 1972. As an employee of The Richards Group, Dennard was a participant in the Company's profit-sharing plan. The Plan, first adopted in April of 1967, was restated in 1976 to comply with the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., the federal legislation regulating private employee benefit plans. 1 Dennard's claims result from a difference in opinion over the amount of benefits to which he is entitled under the Plan, a difference of approximately $7,936.19, an amount attributable to investment earnings on his account in the Plan.
ERISA, enacted in 1974 to protect and regulate private employee benefit plans, 2 establishes for plans which seek tax-exempt status certain minimum requirements for participation and benefit calculation, as well as reporting and disclosure standards. The effect of a "qualified" plan meeting ERISA standards is to allow the employer to deduct contributions and provide the participants with tax deferral of the benefits until receipt. Because ERISA mandated massive overhaul of employee benefit plans, many plans were restated in 1976 and thereafter as Department of Labor and Internal Revenue Service regulations became finalized. The Richards Group Plan was one of those pre-ERISA plans restated to comply with the new statutory demands.
The Richards Group Plan is a profit-sharing plan, whereby the employer contributes a specified percentage of profits annually to a trust fund maintained for the benefit of Participants. An employee is generally eligible to become a Participant upon completion of 1,000 "hours of service", or "one year of service", within a consecutive 12-month period commencing on the date of employment. Once eligible, an employee becomes a Participant on the May 1 or November 1 which coincides with or next follows the date of completion of the 1,000 hours of service. This accords with ERISA standards which establish maximum periods for eligibility and entry into a plan. As a Participant, an employee is eligible to receive an allocation, that is a portion, of the employer's contribution made each Plan Year. The Plan Year, in this case, May 1 through April 30, is the basic computation period, used when participation has commenced, to measure service for purposes of receiving a portion of the employer's contribution and to determine vesting, as described below.
Each Plan Year the Company contributes to a trust fund. The contribution is then allocated to different Participants on the basis of their relative compensation for that Plan Year. ERISA requires that separate accounts for purposes of record-keeping be maintained for each Participant. Under the Richards Plan, each participant receives one unit for each $100 of compensation received during the Plan Year. The total contribution by the Company is then allocated on the basis that a Participant's units for such year bears to the total units of all Participants for the year. For example, with a Company contribution of $10,000 and a total payroll for Participants of $100,000 (or 1,000 units), a Participant earning $20,000 (or 200 units) would receive 1/5 (20,000/100,000) or $2000. A Participant earning $40,000 (400 units) would receive $4000 or 2/5 of the total contribution. This amount would then be credited to the Participant's account.
A Participant is not necessarily entitled to the full amount in his account immediately upon the allocation. Each Plan Year that a Participant works 1,000 or more hours of service with the Company he receives credit for One Year of Service. His vested interest, that is the portion of his account which is nonforfeitable, increases as he receives credit for Years of Service. Vesting, or nonforfeitability, begins with two Years of Service, at which point a Participant is entitled to 20% of his employer account balance. The vested percentage increases 10% per year of service after that point until 10 years are completed at which point the Participant is 100% or fully vested in his account balance and any further contributions made by the employer. A Participant who leaves the employment of the Company prior to full vesting (100%) forfeits the unvested portion of his account once he has incurred a one year Break in Service, that is a Plan Year during which an employee completes less than 501 hours of Service. The forfeitures are then reallocated to the remaining Participants at the end of the Plan Year in which the Break in Service is incurred in the same manner that the employer contribution is allocated. Thus, a Participant who resigns after three years of service and 30% vesting will, once a Break has occurred, forfeit 70% of his account.
Although a participant has a vested interest in the Plan, he is not entitled to receive any benefits until a later date. Receipt of benefits may be deferred generally until retirement age, unless the Committee administering the plan consents to an earlier pay-out. 3 Benefits, when distributed, may be paid in lump sum, periodic payments, or by the purchase of an annuity. When distributed in periodic payments, a Participant's account is segregated from the rest of the trust fund and the earnings on the segregated amount inure only to that Participant, rather than the Participant sharing proportionally in any gains or losses of the trust fund.
Besides employer contributions and forfeitures, there is a third factor involved in determining the amount in a Participant's account-the investment gains or losses of the entire trust fund. 4 It is the allocation of these gains or losses which forms the basis of this lawsuit. The trust fund is valued annually and then gains or losses are allocated to the accounts of "each Participant whose Service was not terminated ... during such Plan Year and to the account of each Former Participant whose Account had not, as of the first day of such Plan Year, been segregated (due to selection of periodic payment method)" on the basis of relative account balances. Thus, if the trust fund appreciates in value $20,000 in a Plan Year, and the total fund prior to this increase was $200,000, a Participant with an account balance of $40,000 or 1/5 of the trust fund (40,000/200,000) would receive 1/5 of the $20,000 gain or $4000. If the trust fund had decreased $20,000, the loss would be allocated in the same manner, reducing our hypothetical Participant's account to $36,000.
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