Hickerson v. Velsicol Chemical Corp., 84-1608

• Citation: 778 F.2d 365
• Decision Date: 29 January 1986
• Docket Number: No. 84-1608,84-1608
• Parties: , 6 Employee Benefits Ca 2545 Robert C. HICKERSON, on his own behalf and on behalf of all others similarly situated, Plaintiffs-Appellees, v. VELSICOL CHEMICAL CORPORATION, a Delaware corporation, et al., Defendants- Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 365

778 F.2d 365

54 USLW 2324, 6 Employee Benefits Ca 2545

Robert C. HICKERSON, on his own behalf and on behalf of all others similarly situated, Plaintiffs-Appellees, v. VELSICOL CHEMICAL CORPORATION, a Delaware corporation, et al., Defendants- Appellants.

No. 84-1608.

United States Court of Appeals Seventh Circuit.

Argued Feb. 20, 1985.

Decided Dec. 3, 1985.

Rehearing and Rehearing En Banc Denied Jan. 29, 1986.

Glen H. Kanwit, Hopkins & Sutter, Chicago, Ill., for defendants-appellants.

John C. Jacobs, Plotkin & Jacobs, Chicago, Ill., for plaintiffs-appellees.

Before CUDAHY and POSNER, Circuit Judges, and BROWN, Senior District Judge. ^*

CUDAHY, Circuit Judge.

This case arises out of the conversion by amendment of defendant Velsicol Chemical Corporation's defined-contribution deferred profit-sharing plan (the "Former Plan") ¹ into a defined-benefit pension plan (the "Present Plan"). ² Plaintiff Robert C. Hickerson brought this action individually and on behalf of a class consisting of all Velsicol employees who were participants in the Former Plan at the time of conversion and continued to be employed by Velsicol after conversion, alleging inter alia that Velsicol and the trustees of the two plans, also defendants, violated the Employee Retirement Income Security Act of 1974 ("ERISA"), codified primarily in title 29 of the United States Code, when it converted the Former Plan into the Present Plan. The district court granted the plaintiffs' motion for partial summary judgment on the issue of liability, finding that the conversion violated ERISA sections 404(a)(1)(A)(i), 403(c)(1), 406(a)(1)(D) and 404(a)(1)(D), 29 U.S.C. Secs. 1104(a)(1)(A)(i), 1103(c)(1), 1106(a)(1)(D) and 1104(a)(1)(D), respectively, and the terms of the Former Plan. Hickerson v. Velsicol Chemical Corp., No. 81 C 2543 (N.D.Ill. October 4, 1983). The parties stipulated the amount of damages, and final judgment was entered. The only issue on appeal is whether the district court erred in concluding that the conversion violated ERISA or the terms of the Former Plan. After giving much consideration to the issue, we conclude that such a conversion does not necessarily violate ERISA or the Former Plan, and thus we reverse the district court's entry of summary judgment. Because we find that a question of fact remains as to whether the terms of this conversion satisfy ERISA and the Former Plan, we remand this case to the district court.

I.

The facts underlying this action are not in dispute, although the characterization of the interests at issue is sharply contested. ³ The following statement of facts is taken substantially from the district court opinion.

Velsicol adopted the Former Plan on December 1, 1956, and it became effective December 31, 1956. The Former Plan was a defined-contribution profit-sharing plan for eligible salaried employees. Velsicol was to contribute an amount (in its discretion) between 2 and 10 percent of its annual net profits, up to the maximum amount deductible under section 404(a) of the Internal Revenue Code (the "Code"), 26 U.S.C. Sec. 404(a), for the benefit of participating employees. Employees made no contributions to the Former Plan.

Velsicol's contributions were allocated to individual book accounts maintained for each participant. Each year participants would receive a "Statement of Your Personal Account" from the Former Plan trust which informed the participant of the total amount credited to his account at the end of the year. The accounts were periodically credited or debited to reflect the investment gains or losses experienced by the trust. Thus from year to year a participant's account might show an increase, a decrease, or no change, depending upon the relative sizes of Velsicol's contributions and the trust's investment gains or losses. The assets held in the trust were not segregated or earmarked for particular participants but were maintained in a common corpus. Over the eighteen-year period from 1957 to 1975, the investment income of the Former Plan trust corpus averaged 5.77% per year, ranging from a gain of 20.55% in 1971 to a loss of 19.44% in 1974.

Amounts allocated to a participant's account vested on a pro rata basis over a ten-year period, so that any employee who left Velsicol before completing ten years of service forfeited a portion of his account balance. No participant was entitled to a distribution of any portion of his account prior to his "initial distribution date" as defined in the Former Plan. ⁴ The plan provided that the amount of a participant's account balance would then be paid in one or a combination of specified ways, at the trustees' discretion. ⁵ Upon the termination or death of an employee whose account had been vested, the full amount would be immediately due and payable. Plaintiff Hickerson and other members of the class had worked for Velsicol for at least ten years and thus had a vested interest in the Former Plan.

The Former Plan was converted to the Present Plan on April 1, 1975. Approximately 563 employees were participants in the Former Plan on March 31, 1975, and they continued to work for Velsicol beyond April 1, 1975. These employees constitute the class Hickerson represents. As of March 31, 1975, the book accounts of these participants in the Former Plan (the "Profit Sharing Participants") became fully vested regardless of length of service and therefore became nonforfeitable. On March 31 the balance in the Former Plan fund was $4,400,154. The named plaintiff, Hickerson, had accumulated a total of $30,485.00 in the Former Plan.

The Present Plan is a defined-benefit pension plan, under which Velsicol promises employees a fixed monthly benefit upon retirement and contributes to the pension fund enough money each year to cover benefits accrued by employees. The Present Plan provides both a standard formula for computing a participant's normal retirement pension (utilizing the participant's total number of months of continuous service) and an alternate method for computing the retirement pension for those employees who had previously participated in the Former Plan. The Present Plan provides that the amount of a Profit Sharing Participant's pension benefits will be the greater of these alternative computations:

1) the normal retirement pension computed under the pension formula for all continuous months of service,

or

2) the sum of:

a) the value of the Participant's profit sharing account in the former Profit Sharing Plan as of March 31, 1975, plus interest at 5% compounded annually until retirement, and

b) the value of the benefit computed under the pension formula taking into account only the months of continuous service earned after March 1975 when the Profit Sharing Plan was converted into the Pension Plan.

See Present Plan, Sec. 6.01(b). Thus, when Velsicol created the Present Plan it guaranteed the Profit Sharing Participants 5% per year on their Former Plan account balances regardless of how the investment of those funds might turn out. Velsicol also provided that all investment income made on the Present Plan funds (which included the $4.4 million balance from the Former Plan fund) would remain in the Present Plan fund. ⁶

The Present Plan attained more than respectable earnings on its funds. According to the district court, the average return actually realized by the pension trust during the seven years following conversion was 11.55%. In addition, the plaintiffs assert that the 1982 investment earnings of the trust fund amounted to 25%. These earnings represent a differential of 6.55% (or more if the plaintiffs are correct about 1982) between the level of earnings guaranteed by the company on Former Plan accounts and the amount actually earned on the funds. It is for this differential that the plaintiffs sue.

The number of participants in the Present Plan has grown as Velsicol has added new employees. The original 563 Profit Sharing Participants have been joined as participants in the Present Plan by some 200-250 new Velsicol employees. Despite the increased number of participants, Velsicol's contributions to the Present Plan fund decreased during the seven years from 1975 to 1982, to the point that in both 1980 and 1981 Velsicol was not required to make any contributions to the fund.

The complaint initiating this action was filed in the Circuit Court of Cook County, Illinois, Hickerson v. Velsicol Chemical Corp., No. 81 CH 2398 (Cir.Ct. of Cook Cty. filed March 31, 1981), and was removed to the federal district court for the Northern District of Illinois on May 7, 1981. The plaintiff's motion for class certification was granted on August 23, 1982, and Hickerson now represents all Velsicol employees who, as of March 31, 1975, were participants in the Former Plan and who continued to be employees of Velsicol after April 1, 1975. The district court also dismissed counts I and II of the complaint, which asserted violations of common law fiduciary and contractual duties, on the grounds that ERISA preempts state law and is the exclusive source for determining the propriety of defendants' conduct. Plaintiffs do not appeal this dismissal and we express no opinion on its correctness.

The two sides then filed cross motions for summary judgment on count III, which alleged the violations of ERISA at issue here. The district court found that the defendant had violated ERISA, as well as the terms of the Former Plan, by not guaranteeing to the participants in the Former Plan the actual investment earnings on the funds allocated to them as of the time of conversion in 1975. The district court thus entered partial summary judgment on liability for plaintiffs, and the parties stipulated to the amount of damages. Final judgment was then entered, and the defendants appeal.

II.

Although the sort of conversion attempted here--from a profit-sharing plan to a defined-benefit pension plan--does not seem unusual, we have been able to unearth nothing...