Harris Trust & Sav. Bank v. JOHN HANCOCK MUT. LIFE

• Decision Date: 06 August 1991
• Docket Number: No. 83 Civ. 5401 (RPP).,83 Civ. 5401 (RPP).
• Parties: HARRIS TRUST & SAVINGS BANK, as Trustee of the Sperry Master Retirement Trust No. 2, Plaintiff, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Third-Party Plaintiff, v. CHASE MANHATTAN BANK, N.A., Counterclaim Defendant, and Sperry Corporation and the Retirement Committee of Sperry Corporation, Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

767 F. Supp. 1269

HARRIS TRUST & SAVINGS BANK, as Trustee of the Sperry Master Retirement Trust No. 2, Plaintiff, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant.

JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Third-Party Plaintiff, v. CHASE MANHATTAN BANK, N.A., Counterclaim Defendant, and Sperry Corporation and the Retirement Committee of Sperry Corporation, Third-Party Defendants.

No. 83 Civ. 5401 (RPP).

United States District Court, S.D. New York.

July 12, 1991.

As Amended August 6, 1991.

COPYRIGHT MATERIAL OMITTED

Anderson Kill Olick and Oshinsky, P.C., New York City by Lawrence A. Kill, for plaintiff Harris Trust and Sav. Bank.

Reboul, MacMurray, Hewitt, Maynard and Kristol, New York City by Howard G. Kristol, for defendant and third-party plaintiff John Hancock Mut. Life Ins. Co.

OPINION AND ORDER

ROBERT P. PATTERSON, Jr., District Judge.

Defendant John Hancock Mutual Life Insurance Company ("Hancock") moves pursuant to Rule 56 of the Federal Rules of Civil Procedure and the Agreed Statement of Facts stipulated by the parties on November 23, 1988 (hereinafter "A.S.F. ¶ —") to dismiss the remaining claims of plaintiff's amended complaint. By its opinion and order dated September 26, 1989, this Court dismissed plaintiff's claim asserted under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. ("ERISA"). This motion relates to plaintiff's contract and common law claims.

The claims in this action arise out of or relate to Group Annuity Contract No. 50 ("GAC 50"), which was first entered into in 1941 by the defendant and Sperry Corporation ("Sperry") and covered non-bargaining unit employees of Sperry Gyroscope, Sperry Division.¹ A.S.F. ¶ 5; Hirschberg Tr. 18. Pursuant to GAC 50's original terms, Sperry purchased on an annual installment payments basis deferred annuities from Hancock payable for life to Sperry employees or their beneficiaries to the extent that the employees and beneficiaries would be entitled to such a payment upon the employees' retirement, according to the terms of Sperry's retirement plan. A.S.F. ¶ 6. In other words, once a covered employee's benefits vested under the plan, Hancock would guarantee those benefits. Id. ¶ 10. By agreement between the parties, GAC 50 has undergone substantial changes since 1941. Most relevant to this motion are those that occurred in 1968 and 1977.²

Effective January 1, 1968 GAC 50 was converted by amendment from a deferred annuity form of participating contract under which Sperry purchased deferred annuities from Hancock on an annual basis for the non-bargaining unit of the Sperry Gyroscope Division to a Retrospective Immediate Participation Guarantee form ("Retro-IPG") under which it guaranteed benefits for each eligible employee under GAC 50 for that employee who was also eligible under the terms of the Sperry Rand Retirement Trust No. 2 (the "Plan" or the "Sperry Trust"). A.S.F. ¶ 23.

Hancock IPG contracts are participating contracts in that the purchaser shares in the aggregate of the contract's mortality, expense and investment experience to the extent that that experience is more favorable than the experience assumed in the contract's purchase rates. Id. ¶ 11. Net investment income from Hancock's General Account allocated to an IPG contract is directly credited on an annual basis to that contract's Pension Administration Fund ("PAF").³ The amount of the PAF depends in part on the investment performance of Hancock's General Account and the allocation of that performance to the IPG.⁴

Pursuant to the 1968 amendment, annuities purchased for certain employees up to December 31, 1967 were "cancelled," but Hancock continued to guarantee benefits to those employees and their beneficiaries. A.S.F. ¶ 32. The 1968 amendment also established a method for the provision of additional guaranteed benefits to be payable for the period after December 31, 1967 as more fully described in this Court's earlier opinion. In essence, if GAC 50's PAF exceeded its Minimum Operating Level ("MOL"), which was equal to 105% of the Liabilities of the Fund ("LOF"), Hancock would guarantee the payment of the additional guaranteed retirement benefits to those employees.⁵Id. ¶ 39.

Effective August 1, 1977 GAC 50 was converted to a Retrospective Immediate Participation Guarantee/Prospective Deferred Liability form of contract ("Retro-IPG-PDL") under which the employees retiring thereafter received some benefits guaranteed by Hancock and relied on Plan assets for the remainder. Under the 1977 amendment GAC 50's LOF would not be increased automatically upon the subsequent retirement of any employee and new retirement benefits would not be guaranteed automatically by Hancock. A.S.F. ¶ 80. The Sperry Retirement Committee ("SRC") could request that Hancock establish guaranteed benefits in addition to the benefits already guaranteed, but it did not do so. Id. ¶ 81. The 1977 amendment also permitted Sperry to designate employees eligible for non-guaranteed benefits and provided for the payment of such benefits by Hancock from the PAF or its Contingency Account within Hancock's General Account. Although the Sperry Retirement Committee did not request Hancock to pay any new guaranteed benefits subsequent to the effective date of the 1977 amendments, the Committee did designate that monthly payments of non-guaranteed benefits be paid to certain employees in 1977 and Hancock paid such non-guaranteed benefits through June 1982, when it gave Sperry 31 days notice in writing that it would no longer pay non-guaranteed benefits.

Hancock contends that it at all times fully performed its obligations under GAC 50 and its amendments and is entitled to summary judgment dismissing plaintiff's breach of contract claims. It further claims that plaintiff's claims for breach of fiduciary duty and for breach of an implied covenant of good faith and fair dealing must also be dismissed since all obligations of Hancock to the plaintiff arise solely from and are defined by the provisions of GAC 50.⁶

I. Contract Claims

Where the language of a contract is unambiguous the question of interpretation is one of law to be answered by the court without reference to extrinsic evidence. See Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir. 1985). If the language of a contract is otherwise plain, the parties cannot create a genuine issue of material fact simply by urging different interpretations. See Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir.1989).

1. Did Hancock Improperly Retain Excess Funds Allocated to GAC 50?

In or about May 1982 Hancock denied a request from the Sperry Retirement Committee for a transfer of assets under what the parties had come to refer to as a "rollover procedure." Hearing Exh. 2.

It is necessary to refer to the history of GAC 50 to understand the reason for the dispute.

Prior to 1968, the Sperry Retirement Committee did not manage pension funds for its employees. At the time of the 1968 Amendment, the Committee took on a number of investment managers to manage various funds for the Plan to provide retirement benefits for its employees upon retirement. (Hirschberg Tr. 13-14) Starting in 1968, Hancock, in addition to providing guaranteed benefits under GAC 50 and similar annuity contracts, received responsibility from Sperry to manage for the Plan a smaller separate account, an equity investment account. (Hirschberg Tr. 14) Funds in the separate account, like the funds distributed to other investment managers retained by the Retirement Committee, did not provide guaranteed benefits and were assets of the Plan. (Id.) By 1977 it became evident to Hirschberg that the other fund managers were providing the Retirement Fund with a better rate of return than Hancock's General Account and he determined that the cost of the benefits guarantee provided by Hancock was excessive. Accordingly, Sperry's Retirement Committee desired to remove funds from Hancock's General Account and place them in other funds over which it could exercise more investment control. (Hirschberg Tr. 11, 15).

By the 1977 amendment, an employee who retired after 1977 had those benefits which had accrued prior to 1968 guaranteed by Hancock and those non-guaranteed benefits which accrued thereafter were funded only by the Plan's assets.⁷ The Committee wanted to move so-called "excess funds" out of Hancock's General Account. It was in this context that Hirschberg explored ways with Hancock as to how a removal of excess funds might be achieved without incurring the contract's Asset Liquidation Adjustment ("ALA"). As an example, in 1977 the GAC 50 had an excess of funds in the General Account, whereas the GAC-1150, another Sperry guaranteed benefit contract, required a transfer of funds into its pension administration fund in the General Account to satisfy its annuity funding requirements. The Committee did not want to liquidate its equity portfolios in the separate accounts at Hancock to meet GAC-1150's shortfall. (Id. at 19) To meet this problem, so-called "excess funds" in GAC 50 were transferred by agreement of the parties to the separate accounts and then to GAC-1150 for its pension administration fund in the General Account. Hearing Exhs. L, T.⁸ The net effect was to leave the balance of the General Account unchanged and no asset liquidation charge was imposed.

Hirschberg continued at meetings between representatives of both companies to press for the reduction of funds in GAC 50's General Account. Thereafter in 1979 and 1981 Hancock permitted the Committee pursuant to so-called "rollover arrangements" to withdraw certain amounts of "excess" funds from the PAF without the ALA required under GAC 50. Hearing Exhs. 4, 5, 11; Jefferson Tr. 46; Hirschberg Tr. 50. Hancock acknowledges it had a "rollover" policy which it offered to General Account customers whose balance of funds in that account exceeded liabilities by 20 percent and some...