Penn v. Howe-Baker Engineers, Inc.

Citation898 F.2d 1096
Decision Date26 April 1990
Docket NumberNo. 89-2257,HOWE-BAKER,89-2257
PartiesTerry T. PENN, Plaintiff-Appellant, v.ENGINEERS, INC., et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Robert M. Bandy and Charles E. Head, Bandy, Head & Raney, Tyler, Tex., for plaintiff-appellant.

R. Michael Moore, Fulbright & Jaworski, Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of Texas.

Before GARZA, WILLIAMS and DAVIS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

Appellant, Terry T. Penn, claims certain benefits under the Howe-Baker Engineers, Inc. pension plan. The Howe-Baker Pension Committee denied him the benefits, determining that he did not meet the requirements for vesting accrued benefits under the plan. The district court upheld the Pension Committee's decision. We affirm.

I.

From June 23, 1975 through October 24, 1984, Terry Penn was continuously employed by Howe-Baker. 1 For some time in 1985, he was again affiliated with Howe-Baker. At the time Penn was hired, Howe-Baker maintained a pre-ERISA pension plan, entitled the Howe-Baker Engineers Pension Plan ("Plan"). The Plan became effective on August 31, 1974 and underwent a series of amendments before it was terminated in 1985.

Three amendments are pertinent to Penn's case. In June 1976, the Plan was first amended and restated, effective January 1, 1975, to comply with ERISA. In January 1977, the Plan was amended to comply with the IRS Code. That amendment, called the "First Amendment to the Plan," although actually it was the second, also became effective retroactively on January 1, 1975. The Third Amendment to the Plan, executed February 1984 and effective January 1, 1984, changed the fiscal year of the Plan to a calendar year, adopting a short fiscal year from October 1, 1983 through December 31, 1983. It also changed the method of calculating vested service from a "1,000 hours" to an "elapsed time" method. 2

Effective March 2, 1985, the Plan was terminated. In compliance with the IRS, all employees laid off during 1984, as well as all employees of Howe-Baker as of March 2, 1985, were fully vested in their accrued benefits under the Plan. Employees who had voluntarily terminated their employment in 1984 were not fully vested.

The conditions that surrounded both Penn's leaving Howe-Baker in October 1984 and his work for Howe-Baker in 1985 are highly disputed. The trial court found, and both parties agree, that Penn took a leave of absence from Howe-Baker for sixty days in August 1984. At the end of that sixty day period, his job with Howe-Baker was terminated. Penn claims that the job was terminated for lack of work. Howe-Baker claims that Penn decided to quit due to a ten percent reduction in pay and that the company gave Penn sixty days to reconsider his decision. At the end of the sixty days, Penn had not contacted anyone at the company so his employment was terminated.

In 1985, Penn did a substantial amount of work for Howe-Baker. Penn contends he was "recalled" at that time and that the work he did was essentially the same as the work he had done before his termination. He claims he had the same work location, the same desk, and the same supervisors he had previously. Howe-Baker argues that Penn was an independent contractor during this time and that he was unable to work as a full-time regular employee because he already was working full-time elsewhere. When Penn returned to do some work for Howe-Baker, he and Howe-Baker signed a Design Services Agreement designating Penn as an independent contractor. When he commenced his services, he was not required to take a physical examination and he was given none of the benefits of regular employees. Moreover, he was paid in full for time he worked, without income tax withholding or other deductions. He reported his income during that time as profit from a sole proprietorship.

In May 1986, Penn requested the payment of his accrued benefits under the Plan. The next day Howe-Baker notified him that he had forfeited his rights under the Plan. After a hearing, the Pension Committee of the Plan Administrator upheld the initial decision to deny benefits.

Penn then filed this suit in federal district court, seeking recovery of the benefits denied him by the Committee. After trial without a jury, the district court entered Findings of Fact and Conclusions of Law and directed judgment for Howe-Baker.

Penn appeals the district court's decision upholding the Committee's denial of benefits. He argues that he is entitled to the benefits on four different grounds: (1) He was laid off in 1984; (2) He was an employee of Howe-Baker at the time of the Plan's termination in March 1985; (3) Under proper methods of calculating years of service for vesting purposes, he is entitled to ten years of service and is therefore 100% vested in the Plan; and (4) In accordance with an IRS General Counsel Memorandum dealing with breaks in service, he is fully vested in his accrued benefits. We shall consider each of these contentions in turn. But first we must resolve significant questions on the standard of judicial review by the District Court and by this Court of the decision of the Pension Committee.

II.

The Supreme Court handed down a recent decision in Firestone Tire and Rubber Company v. Bruch, --- U.S. ----, 109 S.Ct. 948, 957, 103 L.Ed.2d 80 (1989), which alters a number of prior court decisions applying an arbitrary or capricious standard of review to pension committees' conclusions. In Firestone, the Supreme Court held that "unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan," courts should review challenges of denial of benefits de novo. Firestone, 109 S.Ct. at 956. Because the Howe-Baker plan does give the Committee authority to determine benefit eligibility, it falls within the exception in Firestone. The fact that the Howe-Baker plan meets this exception, however, does not mean that Penn's case is unaffected by Firestone.

Prior to Firestone, the Fifth Circuit had followed a limited scope of review for denial of benefits under ERISA. Along with other courts, we considered ourselves bound by a committee's interpretation and determinations unless they were arbitrary or capricious. See, e.g., Dennard v. Richards Group, Inc., 681 F.2d 306, 313 (5th Cir.1982); Bayles v. Central States, Southeast & Southwest Areas Pension Fund, 602 F.2d 97, 99-100 (5th Cir.1979). A number of courts, however, recognized that such a broad deferential review could not be accorded questions of law under ERISA. Nearly all courts properly acknowledged that questions of law should receive at least some less deference than questions of fact or plan interpretations. See e.g., Holt v. Winpisinger, 811 F.2d 1532, 1536 & n. 29 (D.C.Cir.1987). But before Firestone, a number of Circuit Courts had developed an "erroneous standard" for evaluating questions of law under ERISA. This standard apparently originated with the arbitrary or capricious standard in the D.C. Circuit's opinion in Danti v. Lewis, 312 F.2d 345 (D.C.Cir.1962). Dennard, 681 F.2d at 314 (citing Wardle v. Central States, Southeast & Southwest Areas Pension Fund, 627 F.2d 820, 823 (7th Cir.1980), cert. denied, 449 U.S. 1112, 101 S.Ct. 922, 66 L.Ed.2d 841 (1981)). In Danti, the Court explained that the question to be asked on review is "whether the Trustees have acted arbitrarily, capriciously or in bad faith; that is, is the decision of the Trustees supported by substantial evidence or have they made an erroneous decision on a question of law." Danti, 312 F.2d at 348 (emphasis added).

Although several courts claimed to follow an "erroneous" standard when reviewing questions of law under ERISA, none specifically articulated the meaning of that ambiguous standard. In some cases, the courts seemed to apply, in essence, a de novo standard. See, e.g., Holt, 811 F.2d at 1538-41; Richardson v. Central States, Southeast & Southwest Areas Pension Fund, 645 F.2d 660, 662-63 (8th Cir.1981). Other courts, however, continued to give great deference to the pension committee's determinations regarding questions of law, practically applying an arbitrary or capricious standard. See, e.g., Carter v. Central States, Southeast & Southwest Areas Pension Plan, 656 F.2d 575, 577-78 (10th Cir.1981); Wardle, 627 F.2d at 824-28 (holding that the pension committee's decision regarding a question of law was not arbitrary or capricious or erroneous as a matter of law). Both the Carter and Wardle courts pointed out that even though they might have decided the issue differently, were they the original triers, the standard of review required that they be more deferential to decisions by the pension trustees. See Carter, 656 F.2d at 578; Wardle, 627 F.2d at 827.

In Firestone, however, the Supreme Court discussed in detail the emergence and history of the arbitrary or capricious standard as applied to ERISA cases. It pointed out that prior to ERISA, disputes involving denial of benefits under a pension plan were governed by contract law principles. Courts have long applied a de novo standard of review in interpreting contracts. Firestone, 109 S.Ct. at 955. Because "ERISA was enacted 'to promote the interests of employees and their beneficiaries in employee benefit plans,' " id. at 955 (quoting Shaw v. Delta Airlines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 2896, 77 L.Ed.2d 490 (1983)), the Court pointed out that it would contravene those purposes to impose a standard of review that afforded less protection to employees than they had prior to ERISA. Accordingly, "wholesale importation of the arbitrary and capricious standard into ERISA is unwarranted." Id. at 953 (emphasis in original).

Because the Howe-Baker plan falls under the Firestone exception, we continue to apply the arbitrary or...

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