Benefits Committee v. Key Trust Co., 01-3255.
| Decision Date | 16 December 2002 |
| Docket Number | No. 01-3255.,01-3255. |
| Citation | 313 F.3d 919 |
| Parties | BENEFITS COMMITTEE OF SAINT-GOBAIN CORPORATION; George B. Amoss; Bruce H. Cowgill; Stephen A. Segebarth; Dennis J. Baker, in their capacities as members of the Benefits Committee of Saint-Gobain Corporation, Plaintiffs-Appellants, v. KEY TRUST COMPANY OF OHIO, N.A., Trustee of the Furon Company Employee Stock Ownership Plan, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Kay Kyungsun Yu (briefed), Michael L. Banks (argued and briefed), Brian J. Dougherty (briefed), Morgan, Lewis & Bockius LLP, Philadelphia, PA, for Plaintiffs-Appellants.
Jeffrey S. Leavitt (briefed), Patricia Eschbach-Hall (briefed), Jones, Day, Reavis & Pogue, Cleveland, OH, John W. Edwards, II (argued and briefed), Jones, Day, Reavis & Pogue, Menlo Park, CA, for Defendant-Appellee.
Peter B. Dolan (argued and briefed), U.S. Department of Labor, Office of the Solicitor, Washington, DC, for Amicus Curiae.
Before: SILER, COLE, and CLAY, Circuit Judges.
Plaintiff Benefits Committee of Saint-Gobain Corporation and Plaintiffs George B. Amoss, Bruce H. Cowgill, Stephen A. Segebarth, and Dennis J. Baker, in their capacities as members of the Benefits Committee of Saint-Gobain Corporation (collectively, the "Benefits Committee"), appeal the grant of summary judgment to Defendant Key Trust Company of Ohio, N.A. (the "Trustee"), which serves as the trustee of the Furon Company Employee Stock Ownership Plan (the "Furon ESOP"). The district court found that repayment by the Furon ESOP of a loan to Saint-Gobain Corporation ("Saint-Gobain"), the successor corporation to Furon, would violate the Trustee's fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"), 88 Stat. 832, as amended, 29 U.S.C. § 1001, et seq. We reverse and remand.
The parties stipulated below to the basic facts underlying this case, which the district court adopted.
The Benefits Committee is the plan administrator, as defined by ERISA, of the Furon ESOP. Furon was the original plan sponsor of the Furon ESOP. As described below, Saint-Gobain acquired Furon in late 1999. Both the Benefits Committee and the Trustee are named fiduciaries of the Furon ESOP.
Furon established the Furon ESOP on February 4, 1990. The Furon ESOP was intended to qualify as a stock bonus plan under § 401(a) of the Internal Revenue Code of 1986 (the "Code"), as amended, and as an employee stock ownership plan as defined by § 4975(e)(7) of the Code. The Furon ESOP was designed to invest primarily in shares of Furon stock. Furon established the Furon ESOP to provide eligible employees with the opportunity to obtain a beneficial interest in the company through the allocation of Furon stock to individual participant accounts.
Furon and Ameritrust Company National Association entered into the Furon Company Employee Stock Ownership Plan Trust Agreement (the "Trust Agreement") on February 15, 1990. The Trust Agreement provides for the establishment of the Furon Company Employee Stock Ownership Plan Trust (the "Trust") to hold the assets of the Furon ESOP, with Ameritrust as the trustee. The Trustee is the successor to Ameritrust.
The Benefits Committee claims that under the Trust Agreement it has full discretion to construe and interpret the terms of the Furon ESOP. The Trustee is the custodian of the Furon ESOP's assets and holds those assets under the Trust Agreement; it is responsible for making payments and distributions as provided in the Furon ESOP and the Trust Agreement at the direction of the Benefits Committee, to the extent permitted by law.
The Trustee caused the Trust to enter into a series of loan transactions with Furon, whereby Furon loaned money to the Furon ESOP to finance the purchase of Furon stock (the "Exempt Loans"). The Exempt Loans were permitted by the terms of the Furon ESOP. The Exempt Loans are subject to ERISA and the Code, which generally prohibit loans between employers and the employee benefit plans they sponsor. However, the Exempt Loans were structured to fall within the exemption set forth in ERISA, 29 U.S.C. § 1108(b)(3), and the Code, 26 U.S.C. § 4975. The Exempt Loans were made between October 1, 1990, and August 29, 1997, in the aggregate principal amount of $6,241,098.85.
The Exempt Loans were designed so that the Trust, acting through the Trustee, borrowed money from Furon. The Trustee then used the proceeds from the Exempt Loans to purchase Furon stock, which was placed in a Suspense Subfund (the "Subfund") rather than allocated to the account of any individual Furon ESOP participant. No security was pledged, rendering the Exempt Loans unsecured.
Furon made contributions to the Furon ESOP that the Trustee used to make principal and interest payments to Furon on the Exempt Loans. As the Exempt Loans were repaid, a portion of the Furon stock in the Subfund was released based upon a formula set forth in § 6.3 of the Furon ESOP. As the Furon stock was released, it was allocated to the individual accounts of the Furon ESOP participants pursuant to §§ 6.1 and 6.4 of the Furon ESOP. Thus, when the Furon ESOP was first established, individual participant accounts were empty because all of the Furon stock held by the Trust was in the Subfund. Over time, as earned, the Furon stock was transferred from the Subfund and allocated to individual participant accounts.
On October 23, 1999, approximately 95% of Furon's stock was acquired by FCY Acquisition Corporation ("FCY") in a cash tender offer. FCY is a wholly owned subsidiary of Saint-Gobain. The acquisition included the purchase for cash of all the Furon stock held by the Furon ESOP, including the unallocated stock held in the Subfund, at a price of $25.50 per share. The purchase price represented a premium of 56% over the market value of Furon stock, which was valued at $16.31 as of September 17, 1999. The cash proceeds from the sale of the Furon stock in the Subfund were approximately $6,001,042.00. As of October 22, 1999, the day before the acquisition, the Furon ESOP included 2,220 participants.
On November 21, 1999, the remaining outstanding shares of Furon stock were acquired indirectly by Saint-Gobain through a merger of FCY with Furon. As of that date, the Subfund was composed solely of cash proceeds from the sale of the Furon stock. On November 21, 1999, the principal amount of the Exempt Loans was $2,332,653.75.
On December 31, 1999, Saint-Gobain Performance Plastics Corp., a wholly owned subsidiary of Saint-Gobain, was merged with the acquired Furon. The new entity changed its name to Saint-Gobain Performance Plastics Corporation ("Saint-Gobain Plastics"). Thus, the current sponsor of the Furon ESOP and the "Company" referred to in the Furon ESOP is Saint-Gobain Plastics.
On March 10, 2000, the board of directors of Saint-Gobain Plastics amended and terminated the Furon ESOP, effective March 17, 2000. On March 14, 2000, the Benefits Committee notified the Trustee by letter of the Furon ESOP amendment and termination.
On May 22, 2000, Saint-Gobain requested a determination from the Internal Revenue Service ("IRS") that termination of the Furon ESOP and repayment of the Exempt Loans would not violate the Code. On September 1, 2000, the IRS issued a favorable determination that the amendment and termination of the Furon ESOP did not adversely affect the ESOP's status.
The Benefits Committee instructed the Trustee to use the cash proceeds from the sale of the Furon stock in the Subfund to pay the balance of the Exempt Loans (now payable to Saint-Gobain Plastics). The Trustee refused. Nevertheless, on March 17, 2000, at the Benefits Committee's direction, the Trustee allocated the assets in the Subfund, less the amount owing on the Exempt Loans, to individual participant accounts. In early June 2000, Furon ESOP participants were notified of the amount of their individual account balances and informed of the various distribution options available to them. Later that month, the Trustee began processing requests from Furon ESOP participants for distribution.
Neither Saint-Gobain nor Saint-Gobain Plastics has made any contributions to the Furon ESOP since Furon was acquired by Saint-Gobain. Likewise, the Trustee has made no payments on the Exempt Loans since that time. Thus, the amount in controversy is $2,332,653.75, the principal amount owing on the Exempt Loans as of November 21, 1999, and remaining money in the Subfund.
The Benefits Committee filed suit in 2000. The complaint set forth two causes of action. Count One alleged that the Trustee's failure to repay the Exempt Loans with the cash proceeds from the sale of the Furon stock in the Subfund constituted a breach of the terms of the Furon ESOP. Count Two alleged that the Trustee's failure to repay the Exempt Loans with the proceeds from the sale of the Furon stock constituted a breach of its fiduciary duty.
With its answer, the Trustee filed counterclaims against the Benefits Committee seeking a declaratory judgment that (1) the Trustee is precluded by ERISA from using the proceeds from the sale of the Furon stock in the Subfund to repay the Exempt loans; (2) the Trust Agreement requires the Trustee to allocate the Subfund to the participants in the Furon ESOP in proportion to their current account balances; and (3) the Benefits Committee's instructions to use the Subfund to repay the Exempt Loans constitutes a breach of its fiduciary duties.
The parties filed cross-motions for summary judgment. The district court granted the motion of the Trustee and denied the motion of the Benefits Committee, holding that if the Trustee were to repay the Exempt Loans with the assets currently held in the Subfund, it would violate its fiduciary duties to the Furon ESOP participants...
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