Bennett v. Conrail Matched Savings Plan Administrative Committee, s. 97-1916
| Citation | 168 F.3d 671 |
| Decision Date | 23 February 1999 |
| Docket Number | 97-1917 and 97-1918,Nos. 97-1916,s. 97-1916 |
| Parties | 22 Employee Benefits Cas. 2717, Pens. Plan Guide (CCH) P 23952O Steven W. BENNETT; Edmund L. Gillooley; Joseph L. Alessandrini, Jr.; Frank W. Hewitt; Richard E. Semarad; Warren E. Kaylor, Individually and on behalf of all others similarly situated, v. CONRAIL MATCHED SAVINGS PLAN ADMINISTRATIVE COMMITTEE; Deborah A. Melnyk; John/Jane Does 1-10; Consolidated Rail Corporation Matched Savings Plan, Steven W. Bennett; Edmund L. Gillooley; Joseph L. Alessandrini, Jr.; Frank W. Hewitt; Richard E. Semarad; Warren E. Kaylor, Individually and on behalf of all members of the proposed class, Appellants in 97-1916. Joanne Kelly, Individually and on behalf of all others similarly situated, v. Conrail Matched Savings Plan Administrative Committee; Deborah A. Melnyk; John/Jane Does 1-10; Consolidated Rail Corporation Matched Savings Plan, Joanne Kelly, Appellant in 97-1917. George E. Gale, III, Individually and on behalf of all others similarly situated, Appellant 97-1918, v. Conrail Matched Savings Plan Administrative Committee; Deborah A. Melnyk; John/Jane Does 1-10; Consolidated Rail Corporation Matched Savings Plan. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Alan M. Sandals, Esquire (Argued), Howard I. Langer, Esquire, Sandals, Langer & Taylor, LLP, Philadelphia, PA, Attorney for Appellants Bennett, Gillooley, Alessandrini, Hewitt, Semarad and Kaylor.
Kenneth I. Trujillo, Esquire, Ira Neil Richards, Esquire, Trujillo, Rodriguez & Richards, LLC, Philadelphia, PA, Attorneys for Appellants Kelly, et al.
David Berger, Esquire, Harold Berger, Esquire, Stanley R. Wolfe, Esquire, Patricia D. Gugin, Esquire, Berger & Montague, P.C., Philadelphia, PA, Attorneys for Appellants Gale, et al.
Laurence Z. Shiekman, Esquire (Argued), Brian T. Ortelere, Esquire, Pepper Hamilton LLP, Philadelphia, PA, Attorneys for Appellees.
Before: SLOVITER and ROTH, Circuit Judges, FEIKENS, 1 District Judge.
Appellants are former employees of Conrail Corporation. They challenge the distribution of surplus assets of an employee stock ownership plan ("ESOP" or the "Plan"). The Plan is governed by the Employee Retirement Income Securities Act ("ERISA"). We must decide whether ERISA entitled the former employees to a portion of the cash surplus in the Plan that resulted from a favorable tender offer for Conrail's stock. Appellants argue that under ERISA they are entitled to share in the surplus and that Conrail's failure to permit them to do so violates fiduciary duties imposed by ERISA. We conclude that appellants were not entitled to participate in the apportionment of the surplus and that the District Court correctly dismissed their claims.
In 1990, Conrail established a voluntary savings plan for non-union employees. The Plan was a defined contribution plan 2 and included an employee stock ownership plan and a deferred compensation plan. To get established, the Plan borrowed $290 million from Conrail to purchase a specially created class of Conrail preferred stock. This stock was held in an unallocated account. Participating employees contributed a portion of their salary into individual accounts and Conrail matched these contributions with stock from the unallocated account. These contributions vested immediately. Under the Plan, "all amounts allocated to the Account of a Participant shall be fully vested and nonforfeitable at all times." Conrail Plan Agreement, p 12.1. The benefits, which accrued under the defined contribution plan, were based solely on the performance of the shares in the individual accounts. As the District Court noted, the benefits depended on the vagaries of the marketplace.
Shortly after establishing the Plan, Conrail began to terminate employees. A terminated employee was entitled "to a distribution of all amounts credited to his account." Conrail Plan Agreement, p 8.1. Appellants do not dispute that they were fully vested and that, when they were terminated by Conrail, they were credited with the total vested balance in their individual accounts.
In 1997, Norfolk Southern and CSX Corporations made a favorable tender offer to purchase Conrail. The tender offer was for all outstanding shares of Conrail stock, including shares held in the unallocated account. The price Norfolk Southern and CSX paid for the stock was substantially in excess of its market value. After the Plan repaid Conrail the funds which it had borrowed to establish the Plan, the Plan's share of the proceeds from the tender offer resulted in a cash surplus of approximately $533 million in the unallocated account.
In June 1997, the Plan was amended to allocate this surplus to persons employed by Conrail from 1996-1998. 3 The amendment provided that these allocations would be made to the maximum extent allowed under the Internal Revenue Code (). Employees terminated or otherwise separated from employment with Conrail before 1996 were not eligible to share in the surplus. Appellants are among this ineligible group.
Appellants brought suit in the U.S. District Court for the Eastern District of Pennsylvania, alleging two counts of ERISA violations. The District Court concluded that appellants received their accrued benefits as mandated by ERISA and for that reason they were not entitled to share in the surplus. The District Court dismissed both counts for failure to state a claim under Rule 12(b)(6). This appeal followed.
The District Court had jurisdiction over this action based on 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e). We have jurisdiction over the appeal of the dismissal pursuant to 28 U.S.C. § 1291. We review a dismissal under Rule 12(b)(6) under a plenary standard of review. Malia v. General Electric Co., 23 F.3d 828, 830 (3d Cir.1994).
Appellants' complaint set forth two counts, alleging violations of ERISA. First, they claim that Conrail violated ERISA and tax code provisions governing partial and complete termination of pension plans. In the second count, they allege that under ERISA, Conrail breached its fiduciary duty by amending the Plan to adopt an inequitable distribution scheme. Appellants contend that on its termination, the Plan was essentially a "wasting trust" and therefore Conrail had a duty to distribute all its assets equitably.
We turn first to appellants' claim that a partial termination occurred and that the partial termination mandated distribution of a share of the unallocated assets to appellants. Appellants contend that the Plan was partially terminated when in 1990, shortly after Conrail had established it, Conrail started laying off employees. Appellants argue that, under the Internal Revenue Code, a partial termination requires the distribution of unallocated Plan assets to the terminated employees. 26 U.S.C. § 411(d)(3).
The District Court assumed that the employees were correct in contending that the layoffs constituted a partial termination of the Plan. This assumption is consistent with our conclusion in Gluck v. Unisys Corp., 960 F.2d 1168, 1183 (3d Cir.1992), that Since we have found that excluding employees through layoffs is a "vertical partial termination," id., the District Court reasonably assumed that a partial termination had occurred.
This conclusion does not, however, help appellants. Even though a partial termination of the Plan may have occurred, the tax code does not afford the appellants the relief they seek. Appellants argue that the Internal Revenue Code requires any partially terminated tax-qualified pension plan to distribute benefits to all "affected employees." They cite to 26 U.S.C. § 411(d)(3), which provides that a plan will retain its tax qualified status if
upon its termination or partial termination ... the rights of all affected employees to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees' accounts are nonforfeitable.
Appellants' reliance on this section is, however, misplaced. Section 411(d)(3) refers only to "benefits accrued." The code defines "benefits accrued" for defined contribution plans as the balance in the individual's account. 26 U.S.C. § 411(a)(7)(A)(ii). 4 In addition, as § 411(d)(3) makes clear, affected employees are entitled to "benefits accrued to the date of such termination, [or] partial termination." Appellants were fully vested in the balance in their accounts when they were laid off, but their contributions to the Plan ceased at that time. The Plan would not reopen as to them to gather in further assets to accrue for their benefit. Indeed, by the express language of the Plan, only participants having a base salary earned for services could contribute to the Plan. Plan Agreement, p 3.1 and p. 3. For that reason, after their lay-off, appellants were no longer entitled to receive new benefits in the Plan.
Moreover, appellants are conflating accrued benefits with plan assets. Assets and benefits are treated differently under ERISA. As we noted in Malia:
"benefits" are elements that are conceptualized and treated differently in a plan termination than are "assets" of that plan. "Benefits" are computed in a different manner than "assets." Accrued benefits are placed on the liability side, rather than on the asset side of the balance sheet.
In Malia, two pension plans merged resulting in surplus assets. Participants sued to receive the surplus in addition to...
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