Cunha v. Ward Foods, Inc.

• Decision Date: 17 October 1980
• Docket Number: Civ. No. 77-0306.
• Citation: 501 F. Supp. 830
• Parties: Allen H. CUNHA, Jr., George L. Gonsalves, Richard C. Lowry, Janet Leuenberger, Leoda Aguair, Joseph W. Alana, Jr., Haruye Anamizu, Joseph Cabral, Hilton W. C. Chong, Bernard L. Galdeira, C. Elaine Jackson, Herbert S. Kruse, Alvin L. Medeiros, Mineo Murakami, Ricardo Ronolo, Randolph K. Ahuna, Anita K. Amai, Albert L. Botelho, S. E. Cadinha, Richard C. Chong, Eleanor S. Furukawa, Richard H. Ginoza, R. E. Hughes, Judith Kamalii, Ned N. Matsuyama, Samuel Min, Elizabeth H. Okamoto, Joseph F. Santos, George Splinter II, Ruth T. Ung, Wilfred Woo, George Yomes, Joseph T. Imai, Henry H. Harada, David Holmes, Herbert K. D. NG, Isaac Kaai, Jr., Judy M. P. Tsutsui, John T. Watanabe, Doris H. Yoshimoto, Norman S. Teruya, David W. Chang, Joseph K. Puou, Alexander C. Torres, William K. Chong, and Sadie W. Tashima, Plaintiffs, v. WARD FOODS, INC. and The Wyatt Company, Defendants.
• Court: U.S. District Court — District of Hawaii

501 F. Supp. 830

Allen H. CUNHA, Jr., George L. Gonsalves, Richard C. Lowry, Janet Leuenberger, Leoda Aguair, Joseph W. Alana, Jr., Haruye Anamizu, Joseph Cabral, Hilton W. C. Chong, Bernard L. Galdeira, C. Elaine Jackson, Herbert S. Kruse, Alvin L. Medeiros, Mineo Murakami, Ricardo Ronolo, Randolph K. Ahuna, Anita K. Amai, Albert L. Botelho, S. E. Cadinha, Richard C. Chong, Eleanor S. Furukawa, Richard H. Ginoza, R. E. Hughes, Judith Kamalii, Ned N. Matsuyama, Samuel Min, Elizabeth H. Okamoto, Joseph F. Santos, George Splinter II, Ruth T. Ung, Wilfred Woo, George Yomes, Joseph T. Imai, Henry H. Harada, David Holmes, Herbert K. D. NG, Isaac Kaai, Jr., Judy M. P. Tsutsui, John T. Watanabe, Doris H. Yoshimoto, Norman S. Teruya, David W. Chang, Joseph K. Puou, Alexander C. Torres, William K. Chong, and Sadie W. Tashima, Plaintiffs, v. WARD FOODS, INC. and The Wyatt Company, Defendants.

Civ. No. 77-0306.

United States District Court, D. Hawaii.

October 17, 1980.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Larry L. Myers, Alan Van Etten, Fong, Miho & Robinson, Edward C. Kemper, Thomas T. Watts, Kemper & Watts, Honolulu, Hawaii, for plaintiffs.

Edmund Burke, William H. Gilardy, Jr., Burke, McPheeters, Bordner & Gilardy, Honolulu, Hawaii, for The Wyatt Company.

Roger W. Fonseca, Torkildson, Katz, Jossem & Loden, Honolulu, Hawaii, for Ward Foods, Inc.

MEMORANDUM AND ORDER DENYING MOTION FOR SUMMARY JUDGMENT EXCEPT AS TO COUNT III OF THE SECOND AMENDED COMPLAINT

SAMUEL P. KING, Chief Judge.

In June 1964, the Honolulu Iron Works ("Honiron") adopted a "funded" pension for its employees.¹ The new plan went into effect on or about May 1, 1964, and was described in the company newspaper and in a pamphlet distributed to employees. In the company newspaper, employees were informed "that no disaster or change of management can reduce or eliminate your pension." (emphasis in original). Employees were also assured that the payments made to the fund "must be used for the benefit of the employees and can never revert to the company." (emphasis in original). Participants contributed to the plan at the rate of three and one-half percent (3½%) of their wages in excess of four hundred dollars ($400) per month. All the plaintiffs were participants from the plan's inception.

In January 1966, defendant Ward Foods, Inc. ("Ward") acquired Honiron and amended and adopted the plan. Participants contributed to the plan until September 1971 when the plan was amended to eliminate future contributions. Ward, through Honiron, was bound to make all contributions necessary to maintain the plan in full force under the Internal Revenue Code. Ward retained the right to terminate the plan subject to distribution of the funds according to rights that vested immediately upon termination.

Ward divested itself of Honiron in January 1973 and formal termination of most employees, including plaintiffs, was completed by September 1973. At that point, the plan was still in effect. On August 27, 1964, Mr. Richard H. Forster of defendant Wyatt Company ("Wyatt"), the pension plan actuary, wrote the Honiron division treasurer informing him that if Ward terminated after July 1, 1974, and before the effective date for the soon-to-be-enacted Employee Retirement Income Security Act (ERISA), (1) the Pension Benefit Guarantee Corporation (PBGC) to be established under ERISA would guarantee the accrued plan benefits, and (2) Ward would escape certain liabilities imposed by ERISA. Wyatt suggested that Ward make a decision. On August 31, 1974, Ward's Board of Directors terminated the plan.

Ward applied for PBGC's guarantee and was rejected. The PBGC found that Ward had not provided substantial evidence of a reasonable business purpose for termination as required under ERISA, 29 U.S.C. § 1381(b) (1975). The evidence instead indicated that Ward had terminated the plan for the disqualifying purpose of obtaining the guarantee and avoiding liability. The employees, including plaintiffs, received notice of this action in January 1976.

Plaintiffs brought this suit against Ward and Wyatt raising several common law claims based on negligence and misrepresentation, unjust enrichment, breach of contract, breach of fiduciary duty and various breaches of obligations to manage and contribute to the fund properly. The complaint was filed on July 11, 1977, in The Circuit Court of the First Circuit, State of Hawaii, and removed to this Court on diversity grounds. In early 1978, both defendants made motions for summary judgment. By Order of September 5, 1978, this Court denied the motions for summary judgment except as to the claim based on unjust enrichment. After two years of discovery and two amendments to the complaint, Ward again has moved for summary judgment.

Plaintiffs filed a second amended complaint on January 3, 1980. That complaint contains 24 counts that conveniently can be considered in seven categories: (1) state common law claims based on tortious acts, (2) state common law claims based on breach of contract, (3) state common law claims based on failure to manage and/or fund the plan properly, (4) federal securities claims, (5) state securities claims, (6) state claims based on unfair trade practices, and (7) violations of ERISA. The various claims were raised against one or both defendants and defendants have raised statute of limitations defenses.

1. State Common Law Claims Based on Tortious Acts

Plaintiffs allege that Wyatt, by its advice about termination and the PBGC benefits, is liable for negligence, misrepresentation, the unauthorized practice of law and tortious interference with a prospective advantage. In general, plaintiffs' claims are based on Wyatt's influence on Ward to terminate the plan and on the inaccuracy of Wyatt's advice that the plan would be covered under the PBGC. As to all but one of these counts, defendant's motion must be denied. The outcome here is dependent wholly upon the facts and those are still in dispute. As to Count III of the second amended complaint (alleged unauthorized practice of law), defendant's motion is granted. Under Hawaii Rev.Stat. § 605-15.1 (1976), only the Attorney General or bar association of the state has standing to bring an action for violation of Hawaii Rev. Stat. § 605-14 (1976) (unauthorized practice of law). See Reliable Collection Agency v. Dole, 59 Haw. 503, 584 P.2d 107 (1978).

2. State Law Claims Based on Breach of Contract

Plaintiffs contend that Wyatt's alleged misrepresentations constituted a breach of the pension plan contract of which plaintiffs were third-party beneficiaries, and that Ward's refusal to pay benefits constituted a breach. Further, they allege that Ward breached a contract of the union of which some plaintiffs were members. According to plaintiffs, the contract provided for no termination before June 30, 1977. In its Order of September 5, 1978, this Court discussed the use of the company newspaper and the pamphlets as they affected the plan contract and Ward's alleged absolute right to terminate the plan. This Court concluded that the circumstances posed genuine issues of material fact and denied Ward's motion for summary judgment. Those issues remain in dispute and this motion must be denied as to them.

3. State Law Claims Based on Failure to Manage and Fund Properly

Plaintiffs claim that Wyatt failed to make actuarial calculations for the 1974 contributions to the plan and that Ward is liable for breach of fiduciary duty in managing the plan and for inadequate funding of the plan. Plaintiffs also claim that, prior to the termination of the plan, Ward violated the terms of the plan by paying a pension to those who reached age 55 and not paying those who reached age 45 and had ten years of service. Ward denies these claims and the issues remain in dispute.

4. Federal Securities Claims

Plaintiffs allege violations of the following federal securities laws: (1) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1971) and Rule 10b-5 promulgated under it, (2) Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e (1971), (3) Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (1971), and (4) Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1971). All of these claims involve allegations about defendants' conduct and motives in terminating the plan.

Defendants claim that plaintiffs' interests in the pension plan are not securities covered by the federal laws. They rely on the recent decision of the Supreme Court of the United States in International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979), to support that contention. The Supreme Court held that the Securities Act and Securities Exchange Act do not apply to a noncontributory, compulsory pension plan, reasoning that such interests do not constitute investment contracts under SEC v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The test, under Howey, is "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." 328 U.S. at 301, 66 S.Ct. at 1104. See also Tanuggi v. Grolier, Inc., 471 F.Supp. 1209 (S.D.N.Y.1979). The Supreme Court also reasoned that an employee who makes no decision to participate and no contribution cannot be making an investment decision. However, the Court left open the question for plans that are voluntary and/or contributory.

Defendants argue that the Honiron plan was mandatory and non-contributory. While it is undisputed that the plan was non-contributory at the time of termination, it was clearly contributory at its inception when all the plaintiffs joined the plan. Therefore, plaintiffs made contributions from 1964 to 1971. The plan, by its terms, speaks of participants, not all employees, and plaintiffs claim participation was voluntary while defendants claim it was mandatory. This disputed factual issue...