Cunha v. Ward Foods, Inc.

Decision Date21 November 1986
Docket NumberNo. 84-1979,84-1979
Citation804 F.2d 1418
Parties7 Employee Benefits Ca 2747 Allen H. CUNHA, Jr., George L. Gonsalves, Richard G. Lowry, Janet Leuenberger, Leoda Aguiar, Joseph W. Alana, Jr., Haruye Anamizu, Joseph Cabral, Hilton W.C. Chong, Bernard L. Galdeira, C. Elaine Jackson, Herbert S. Kruse, Alvin J. Medeiros, et al., Plaintiffs-Appellants, v. WARD FOODS, INC., Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Edward C. Kemper, Honolulu, Hawaii, for plaintiffs-appellants.

Robert Katz, Jamie A. Chuck, Honolulu, Hawaii, for defendant-appellee.

Appeal from the United States District Court for the District of Hawaii.

Before SKOPIL, FLETCHER and ALARCON, Circuit Judges.

FLETCHER, Circuit Judge:

Former employees of Ward Foods' Honiron Division appeal the district court's judgment limiting damages for Ward's negligent misrepresentation of its pension plan to the employees' "out-of-pocket" losses. The employees also challenge the district court's grant of summary judgment on two counts of their complaint, and the granting of directed verdicts on four other counts. The employees also contest certain evidentiary rulings during trial, and decisions on jury instructions.

We affirm the district court in part, and reverse and remand in part.


In 1964, Honolulu Iron Works (Honiron), sometime before it was acquired by defendant Ward Foods, Inc., replaced its "pay-as-you-go" pension plan with a new "funded" plan (the Plan). The company newsletter, the "HONIRONEWS", and an employee brochure described the Plan to employees. The HONIRONEWS explained that a funded pension plan provided greater security, because it was not dependent upon the company's current financial condition. The newsletter declared that "no disaster or change of management can reduce or eliminate your pension." The employee brochure and company officials reaffirmed the attractiveness of the Plan.

We summarize the terms of the Plan briefly here. Under the original Plan, employees contributed three and one-half percent of wages over $400. However, in 1971 an amendment made the Plan noncontributory. The company agreed to "make[ ] such contributions to the Trust Fund which are necessary to maintain the Plan in full force and effect under the terms of the Internal Revenue Code." An employee with ten or more years of service who reached age 45, would receive benefits beginning at age 65. An employee could elect early retirement at age 55. In Article XIII, Ward reserved the right to "change, modify, amend, suspend, or discontinue the Plan at any time except as modified by any Labor Agreement between [Ward] and the Union."

All of the employees in this action joined the Plan, claiming that they did so in reliance on Ward's representations concerning its security and stability. The employees testified that they read the newsletter and pension brochure, but that with the exception of one plaintiff, Elaine Jackson, they never saw the actual Plan document, which was on file in Honiron's office. They testified that Ward's oral and written representations concerning the Plan misled them to think that Ward was guaranteeing full payment of pensions, under all circumstances.

In 1973, Ward began liquidating Honiron's operations. Although most employees, including the plaintiffs, were terminated by September 1973, the Plan continued in existence.

On August 27, 1974, the Wyatt Company, the Plan's actuarial consultant, wrote Ward to inform the company about certain aspects of the new Employee Retirement Income Security Act of 1974 (ERISA). Wyatt advised Ward that under the legislation, if a pension plan terminated after July 1, 1974, the Pension Benefit Guaranty Corporation (PBGC) would guarantee accrued plan benefits without employer liability. However, if a plan terminated after September 2, 1974, the employer would be required to repay the PBGC up to thirty percent of the company's net worth to cover vested pension obligations.

On August 31, 1974, Ward terminated the Honiron Plan. Ward then applied for PBGC's insurance. The PBGC ruled that Ward had not provided substantial evidence to show that there was a reasonable business purpose behind the Plan's termination. Because the apparent motive for termination was to avoid liability and obtain the PBGC guarantee, the Ward application was denied.

Under Article XIII's terms, participant rights would vest immediately upon Plan termination. To the extent available, assets would be distributed first to retired participants. Any remaining assets would then be distributed, without preferential treatment, to participants eligible for early retirement (the "55+ Group") and to those with vested pension rights (participants who were 45 years old with ten years of service, the "45 & 10 Group"). At the time of Plan termination, Honiron pension fund assets were insufficient to pay accrued benefits to retired employees, and there were no assets to pay benefits to the 55+ Group or the 45 & 10 Group.

After termination, Ward took the total available Plan assets and purchased annuity policies with Bankers Life Insurance Company. These funds were sufficient to purchase a policy that would provide employees who had retired with seventy-five percent of the benefits to which they were entitled under the Honiron Plan. Using its corporate assets, Ward purchased an additional annuity policy to make up the remaining twenty-five percent of benefits due. Ward purchased another annuity to provide benefits to individuals in the 55+ Group. The 45 & 10 Group received refunds of their contributions, but no annuity. All of the plaintiffs in this action are former Honiron employees in the 45 & 10 Group (the Employees).

In 1977, the Employees sued Ward and Wyatt in state court, and the defendants removed the action to federal court on diversity grounds. 1 The employees' Second Amended Complaint contained twenty-four claims, alleging: breach of contract; violations of fiduciary duties; federal and state securities law violations; fraudulent and negligent misrepresentation; state law unfair trade practices; and ERISA violations.

Several claims were dismissed on summary judgment, see Cunha v. Ward Foods, Inc., 545 F.Supp. 94, 102 (D.Haw.1982); Cunha v. Ward Foods, 501 F.Supp. 830, 837 (D.Haw.1980); and others were dismissed on directed verdicts. At trial the jury found Ward liable for negligently misrepresenting the Plan to the Employees. The jury found against the Employees on the breach of contract issues.

The trial court awarded no damages for Ward's negligent misrepresentation, however. The trial court ruled that out-of-pocket costs represented the appropriate measure of damages, and that because the Employees' contributions, with interest, had already been returned, the Employees' claim must be dismissed.


This court reviews the district court's determination of Hawaii state law de novo. Matter of McLinn, 739 F.2d 1395, 1403 (9th Cir.1984) (en banc).

In reviewing the grant of summary judgment, our task is identical to that of the district court. Water West, Inc. v. Entek Corp., 788 F.2d 627, 628 (9th Cir.1986). We view the evidence and inferences de novo, in the light most favorable to the non-moving party, and determine whether the district court correctly found that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Id. at 628-29.

Similarly, in reviewing a district court's directed verdict, our role is identical to that of the district court. A directed verdict is proper if the evidence permits only one reasonable conclusion. We examine the evidence in the light most favorable to the non-moving party to decide whether substantial evidence could support a finding in that party's favor. Othman v. Globe Indemnity Co., 759 F.2d 1458, 1463 (9th Cir.1985).

We review for an abuse of discretion the trial court's decisions concerning the admission of evidence, Maddox v. City of Los Angeles, 792 F.2d 1408, 1412 (9th Cir.1986), and the formulation of jury instructions, United States v. Wellington, 754 F.2d 1457, 1463 (9th Cir.), cert. denied, --- U.S. ----, 106 S.Ct. 593, 88 L.Ed.2d 573 (1985). This court will uphold a trial court's decision to admit or exclude expert testimony unless it is manifestly erroneous. Taylor v. Burlington Northern R.R. Co., 787 F.2d 1309, 1315 (9th Cir.1986).


In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Sec. 1001 et seq. Congress' primary purpose in enacting this comprehensive legislative scheme was "to prevent the 'great personal tragedy' suffered by employees whose vested benefits are not paid when pension plans are terminated." Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 374, 100 S.Ct. 1723, 1732, 64 L.Ed.2d 354 (1980) (footnotes omitted); see United Steelworkers of America v. Crane Co., 605 F.2d 714, 717 (3d Cir.1979).

The case before us illustrates vividly the problems prevalent in contractual pension arrangements between employers and employees that caused Congress to enact ERISA's protections. However, for those plans, such as Honiron's, that terminated prior to ERISA's effective date, we are governed, albeit reluctantly, by the terms of the parties' contract, not ERISA's protective mantle. See Nachman, 446 U.S. at 382, 100 S.Ct. at 1736; United Steelworkers, 605 F.2d at 717; Dwyer v. Climatrol Industries, Inc., 544 F.2d 307, 309-11 (7th Cir.1976), cert. denied, 430 U.S. 932, 97 S.Ct. 1553, 51 L.Ed.2d 776 (1977).

A. Proper Measure of Damages for Negligent Misrepresentation

The Employees contend that they are entitled to receive the full value of their pensions or, "benefit-of-the-bargain" damages for Ward's negligent misrepresentations. Hawaii law governs the damages issue. See Tenneco West, Inc. v. Marathon Oil Co., 756 F.2d 769, 771 (9th Cir.), cert. denied, ---...

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