Koch Industries, Inc. v. Sun Co., Inc.

• Decision Date: 12 December 1990
• Docket Number: No. 89-2577,89-2577
• Citation: 918 F.2d 1203
• Parties: , 13 Employee Benefits Ca 1097 KOCH INDUSTRIES, INC., Plaintiff-Appellee, Cross-Appellant, v. SUN COMPANY, INC., et al., Defendants-Appellants, Cross-Appellees, and Champlin Refining & Chemicals, Inc., Defendant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1203

918 F.2d 1203

59 USLW 2418, 13 Employee Benefits Ca 1097

KOCH INDUSTRIES, INC., Plaintiff-Appellee, Cross-Appellant, v. SUN COMPANY, INC., et al., Defendants-Appellants, Cross-Appellees and Champlin Refining & Chemicals, Inc., Defendant-Cross-Appellee.

No. 89-2577.

United States Court of Appeals Fifth Circuit.

Dec. 12, 1990.

Joseph A. Cohn, Jr., Wood, Burney, Cohn & Bradley, Corpus Christi, Tex., John A. Baughman, Carolyn Warter Goff, Pepper, Hamilton & Scheetz, Philadelphia, Pa., for Sun Co., Inc., et al.

Kelley D. Sears, Louis K. Obdyke, Michael E. Lazzo, Wichita, Kan., Shirley Selz, Gary, Thomasson, Hall & Marks, Corpus Christi, Tex., for Koch Industries.

Sloan B. Blair, Cantey & Hanger, Ft. Worth, Tex., for Champlin Refining Co., et al.

Appeals from the United States District Court for the Southern District of Texas.

Before GARZA, JOLLY, and JONES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

In two disputes stemming from its purchase of an oil refinery in Corpus Christi, Texas, Koch Industries, Inc., ("Koch") sued Sun Company, Inc., and affiliated entities ("Sun") and Champlin Petroleum Company and affiliated entities ("Champlin"), invoking the diversity jurisdiction of the federal courts. Koch sought damages from Sun for breach of contract, specifically for Sun's refusal properly to "fund" a pension plan that was transferred as part of Koch's acquisition of Sun's refinery. Koch also sought contract damages from Sun and specific performance from both Sun and Champlin for failure to honor Koch's right of first refusal on an oil storage terminal that Sun ultimately sold to Champlin.

After a bench trial of the pension fund issue, the United States District Court for the Southern District of Texas entered judgment for Sun, dismissing Koch's claim. 691 F.Supp. 1028. Regarding the right of first refusal issue, the court granted summary judgment to Sun and Champlin on Koch's claim for specific performance and dismissed Champlin from the action. After a separate bench trial, the court awarded Koch $717,085 in damages against Sun for breach of contract and subsequently amended its award to include prejudgment interest at the rate of ten percent. We conclude that Koch has proved no breach of contract and should recover nothing. We therefore affirm the district court's judgment as to the pension fund issue and the claim for specific performance, but reverse the judgment as to the right of first refusal.

I. PENSION FUND ISSUE

Koch purchased Sun's refinery pursuant to an Acquisition Agreement dated November 10, 1981. As a consequence of the purchase, more than 500 Sun employees at the refinery became employees of Koch. In order to protect the pension benefits of these employees, the parties agreed to establish a special pension plan for them, called the Suntide Plan. Sun adopted the plan immediately prior to the transfer of the refinery, and pursuant to the Acquisition Agreement, Koch assumed the plan as of the defined "closing date," November 13, 1981. The parties agreed that Sun would "fund" the plan--that is, transfer to it assets equal to the present value of the benefits expected to be paid to the employees as they became eligible. As a benefit to the covered employees, Sun would also transfer an amount (in present value terms) sufficient to fund increases in retirement benefits based on assumed annual cost of living increases for the employees of 6 3/4%.

The calculations of these two present values were to be performed by Sun employing specified actuarial assumptions and later checked by Koch. Because of the complexity of the calculations, the parties knew that Sun would not immediately transfer the funds, and they specified no date by which Sun was required to do so. Sun made the first transfer on March 18, 1982, in the amount of $3,881,707, and the second on April 14, 1982, in the amount of $5,464,523, for a total of $9,346,230. Koch accepted both payments, its actuary having confirmed Sun's calculations. Later in April of 1982, Koch wrote Sun, claiming a deficiency in the payments by virtue of Sun's failure to pay "interest" on the funds from the closing date until the dates of transfer. Sun denied any obligation to make additional payments. In this litigation, Koch makes a claim for $360,499 from Sun, relying on paragraph 13.6 of the Acquisition Agreement and on federal pension law. We dispose of the latter issue first.

A. ERISA

Koch claims that Sun's refusal to pay interest violated section 208 of the Employee Retirement Income Security Act, 29 U.S.C. Sec. 1058. Although Koch has not sought relief directly under ERISA, it asserts that ERISA is de jure part of the Acquisition Agreement, citing Nedrow v. MacFarlane & Hays Co. Employees' Profit Sharing Plan & Trust, 476 F.Supp. 934, 937 (E.D.Mich.1979). Assuming without deciding that ERISA is part of the Acquisition Agreement, we hold that Koch has not shown any violation of ERISA by Sun.

Section 208 provides in relevant part:

A pension plan may not merge or consolidate with, or transfer its assets or liabilities to, any other plan ..., unless each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive before the merger, consolidation, or transfer (if the plan had then terminated).

29 U.S.C. Sec. 1058; see also 26 U.S.C. Sec. 414(l ) (imposing same requirement for pension plan to qualify as tax-deferred retirement plan). "Because Sun did not include an additional sum for the time value of the funds transferred," argues Koch, the amount transferred was less than the employees' accrued benefits as of November 13, 1981, when the employees became covered under the Suntide Plan.

This argument confuses the two separate duties that section 208 imposes on employers who merge, consolidate, or transfer pension plans. First, employers may not by these actions decrease the "liabilities" of the plan--the benefits promised to employees upon retirement, disability, or termination. ¹ That is, the promised benefits to employees must be at least as good or better under the new pension plan as under the old one. There is no dispute in this case that the affected employees will receive benefits under the Suntide Plan the same as or greater than under their former pension plan at Sun. As noted in the margin, the level of benefits does not depend on the amount of funds transferred by Sun to Koch, because the Acquisition Agreement requires that Koch satisfy any shortfalls. Thus, no matter what we decide about the amount that Sun should have transferred to Koch pursuant to their contract, Sun did not violate this portion of section 208.

Second, in transferring the liabilities of pension plans, section 208 requires that employers also transfer sufficient plan "assets" to pay previously promised benefits to employees as they come due. Because these benefits will be paid in unknown amounts in future years, assets are deemed sufficient if they are not less than the present value of the promised benefits of the former plan. 26 C.F.R. Sec. 1.414(l )-1(n)(1)(ii). The only testimony adduced at trial about such present value as applied to this case was that of Mr. Stanley Freilich, Sun's actuary. Mr. Freilich testified on direct examination that the transfer of only $4.8 million--compared to the $5,464,523 actually transferred under this provision--would have satisfied the complicated requirements of ERISA and IRS regulations. Furthermore, according to Freilich, the $5,464,523 was legally sufficient even if those regulations had required interest. Koch has offered neither evidence nor briefing to dispute this testimony.

The two ERISA cases cited by Koch do not support its contentions. Hickerson v. Velsicol Chem. Corp., 778 F.2d 365 (7th Cir.1985), cert. denied, 479 U.S. 815, 107 S.Ct. 70, 93 L.Ed.2d 28 (1986), involved the conversion of a defined-contribution deferred profit-sharing pension plan into a defined-benefit pension plan. Under the former plan, the employer made a specified contribution to the plan, which then invested the funds as trustee; each employee had a vested interest in a pro rata portion of the trust corpus. Id. at 368. The court ruled that in order for the benefits under the new plan to equal these vested interests as required by section 208 of ERISA, the new plan must provide interest on then-existing employee account balances at least equal to the long-term interest rate as of the date of conversion. Id. at 379. In this case, employees never had individual "account balances" that depended on investment returns; instead, they have from the Suntide Plan (as guaranteed by Koch) promises to pay set levels of benefits. As stated above, these benefit levels were protected by the amount of funds transferred by Sun.

Koch's other proffered case, Bigger v. American Commercial Lines, Inc., 677 F.Supp. 626, 632-33 (W.D.Mo.), aff'd, 862 F.2d 1341 (8th Cir.1988), ruled that even if the actual payment (transfer) of funds between pension plans takes place after the "merger, consolidation, or transfer" described in section 208, it is the former date at which the amount of funds will be judged for sufficiency under section 208. As we described, Sun's actuary testified that the actual transfer of funds from Sun to Koch was legally sufficient at either the date of closing or the date of payment. Thus, Sun's actions in this case complied with the requirements of section 208 as interpreted by Bigger. Because the payment of interest is not dictated by ERISA, we now look to the contract between the parties.

B. Acquisition Agreement

Paragraph 13.6 of the Acquisition Agreement required Sun to "fund" the Suntide Plan "as of the Closing Date" with an amount of money specified in two formulas based on agreed actuarial assumptions. Koch asserts that this provision required Sun to pay, in...