Sage v. Automation, Inc. Pension Plan and Trust

• Decision Date: 28 April 1988
• Docket Number: Nos. 85-2036,85-2136,s. 85-2036
• Parties: , 9 Employee Benefits Ca 1898 Harold SAGE, Georgianna Wong, Lonnie Lawton, Mae Dyer, Dianne Berroth, Jean Alden, and Richard Dominguez, Plaintiffs-Appellants and Cross-Appellees, v. AUTOMATION, INCORPORATED PENSION PLAN AND TRUST; Automation, Incorporated Profit Sharing Plan and Trust; Harold M. Goodman, as Trustee of Automation, Incorporated Profit Sharing Plan and Trust; Harold M. Goodman, individually; Janice M. Finley, as member of Advisory Committee of Automation, Incorporated Pension Plan and Trust; Janice M. Finley as member of Advisory Committee of Automation, Incorporated Profit Sharing Plan and Trust; Harold M. Goodman, as member of Advisory Committee of Automation, Incorporated Pension Plan and Trust; Harold M. Goodman, as member of Advisory Committee, of Automation, Incorporated Profit Sharing Plan and Trust; and Automation, Incorporated, a Kansas corporation, Defendants-Appellees and Cross-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 885

845 F.2d 885

56 USLW 2647, 9 Employee Benefits Ca 1898

Harold SAGE, Georgianna Wong, Lonnie Lawton, Mae Dyer Dianne Berroth, Jean Alden, and Richard Dominguez Plaintiffs-Appellants and Cross-Appellees, v. AUTOMATION, INCORPORATED PENSION PLAN AND TRUST Automation, Incorporated Profit Sharing Plan and Trust Harold M. Goodman, as Trustee of Automation, Incorporated Profit Sharing Plan and Trust; Harold M. Goodman, individually; Janice M. Finley, as member of Advisory Committee of Automation, Incorporated Pension Plan and Trust; Janice M. Finley as member of Advisory Committee of Automation, Incorporated Profit Sharing Plan and Trust; Harold M. Goodman, as member of Advisory Committee of Automation, Incorporated Pension Plan and Trust; Harold M. Goodman, as member of Advisory Committee, of Automation, Incorporated Profit Sharing Plan and Trust; and Automation, Incorporated, a Kansas corporation, Defendants-Appellees and Cross-Appellants.

Nos. 85-2036, 85-2136.

United States Court of Appeals, Tenth Circuit.

April 28, 1988.

Donna M. Dill, Topeka, Kan. (Henry L. Hiebert, Topeka, Kan., Jay W. Vander Velde, Atherton, Sanderson and Vander Velde, Emporia, Kan., with her on the brief), for plaintiffs-appellants and cross-appellees.

Michael G. Norris, Niewald, Waldeck, Norris & Brown, Overland Park, Kan., for defendants-appellees and cross-appellants.

Before McKAY, TACHA and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

This appeal and cross-appeal concern the legal characterization, under the Employment Retirement and Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1001 to 1461, and the Internal Revenue Code, of various events that occurred at the former employer of appellants, Automation, Inc. (Automation). Employer pension and profit-sharing plans must comply with ERISA and also must conform to various Code requirements to qualify for favorable tax treatment. Appellants contend that the pension and profit sharing plans of Automation did not comply with either. Specifically, appellants maintain that their departure from the firm was a partial termination of the pension and profit sharing plans, entitling them to full vesting of amounts credited to their plan accounts with interest. See I.R.C. Sec. 401(a)(7) and Sec. 411(d)(3) ¹ (plan must provide that accrued benefits, to the extent funded, or amounts credited to employees' pension and profit sharing accounts, are nonforfeitable upon termination or partial termination of the plan). They also maintain that the plans failed to provide an adequate claims denial procedure and that such a failure constitutes a breach of fiduciary duty on the part of the plans' trustee. See 29 U.S.C. Secs. 1133 & 1104(a)(1)(A)(i), (a)(1)(B) & (D). Appellants sought compensatory and punitive ² damages based on the appellees' failure to provide an adequate claims procedure and also sought costs and attorney's fees. Appellees contended that appellants' claims were without merit and barred by the three year limitations period contained in 29 U.S.C. Sec. 1113(a)(2). Appellees also sought costs and attorney's fees necessitated by this action.

Appellee Automation performed various accounting services for several clients. Appellee Harold Goodman was the sole shareholder and president of the firm and the sole trustee of the company's pension and profit-sharing plans. Appellees Goodman and Janice Finley also were on the advisory boards of the plans, which were adopted in April 1972, and provided for vesting of an employee's interest in a contribution account at a rate of 10% per year, beginning on the third year of employee participation. The appellants were all plan participants. In December 1975, all but one of the appellants left Automation and obtained other employment with Volume Shoe, a major client of Automation, when Volume Shoe decided to develop in-house accounting capability. The trial court specifically found that all of the appellants were offered the opportunity to stay with Automation, rather than seek employment with Volume Shoe. By February 1976, appellant Dominguez had left the employ of Automation.

On the advice of an accounting firm, the plans' trustee did not characterize the departure of these employees as a partial termination of the plans; rather, the appellants were considered partially vested for 10% of their proportionate interests, with the exception of appellant Wong, who was considered partially vested for 20%. The plans' trustee wrote the appellants, informing them of the decision to grant partially vested benefits and including checks for partially vested amounts.

Shortly thereafter, appellee Goodman sold the assets of Automation and terminated the plans. He had been attempting to sell Automation since 1973. Upon termination of the pension and profit sharing plans, the 16 remaining employees were to receive 100% vesting. I.R.C. Sec. 401(a)(7) and Sec. 411(d)(3). In late 1976, appellants learned of this and inquiry was made by one of the appellants concerning further benefits for the former employees. Upon the advice of the plans' accounting firm, the trustee responded that the former employees would not be receiving further benefits. Thereafter, the appellees sought, and ultimately received, a determination from the Internal Revenue Service that the circumstances under which the plans were terminated did not affect the qualified status of the plans. In making this determination, the IRS apparently concluded that a partial termination had not occurred when the appellants left the employ of Automation. This determination was based on four days of field work by a revenue agent, including two days of interviews with the appellants.

Prior to that determination, appellants were represented by counsel. Appellants' counsel sought and received copies of the plans from the trustee's counsel, but not the application for determination submitted to the IRS. Appellants' counsel wrote the IRS explaining the appellants' position that a partial termination of the plans had occurred with the loss of the Volume Shoe account. Thereafter, the trustee's accounting firm forwarded an opinion letter to the IRS explaining why a partial termination had not occurred. Appellants' counsel received a copy and drafted a response, which was sent to the IRS.

Shortly thereafter, a meeting was held in the office of the plans' trustee concerning the issue of partial termination. Two of the appellants were present together with their counsel. The trustee was represented by counsel and an accountant. The trustee's representatives restated the position that no partial termination had occurred. Appellants requested that they be provided a copy of all correspondence with the IRS concerning the application for determination. This request was denied by the trustee's counsel, and appellants were unable to convince the IRS to disclose the information.

After a bench trial, the trial court concluded that a partial termination of the plans, which would have entitled appellants to full vesting, had not occurred. Underlying this conclusion is the factual finding that appellants voluntarily left their employment with Automation. On appeal, appellants do not contest the trial court's factual findings on this issue, but renew their contention that partial termination of a qualified plan occurs as a matter of law whenever a substantial reduction in plan participants occurs in connection with a significant corporate event. Under appellants' approach, whether an employee voluntarily left an employer would not be considered. Rather, the focus would be on whether there was a significant reduction in the work force over a short period of time, without regard to the cause of that reduction. The trial court rejected this approach, relying on pertinent authority.

Although partial termination is not defined in the Code, the regulations and revenue rulings of the Commissioner are entitled to important consideration. Babb v. Olney Paint Co., 764 F.2d 240, 242 (4th Cir.1985). Initially, we must decide which regulation controls this case. All of the appellants, save appellant Dominguez, left the employment of Automation in December 1975, and took positions with Volume Shoe. Appellant Dominguez left Automation as of February 1976. The pension and profit sharing plans were terminated on April 30, 1976, the end of the fiscal year for both plans. These dates are relevant because it has been suggested by appellees that an arguably more inclusive test for partial terminations was enacted for plan years beginning after December 31, 1975. I.R.C. Sec. 411(d)(3); Treas.Reg. Sec. 1.411(d)-2; ³ Treas.Reg. 1.411(a)-2(b). Thus, the appellants' departure from Automation and the final termination of the plans occurred in the latter part of a plan year beginning before December 31, 1975, and the new test, to the extent it differs from the former regulation, would not apply. Stated another way, the more recent version of the test would have applied to Automation plan years beginning after April 30, 1976, however, the events in question occurred before that time and indeed, the plan was terminated before any plan year could begin after December 31, 1975.

Thus, the applicable regulation concerning partial termination in this case is former Treas.Reg. Sec. 1.401-6(b)(2) (1963) which provides:

(b) Termination defined.

* * *

(2) ... Whether or not a partial termination of a qualified plan occurs when a group of employees who have been covered by the plan are subsequently excluded, either by reason of an amendment to the plan or by reason of being discharged by the employer, will be determined on the basis of all the facts and circumstances. Similarly, whether or not a partial termination occurs when benefits or employer contributions are reduced, or eligibility or vesting requirements under the plan are made less liberal, will be determined on the basis of all the facts and circumstances.

Because the difference...