Steiner Corp. Retirement Plan v. Johnson & Higgins of California

• Decision Date: 07 July 1994
• Docket Number: Nos. 92-4097,92-4106,s. 92-4097
• Citation: 31 F.3d 935
• Parties: , 18 Employee Benefits Cas. 1609 STEINER CORPORATION RETIREMENT PLAN, Plaintiff, and Steiner Corp., a Nevada corporation, and Carol S. McCormick, administrator of the Steiner Corporation Retirement Plan, Plaintiffs, Counter-Defendants, Appellants, v. JOHNSON & HIGGINS OF CALIFORNIA, a California corporation, Donald F. Reeves, and Roy J. Bertoldo, Counterclaim Defendants, Appellees. STEINER CORP., a Nevada corporation, Carol S. McCormick, administrator of the Steiner Corporation Retirement Plan, and Steiner Corporation Retirement Plan, Plaintiffs, Counter-Defendants, Appellees, v. JOHNSON & HIGGINS OF CALIFORNIA, a California corporation, Donald F. Reeves, and Roy J. Bertoldo, Defendants, Counter-Claimants, Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 935

31 F.3d 935

63 USLW 2080, 18 Employee Benefits Cas. 1609

STEINER CORPORATION RETIREMENT PLAN, Plaintiff,

and

Steiner Corp., a Nevada corporation, and Carol S. McCormick,

administrator of the Steiner Corporation

Retirement Plan, Plaintiffs, Counter-Defendants, Appellants, v. JOHNSON & HIGGINS OF CALIFORNIA, a California corporation, Donald F. Reeves, and Roy J. Bertoldo, Counterclaim Defendants, Appellees.

STEINER CORP., a Nevada corporation, Carol S. McCormick,

administrator of the Steiner Corporation

Retirement Plan, and Steiner Corporation

Retirement Plan, Plaintiffs, Counter-Defendants, Appellees, v. JOHNSON & HIGGINS OF CALIFORNIA, a California corporation, Donald F. Reeves, and Roy J. Bertoldo, Defendants,

Counter-Claimants, Appellants.

Nos. 92-4097, 92-4106.

United States Court of Appeals, Tenth Circuit.

July 7, 1994.

Peter W. Billings, Jr. (Jay B. Bell and John E.S. Robson, with him on the briefs), of Fabian & Clendenin, P.C., Salt Lake City, UT, for plaintiffs, appellants, cross-appellees.

Robert A. Lewis, of McCutchen, Doyle, Brown & Enersen, San Francisco, CA (John R. Reese and Robert M. Gilhuly, of McCutchen, Doyle, Brown & Enersen, San Francisco, CA and David A. Greenwood, of Van Cott, Bagley, Cornwell & McCarthy, Salt Lake City, UT, with him on the briefs), for defendants, appellees, cross-appellants.

Before TACHA, SETH, and BRIGHT ^*, Circuit Judges.

SETH, Circuit Judge.

Appellant Steiner Corporation and other plaintiffs, who are not parties to this appeal, sued Appellees Johnson & Higgins of California and two of its employees, Donald F. Reeves and Roy J. Bertoldo (collectively "J & H"), for professional malpractice and breach of contract, both of which implicated ERISA and the Internal Revenue Code. The crux of Appellant's complaint was that J & H breached its actuarial duties by not properly advising Appellant regarding the redrafting of Appellant's employee retirement plan ("Plan"), by improperly redrafting section 11.2 of the Plan, by not providing Appellant with information that it requested, and by improperly calculating the amount of Appellant's annual contributions to the Plan. J & H counterclaimed for unpaid fees.

After a bench trial before the United States District Court for the District of Utah, the court found that J & H negligently redrafted section 11.2 of the Plan and awarded damages. With respect to the Appellant's other claims, the court found either that J & H had not committed malpractice or that Appellant incurred no damages as a result of any misconduct by J & H. On J & H's counterclaim the court found that the fees at issue were attributable to J & H's negligence and therefore were not recoverable. Both parties appealed the district court's decision.

In its opening brief to this court, Appellant accepted as true the factual findings of the district court as paraphrased below. Appellant established the Plan in 1958 to provide retirement benefits for its employees. The Plan is governed by ERISA and qualifies as a "defined benefit plan" as that term is defined in the Internal Revenue Code ("IRC"). Under the Plan employees are entitled to receive a monthly annuity as the normal form of retirement benefit. As an alternative to the annuity, the Plan provides employees with the option to select a lump sum distribution.

Throughout the years the Plan was amended several times, but for purposes of our review we are only concerned with the versions of the Plan enacted on January 1, 1978 ("1978 Plan") and on October 30, 1985 ("1985 Plan"). At all times the Plan and other documents provided that the lump sum optional benefit was supposed to be the actuarial equivalent of the annuity. Specifically, actuarial equivalent was defined in section 1.17 of the 1978 Plan as "a benefit having the same value as the benefit which such Actuarial Equivalent replaces."

In 1958 Appellant adopted a formula for calculating the value of the lump sum benefit.

Over the life of the Plan, the formula was modified such that it became a layered formula ("Layered Formula"); consequently, calculating a single lump sum payment for a retiree required adding together three separately calculated amounts. Each of these amounts was based upon select actuarial assumptions as applied to an individual's duration of employment with Appellant. For service prior to January 1, 1972, a 3.5% interest rate and a 1951 group mortality table were the actuarial assumptions. For service between January 1, 1972 and December 31, 1977, a 4% interest rate and a 1951 group mortality table were used. For service after January 1, 1978, a 6% interest rate and a 1971 group mortality table were the assumptions. These actuarial assumptions that comprised the Layered Formula were not specified in the Plan, but rather they were written as a separate document. If a fluctuating market interest rate, which is an accurate measure of the effect of inflation on the dollar, were used to calculate the lump sum, the lump sum would have been the real dollar equivalent to a monthly annuity paid over the life of a retiree. However, because the Layered Formula utilized fixed rates, the lump sum was more valuable than the annuity.

In 1977 J & H was hired to replace William M. Mercer, Inc. as the actuary for the Plan. J & H continued to provide actuarial services until 1988 when it was fired by Appellant. As a part of its services, J & H prepared annual actuarial statements that valued the Plan and provided a range of permissible annual contributions that were to be made by Appellant. Although almost all retirees historically opted for the lump sum, J & H evaluated the Plan based on the value of annuities rather than the more valuable lump sum. As a consequence, the Plan valuations substantially understated the value of the benefits and costs that Appellant had incurred.

For most of the time period relevant to this action, F.J. Kane was Appellant's Chief Financial Officer, and Daniel Harris was the Plan Administrator. Collectively, Mr. Kane and Mr. Harris were responsible for the entire operation and maintenance of the Plan, with J & H providing support services such as those mentioned above. Mr. Kane retired in 1984. It is undisputed that Mr. Kane knew that the Layered Formula provided a lump sum that was more valuable than the annuity despite the express language in the Plan that they were to be comparable.

On July 1, 1984, Kevin Steiner replaced Mr. Kane as Chief Financial Officer. The record reflects that unlike Mr. Kane, Mr. Steiner did not know that the lump sum was more valuable than the annuity. Also, there is no evidence that Mr. Harris informed Mr. Steiner of the disparity between the alternative benefits. Sometime in 1984 the decision was made to amend the Plan because of the enactment of the Retirement Equity Act and other applicable federal laws and regulations. The most important requirement imposed by these enactments was that by October 31, 1985 a qualified plan must specify all of the factors used to calculate the actuarial equivalence of optional benefits so that the calculations would be non-discretionary and known to a plan's participants.

Sometime in February 1985, Mr. Steiner met with representatives of J & H to discuss amending the Plan. Although J & H disputes the following, the record supports the court's finding that Mr. Steiner requested that J & H provide a valuation of the Plan assuming that all retirees opted for the lump sum as opposed to J & H's traditional method of valuating based on the annuity. Although Mr. Steiner made several more requests for this information, J & H did not provide the calculations until after the October 31, 1985 deadline for Appellant to submit its amended Plan for approval. Rather than make the requested calculations or inform Appellant that it could potentially change its Layered Formula when it amended the Plan, J & H submitted a proposed amended Plan for Mr. Steiner's approval that merely incorporated the preexisting Layered Formula. There were several other modifications made to the Plan that will be discussed later in this opinion. Without reading the proposed amended Plan or any of the previous plans, Mr. Steiner executed the proposed Plan on October 30, 1985.

Early in 1986, J & H finally provided the calculations requested by Mr. Steiner almost a year previously. Based on the calculations, Appellant amended the 1985 Plan in July 1986 so that the lump sum was in fact the actuarial equivalent of the annuity. However, because this amendment was made after October 31, 1985, it applied only to the prospective calculation of benefits accrued after July 1986. Mr. Steiner testified at trial that if J & H had submitted the requested calculations before October 31, then Appellant would have adopted a new formula for calculating the lump sum that would have retroactively affected retirees' benefits such that the lump sum would have been equal to the annuity benefit for anyone retiring after October 31.

Unrelated to the facts surrounding the Layered Formula, the court found that Appellant sold the stock of a subsidiary named Steiner Financial Corporation ("SFC") in 1987. As a result SFC's fourteen employees were transferred and later terminated. Of these fourteen employees, only one was fully vested under the Plan while the other thirteen were not. As a matter of percentages, the SFC employees constituted only 1.6 percent of all Steiner employees, and the thirteen non-vested SFC employees comprised 2.6 percent of Steiner's total non-vested employees.

When J & H revised the Plan in 1985, it rewrote section 17.3 of the 1978 Plan. As originally drafted, section 17.3 provided:

"In the event of permanent discontinuance of contributions or termination (whole or partial) of the Plan, all Participants for whom the Plan is being discontinued or terminated shall be fully vested with respect to benefits to which they would have been entitled had they terminated employment with a...