Tanuggi v. Grolier Inc.

• Decision Date: 07 May 1979
• Docket Number: No. 77 Civ. 1126 (RWS).,77 Civ. 1126 (RWS).
• Citation: 471 F. Supp. 1209
• Parties: Andre TANUGGI, Plaintiff, v. GROLIER INCORPORATED, the Grolier Incorporated Profit Sharing Plan of December 31, 1955, the Grolier Incorporated Retirement Plan, Americana Corp., Grolier Interstate, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

471 F. Supp. 1209

Andre TANUGGI, Plaintiff, v. GROLIER INCORPORATED, the Grolier Incorporated Profit Sharing Plan of December 31, 1955, the Grolier Incorporated Retirement Plan, Americana Corp., Grolier Interstate, Inc., Defendants.

No. 77 Civ. 1126 (RWS).

United States District Court, S. D. New York.

May 7, 1979.

COPYRIGHT MATERIAL OMITTED

Alexander & Green, New York City, for plaintiff by Jeffrey A. Lowin and Craig M. Walker, New York City, of counsel.

Satterlee & Stephens, New York City, for defendants by Robert M. Callagy and James F. Rittinger, New York City, of counsel.

OPINION

SWEET, District Judge.

In the course of the trial of this action, the court made certain rulings on the proposed special verdict form and granted defendant Grolier Incorporated's ("Grolier") motion pursuant to Rule 12, F.R.Civ.P. to dismiss, at the close of his case, one of plaintiff Andre Tanuggi's ("Tanuggi") causes of action. The principal issue raised was whether the retirement benefits claimed by Tanuggi upon his termination from Grolier's retirement plan constituted a "security" and thus gave rise to a cause of action under the Securities Act of 1933, 15 U.S.C. § 77a et seq. and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ("Securities Acts") and the rules promulgated thereunder by the Securities and Exchange Commission ("SEC"). Tanuggi's complaint also included causes of action under the Employee Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. § 1001 et seq., and state law theories of contract, waiver, and estoppel.

The motion to dismiss the Securities Acts claim was granted and relief under the remaining claims was limited. Because of the issues implicated in its rulings the court undertook to set forth at a later time its underlying reasoning. This opinion seeks to fulfill that undertaking and to resolve certain issues relating to the final relief.

Tanuggi, a French citizen, was employed by Grolier or its subsidiaries as a European sales representative for Grolier publications, principally the Encyclopedia Americana. At his own election in 1971, the plaintiff was enrolled in the Grolier Incorporated Retirement Plan (the "Plan"), the company's shared contribution, defined benefit pension plan. In August, 1974 plaintiff's participation in the Plan was terminated over his protest. The instrument governing the Plan, a January 1, 1971 Agreement and Declaration of Trust ("Agreement") entered into by Grolier and the manager-trustees, of the plan provides that:

— An employee agrees to contribute a mandatory, minimum three per cent (3%) of his annual earnings to maintain his status as a participant.¹

— Employer contributions are made annually at the direction of the Plan's trustees, according to an actuarial determination of the amount required to maintain the overall level of anticipated benefits. The employer contributions are not made on behalf of any individual employee.

— The employee-participant, after ten years of credited service, becomes entitled to a fixed annuity, payable in monthly installments upon retirement.

— The amount of deferred benefits to which an employee becomes entitled is determined by a formula with two variables: the employee's number of years of credited service and his highest average salary over a five-year period. The total amount is a function of each employee's life expectancy.

— Participants' benefits do not in any significant way depend on the investment skill of the Plan's trustees because the annual employer contributions account for shortfalls in earnings.

— A participant risks losing his benefit under the Plan only if the employer is legally dissolved, declared bankrupt, or permanently ceases to contribute its actuarially determined share. In such event, each participant shares equally in the loss. If the employer permanently ceases its contributions, the assets of the plan are used to purchase deferred annuities for the participants in the amount of their mandatory contributions, plus four per cent (4%) annual interest. Neither this nor other of the communications from the company indicated that a participant's income would fluctuate with the Plan's investment fortunes.

The issue thus presented is whether the securities acts apply to a voluntary, shared contribution, defined benefit pension plan,² under the principles recently enunciated by the Supreme Court in International Brotherhood of Teamsters v. Daniel, ___ U.S. ___, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979) ("Daniel").³

The Daniel court held that the definitional scope of the securities acts was not broad enough to encompass interests in "non-contributory, compulsory" pension plans. Id. ___ U.S. at ___, 99 S.Ct. at 802.⁴ Daniel involved a member of a Chicago Teamsters local whose rights to pension benefits under a collectively-bargained-for plan were extinguished for failure to meet a continuous service requirement. The pensioner sued, claiming that the alleged misrepresentations and omissions by the Union and his employer gave rise to a cause of action under the securities laws.

The Daniel court concluded that of the instruments included in the definition of a security under the Acts, only the term "investment contract" could be said to cover an interest in a pension plan. Id. ___ U.S. at ___, 99 S.Ct. at 795.⁵

To determine whether the financial relationship represented by an employee's interest in his employer's pension plan constitutes an investment contract, the test is "whether the pension plan scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Id. ___ U.S. at ___, 99 S.Ct. at 796, citing SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). As reaffirmed in Daniel, "The touchstone of the Howey test is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." United Housing Corp. v. Forman, 421 U.S. at 852, 95 S.Ct. at 2060, (emphasis supplied).

The Daniel analysis of a pension plan divided the Howey test into two component parts: 1) an investment of money and 2) the expectation of profits from a common enterprise. Each element must be applied separately to the "economic realities" of the plan and in "terms of the Acts' purposes." Id. ___ U.S. at ___, 99 S.Ct. at 796. A pension plan interest cannot comport with the commonly held understanding of an investment contract if it fails to meet either element of the Howey test. Id.

The Supreme Court has defined "reasonable expectation of profits" to mean either capital appreciation resulting from the development of the initial investment, . . or a participation in earnings resulting from the use of investors funds. United Housing v. Forman, supra, 421 U.S. at 852, 95 S.Ct. 2051 (emphasis supplied).

With respect to a pension plan, the profit element of the Howey test is not satisfied when the benefits due a participant upon retirement are not primarily dependent on the success or failure of the trustees' investment efforts to generate asset earnings. Daniel, supra, ___ U.S. at ___ - ___, 99 S.Ct. at 797-798. The prospect of participating in asset earnings must be more than "speculative and insubstantial" to fall within the scope of the Securities Acts. Id. When an employee's participation in a pension plan does not include this substantial profit characteristic of a security, the fact that such participation is voluntary and involves giving up a specific consideration in return for a financial interest does not make the absence of the profit characteristic less conspicuous. That an employee has acquired a financial interest by electing to participate in a contributory plan does not automatically make his interest a security. Further analysis of the plan's benefit and payout provisions in light of the "total compensation plan" is required before that interest can be called a security under Daniel. See Id. ___ U.S. at ___, 99 S.Ct. at 798. Applying Daniel's interpretation of the profit element to Tanuggi's interest in the Grolier Plan, the court concludes that he does not have an interest in an investment contract and that he therefore does not have a security. The court need not address therefore, the "investment of money" or "common enterprise" elements of the Howey test.

Under the terms of the Plan and in the wording of the informational brochures which were sent to the plaintiff, and other employees whom Grolier considered eligible, the benefits an employee participant receive have only a tenuous connection to the investment success of the pension fund.

There is no provision for any employer's individual participation in the fund's asset earnings. The employer (Grolier) is required to make an annual contribution to the fund of the total amount necessary to cover any shortfalls in earnings and the balance of the defined benefit account. Unlike a profit sharing plan, these fixed benefit provisions are substantially the same as those of the plan analyzed in Daniel. Here the sole effect of the fund's investment success or failure is an amount of mandatory contributions needed to maintain the financial health of the Plan. Conversely, a participant's benefits are affected to a much greater degree by the Plan's 10-year vesting and credited service requirements.⁶ The amount a participant will receive is a function of his earnings and length of service and only remotely a function of investments made by the trustees. As in Daniel, "the importance of asset earnings in relation to the other benefits received from employment is diminished . . ." Id. ___ U.S. at ___, 99 S.Ct. at 798.

Tanuggi's interest in the Plan is more like an interest in a deferred, fixed annuity than an investment contract. See SEC v. Variable Annuity Life Insurance Company of America, 359 U.S. 65, 89-90, 79 S.Ct. 618, 3 L.Ed.2d 640 (1958), (Brennan, J. concurring); SEC...