TRUSTEES OF LABORERS'LOCAL 72 v. Nationwide Life

• Decision Date: 24 February 1992
• Docket Number: Civ. No. 89-719 (HLS).
• Citation: 783 F. Supp. 899
• Parties: TRUSTEES OF LABORERS' LOCAL NO. 72 PENSION FUND, Plaintiff, v. NATIONWIDE LIFE INSURANCE COMPANY, Defendants.
• Court: U.S. District Court — District of New Jersey

783 F. Supp. 899

TRUSTEES OF LABORERS' LOCAL NO. 72 PENSION FUND, Plaintiff, v. NATIONWIDE LIFE INSURANCE COMPANY, Defendants.

Civ. No. 89-719 (HLS).

United States District Court, D. New Jersey.

February 24, 1992.

COPYRIGHT MATERIAL OMITTED

Andrew F. Zazzali, Jr., Zazzali, Zazzali, Fagella & Nowak, Newark, N.J., for plaintiff.

Eugene M. Haring, McCarter & English, Newark, N.J., for defendants.

OPINION

SAROKIN, District Judge.

Before the court are plaintiff's and defendant's motions for summary judgment.

BACKGROUND

This case arises from a dispute over a group annuity contract ("the Contract") issued by defendant Nationwide Life Insurance Company ("Nationwide") to plaintiff, the Trustees of the Laborer's Union No. 72 Pension Fund ("Trustees"). The Contract was issued on December 31, 1971.¹ Plaintiff Exh. 1. Prior to entering into the Contract, the Trustees established a Pension Plan ("the Plan") for participants in the Laborer's Union No. 72 Pension Fund. The Plan provided for payment of benefits to participants upon their retirement. The Contract provided that the Trustees would invest Plan monies in one of several funds established by Nationwide. In turn, Nationwide agreed, inter alia, to pay or purchase annuities for Plan beneficiaries entitled to pensions under the terms of the Plan.

The Contract provided for the creation of two types of funds: Guaranteed Funds, to be credited with a rate of interest as determined by the greater of a rate specified in the Contract and its amendments and the "Net Investment Rate" of return earned by the guaranteed fund, as determined by Nationwide; and Variable Funds, which were not guaranteed, but credited with an effective investment return based on the investment income and market value of assets held in the account. Plaintiff Exh. 2., Arts. II & III.² Contributions to either or both types of fund were to be made by the Trustees at their discretion, up to a maximum annual contribution.³ Id. at Art. IV. The Contract provided that the Trustees were to give notice to Nationwide to provide an annuity for Plan participants when they became eligible for a pension under the Plan. Id. at Art. V. Upon receipt of such notice, Nationwide agreed to make annuity payments from the Guaranteed Fund to the beneficiary in an amount determined in accordance with the Plan. Id. at Art. VI. However, upon the occurrence of certain events, including notice by the Trustees, termination of the Plan, and the event that balances in the Guaranteed Fund fell below a certain level, the Contract provided that Nationwide would purchase annuities for each participant entitled to receive a pension with funds withdrawn from the Guaranteed Fund.⁴

Over a period of time through 1986, the Trustees remitted contributions from participating employers to Nationwide for deposit in one of several Guaranteed Funds as prescribed by the Contract. Plaintiff Brief at 7. In 1987, the Trustees requested that Nationwide return the sums invested in the Guaranteed Funds to the Trustees. Id. at 8, Def. Brief at 4. Nationwide apparently responded that, pursuant to its interpretation of the termination provisions of the Contract, it was obliged and intended to purchase annuities from itself for all eligible participants. This arrangement was unacceptable to the Trustees, who offered to assume all obligations for the payment of retirement benefits to Plan participants and to enter a hold harmless agreement, defending Nationwide from any claims for benefits. The parties were unable to resolve their differences, and this litigation followed.

Plaintiff claims that defendant was a fiduciary with respect to Plan benefits⁵ and, as such, violated duties owed to plaintiff under the Employee Retirement Income Security Act (ERISA). In particular, the Trustees claim that Nationwide's inclusion and insistence on application of the termination procedure in the Contract, providing that Nationwide purchase its own annuities upon the termination of the Contract, represented a per se violation of ERISA's prohibition of self-dealing; that, even if it is not a per se violation, such self-dealing violates ERISA where defendant failed to investigate other sources of annuities available at lower cost; and that Nationwide violated its fiduciary duties by breaching the express terms of the Contract, which was itself a Plan asset.⁶ Plaintiff further claims that the Contract was "perpetual in violation of ERISA, and that based on considerations of fairness and unconscionability, this court should impose a reasonable contract termination date on the contract, reflecting plaintiffs' desire to terminate it immediately."

Plaintiff has moved for summary judgment on all its claims, seeking termination of the Contract, return of the funds to plaintiff with no deductions, an accounting from Nationwide for interest allegedly owed due to Nationwide's averaging of Guaranteed Interest Rates and for profits realized by Nationwide through debiting expenses from higher yielding funds, declaratory relief, attorney fees, and punitive damages.

Defendant has also moved for summary judgment, on several bases. Nationwide asserts that, as the issuer of a group guaranteed annuity contract, it is not an ERISA fiduciary. Further, Nationwide claims that even if it were not exempt from fiduciary status, it exercised no discretion with respect to the administration of the Plan, and hence violated no fiduciary duties. Nationwide also argues that it was contractually entitled to issue its own annuities to Plan beneficiaries upon termination, that such annuities were competitive with market rates, and that Nationwide derived no benefit from their issuance. On these grounds, Nationwide urges that this action should be dismissed and summary judgment entered in its favor.

DISCUSSION

In order to prevail on a motion for summary judgment, the moving party must show that there are no genuine issues of material fact and that, viewing the facts in the light most favorable to the non-movant, the movant will prevail as a matter of law. Fed.R.Civ.P. 56. See, Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Wisniewski v. Johns-Manville Corp., 812 F.2d 81, 84 (3d Cir. 1987).

The court will address the issue of whether Nationwide was a fiduciary subject to ERISA and, if so, whether it violated fiduciary duties imposed by ERISA, with respect to the following alleged actions: (1) including in the Contract a provision that Nationwide would buy its own annuities upon termination of the Contract; (2) purchasing such annuities from itself after amendment of the Contract by Nationwide; (3) crediting the Guaranteed Fund with interest based on the actual return earned by the Fund (in the event that this rate exceeded the Guaranteed Interest Rate); (4) averaging guaranteed rates before applying the Net Investment Rate to Guaranteed Fund assets; (5) debiting expenses from high yielding accounts; and (6) including in the Contract no fixed date for termination of the Contract.

EXEMPTION FROM FIDUCIARY STATUS UNDER 29 U.S.C. § 1101(b)

Under ERISA, "a person is a fiduciary with respect to a plan to the extent ... he ... exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A)(i). However, ERISA also includes an exception to the coverage of ERISA, and hence to the reach of ERISA's fiduciary duties, applicable to certain insured benefit policies:

In the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer. For purposes of this paragraph ... the term "guaranteed benefit policy" means an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer. Such term includes any surplus in a separate account, but excludes any other portion of a separate account.

29 U.S.C. § 1101(b). The legislative history of this provision, as embodied in the Conference Committee Report, states that:

An insurance company ... is not considered to hold plan assets if a plan purchases an insurance policy from it, to the extent that the policy provides payments guaranteed by the company. If the policy guarantees basic payments, but other payments may vary with, e.g., investment performance, then the variable part of the policy and the assets attributable thereto are not considered to be as guaranteed, and are to be considered as plan assets subject to the fiduciary rules.

Joint Explanatory Statement of the Conference Committee, H.R. No. 1280, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Admin. News, 4639, 5038, 5077.

Further light is shed on the meaning of § 1101's exemption to ERISA's coverage by regulations enacted by the Department of Labor, the federal agency in charge of overseeing ERISA, whose views are accordingly entitled to deference unless clearly inconsistent with the law. Amato v. Western Union International, Inc., 773 F.2d 1402, 1411-12 (2d Cir.1985), cert. dismissed, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986). In 1987, this agency enacted regulations defining "plan assets" under ERISA. As one district court has said:

"the policy animating this regulation is to impose ERISA fiduciary obligations upon persons or entities that, practically speaking, have been entrusted with the management and investment of plan assets. The regulation thus `looks through' the form of an entity to hold it directly liable as a fiduciary with respect to plan assets that have ostensibly been used to purchase an equity interest in that enterprise."

Associates in Adolescent Psychiatry v. Home Life Insurance Co., 729 F.Supp. 1162, 1183 (N.D.Ill.1989), aff'd, 941 F.2d 561 (7th Cir.1991). The Department of Labor further explained:

there are many

...