Vornado, Inc. v. Trustees of Retail Store Employees' Union Local 1262

• Decision Date: 22 September 1987
• Docket Number: No. 86-5470,86-5470
• Parties: 8 Employee Benefits Ca 2475 VORNADO, INC., t/a Two Guys v. TRUSTEES OF THE RETAIL STORE EMPLOYEES' UNION LOCAL 1262, et al. v. Benedict J. FOCARINO and Neal Rosen, et al. VORNADO, INC., t/a Two Guys, et al. v. TRUSTEES OF THE RETAIL STORE EMPLOYEES' UNION LOCAL 1262, et al. v. Neal ROSEN, et al. Appeal of VORNADO, INC., t/a Two Guys, ("Vornado"), Benedict J. Focarino, Catherine Stillman and Linda Soto, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 416

829 F.2d 416

8 Employee Benefits Ca 2475

VORNADO, INC., t/a Two Guys v. TRUSTEES OF THE RETAIL STORE EMPLOYEES' UNION LOCAL 1262, et al. v. Benedict J. FOCARINO and Neal Rosen, et al.

VORNADO, INC., t/a Two Guys, et al. v. TRUSTEES OF THE RETAIL STORE EMPLOYEES' UNION LOCAL 1262, et al. v. Neal ROSEN, et al.

Appeal of VORNADO, INC., t/a Two Guys, ("Vornado"), Benedict

J. Focarino, Catherine Stillman and Linda Soto, Appellants.

No. 86-5470.

United States Court of Appeals, Third Circuit.

Argued June 25, 1987.

Decided Sept. 22, 1987.

Brian D. Sullivan (argued), W. Thomas McDonough, Carl A. Schwarz, Jr., Montclair, N.J., for appellants.

Ronald E. Richman (argued), Mark E. Brossman, Susan Jameson, Chadbourne & Parke, New York City, William Hunt, DeMaria Ellis & Hunt, Newark, N.J., for appellees.

Peter H. Gould (argued), Washington, D.C., for amicus curiae, Pension Benefit Guar. Corp.

Before GIBBONS, Chief Judge, WEIS, Circuit Judge, and POLLAK, ^* District Judge.

OPINION OF THE COURT

WEIS, Circuit Judge.

Two questions are presented in this ERISA appeal. First, whether the Act gives a contributing employer the right to have a multiemployer pension fund transfer assets and liabilities pursuant to previously adopted rules. Second, whether, on partial termination of a pension plan, the trustees may use a method of valuation more conservative than current market rates to determine if non-vested participants' benefits have become non-forfeitable. The district court answered "no" to the first question and "yes" to the second. We agree and will affirm.

Plaintiff Vornado, Inc., formerly operated a chain of retail stores. Beginning in 1972, it entered into a series of collective bargaining agreements that included obligations to contribute, for the benefit of its store employees, to the multiemployer Retail Store Employees Union Local 1262 (Non-Food) Industry Pension Fund.

In November 1981, Vornado began to withdraw from the retail field. After closing its last store in February 1982, the company stopped making contributions to the fund. As a result of the termination of Vornado's retail business, many of its employees were discharged.

The fund had been qualified under ERISA; consequently, when Vornado ceased making payments it became subject to withdrawal liability. See 29 U.S.C. Sec. 1381. The trustees of the fund submitted a claim for $952,810 and later requested an additional $830,500.

Since the inception of the fund, about thirteen employers have contributed on behalf of their employees. Most, however, have made payments for only a few years and in much smaller amounts than Vornado, which accounted for approximately seventy-nine percent of total employer payments to the fund until 1980. That was the last full year that Vornado contributed before it began closing the stores. The eight Faced with the prospect of substantial withdrawal liability, Vornado cast about for alternative ways to meet its obligations to its former employees. After investigating the actuarial condition of the fund and mindful of the predominance of its former employees as beneficiaries, Vornado concluded that it would be desirable to transfer the assets and liabilities attributable to its employees to a single-employer plan. ¹ The result would protect the interests of the Vornado beneficiaries but free the company from obligations to the multiemployer fund.

smallest employers collectively accounted for slightly more than one percent.

Discovering that the fund had not yet adopted rules governing the transfer of assets, as required by ERISA, 29 U.S.C. Sec. 1414(a), Vornado brought suit in the district court to compel the fund to do so. The district court concluded that the trustees had a duty to comply with this provision of the statute, and the fund responded by adopting rules in April 1984.

One of the adopted rules prohibited the transfer of ten percent or more of the fund's assets. Vornado's proposal would have required a transfer of substantially more than that amount; thus, the rules effectively frustrated Vornado's hopes to create a single-employer plan.

Vornado attacked the rules in the district court as unreasonable and violative of the statutory requirements. The district court rejected that argument, concluding that ERISA requires rules which apply only when a liability transfer occurs, and that the statute mandates no general rules governing transfer of both assets and liabilities. Vornado has appealed from that determination.

A separate consequence of Vornado's decision to close its doors was the partial termination of the fund within the meaning of the Internal Revenue Code. Section 1012(a), 26 U.S.C. Sec. 411(d)(3), requires a qualified plan to provide that the employees' rights to benefits are nonforfeitable "to the extent funded" on termination. The occurrence of a partial termination thus has significance for beneficiaries of the fund because it may result in nonforfeiture of their benefits.

A second suit was filed by Vornado and three of its employees--one of whom was a former fund trustee, another whose interest was vested because of completion of the ten years service required by the plan, and a third individual who had not been employed for the necessary ten years. Plaintiffs alleged that the trustees had failed to declare a formal partial termination in accordance with the Internal Revenue Code and that this inaction had both jeopardized Vornado's tax exemption and prejudiced the rights of non-vested employees. ² This suit was consolidated with the one raising the asset transfer issue.

The district court found that the occurrence of a partial termination was not in dispute. The question, as the court saw it, was whether the partial termination was of any consequence to the beneficiaries and the employer. The interpretation given the "to the extent funded" clause in the Internal Revenue Code determined whether all employees had become vested, and that inquiry focused on the actuarial data used by the fund. The trustees assumed that future earnings on the fund's assets should be calculated at seven percent. Plaintiffs assert that this rate was unrealistically low and that the then current, higher market rate should have been employed.

The determination of a proper interest rate is significant because, applying the trustees' seven percent rate, the fund's liabilities would exceed its assets. In that The district court decided that the trustees had been justified in using the seven percent rate because it conformed with the Trust Plan. The Plan stated that in the event of a termination, assets should be used to satisfy liabilities "in the amount required in accordance with the actuarial assumptions underlying this Plan fully to fund the Retirement Pensions, based on the provisions of the Plan during the five year period prior to the date of the termination." An affidavit by the plan administrator averred that the Plan had used a seven percent rate for the calculation of lump sum amounts and for its minimum funding standard account.

event, the funds available would be inadequate to provide for participants other than those who were already vested. Participants with insufficient service could not gain non-forfeitable benefits. Plaintiffs argued that if the higher market rate were used, the assets would exceed liabilities, and the surplus could be allocated to newly-vesting employees. In making the calculations, plaintiffs also insisted that the amount of Vornado's withdrawal liability should be included as an asset of the fund.

Having determined that the fund had followed a permissible actuarial computation that resulted in a deficiency of assets to meet all liabilities, the court decided that the trustees' failure formally to declare a partial termination was of no consequence. Accordingly, summary judgment was entered for defendants.

Plaintiffs also complained that the trustees' actions had violated their fiduciary duties. The district court granted summary judgment on this claim, concluding that Vornado did not have standing to press it and that the other plaintiffs could not prove damages in view of the fund's fiscal condition. On appeal, plaintiffs have not argued that Vornado has standing, and our resolution of the other claims also disposes of this one.

I. THE ASSET TRANSFER SUIT

Vornado concedes that ERISA does not give an employer an absolute right to require a transfer of assets, but contends that the statute does provide a mechanism through which an employer may propose a transfer and have its request judged by a standard that is not "unreasonably restrictive." Defendants, supported by amicus curiae, the Pension Benefit Guaranty Corporation, argue that ERISA does not require adoption of rules that permit an employer to obtain a transfer of assets and liabilities.

Section 4234(a) of ERISA provides in pertinent part:

"A transfer of assets from a multiemployer plan to another plan shall comply with asset-transfer rules which ...

(1) do not unreasonably restrict the transfer of plan assets in connection with the transfer of plan liabilities, and

(2) operate and are applied uniformly." (with exceptions not relevant here)

29 U.S.C. Sec. 1414(a).

The district court succinctly stated the parties' conflicting readings of the statute. Plaintiffs contended that "any asset transfer rules must be reasonable" or "to paraphrase the statute, cannot unreasonably restrict the transfer of assets and liabilities." Defendants, however, insisted that Sec. 1414 does not require the rules to permit the reasonable transfer of assets and liabilities, but only provides that "if liabilities are transferred, the rules cannot unreasonably restrict a concomitant transfer of assets."

The difference between the contentions of the two parties is subtle but significant. Vornado argues that the required rules should govern all transfers of assets and liabilities. The trustees' reading of the statute, however,...