1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-13-1994

Malia, et al v. General Electric Company, et al.

Precedential or Non-Precedential:

Docket 92-7487

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Recommended Citation

"Malia, et al v. General Electric Company, et al." (1994). 1994 Decisions. Paper 15.

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 92-7487 

 

SAM J. MALIA; JOHN A. GLUCKSNIS; 

MATTHEW J. LOFTUS 

 

v. 

GENERAL ELECTRIC COMPANY; RCA 

CORPORATION; RETIREMENT PLAN FOR 

THE EMPLOYEES OF RCA CORPORATION AND 

SUBSIDIARY COMPANIES; GE PENSION PLAN 

 Sam J. Malia, John A. Glucksnis 

 and Matthew J. Loftus, for 

 themselves and all others 

 similarly situated, 

 

 Appellants 

 

On Appeal From the United States District Court 

 for the Middle District of Pennsylvania 

(D.C. Civil Action No. 91-01743) 

 

 Argued on March 17, 1993 

 Before: STAPLETON, ROTH and LEWIS, Circuit Judges

(Opinion Filed May 13, 1994) 

 

Thomas W. Jennings, Esquire 

Kent Cprek, Esquire (Argued) 

Sagot, Jennings & Sigmond 

1172 Public Ledger Building 

Independence Square West 
2 

Philadelphia, PA 19106 

 Attorneys for Appellants 

Joseph J. Costello, Esquire 

Robert J. Lichtenstein, Esquire 

Mark S. Dichter, Esquire (Argued) 

Morgan, Lewis & Bockius 

2000 One Logan Square 

Philadelphia, PA 19103 

 Attorneys for Appellees 

 

 

OPINION OF THE COURT 

 

ROTH, Circuit Judge: 

I.

 Appellants challenge the results of the merger of two large 

pension plans. The central issue of this case is whether pension 

plan participants whose plan is merged with another pension plan 

are entitled by law to receive only the defined benefits that 

they had actually accrued under the previous plan or are also 

entitled to receive a share of any surplus assets in their 

pension plan. Appellants allege that under two distinct sections 

of the Employee Retirement Income Security Act of 1974 ("ERISA") 

they are entitled to a share of the surplus assets that existed 

in their pension plan at the time of the merger. Appellants cite 

no case law supporting this position, relying solely on statutory 

language and legislative history. Appellants also allege that 

their employer's conduct of the merger violated its fiduciary 

duty under ERISA. Our detailed review of appellants' allegations 
3 

and argument convinces us that the district court correctly 

dismissed their claims. 

II.

 Plaintiffs were entitled to receive benefits under RCA 

Corporation's ("RCA") pension plan as long-time employees of RCA 

and contributors to its pension fund. RCA's pension plan was a 

defined benefit plan that required employees to make 

contributions to the plan in order to receive a specified level 

of benefits upon retirement. In 1986, General Electric ("GE") 

bought out RCA, which became a wholly-owned subsidiary of GE. 

General Electric also sponsored a defined benefits plan for its 

employees. 

 Upon hearing of GE's intention to merge the two plans, 

appellant Sam J. Malia withdrew his contributions from the RCA 

plan effective December 10, 1988. In January 1989, the RCA and 

GE pension benefit plans were merged, and Malia's two coappellants became participants in the GE pension plan. At the 

time of the merger, RCA's pension plan had residual assets --

assets in excess of liabilities -- of roughly $1.3 billion. The 

core of appellants' argument is that GE improperly "plann[ed] the 

capture of more than $1 billion in residual assets of the RCA 

Pension Plan for its own benefit." They further allege that GE 

intended to convert the RCA pension plan surplus to offset its 

own liabilities to GE employees. They contend that GE's capture 

of the surplus was improper in that under 29 U.S.C. §§ 1058 and 

1344(d)(3) the RCA pensioners were entitled to receive a share of 
4 

the excess assets from the former RCA pension plan.1 However, 

appellants fail to point out that the assets of the GE plan also 

exceeded its liabilities by nearly $7.5 billion. Thus, all 

benefits that had accrued under the RCA plan were fully funded 

and protected under the merged GE-RCA plan. 

 Appellants further allege that GE intentionally misled RCA 

plan participants in an effort to get them to cash out of the 

plan in order to increase GE's share of any future distribution 

of residual assets, that GE breached a fiduciary duty owed to 

plaintiffs under 29 U.S.C. §§ 1021-25 by failing to inform them 

of a possible forfeiture of their interest in residual assets 

from the RCA plan, and that GE improperly failed to appoint an 

independent representative of the pension plan participants to 

review and approve the plan merger under 29 U.S.C. §§ 1104 and 

1106(b)(1). 

 On August 10, 1992, the district court granted defendants' 

Rule 12(b)(6) motion to dismiss all counts. This appeal 

followed. We conclude that the district court correctly 

dismissed appellants' complaint on the ground that it failed to 

state a claim. 

 

1GE did not, in fact, take steps to terminate the merged pension 

plan in an effort to capture the surplus funds. Appellants 

attribute this inaction to changes in the law which made 

mandatory the distribution of a significant portion of the 

surplus of a pension plan to employees upon termination of the 

plan. 
5 

III.

 The jurisdiction of the district court rested on 29 U.S.C. 

§1132(e). The appellate jurisdiction of this Court rests on 28 

U.S.C. § 1291. As we are reviewing the district court's grant of 

a Rule 12(b)(6) motion to dismiss for failure to state a claim, 

our standard of review is plenary. Unger v. National Residents 

Matching Program, 928 F.2d 1392, 1394 (3d Cir. 1991). In 

addition, all facts alleged in the complaint and all reasonable 

inferences that can be drawn from them must be accepted as true. 

Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 

1990). 

IV. 

 Appellants' complaint alleges that GE violated ERISA. As 

this Court has stated, "ERISA provides for comprehensive federal 

regulation of employee pension plans . . . . [T]he major concern 

of Congress was to ensure that bona fide employees with long 

years of employment and contributions realize anticipated pension 

benefits." Reuther v. Trustees of Trucking Employees of Passaic 

& Bergen County Welfare Fund, 575 F.2d 1074, 1076-77 (3d Cir. 

1978). We will review appellants' contentions with this 

regulatory concern in mind. 

 A. Distribution of Residual Assets

 In general, pension plans like the RCA and GE plans hold a 

portfolio of investments that are managed by the plan 

administrator in order to provide in the future a defined set of 
6 

accrued benefits for the pension plan participants. When the 

investments of a pension plan increase in value more rapidly than 

the anticipated liabilities of the plan, an actuarial surplus 

results that fluctuates as the value of the plan's portfolio 

changes.2 Employers are permitted to recover the surplus assets 

of a pension plan under some circumstances if the plan is first 

terminated. See Edward Veal & Edward Mackiewicz, Pension Plan 

Terminations 211-12 (1989). 

 Appellants acknowledge that their accrued benefits under the 

RCA plan were adequately protected under the merged plan. What 

they seek is to have these benefits increased by a share of the 

residual assets which existed in the RCA pension plan at the time 

of its merger with the GE plan. For authority, appellants rely 

on two distinct sections of ERISA, 29 U.S.C. §§ 1058 and 

1344(d)(3). Appellants contend that these two sections, when 

 

2ERISA permits both defined benefit and defined contribution 

plans to require employee contributions. Chait v. Bernstein, 835 

F.2d 1017, 1019 n.7 (3d Cir. 1987). In a "defined benefit" plan 

such as the RCA and GE plans, benefits are not dependent upon the 

current or future assets of the plan. The employer must provide 

a "defined benefit" to the plan participant upon retirement, 

termination or disability, id., and the employer must satisfy 

shortfalls if the actuarial assumptions of the plan prove 

incorrect. In contrast, in a "defined contribution" plan, the 

benefits paid upon retirement are dependent upon the amounts 

contributed by the employee or employer on behalf of the plan 

participant. 29 U.S.C. § 1002(34). On the surface, it may 

appear that an employer profits from employee contributions when 

the employer does not distribute residual assets to plan 

participants. Residual assets are, however, a function of the 

actual rate of return on plan investments exceeding actuarial 

expectations of plan asset performance. In a defined benefit 

plan, just as an employer would be required to fund any 

deficiency in assets resulting from poor plan asset performance, 

any excess in assets resulting from superior plan asset 

performance typically accrues to the employer's benefit by 

reducing the out-of-pocket contribution the employer must make to 

maintain required funding levels for the present value of the 

defined benefits. Therefore, a defined benefit plan containing 

residual assets by its nature benefits an employer; the benefit 

does not come about simply in the context of a merger or 

termination. Cf. Bruce, Pension Claims: Rights and Obligations

at 18 (2d ed. 1993). 
7 

read together, support their claim. The first section, § 1058, 

protects pension plan beneficiaries from losing benefits through 

the merger or consolidation of pension plans. It provides that: 

"A pension plan may not merge or consolidate with, or transfer 

its assets or liabilities to any other plan . . . unless each 

participant in the plan would (if the plan were then terminated) 

receive a benefit immediately after the merger, consolidation or 

transfer which is equal to or greater than the benefit he would 

have been entitled to receive immediately before the merger, 

consolidation or transfer (if the plan had then terminated). 

The second, § 1344(d)(3), governs the distribution of residual 

plan assets in the event of a plan termination.3 

 We agree with appellants that the language of § 1058 should 

be read together with § 1344 as a whole in order to understand 

the "benefits" that would be payable at the time of the 

hypothetical termination envisaged in § 1058. The problem with 

appellants' argument is that, in the situation of a merger of 

pension plans, appellants equate the "benefits" receivable, as 

defined in § 1058 as of the time of a hypothetical termination, 

with the "residual assets" which may ultimately be distributed 

under § 1344(d)(3) in the case of an actual termination. An 

examination of § 1344, however, demonstrates that "benefits" are 

distinguished from "assets" in the language of § 1344. 

 Section 1344(a) sets out the priority of allocation of 

assets of the plan on termination, giving first priority to 

accrued benefits derived from a participant's contributions to 

the plan which were not mandatory contributions; second priority 

to accrued benefits derived from mandatory contributions; third 

 

3§ 1344 controls the allocation of assets on the termination of a 

single-employer plan. The GE pension plan is a single-employer 

defined benefit plan. § 1344(d)(3)(A) sets out the priority of 

residual asset distribution in connection with such a 

termination. 
8 

priority to benefits payable as an annuity; and fourth priority 

to other and additional benefits. Subsections 1344(b) and (c) 

provide for adjustment of allocations and increase or decrease in 

value of assets during the termination process. Subsection 

1344(d) then regulates the distribution of residual assets to the 

employer after the satisfaction of all liabilities to plan 

participants and their heir beneficiaries. As described in 

§1344(a), those "liabilities" are the designated benefits payable 

to the participants. Section 1344(d)(3)(A) then provides that, 

before any residual assets are distributed to the employer, "any 

assets of the plan attributable to employee contributions . . . 

shall be equitably distributed to the participants who made such 

contributions . . .." 

 This language of § 1344 demonstrates clearly that "benefits" 

are elements that are conceptualized and treated differently in a 

plan termination than are the "assets" of that plan. "Benefits" 

are computed in a different manner than "assets." Accrued 

benefits are placed on the liability side, rather than on the 

asset side of the balance sheet. "Residual assets" are computed 

only after liability for accrued benefits has been satisfied; 

"residual assets" are payable to the employer only after assets 

attributable to employee contributions have been returned to the 

employees. 
9 

 The Treasury Regulation, interpreting pension plan mergers, 

corroborates this distinction between "benefits" and "assets" 

which is made in § 1344. It provides:4

(e) Merger of defined benefit plans -- (1) General 

rule. Section 414(1) compares the benefits on a 

termination basis before and after the merger. If the 

sum of the assets of all plans is not less than the sum 

of the present values of the accrued benefit (whether 

or not vested) of all plans, the requirements of 

section 414(1) will be satisfied merely by combining 

the assets and preserving each participant's accrued 

benefits. This is so because all the accrued benefits 

of the plan as merged are provided on a termination 

basis by the plan as merged. However, if the sum of 

the assets of all plans is less than the sum of the 

present values of the accrued benefits (whether or not 

vested) in all plans, the accrued benefits in the plan 

as merged are not provided on a termination basis. 

 Moreover, the district court, in its opinion dismissing 

appellants' claims, correctly noted that "benefits" under § 1058 

have consistently been held under both regulations and case law 

to refer to "accrued benefits" and not to include projected 

residual assets of a plan after termination. Malia v. General 

Electric Co., slip op. at 6-7, (E.D. Pa., Aug. 10, 1992). The 

district court cited both Van Orman v. American Ins. Co., 608 F. 

Supp. 13, 25 (D.N.J. 1984) and In re Gulf Pension Litigation, 764 

F. Supp. 1149, 1185 (S.D. Tex. 1991) for the proposition that the 

 

4These regulations were promulgated under 26 U.S.C. § 414(1), the 

Internal Revenue Code counterpart to ERISA § 1058 which has 

almost the same language as § 1058. In the ERISA Reorganization 

Plan of 1978 the Treasury Department was assigned responsibility 

for issuing regulations under certain provisions of ERISA, 

including § 1058. See 44 Fed. Reg. 1065 (attached to D's brief). 

Thus, "all regulations implementing the provisions of [sections 

1058 and 414(1)] have been promulgated by the Secretary of the 

Treasury, mostly under § 414(1) of the Internal Revenue Code." 

Van Orman v. American Ins. Co., 608 F. Supp. 13, 24 n.3 (D.N.J. 

1984), on remand from 680 F.2d 301 (3d Cir. 1982). 
10 

relevant Treasury Department regulations correctly interpreted 

"benefits" under § 1058 as being limited to "accrued benefits," 

rather than including all benefits to which a plan participant 

would be entitled upon termination. 

 Appellants attempt to discredit the district court's opinion 

as relying on "irrelevant and obsolete authority." However, the 

1987 changes in 29 U.S.C. § 1344(d)(3) raised by appellants are 

not relevant to this issue, and the facts of Van Orman and Gulf 

Pension are quite similar to the case at issue. 

 Our interpretation of this ERISA language is supported by 

the recent decision of the Seventh Circuit in Johnson v. GeorgiaPacific Corp., No. 93-2357, 1994 WL 92167 (7th Cir. March 23, 

1994). Johnson involved a suit by pensioners who complained that 

the promised pension benefits of current employees could not be 

increased without a corresponding increase in the retirees' 

pensions. The retirees asserted that it was their contributions 

that had produced the surplus by which the current employees' 

benefits were increased; in other words, that they owned the 

"surplus" of the plan which had enabled the employer to increase 

the current employees' benefits. In holding that the employer 

did not exceed its powers under ERISA to amend the plan, the 

court described the same distinction under an ERISA defined 

benefit plan between "benefits" and "assets": 

A defined-benefit plan gives current and former 

employees property interests in their pension benefits 

but not in the assets held by the trust. (Citation 

omitted). If the investments appreciate, the plan need 

not devote that increase to improving benefits; it may 

retain the surplus as a cushion against the day when 

yields decrease, or the employer may cease making 
11 

contributions and allow the surplus to erode as 

liabilities continue to increase. 

1994 WL 92167 at *6. 

 We conclude, therefore, in light of the language of the 

statute that §§ 1058 and 1344(d)(3) cannot be combined to provide 

plan participants with a right to residual assets in the context 

of a plan merger. The district court correctly granted 

appellees' motion to dismiss on this claim. 

 B. Fiduciary Duty to Notify

 Appellants next claim that RCA should have notified them 

that they would not in the future be entitled to residual assets 

if they withdrew their contributions from the RCA Pension Plan 

prior to its merger with the GE plan. However, the reporting and 

disclosure provisions of ERISA, and regulations adopted pursuant 

to these code sections, impose no requirement that a pension plan 

sponsor notify beneficiaries of the possibility of forfeiture of 

interest in residual assets resulting from the early withdrawal 

of employee contributions. See 29 U.S.C. §§ 1021-25. 

 Under ERISA, stringent fiduciary duties attach when an 

employer acts directly as the pension plan administrator or makes 

decisions directly affecting the administration of the plan. See

29 U.S.C. §§ 1002 (21)(A), 1104. However, employers take on 

fiduciary obligations of the type alleged in appellants' second 

claim only to the extent that they act as the actual plan 

administrators: 

Under ERISA, the roles of plan administrator and plan 

sponsor are distinct. The plan administrator owes a 
12 

fiduciary duty to the plan participants; the plan 

sponsor, as long as it is not acting as an 

administrator, generally does not. 

Payonk v. HMW Indus., Inc., 883 F.2d 221, 231 (3d Cir. 1989) 

(Stapleton, J., concurring in the judgment). 

 Only plan administrators are required to disclose benefits 

information to beneficiaries, and such information typically 

involves an accounting of the plan's assets and liabilities and 

of the actual benefits accrued by individual beneficiaries rather 

than including notice of the existence of possible residual 

assets which might be recouped should the plan be terminated. See

29 U.S.C. §§ 1021-25. Thus, given that appellant Malia sought 

relief under a fiduciary duty not borne by GE, the district court 

correctly granted appellees' motion to dismiss on this claim. 

 C. Fiduciary Duty to Appoint Independent Manager

 The district court found that under the circumstances of a 

pension plan merger as presented here, the only fiduciary duties 

borne by the appellees were the anti-dilution obligations imposed 

by § 1058. As the district court held that GE complied with the 

requirements of § 1058, it properly dismissed appellants' claim 

on this issue. Efforts by an employer to merge two pension plans 

do not invoke the fiduciary duty provisions of ERISA. Such 

duties do not attach to business decisions related to 

modification of the design of a pension plan, and in such 

circumstances the plan sponsor is free to act "as an employer and 
13 

not a fiduciary." See Hlinka v. Bethlehem Steel Corp., 863 F.2d 

279, 285 (3d Cir. 1983). 

V. 

 For all the reasons discussed above, we will affirm the 

opinion of the district court.