Opinion ID: 668555
Heading Depth: 2
Heading Rank: 1

Heading: Defendants' Full Funding Obligation

Text: 20 We note preliminarily that the district court grounded its finding of the defendants' liability solely in the provisions of the G & W Plan, with some reference to general principles underlying ERISA. The district court concluded that, having found contractual liability on the part of the defendants by applying rules of contract construction, there was no need to reach the issue of whether section 208 also supported plaintiffs' interpretation of the contract. Kinek I, 720 F.Supp. at 284 n. 6. On appeal, however, the defendants contend that the district court's contractual interpretation is flawed insofar as it is inconsistent with section 208, which section 10.2 mirrors, and that this inconsistency is demonstrated by regulatory and other guides to interpreting section 208. Accordingly, we will consider not only the issue of how the two contractual provisions, sections 10.2 and 3.1 of the G & W Plan, interrelate, but also the issue of whether section 208 is inconsistent with the district court's contractual interpretation. 21 The defendants assert several arguments on appeal in support of their contention that the district court erred in determining that they were obligated to fund fully all vested benefits of the Kinek plaintiffs at the time of the spinoff. Some of these arguments relate strictly to the interpretation of the provisions of the G & W Plan; others relate to the interpretation of section 208. None of these arguments, however, is persuasive. 22 The defendants' lead argument on appeal relates to the parties' intent with respect to section 10.2 and its interrelationship with section 3.1. Specifically, the defendants contend that when sections 10.2 and 3.1 were added to the G & W Plan, the parties' understanding of the obligations imposed, as well as their conduct since then, demonstrate that the plaintiffs did not believe that those contract provisions obligated the defendants to fund fully the spun off portion. The plaintiffs counter that the parties simply did not consider the impact of reading sections 3.1 and 10.2 in conjunction and that the particular facts giving rise to these cases were never considered. 23 Extrinsic evidence regarding the parties' intent is relevant, however, only if the contract is ambiguous. See Sanchez v. Maher, 560 F.2d 1105, 1108 (2d Cir.1977) (where contested contract provision is unclear, parties may submit extrinsic evidence to aid the court in its interpretation of the provision); cf. Ocean Transp. Line v. American Philippine Fiber Indus., 743 F.2d 85, 90 (2d Cir.1984) (considering evidence of the parties' practical interpretation of the contract where the contract was not clear). Because we conclude that sections 10.2 and 3.1 are unambiguous, any facts about the parties' intent are immaterial. 24 Indeed, the plain language of the two provisions, taken together, establishes the defendants' obligation to fund fully the spun off portion. Section 10.2 provides that, as of the time of a transfer of assets or liabilities, such as a spinoff, plan participants become entitled to that which they would have been entitled to receive in the event of a termination prior to the transfer. Section 3.1 requires that, in the event of a plan termination, plan participants are entitled to full funding of vested benefits. Because the participants would thus have been entitled to full funding of vested benefits if the plan had terminated before the spinoff, they were entitled to full funding of vested benefits as of the time of the spinoff. 25 In any case, the defendants do not seem to dispute seriously that sections 10.2 and 3.1, when read together, require full funding of the spun off portion. Rather, the defendants focus their attention on their claim that the two provisions should not be read together and that, when read in isolation from section 10.2, section 3.1 is triggered only in the event of an actual termination or cessation of all operations, neither of which occurred here. See also Kinek I, 720 F.Supp. at 282 ([t]he dispute centers on whether or not sections 3.1 ... and 10.2 ... of the G & W Plan should be read together). The defendants' attempt to read sections 3.1 and 10.2 in isolation is, however, inconsistent with well established principles of contract construction, which require that all provisions of a contract be read together as a harmonious whole, if possible. See, e.g., Enercomp, Inc. v. McCorhill Publishing, 873 F.2d 536, 549 (2d Cir.1989) (rejecting appellants' construction of contract as somewhat at odds with the agreement as a whole); see also Rothenberg v. Lincoln Farm Camp, 755 F.2d 1017, 1019 (2d Cir.1985); Restatement (Second) of Contracts Sec. 202(2). Here, sections 10.2 and 3.1 are not inherently inconsistent nor mutually exclusive and can be read together harmoniously, as the district court read them. Furthermore, it is irrelevant that the respective provisions were added to the contract at different times; it is significant only that the two provisions were both part of the pension plan agreement at the time of the spinoff. Accordingly, we conclude that sections 10.2 and 3.1 are properly read together to require the defendants to fund fully the spun off portion of the G & W Plan. 26 The defendants also argue, however, that reading sections 10.2 and 3.1 together yields an outcome that is inconsistent with regulatory and other guides to the interpretation of section 208, on which section 10.2 is modeled. We are not persuaded. 27 The defendants assert that, in the event of a spinoff, section 208 merely requires allocation of extant fund assets in accordance with the priority rules of ERISA section 4044, 29 U.S.C. Sec. 1344, and does not require any additional funding that would be required in the event of termination. They argue that the limited purpose of the hypothesized termination in section 208 is to invoke section 4044's priority rules. The alleged authority for this view is a regulation issued by the Treasury Department interpreting Internal Revenue Code section 414(l ), the tax counterpart of section 208. The Treasury Secretary, rather than the Labor Secretary, has authority for issuing regulations interpreting section 208. See Hurwitz v. Sher, 982 F.2d 778, 779 n. 1 (2d Cir.1992) (citing Reorganization Plan No. 4 of 1978 Sec. 101, 3 C.F.R. Sec. 332 (1978), reprinted in, 1978 U.S.Code Cong. & Admin.News 9814), cert. denied, --- U.S. ----, 113 S.Ct. 2345, 124 L.Ed.2d 255 (1993). The regulation on which the defendants rely, 26 C.F.R. Sec. 1.414(l )-1(a)(2), provides in pertinent part: 28 A trust which forms a part of a plan will not constitute a qualified trust ... unless, in the case of ... a transfer of assets or liabilities ... each participant receive[s] benefits on a termination basis ... from the plan immediately after the ... transfer which are equal to or greater than the benefits the participant would receive on a termination basis immediately before the ... transfer. 29 The defendants assert that this regulation makes clear that, when a transfer of assets or liabilities occurs, as in a spinoff, the spun off portion of the plan must be funded only to the extent that benefits on a termination basis are provided. Such benefits are defined in 26 C.F.R. Sec. 1.414(l )-1(b)(5)(i) as the benefits that would be provided exclusively by the plan assets pursuant to section 4044 of [ERISA, 29 U.S.C. Sec. 1344] and the regulations thereunder if the plan terminated[, but not] benefits that are guaranteed by the Pension Benefit Guaranty Corporation. The defendants thus contend that all that section 208 requires in the event of a spinoff is funding of the spun off portion of the plan in the amount that is provided by existing plan assets, allocated according to the priority rules of ERISA section 4044, 29 U.S.C. Sec. 1344. 30 This interpretation of the obligations imposed by section 208, which we assume, without deciding, is a valid interpretation, 4 does not, however, undermine our interpretation of the defendants' contractual funding obligations. Indeed, our contractual interpretation, under which the defendants must provide full funding of the spun off portion of the G & W Plan, would be inconsistent with section 208 only if the term plan assets in section 1.414(l )-1(b)(5)(i) means existing plan assets and prohibits the funding of benefits with assets that are added to a plan in accordance with a contractual full funding obligation. Even assuming that plan assets means nothing more than existing plan assets, the regulations cannot be read to prohibit that which they do not require. It is well established that ERISA provides merely a floor for benefits, not a ceiling. A contractual provision like section 3.1 of the G & W Plan, which requires additional funding, therefore constitutes a permissible supplement to the minimum standards mandated by ERISA. See, e.g., Pension Benefit Guaranty Corp. v. White Consol. Indus., 998 F.2d 1192, 1200 (3d Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 687, 126 L.Ed.2d 655 (1994); United Steelworkers, 860 F.2d at 197; International Union, United Automobile, Aerospace and Agricultural Implement Workers v. Keystone Consol. Indus., 793 F.2d 810, 813 (7th Cir.), cert. denied, 479 U.S. 932, 107 S.Ct. 403, 93 L.Ed.2d 356 (1986). 31 The defendants further contend that several district court cases interpreting section 208 support their position. See Malia v. General Elec. Co., No. 91-1743 (M.D.Pa. Aug. 10, 1992); In re Gulf Pension Litigation, 764 F.Supp. 1149 (S.D.Tex.1991); Van Orman v. American Ins. Co., 608 F.Supp. 13, 25 (D.N.J.1984). These cases generally hold that section 208 does not entitle pension plan participants to surplus assets in the event of a plan merger, even though they may have been entitled to those surplus assets in the event of a termination. Because each of the cases involves a merger of pension plans, rather than a spinoff, as occurred here, however, they are not particularly supportive of the defendants' contention. The distinction is significant because mergers are subject to different regulations than spinoffs. Indeed, the Treasury regulation applicable to mergers, 26 C.F.R. Sec. 1.414(l )-1(e)(1), requires full funding of all accrued benefits upon merger: [i]f 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 [I.R.C.] section 414(l ) will be satisfied merely by combining the assets. 26 C.F.R. Sec. 1.414(l )-1(e)(1). In light of the defendants' argument that there is no full funding requirement for spinoffs, under either the contract or section 208, it is clear that, at best, mergers and spinoffs are subject to different regulatory requirements and, therefore, cases involving mergers are not necessarily useful in spinoff cases. At worst, from the defendants' perspective, mergers and spinoffs would be subject to the same regulatory requirements and section 1.414(l )-1(e)(1) would make clear that section 208 itself required full funding upon the spinoff. Accordingly, the cases the defendants cite give us no reason to believe that our contract interpretation is contrary to ERISA. 32 In any case, even if these cases were apposite here, we would reject their suggestion that the district court's contractual interpretation is at odds with section 208. We read section 10.2 of the G & W Plan, which is substantially similar to section 208, to provide unambiguously that plan participants are entitled, in the event of a spinoff, to what they should have received in the event of an actual termination. Nothing in these cases persuades us otherwise. 33 The defendants next cite certain actuarial information that they contend supports their view that the district court's contract interpretation is inconsistent with ERISA. See, e.g., Mergers and Spinoffs, 1989 Enrolled Actuaries Meeting 171. Even assuming that the actuarial advice relied on by the defendants is an authoritative source, that advice is irrelevant here because it relates only to what section 208 requires alone and in conjunction with the amended section 4041, 29 U.S.C. Sec. 1341. 5 The advice does not relate to the question of whether section 208 prohibits the operation of the full funding requirement imposed by section 3.1 in the event of a spinoff. Accordingly, the actuarial advice does not aid the defendants. 34 Finally, the defendants assert that the district court's contract construction is improper because it will anomalously necessitate the full funding of the entire G & W Plan, including the portion that was not spun off, as of September 30, 1981. The difficult issue of whether the defendants must fully fund the entire G & W Plan is, however, well beyond the scope of the issues that were addressed by the district court and fully briefed by the parties on appeal. We decline, therefore, to answer that question and hold narrowly that the defendants must fully fund the spun off portion of the G & W Plan. For similar reasons, we do not address the defendants' corollary argument concerning the application of the contractual full funding requirement in the event of a partial termination of the G & W Plan. 35 To summarize, we conclude that section 10.2 of the G & W Plan, read together with section 3.1, requires the defendants to fund the spun off portion to the extent that would have been required in the event of an actual termination. Because the G & W Plan called for full funding upon actual termination, full funding was also required at the time of the spinoff that occurred in these cases. This result is not inconsistent with section 208 or the pertinent regulations. We therefore affirm the district court's finding as to the defendants' liability.