Opinion ID: 516903
Heading Depth: 1
Heading Rank: 3

Heading: the effect of erisa

Text: 31 We turn now to the plaintiffs' argument that if the Plan be construed to permit valuation on a minority basis, it violates ERISA. The parties agree that the Plan is subject to ERISA, which preempts state law governing employee benefit plans (with limited exceptions not relevant here). See ERISA Sec. 514, 29 U.S.C. Sec. 1144 (1982); Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 54, 107 S.Ct. 1549, 1556, 95 L.Ed.2d 39 (1987) (ERISA's civil enforcement remedies in Sec. 502(a), 29 U.S.C. Sec. 1132, are exclusive). Thus ERISA frames the duties that the Plan's management owned participants. ERISA creates a cause of action for benefits due, whether under the terms of the Plan itself or because some term of the Plan conflicts with ERISA. Pilot Life, supra. 32 While trust documents cannot excuse trustees from ERISA duties, Central States, SE & SW Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 568, 105 S.Ct. 2833, 2839, 86 L.Ed.2d 447 (1985), rights under ERISA are largely defined by the plan document, Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 511, 101 S.Ct. 1895, 1900, 68 L.Ed.2d 402 (1981). Plaintiffs claim to find in ERISA, however, three sources of a duty to use a majority valuation, strong enough in their view to overcome the terms of the U.S. News Plan: (1) an implied incorporation of IRS valuation techniques, which in their view compelled valuation on a majority basis; (2) ERISA's mandate that a plan fiduciary discharge his duties ... solely in the interest of the participants and beneficiaries, ERISA Sec. 404(a)(1), 29 U.S.C. Sec. 1104(a)(1); and (3) ERISA's requirement that it file an annual report containing a statement of its assets and liabilities valued at their current value, ERISA Sec. 103(b), 29 U.S.C. Sec. 1023(b)(3)(A) (1982). We work through them in that order. 33 Internal Revenue Service rules. Although ERISA at no point relevant here incorporates the Internal Revenue Code or IRS regulations, courts have on occasion found the regulations of useful guidance in addressing problems under ERISA that parallel issues under the Code. See, e.g., Tulley v. Ethyl Corp., 861 F.2d 120, 125 (5th Cir.1988); Rose v. Long Island R.R. Pension Plan, 828 F.2d 910, 917-18 (2nd Cir.1987) (adopting IRS definitions of agency and instrumentality into ERISA); see also Alessi, 451 U.S. at 517-21, 101 S.Ct. at 1903-05 (interpreting ERISA provision against discrimination in pension plans as endorsing view taken in Treasury regulations and IRS rulings applying Internal Revenue Code's parallel non-discrimination requirement for plans to qualify for favorable tax treatment). We will assume potential relevance here and consider the possible import of Rev.Rul. 59-60. 34 The ruling unquestionably suggests that control may justify higher valuations for a specific block of shares: 35 The size of the block of stock itself is a relevant factor to be considered. Although it is true that a minority interest in an unlisted corporation's stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock. 36 Rev.Rul. 59-60 at Sec. 4.02(g), 1959-1 Cum.Bul. 237, 238-39. 37 In the estate tax context for which Rev.Rul. 59-60 was drafted, the courts have taken the view that valuation of a decedent's control block of shares should include a control premium. This applies even though the will itself may split the control block among legatees. See Estate of Curry v. United States, 706 F.2d 1424, 1428 (7th Cir.1983) (applying control valuation to decedent's non-voting shares because of his ability to sell them as a block with voting shares). It thus represents a decision that for estate tax purposes control at the moment before death calls for imputation of a control premium even if death and the will or intestacy will destroy control. In that context, as Curry pointed out, any other rule would enable decedents to artificially reduce estate taxes by splitting interests in anticipation of the legatees' reassembling them. Id.; see also Citizens Bank & Trust Co. v. Commissioner of Internal Revenue, 839 F.2d 1249 (7th Cir.1988); Ahmanson Foundation v. United States, 674 F.2d 761, 767-69 (9th Cir.1981). Moreover, the estate tax is ordinarily conceived as falling on the decedent's passage of property, not upon the legatees' receipt. See, e.g., Ahmanson Foundation, 674 F.2d at 768. 38 Here the reigning conception is quite different. As we noted in our original consideration of Article Fifth (e) of the Articles of Incorporation, the architects of U.S. News's 1962 reorganization, which included the Plan, saw as a major objective the establishment and perpetuation of employee ownership. Foltz, 663 F.Supp. at 1500; see also U.S. News's Articles of Incorporation, Article Fifth at 7-12, III J.A. 916-21. A control premium is realized by sale of a controlling block of stock; the trial court found that the Plan fiduciaries believed that they were not going to make such a sale, and that finding is supported by ample evidence. So long as they expected to carry out the Plan's employee-ownership purpose, it seems clear that the context underlying valuation of the Plan's shares was diametrically opposed to that of the estate tax. 39 We pause to note some tension between this conclusion and some of the explanations for the very existence of control premiums. A leading analysis argues that bidders offer a premium for control because it will enable them to eliminate or reduce agency costs--the costs associated with the managers' failure to realize the maximum value of the firm's assets. See, e.g., Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J.Fin.Econ. 305, 308-10, 329, 351-52 (1976); see also Saul X. Levmore, A Primer on the Sale of Corporate Control, 65 Tex.L.Rev. 1061 (1987). There is some irony in allowing plan fiduciaries--who here overlap largely with corporate management--to deny retiring employees the benefit of firm assets that could have been realized by management's pursuing a course of conduct that was clearly available--and the availability of which induced the ultimate purchaser to pay a control premium for all the company's stock. 40 Ultimately, however, we are not persuaded that this view of control premiums undermines our conclusion. In the first place, the existence of a control premium should not be conceived as necessarily proving the incumbent managers delinquent: the winning bidder's readiness to offer a premium may stem from its possession of special assets or skills that are uniquely able to enhance the firm's value, and the costs of identifying the synergistic opportunity may have been lower for the winning bidder than for anyone else. Second, even if the control premium is due to incumbent management's lack of acumen, the law provides a remedy for extreme cases--albeit only extreme cases, as the business judgment rule allows the firm's managers great leeway. 41 Most important, however, is that where the controlling instruments contemplate employee ownership, all participants are on notice that maximization of the firm's pecuniary value is not to serve as an exclusive goal. The market for corporate control provides incumbent management a critical incentive to perform well: inadequate performance will induce outsiders to bid for control of the company and to oust them. See Edgar v. MITE Corp., 457 U.S. 624, 633, 102 S.Ct. 2629, 2636, 73 L.Ed.2d 269 (1982) (noting congressional finding that takeover bids ... serve a useful purpose in providing a check on entrenched but inefficient management); see also id. at 643-44, 102 S.Ct. at 2641-42 (recognizing that tender offer mechanism gives management incentive to perform well). To the extent that the investor-workers establish a preference for employee ownership, they blunt the operation of the market for corporate control and diminish the force of its incentive effects. 42 Accordingly, we see no reason why the courts' quite appropriate use of Rev.Rul. 59-60 for estate tax valuations should preclude a plan's use of minority valuation where the Plan document so provides and where the controlling instruments effect a clear preference for employee ownership. The Fifth Circuit has observed that plan fiduciaries do not breach their ERISA duties merely because they fail to follow Rev.Rul. 59-60 jot and tittle, Donovan v. Cunningham, 716 F.2d 1455, 1473 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984), and we think the point entirely apt here. 43 Thus we find no error in the district court's conclusion that, as applied to this Plan, Rev.Rul. 59-60 does not require a majority valuation. See 663 F.Supp. at 1525-29. 44 The fiduciaries' exclusive duty to provide benefits: The retirees rely heavily on ERISA Sec. 404(a)(1), 29 U.S.C. Sec. 1104(a)(1) (1982), which requires a plan fiduciary to: 45 discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-- 46 (A) for the exclusive purpose of: 47 (i) providing benefits to participants and their beneficiaries; and ... 48 (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; 49 .... 50 (D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA]. 51 29 U.S.C. Sec. 1104(a)(1) (1982) (emphasis added). 52 The retirees read the italicized phrase as meaning that the Plan fiduciaries had a duty to maximize pecuniary benefits; moreover, they believe that such a duty would invalidate Plan decisions that, effectively, favored later distributees over earlier ones such as themselves. Both steps of the argument fail. 53 Section 404 creates no exclusive duty of maximizing pecuniary benefits. Under ERISA the fiduciaries' duties are found largely in the terms of the plan itself. See Alessi, 451 U.S. at 511, 101 S.Ct. at 1900; see also Edwards v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d 52, 56-57 (3d Cir.1985). In using a minority basis for stock valuation, the fiduciaries here sought to pursue the Plan's goal of continued employee ownership. As we have already noted, the control premium is normally realized by sale, an event that would obviously thwart one of the Plan's purposes--perpetuation of employee ownership. Moreover, while obviously evaluation on the basis of a hypothetical sale could co-exist with employee ownership, it could create liquidity problems that would jeopardize that purpose. ERISA, far from manifesting any intention to discourage long-term employee ownership, specifically favors that pattern by exempting Employee Stock Ownership Plans from ERISA's 10 percent cap on plans' holdings of employer securities. See 29 U.S.C. Sec. 1107(b)(1) (1982) (exempting any eligible individual account plan, which is defined in id. Sec. 1107(d)(3) as including ESOPs). See also Donovan v. Cunningham, 716 F.2d 1455, 1465-67 (5th Cir.1983). While U.S. News's Plan was not an ESOP, see 663 F.Supp. at 1518 n. 33, 5 ERISA's evident approval of ESOPs precludes any claim that it forbids employee ownership as a legitimate plan objective. 54 Further, even if we supposed that Sec. 404 called for exclusive pursuit of pecuniary advantages for plan beneficiaries, the disputed valuation decisions are consistent with such an aim. The plaintiffs were not the only beneficiaries of the Plan. Plan wealth that was not distributed to them was available for distribution to other Plan beneficiaries. Indeed, the worst that can be said of the Plan is that it was administered to favor a rolling class of future beneficiaries over those present and past. Nothing in Sec. 404 requires that one set of beneficiaries be favored over another. See, e.g., Edwards, 757 F.2d at 56-57. 55 Plaintiffs would also infer from Sec. 404(a)(1)(B)'s requirement that plan fiduciaries exercise the care, skill, prudence and diligence of a prudent man that we owe their valuation decision no deference, since, they say, the fiduciary standard exacted is the highest known to law. In support of this view they cite Donovan v. Cunningham, 716 F.2d 1455 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984), and Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1982). In fact, however, courts have reviewed ERISA fiduciaries' decisions as to the allocation of benefits among beneficiaries by an arbitrary or capricious standard so long as the decisions involved no conflict of interest. See, e.g., Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134 (3d Cir.1987), cert. granted, --- U.S. ----, 108 S.Ct. 1288, 99 L.Ed.2d 498 (1988); Edwards, 757 F.2d at 56; Struble v. New Jersey Brewery Employees' Welfare Trust Fund, 732 F.2d 325, 333-34 (3d Cir.1984). 56 Plaintiffs appear to recognize that principle as governing application of the arbitrary or capricious standard, but argue that the fiduciaries were subject to a conflict because they sought to continue ownership of U.S. News by its employees. But that interest was not some outside concern; rather, by the terms of the Plan, it was was an interest that Plan beneficiaries shared, inseparable from their interests in the Plan itself. This contrasts sharply with Cunningham, where the plan fiduciaries (identical with the firm's board of directors) used plan assets to buy stock from one of their number (chairman of the board of directors and until the purchase the firm's sole shareholder), allegedly at inflated prices, and with Bierwirth, where the fiduciaries and firm insiders acted to defeat a tender offer for the firm's shares that, if successful, would have markedly increased the value of the plan's assets but have jeopardized their personal positions. It is also clearly distinct from the facts of Pilon v. Retirement Plan for Salaried Employees of Great Northern Nekoosa Corp., 861 F.2d 217 (9th Cir.1988), where the court, apparently assuming that more generous payments to a particular retiree might ultimately come from the corporate treasury, see id. at 219, noted that divided loyalty increased the likelihood that a decision would be found arbitrary and capricious, id. at 219. 57 In any event, as we regard the fiduciaries' reading of the Plan document as correct and as not countermanded by anything in ERISA, application of even the severest type of scrutiny would not lead us to overturn it. 58 Plaintiffs further invoke Maggard v. O'Connell, 671 F.2d 568, 571 (D.C.Cir.1982), for the proposition that to satisfy even the arbitrary or capricious test an ERISA trustee must have taken a hard look at salient problems and engaged in reasoned decisionmaking. We have some hesitation about a wholesale incorporation of administrative law doctrine into judicial review of fiduciary decisions, and note that the issue at stake in Maggard was a factual one--whether an applicant for benefits had worked in coal mines for the requisite number of years. In any event, while it is true here that the Plan fiduciaries here never recorded any deliberations and appear to have pursued the minority-basis valuation more on the basis of inertia than explicit decisionmaking, that is no basis for overturning a decision that is entirely consistent with the Plan document and with ERISA's substantive requirements. 59 ERISA's reporting requirements: Sec. 103(b) of ERISA requires all ERISA plans to publish an annual report containing a statement of the plan's assets and liabilities valued at their current value. 29 U.S.C. Sec. 1023(b)(3)(A) (1982). Section 3(26) of ERISA in turn defines current value as 60 fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary ... pursuant to the terms of the plan and in accordance with the regulations of the Secretary, assuming an orderly liquidation at the time of such determination. 61 29 U.S.C. Sec. 1002(26) (1982). The Plan, of course, valued itself on a minority basis, while the liquidation value, arguably, would be computed on a majority basis. 62 Since the terms of the Plan by no means contemplated a liquidation, Sec. 103(b)'s directive to assum[e] an orderly liquidation is to a degree inconsistent with the requirement of valuation pursuant to the terms of the plan. Moreover, as Sec. 103(b) is a reporting requirement, we are far from clear that it applies at all to benefit calculations. In any event, assuming the defendants' benefit calculation method deviates from that of Sec. 103(b), we think such a deviation permissible so long as the fiduciaries have not concealed from the beneficiaries the critical facts that expose the possible deviation. Here there was no concealment. The evidence introduced below demonstrates beyond doubt that all employees were aware, or at the very least were on inquiry notice, as to the great gap between the book value of U.S. News's West End real estate and its true value. To take just one example, this disparity was often discussed--though not always at great length--at the annual employee lunch. Written transcripts of these discussions between employees and management were available on request to all employees who were unable to attend. 663 F.Supp. at 1510. As there was no concealment, and as the Plan in good faith reported one measure of its fair value, we were unable to find an ERISA violation in any possible deviation of the Plan's benefit calculation from the methods appropriate to Sec. 103's reporting requirements. 63