Opinion ID: 510037
Heading Depth: 2
Heading Rank: 2

Heading: Breach of Fiduciary Duty: Terminating the Brewery Fund

Text: 19 The Participants also base their claim that the Trustees breached their fiduciary duty on a theory grounded in provisions of ERISA and the Internal Revenue Code (I.R.C.), independent of the 1973 agreement and the circumstances of its execution. According to this theory, the 1976 partial termination of the Brewery Fund limits the benefits available to Brewery Fund beneficiaries to the assets in the Brewery Fund at that time. Therefore, the Participants contend, the Trustees are obliged to pay benefits to Brewery Fund beneficiaries only until Brewery Fund assets are exhausted. Moreover, the Participants argue, the Trustees have an affirmative duty to spend no more than the Brewery Fund's assets, and a concomitant duty, once those assets are exhausted, to terminate the Brewery Fund outright or to segregate it from the Teamsters Fund. The Participants conclude that they are entitled to relief because the Trustees have failed to perform these purported duties. 20 As an initial matter, the orders of the New York state courts place a significant obstacle in the Participants' path. We have just held that ERISA does not preempt those orders with respect to the merger agreement and its consequences. The Trustees are therefore subject to valid state decisions that compel them, in no uncertain terms, to merge the two funds into one and to pay benefits to Brewery Fund beneficiaries as they come due. The Participants cite no authority, and our research discloses none, to support the remarkable notion that fiduciary duty can require deliberate disobedience of a valid judicial order. On the contrary, it is more likely that obedience to such orders insulates a fiduciary from claims of breach of duty. See III A. Scott, The Law of Trusts Sec. 259, at 2217 (3d ed. 1967 & Supp.1985). 21 Even if the Participants could overcome the force of the state courts' judgments, the partial termination of the Brewery Fund does not translate into a fiduciary duty to act as they urge. Under the I.R.C., pension plans qualify for favorable tax treatment if they are structured as the Code dictates. See generally 26 U.S.C.A. Sec. 401 (West 1978 & Supp.1988). Among these structural criteria is a requirement that a pension plan must provide that participating employees' accrued rights become nonforfeitable, or vest, upon termination or partial termination of the plan. 26 U.S.C.A. Sec. 411(d)(3) (West 1978 & Supp.1988). The plan must also provide that in the event of full or partial termination, accrued rights vest to the extent funded. Id. The Participants contend that the 1976 partial termination of the Brewery Fund, as found in the 1985 IRS Determination Letter, see J.App. 48, and Technical Advice Memorandum, see id. at 44, means that the interests of brewery workers vested in 1976 only to the extent funded according to section 411(d)(3). The Participants conclude that the Trustees therefore have a fiduciary obligation to terminate the Brewery Fund or segregate it from the Teamsters Fund so that benefits are paid to beneficiaries of the former only to the extent it was funded in 1976. 22 This argument is without merit. A partial termination within the meaning of section 411(d)(3) is primarily a tax event. It may occur where a significant number of employees are excluded from a plan or where, as here, there is a significant reduction in employer contributions. See Treas.Reg. Sec. 1.401-6(b)(2) (1988); see also Weil v. Retirement Plan Administrative Committee for the Terson Co., 750 F.2d 10, 13 (2d Cir.1984). Section 411(d)(3) requires that tax qualified plans make certain provisions for vesting of accrued benefits in the event of a partial termination. ERISA requires the plan administrator to report a partial termination to the PBGC. See 29 U.S.C. Sec. 1343(a) (1982). Thus, a plan's treatment of partial termination has consequences for its tax status and partial termination is itself a reportable event under ERISA. But partial termination does not mean that the plan itself goes out of existence. ERISA makes absolutely clear that partial termination does not, by itself, constitute or require a termination of a plan. 29 U.S.C. Sec. 1343(b)(4) (1982) (emphasis added). See also Chait v. Bernstein, 835 F.2d 1017, 1020-21 (3d Cir.1988); United Steelworkers v. Harris & Sons Steel Co., 706 F.2d 1289, 1300 (3d Cir.1983). Rather, partial termination of a plan that contains the provisions required by section 411(d)(3) accelerates vesting of accrued pension benefits. Moreover, partial termination for tax purposes does not cause a corresponding portion of the plan to be spun off or terminated. See Harris & Sons Steel, 706 F.2d at 1300. 23 Because partial termination within the meaning of section 411(d)(3) does not alone result in a pension plan's partial extinction, then it naturally follows that the trustees of a plan are under no fiduciary obligation to extinguish a portion of the plan under such circumstances. Accordingly, we reject the Participants' argument that the Teamsters Fund Trustees have breached any fiduciary obligation in failing to terminate or segregate the Brewery Fund in response to the IRS' finding of partial termination. 24 Finally, the Participants contend that the Trustees have a fiduciary duty to stop paying benefits to Brewery Fund beneficiaries once the assets of the Brewery Fund are exhausted. This contention also rests on section 411(d)(3), under which a pension plan must provide that employees' accrued pension rights vest to the extent funded upon partial termination. The Participants conclude that this provision means that accrued rights vest only to the extent funded, and that it is therefore improper to pay benefits in excess of the assets in the partially terminated Brewery Fund. Cf. Weil, 750 F.2d at 13 (citing section 411(d)(3) and noting that parties claiming benefits under partially terminated fund must demonstrate funding of the benefits they seek). 25 The meaning of the term funded is far from clear, however. It is an actuarial term of art. As the IRS' 1985 Technical Advice Memorandum notes, a qualified plan must be funded, but 26 failure to fund at a particular level does not disqualify a plan. Minimum funding requirements for qualified plans are provided in [I.R.C.] section 412, not in the qualification provisions of the Code, and failure to meet those minimum funding requirements results in imposition of an excess tax on the employers under [I.R.C.] section 4971, not loss of plan qualification. (See Anthes v. Commissioner, 81 T.C. 1 (1983), [aff'd mem., 740 F.2d 953 (1st Cir.1984).] 27 J.App. 46 (emphasis added). It therefore appears that underfunding of a plan, without more, affects only the tax treatment of the plan and of contributions to it. 28 We need not delve further into the actuarial minutiae of pension plan funding and taxation, however, to resolve the question of fiduciary duty presented by this appeal. We are convinced that possible underfunding of the merged plan does not place the Trustees under a fiduciary obligation to cease payments to Brewery Fund beneficiaries. Indeed, by virtue of the orders of the New York courts, the Brewery Fund has been fully merged into the Teamsters Fund and the Trustees have a fiduciary relationship to the beneficiaries of the Brewery Fund as well as to the Participants. We are not persuaded that under these circumstances ERISA or the I.R.C. compel the Trustees to prefer one group of beneficiaries over the other.