Opinion ID: 679507
Heading Depth: 2
Heading Rank: 2

Heading: Entitlement to Surplus

Text: 15 Plaintiffs assert that they are entitled to a pro rata share of the surplus assets in the A & B portion of the Gulf Plan. They argue that ERISA prohibits reversion of any plan assets unless the plan language contains an explicit reversion provision. Plaintiffs rely upon ERISA section 403(c)(1), a part of section 403 which is entitled Establishment of Trust. Section 403(c)(1) directs that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. 29 U.S.C. Sec. 1103(c)(1). This provision, however, is subject to, inter alia, ERISA section 4044(d)(1), which specifically addresses allocation of surplus assets upon the final termination of a plan. Section 4044(d)(1) provides: 16 (1) Subject to paragraph (3) [addressing distributions of plans containing employee contributions], any residual assets of a single-employer plan may be distributed to the employer if-- 17 (A) all liabilities of the plan to participants and their beneficiaries have been satisfied, 18 (B) the distribution does not contravene any provision of law, and 19 (C) the plan provides for such a distribution in these circumstances. 29 U.S.C. Sec. 1344(d)(1) (emphasis added). 12 20 In contrast, section 4044(d)(3)(A) provides that [b]efore any distribution from a plan pursuant to paragraph (1) [above quoted], if any assets of the plan attributable to employee contributions remain after satisfaction of all liabilities ... such remaining assets shall be equitably distributed to the participants who made such contributions or their beneficiaries.... (emphasis added). 21 Plaintiffs also seek support for their claim in the common law of trusts. Their premise for this argument is that, because pension benefits are a source of additional compensation for employees, the pension trust is not a gratuitous trust. Ball v. Victor Adding Machine Co., 236 F.2d 170, 173 (5th Cir.1956). Indeed, under common law, where surplus assets remained at termination of a trust established for consideration, a resulting trust of the surplus arose in favor of the person furnishing the consideration. RESTATEMENT (SECOND) OF TRUSTS Sec. 434 (1959). However, although plaintiffs have rendered consideration to Gulf in the form of their services, this is not the situation envisioned by section 434. A trust established for consideration, in the context of that section, is one in which the owner of the property transfers it upon a trust to certain beneficiaries and receives consideration for the transfer from a third party, not from the beneficiaries themselves. 22 Further, while specified pension benefits in an employer funded defined benefit plan may be viewed as compensation for services rendered, an employer is not required by law to provide such benefits and if it undertakes to do so it is not required to do more than pay, or provide for payment of, those particular benefits. See Malia v. General Electric Co., 23 F.3d 828, 832 (3d Cir.1994) ( 'A defined benefit plan gives current and former employees property interests in their pension benefits but not in the assets held by the trust.' ). An entirely employer funded defined benefit plan pension trust is therefore more akin to a gratuitous trust so far as concerns surplus assets, as to which ERISA so markedly distinguishes between those attributable to employee contributions and those attributable to employer contributions (thus suggesting that employer contributions are not a form of recontributed wages for such purpose). Where a gratuitous trust is fully performed without exhausting the trust estate, a resulting trust of the surplus is presumed to arise in favor of the settlor. RESTATEMENT (SECOND) OF TRUSTS Sec. 430. This principle has been looked to in holding an employer entitled to surplus assets on termination of an employer funded defined benefit pension plan. See Wilson v. Bluefield Supply Co., 819 F.2d 457, 464 (4th Cir.1987) ( 'Surplus' is the term used in the common law of trusts to describe any remaining assets in a trust after its purpose has been fulfilled. Under such circumstances, a 'resulting trust' for the benefit of the creator of the original trust arises by operation of law, unless he manifested a contrary intent) (citing RESTATEMENT (SECOND) OF TRUSTS Sec. 430); Washington-Baltimore Newspaper Guild v. Washington Star Co., 555 F.Supp. 257, 260 (D.D.C.1983), aff'd mem., 729 F.2d 863 (D.C.Cir.1984) (the common law of trusts provides that an employer can retain such a surplus). 23 Plaintiffs claim that the language of the A & B Plan did not contain an explicit reversion provision as they assert is required by section 4044(d)(1), 29 U.S.C. Sec. 1344(d)(1). They rely on Albedyll v. Wisconsin Porcelain Co. Revised Retirement Plan, 947 F.2d 246, 256 (7th Cir.1991) (unless the plan specifically provides for reversion to the employer, surplus assets go to beneficiaries and participants). However, we note that section 4044(d)(1) merely requires that a plan provide[ ] for distribution of surplus assets to an employer, it does not say that the provision must be specific, explicit or express. In any event, Albedyll is a total termination case, 13 and section 4044(d)(1) does not address a partial termination. 14 Internal Revenue Code section 401(a)(2) allows employer reversion only on complete termination. 26 U.S.C. Sec. 401(a)(2) (only after satisfaction of all liabilities). See also 26 C.F.R. Sec. 1.401-2(b)(1). Internal Revenue Code section 411(d)(3) requires that a plan, in order to be qualified, provide that upon its termination or partial termination ... the rights of all affected employees to benefits accrued to the date of such termination, [or] partial termination ... to the extent funded as of such date, or the amounts credited to the employees' accounts, are nonforfeitable. As previously noted, all participants in the A & B Plan who were terminated from Gulf during the March 1984-July 1986 period, and all former Gulf employees employed by Chevron on July 1, 1986, have been fully vested in their accrued A & B Plan benefits. Nothing in ERISA or the Internal Revenue Code mandates a distribution of any surplus assets on a partial termination or requires any particular provision in a plan in order to avoid such a result. See, e.g., Chait v. Bernstein, 835 F.2d 1017, 1021 (3d Cir.1987) (in a partial termination Sec. 411(d)(3) should not be extended to apply to surplus assets ... in a defined benefit plan); Van Orman v. American Insurance Co., 680 F.2d 301, 313 (3d Cir.1982) (only rights to surplus are at complete termination under Sec. 4044); Walsh v. Great Atlantic & Pacific Tea Co. Inc., 96 F.R.D. 632, 652 (D.N.J.1983) (partial termination[ ] ... would only result in those benefits defined in the 'Benefits' portion of the plan becoming non-forfeitable.... The persons affected by the partial termination would not become entitled then and there to a pro rata share of any excess assets. As long as the remainder of the plan remains ongoing, 'excess assets' is a meaningless concept, since the amount of any surplus can only be calculated after a complete termination of the plan), aff'd, 726 F.2d 956 (3d Cir.1983). Nor can we construe benefits accrued under Sec. 411(d)(3) to encompass a right, not specified in the plan itself, to a share of surplus assets in a defined benefit employer funded plan. Treasury Regulation 1.411(a)-7(a) provides that in the case of a defined benefit plan accrued benefit for purposes of Sec. 411 generally refers only to pension or retirement benefits and does not include ancillary benefits not directly related to retirement benefits. 26 C.F.R. 1.411(a)-7(a). 15 This conclusion likewise follows from Malia, where the Court held that benefits under Sec. 1344 does not include a right to residual assets. Id. 23 F.3d at 830-831. And, Malia cited with approval the district court's opinion in the present case. Malia, 23 F.3d at 832. Further, in Mead Corp. v. Tilley, 490 U.S. 714, 722-23, 109 S.Ct. 2156, 2162, 104 L.Ed.2d 796 (1989), the Court held that the comparable section 4044(a) in no way indicates an intent to confer a right upon plan participants to recover unaccrued benefits and that all other benefits under the plan as used in section 4044(a)(6) can refer only to the allocation of benefits provided by the terms of the terminated plan. Finally, to construe benefits accrued in section 411(d)(3) as including a share in surplus assets would necessarily preclude an employer from ever reserving the right to receive any residual assets under Sec. 4044(d)(1). 24 Consequently, we conclude that plaintiffs' rights to a pro rata share of residual or surplus assets on partial termination must rest on some provision of the plan itself, and not merely on section 4044(d)(1) or section 411(d)(3). We likewise conclude that unless the plan itself provided for such rights or precluded amendment providing for reversion of surplus to the employer on complete termination, then the partial termination did not of itself prevent such a reversionary amendment thereafter. See Chait, 835 F.2d at 1022 (we find no authority that holds that a partial termination ... precludes further plan amendments which do not interfere with the employees' anticipated and calculated rights under a defined benefit plan). It is settled that a plan amendment may validly provide for reversion of surplus assets to the employer on final termination of an employer funded defined benefit pension plan. See Outzen v. FDIC, 948 F.2d 1184 (10 Cir.1991); Wilson, 819 F.2d at 465; Chait. Accordingly, we turn now to the Plan language.
25 Plaintiffs base their argument on the language of section 10A-2 of the Plan, which governs the distribution of assets on termination of the Plan, viz: 26 Distribution of assets. Upon termination of the Plan the rights of members to the benefits accrued under the Plan to the date of such termination, to the extent then funded, shall be nonforfeitable. All of the assets held in trust, after provision for any properly chargeable expenses, shall be used solely for the members, pensioners, spouses, beneficiaries and joint pensioners until all liabilities under the Plan shall have been satisfied in full. The Benefits Committee shall determine on the basis of an actuarial valuation the share of the funds of the Plan allocable to each member, pensioner, spouse, and joint pensioner in the following order: 27 [there follows a six-tiered schedule of distribution directives] 28 .... 29 In the event of a partial termination of the Plan the provisions of this Section 10A-2 shall be applicable to the members affected by such partial termination. 16 30 In no event shall any part of the Plan assets held in trust or any income on it, prior to the satisfaction of all liabilities under the Plan, revert to the Company or be used other than for the members, pensioners, spouses, beneficiaries and joint pensioners. (emphasis added) 31 The six-tiered schedule of distribution set forth in section 10A-2 as above indicated does not contain any direction for distribution or allocation of surplus assets. Its allocations are only up to the amount of accrued benefits. 32 Section One of the 1944 Agreement of Trust of the A & B Plan echoes the language of section 10A.2:The Corporation hereby establishes with the Trustee a trust, effective as of January 1, 1944, which shall comprise such payments as shall from time to time be made to the Trustee by or on behalf of the Corporation for the purposes of the Plan.... Any and all contributions made by the Corporation shall be irrevocable and no part of the corpus of the Fund nor any income therefrom shall at any time prior to the satisfaction of all liabilities under the Plan revert to the Corporation or be used for or diverted to purposes other than for the exclusive benefit of participants, retired participants or their beneficiaries under the Plan. (emphasis added) 33 In particular, plaintiffs rely on the language providing that Gulf's contributions to the Plan were to be irrevocable and that the funds were to be used solely for or for the exclusive benefit of the plan participants. Defendants contend that these phrases, and the rights created thereby, are qualified by the phrases until all liabilities under the Plan shall have been satisfied in full and prior to the satisfaction of all liabilities under the Plan. This language, defendants argue, implies that reversion to the employer is contemplated once all liabilities are satisfied. 17
34 Although section 10A.2 does declare that Plan assets are not to revert to the employer, that language is qualified by the phrase prior to the satisfaction of all liabilities under the Plan. Plaintiffs maintain that this phrase creates, at best, an implied reversion; they contend that ERISA section 4044(d)(1) requires an explicit reversion provision, citing Albedyll. However, as noted, section 4044(d)(1) does not apply to partial terminations, and Albedyll was a final, not a partial, termination case. Further, the Albedyll plan contained a section which the court interpreted to provide for pro rata distribution of plan assets to the participants upon termination. In addition, an early outline of the plan clearly indicated that the company could recover none of the contributed assets. 35 Other cases, dealing with plans having language more similar to that now before us, but without an express employer reversion provision, have allowed an employer to recapture surplus assets upon termination of the plan. See Outzen v. Fed. Deposit Ins. Corp. ex rel. State Examiner of Banks, 948 F.2d 1184, 1186-87 (10th Cir.1991) (where plan provided funds could not be used other than for the exclusive benefit of participant prior to the satisfaction of all liabilities, court held later amendment adding express reversion provision was valid). 36 Plaintiffs mount a second attack on the prior to phrase of section 10A.2, claiming that it is mere boilerplate language required by tax law. The phrase in question was part of section 165(2) of the Revenue Act of 1938, and became section 165(2) of the Internal Revenue Code of 1939. 53 Stat. Sec. 165(2) (1939). It has been carried over into the present Internal Revenue Code. 18 Plaintiffs contend that Gulf's use of the language in the A & B Plan was mere repetition of the 1938 statute. 37 In response, Chevron argues that the legislative history of section 165 supports reading the A & B Plan to allow employer reversion. The prior to phrase was added to the Revenue Act of 1938 to allow employers to recapture surplus assets without losing their exempt status under the tax laws. 19 S. REP. No. 1567, 75th Cong., 3d Sess. 24 (1938), reproduced in 1939-1 C.B. 779, 796. Thus, the prior to language of section 165 of the 1938 Revenue Act did not require a rote phrase, without meaning or implication. Instead, it offered employers the ability, if desired, to establish a qualified pension plan in which the employer, upon final termination, received the surplus assets. 38 Based on the foregoing, we hold that in the context of section 10A-2 of the Plan, with its distribution allocation provisions not reaching surplus assets, the phrases until all liabilities under the Plan shall have been satisfied in full and prior to the satisfaction of all liabilities under the Plan at least implied the right to reversion in Gulf. We consider now whether any other language in the Plan limited or prohibited that right.
39 Plaintiffs assert that the prior to language discussed above is inconsistent with the provision that Gulf's contributions to the A & B Plan be irrevocable. The Plan has contained the irrevocable language since its inception in 1944. 20 Chevron claims that the drafters of the Plan were merely parroting references in the tax law as it existed in 1944 when the Plan was created. While the 1939 Internal Revenue Code did not specifically use the term irrevocable, it decreed that a trust forming part of a pension plan would not be taxable under the Code 40 if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be ... used for, or diverted to, purposes other than for the exclusive benefit of his employees. Internal Revenue Code, 53 Stat. Sec. 165(2) (1939). 41 The essence of this Code provision is that an employer may not revoke, or use for his own purposes, any part of corpus or income of the pension trust. Our reading of this provision, to require an employer's contributions to be irrevocable, is supported by the immediately succeeding section of the 1939 Code, which governs Revocable Trusts. 21 Thus, Gulf's use of the term irrevocable in the A & B Plan is not extraordinary, as plaintiffs contend, but merely a rephrasing of the then-current tax code provision governing pension trusts. 42 Furthermore, we agree with Chevron that revocation and reversion are not synonymous terms. 43 A power to revest or revoke may in economic fact be the equivalent of a reversion. But at least in the law of estates they are by no means synonymous. For, generally speaking, the power to revest or to revoke an existing estate is discretionary with the donor; a reversion is the residue left in the grantor on determination of a particular estate. Helvering v. Wood, 309 U.S. 344, 347, 60 S.Ct. 551, 553, 84 L.Ed. 796 (1940). 44 The full termination of the A & B Plan and the fulfillment of its purpose by payment of accrued benefits to participants do not constitute a revocation of the Plan or of any of Gulf's contributions to the Plan. When all liabilities are satisfied, the Plan may terminate, and surplus assets revert to Chevron, without causing a revocation of the Plan. 45 Because defendants, through the merger, have not caused a revocation of the A & B Plan, the irrevocable provision does not determine whether the Plan allowed employer reversion of surplus assets.
46 Plaintiffs claim that the A & B Plan could not provide for employer reversion of surplus assets because Gulf's contributions to the plan were to be used for the exclusive benefit of the plan participants and their beneficiaries. Their argument fails to recognize, however, that the exclusive benefit requirements of tax law and ERISA are counterbalanced by provisions allowing employer recapture of surplus assets. 47 Both tax law and ERISA require the funds of a pension plan be used for the exclusive benefit of the plan participants. 26 U.S.C. Sec. 401(a)(2); 29 U.S.C. Sec. 1103(c)(1) (for the exclusive purposes of providing benefits ... and defraying ... expenses). Plaintiffs ignore the fact that both ERISA and the Internal Revenue Code also contemplate employer reversion. The ERISA exclusive benefit provision is expressly made subject to the exception that when the plan finally terminates, surplus assets may revert to the employer if three conditions are then met, including that the plan provide for such a distribution. 29 U.S.C. Sec. 1344(d)(1). The exclusive benefit provision of Section 165 of the 1939 Revenue Code, quoted above, the law in effect in 1944 when the A & B Plan was established, provided that a plan would be tax exempt if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be used for purposes other than for the exclusive benefit of the participants or their beneficiaries. 22 Internal Revenue Code, 53 Stat. Sec. 165(2) (1939). The Treasury Regulations originally promulgated for section 165(a), which continue in effect without presently relevant substantive change, make clear that, notwithstanding the exclusive benefit phrase, the prior to language of that section permits the employer to recover surplus assets upon termination of the plan if those assets stem from actuarial error. See notes 19 & 22, supra. 48 Because both the Tax Code and ERISA require exclusive benefit language and contemplate that an employer may recover surplus assets after all plan liabilities are satisfied, the mere existence of the exclusive benefit provision in the A & B Plan cannot prohibit reversion to an employer. 49 Courts construing pension plans containing this exclusive benefit language follow the rule that the phrase does not prohibit reversion of surplus assets to the employer upon termination of the plan. See, e.g., Chait v. Bernstein, 835 F.2d 1017, 1023 (3rd Cir.1987) (Thus, the text of ERISA itself demonstrates that the 'exclusive benefit' language of ERISA Sec. 403 is not at odds with reversion of the surplus of a single employer plan under Sec. 4044(d)(1)(C)); Washington-Baltimore Newspaper Guild Local 35 v. Washington Star Co., 555 F.Supp. 257, 261 (D.D.C.1983) (section 4044(d)(1) of [ERISA] provides that an employer may retain a plan's surplus without running afoul of the exclusive benefit rule), aff'd mem., 729 F.2d 863 (D.C.Cir.1984); In re C.D. Moyer Co. Trust Fund, 441 F.Supp. 1128, 1132 (E.D.Pa.1977), aff'd without published opinion, 582 F.2d 1273 (3d Cir.1978). 50 The use of the exclusive benefit language in the A & B Plan does not preclude reversion of surplus assets to Gulf. 51
52 Plaintiffs extend their argument that the A & B Plan did not allow reversion of surplus assets to the employer, claiming that the language of the Plan also prohibited amendments creating a right of reversion in the employer. 23 53 The amendment provision of the A & B Plan stated as follows: 54 The Board of Directors reserves the right at any time and from time to time to modify or to amend, in whole or in part, any or all of the provisions of the Plan, provided that: 55 (a) No modification or amendment may be made which will deprive any person of any benefit under the Plan which has accrued on or prior to the time of such modification or amendment, and 56 (b) No such modification or amendment shall make it possible for any part of the Trust Fund to be used for, or diverted to, purposes other than for the exclusive benefit of participants and retired participants, or their beneficiaries under the Plan. (Emphasis added.) 57 Other courts have held that exclusive benefit language in a plan does not, by itself, prevent an employer from amending a plan to allow reversion of surplus assets. In Chait, although the plan contained a provision similar to that in the Gulf Plan, the Third Circuit determined that the language of the plan did not prohibit a reversionary amendment. Chait, 835 F.2d at 1022-26. 24 The court held that a vested employee who has fully received his vested benefits cannot rely on the 'exclusive benefit' language, standing alone, to prevent an amendment reverting surplus plan assets to the employer. Id. at 1018. See also Outzen v. Federal Deposit Ins. Corp., 948 F.2d at 1186, 1187 (allowing reversion amendment despite exclusive benefit language, stating [t]he cases which allow reversion as well as those which preclude it all dictate that strong, express prohibitory language is necessary to block employer recapture of surplus pension funds in a defined benefit plan); Wilson v. Bluefield Supply Co., 819 F.2d at 461-465 (allowing reversion of surplus assets despite exclusive benefit language in plan); Washington-Baltimore Newspaper Guild Local 35, 555 F.Supp. at 260-262; In re C.D. Moyer Co. Trust Fund, 441 F.Supp. at 1131-32. 58 Thus, a defined benefit plan must generally contain language other than the exclusive benefit phrase in order to preclude an amendment providing for employer reversion. For example, in Bryant v. Int'l Fruit Products Co., Inc., 793 F.2d 118, 123 (6th Cir.), cert. denied, 479 U.S. 986, 107 S.Ct. 576, 93 L.Ed.2d 579 (1986), the Sixth Circuit held that an amendment to a defined benefit plan purporting to allow employer reversion was ineffective in light of strong plan language expressly prohibiting such an amendment. The plan contained, in addition to the standard exclusive benefit phrase limiting amendment, the phrase [i]n no event and under no circumstances shall any contributions to this Trust by the Employer, nor any of the Trust Estate or the income therefrom, revert to or be repaid to the Employer. Bryant, 793 F.2d at 120 (quoting agreement) (emphasis added). The court found this language to be a unique, unequivocal prohibition against employer recapture of any contributions to the plan. Id. at 123. Language in the handbook distributed to plan participants supported the Bryant court's conclusion: 59 Funds paid into the trust can never be refunded to the Company and are for the exclusive benefit of the employees under the Trust.... It is definitely provided that the funds paid into the Trust are for your exclusive benefit and can never, under any circumstances, revert to the Company. Id. (quoting handbook) (emphasis added). 60 We conclude that the language of the A & B Plan prohibiting amendments other than for the exclusive benefit of the participants does not, by itself, preclude an amendment expressly allowing reversion to the employer. Furthermore, as discussed above, the language of the Plan impliedly allowed such a reversion. 25 61 The policies underlying ERISA support our conclusion. 62 Employers will continue to fund their plans under ERISA guidelines, but will not be penalized for overfunding in 'an abundance of caution' or as a result of a miscalculation on the part of an actuary. Thus, employees will continue to be protected to the extent of their specific benefits, but will not receive any windfalls due to the employer's mistake in predicting the amount necessary to keep the Plan on a sound financial basis. In re C.D. Moyer Co. Trust Fund, 441 F.Supp. at 1132-33. 26 63 Plaintiffs have received their expected benefits. An award of surplus assets, in light of Plan provisions inferentially and now expressly allowing employer reversion, would result in a windfall to the plaintiffs and would encourage defendants to fund the Chevron Plan more cautiously, to the potential detriment of present and future participants and their beneficiaries. 64