Opinion ID: 163683
Heading Depth: 3
Heading Rank: 2

Heading: Breach of Contract and Breach Fiduciary Duties

Text: Messrs. Walker and Salazar subsequently moved the district court for summary judgment on its breach of contract and breach of fiduciary duty claims. The district court granted the motion. The court concluded the Board’s decision to apply the 1998 amendment to Messrs. Walker and Salazar, thereby reducing their pension benefits, was arbitrary and capricious; the decision was contrary to the terms of the pension plan and the Board’s fiduciary duties under the plan and common law. The Board argues on appeal the district court incorrectly granted summary judgment against it. We agree with the district court. “We review the district court’s grant of summary judgment on these claims de novo, applying the same legal standard used by the district court.” Simms v. 2 The Board also argues that because the district court concluded below its actions were “state actions” for purposes of Messrs. Walker and Salazar’s 42 U.S.C. § 1983 claim, it must be a “public entity” under the Colorado Governmental Immunity Act. The district court dismissed the § 1983 claim on summary judgment, however, and Messrs. Walker and Salazar do not appeal the court’s ruling. As the issue is not before us, we do not decide whether the Board’s conduct is “state action” for purposes of § 1983. We also do not decide whether the district court erred in concluding the Board can engage in “state action” under § 1983 but nevertheless fail to qualify as a “public entity” under the Colorado Governmental Immunity Act. -10- Oklahoma ex. rel. Dep’t of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir.), cert. denied, 528 U.S. 815 (1999). The plan in this case grants the Board discretion to “construe the Plan,” to “correct any defects or supply any omission or reconcile any inconsistency” in the plan, and to make “such rules, regulations, interpretations, decisions, and benefit computations as may be necessary” for the plan. The plan prohibits the Board, however, from passing an amendment that would “decrease the accrued benefits of any Participant.” Because the plan grants the Board with discretion, we should uphold the Board’s decision unless it was arbitrary and capricious or an abuse of discretion. 3 See Unisys Corp. v. Damon (In re Estate of Damon), 915 P.2d 1301, 1308 (Colo. 1996); Hubbard v. Pueblo Firemen’s Pension Fund, 374 P.2d 492, 493 (Colo. 1962). “A pension plan is a unilateral contract that creates a vested right in those employees who accept the offer it contains” by complying with the conditions imposed by the plan. Pratt v. Petroleum Prod. Mgmt., Inc. Employee Sav. Plan & Trust, 920 F.2d 651, 661 (10th Cir. 1990) (quotation marks and citation omitted). 3 The Board believes the district court “either misapplied the arbitrary and capricious standard of review or actually applied a de novo standard of review.” We disagree. The district court expressly stated it was applying an “arbitrary and capricious” standard of review, and we conclude it did not misapply this standard. -11- See also Police Pension and Relief Bd. v. McPhail, 338 P.2d 694, 700-02 (Colo. 1959); McInerney v. Public Employees’ Ret. Ass’n, 976 P.2d 348, 352 (Colo. Ct. App. 1998). The trustee of a pension plan must determine an employee’s benefits according to the plan in effect at his or her retirement. See Pratt, 920 F.2d at 661; Boog v. Bradley, Campbell, Carney & Madsen, P.C. Defined Benefit Pension Plan & Trust, 949 P.2d 96, 97 (Colo. Ct. App. 1997); Baker v. Sheet Metal Workers Local Union No. 9 Pension Trust Fund, 669 P.2d 138, 140 (Colo. Ct. App. 1983). In addition, the trustee of a pension plan has a fiduciary duty, arising from the common law of trusts, to administer the plan in accordance with the terms of the plan. 4 See Sinai Hosp. v. Nat’l Benefit Fund, 697 F.2d 562, 566 (4th Cir. 1982); see also United Mine Workers v. Robinson, 455 U.S. 562, 573-74 (1982); Restatement (Second) of Trusts § 164 (1959). Once an employee retires, a trustee may not adopt an amendment that impairs an employee’s vested rights under the plan: it is arbitrary and capricious, a breach of contract, and a breach of its fiduciary duties. See Police Pension & Relief Bd. v. Bills, 366 P.2d 581, 58385 (Colo. 1961); McPhail, 338 P.2d at 700-02; Boog, 949 P.2d at 98. See also United Mine Workers, 455 U.S. at 573-74; Pratt, 920 F.2d at 661; Sinai Hospital, 697 F.2d at 566. 4 The plan in this case also imposes on the Board a fiduciary duty to discharge its responsibilities “in accordance with the documents and instruments governing the Plan.” -12- Under these principles, the Board cannot adopt an amendment that impairs Messrs. Walker and Salazar’s vested pension benefits. It is obligated to provide pension benefits to Messrs. Walker and Salazar according to the plan in effect at the time of their respective retirements. It did not do so. We therefore conclude, like the district court, the Board acted arbitrarily and capriciously and breached its contract and fiduciary duties by applying the 1998 amendment to Messrs. Walker and Salazar. See Baker, 669 P.2d at 140 (“The trustees of a pension plan act arbitrarily and capriciously when they act so as to contravene the express language of the plan they are charged with administering.”). The Board seeks to justify its conduct by arguing it adopted the 1991 amendment in error. It argues the definition of “final average earnings” in the 1991 amendment was inconsistent with other provisions of the plan and the plan’s purpose. According to the Board, it corrected this inconsistency by adopting the 1998 amendment and applying it to Messrs. Walker and Salazar. We reject the Board’s argument. The Board did not adopt the 1991 amendment in error. The Board adopted the 1991 amendment to facilitate, and to avoid discouraging, the transfer of employees between covered Union positions and non-covered management positions. The Board was concerned some employees -13- did not want to make such transfers in fear they would be “disadvantaged” in their retirement plan. The Board resolved this concern in the 1991 amendment by defining the term “final average earnings” to include an employee’s highest sixty months of earnings in either covered or non-covered positions. The Board believes the definition of “final average earnings” in the 1991 amendment is inconsistent with the language of section 3.04 of the plan. We disagree. The plan requires plan participants to have at least ten years of “Credited Service,” i.e., ten years of continuous employment, to receive a regular retirement benefit. As the number of years of “Credited Service” increases, so does the amount of the regular retirement benefit (based on a percentage of final average earnings). Section 3.04 of the plan clarifies an employee’s non-covered employment “shall be counted as Continuous Employment for purposes of Vesting and participation, but not for determining the amount of Credited Service for benefit accrual purposes.” This section confirms an employee who transfers to non-covered employment will retain his Credited Service “to the date of such transfer.” Essentially, section 3.04 addresses the purposes for which the Board will treat non-covered employment as continuous employment; it does not address whether the Board should include non-covered employment in the final average earnings calculation. As a result, we see nothing in section 3.04 that is -14- inconsistent with the definition of “final average earnings” in the 1991 amendment. The Board argues the 1991 amendment of “final average earnings” is also inconsistent with the definition of “Earnings” in the plan. Again, we fail to see the inconsistency. The plan defines “Earnings” as the “total non-deferred cash compensation paid [to an employee] in any Plan Year.” The amount of an employee’s “Earnings” is used to determine the amount (based on a percentage of “Earnings”) an employee must contribute to the trust that funds the plan. An employee’s “final average earnings,” on the other hand, is used to determine the amount of the employee’s actual retirement benefit. Since these two terms deal with different issues, it was not inconsistent for the Board to define one differently from the other. The Board briefly mentions the definition of “final average earnings” in the 1991 amendment is also “inconsistent with the underlying purpose of the Plan.” It argues, without support, the purpose of the plan is “to provide retirement benefits to union member employees for work performed while those employees are covered by collective bargaining agreements between [the District] and the Union.” Even assuming this is the plan’s purpose, we do not believe it -15- inconsistent with that purpose to include the amount earned in non-covered employment as part of the benefit calculation, especially when the plan also uses (even under the 1998 amendment) periods of non-covered employment to determine “Vesting and participation.” The Board’s attempt to justify its conduct by questioning the validity of the 1991 amendment fails. The 1991 amendment was a reasonable and good faith interpretation of the plan. 5 As the 1991 amendment was in effect at the time of their retirements, Messrs. Walker and Salazar each have a vested right to receive benefits in accordance with its definition of “final average earnings.” The Board cannot act to impair or eliminate these vested rights; the Board’s attempt to do so is arbitrary and capricious, a breach of contract, and a breach of its fiduciary duties under the plan and the common law of trusts. The Board argues in the alternative it cannot be liable for breaching its fiduciary duties because it acted in good faith and relied on the advice of counsel. 5 A portion of the district court’s decision suggests the definition of “final average earnings” in the 1998 amendment is an unreasonable interpretation of the plan. It is unnecessary for us to reach this question. Even if the definition in the 1998 amendment is a more reasonable interpretation of the plan than the one in the 1991 amendment, the Board may not apply this new definition to Messrs. Walker and Salazar to reduce their vested pension benefits. -16- We disagree. Good faith and reliance on the advice of counsel are not defenses where, as here, a trustee believes in error the plan authorized its conduct. See Morgan v. Indep. Drivers Ass’n Pension Plan, 975 F.2d 1467, 1470 (10th Cir. 1992) (citing Restatement (Second) of Trusts § 201 cmt. b); Franzen v. Norwest Bank Colorado (In re Trust of Franzen), 955 P.2d 1018, 1022 (Colo. 1998) (noting “good faith reliance on the advice of counsel is not a defense to liability for a breach of duty”). Under Colorado law and the express language of the plan in this case, the Board is not authorized to pass an amendment that impairs a vested pension benefit. 6 See Pratt, 920 F.2d at 661; Bills, 366 P.2d at 583-85; McPhail, 338 P.2d at 700-02; Boog, 949 P.2d at 97-98. In any event, as discussed below, we conclude the Board did not act in good faith reliance on the advice of counsel in deciding the 1991 amendment was an error and in applying the 1998 amendment to Messrs. Walker and Salazar. In sum, we conclude the district court properly granted Messrs. Walker and Salazar’s motion for summary judgment on their claims for breach of contract and breach of fiduciary duties under the plan and the common law of trusts. 6 As discussed above, the plan authorizes the Board to amend the plan “at any time” and to “reconcile any inconsistency,” but it expressly prohibits the Board from passing an amendment that would “decrease the accrued benefit of any Participant.” -17-