Court Opinion

ID: 770563
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:36:23+00
Date Added: 2024-06-11T17:55:51.601252
License: Public Domain

227 F.3d 971 (7th Cir. 2000)
ROBERT J. MATZ, individually and  on behalf of all others similarly situated, Plaintiff-Appellee,v.HOUSEHOLD INTERNATIONAL TAX  REDUCTION INVESTMENT PLAN, Defendant-Appellant.
No. 00-1109
In the  United States Court of Appeals  For the Seventh Circuit
Argued May 17, 2000Decided September 21, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 96 C 1095--Joan B. Gottschall, Judge.
Before Bauer, Coffey and Kanne, Circuit Judges.
Bauer, Circuit Judge.

1
Robert J. Matz and other  employees of Hamilton Investments, Inc. lost  their jobs and the non-vested portions of their  retirement benefit plan in 1994 when the company  was sold. Matz filed suit on behalf of himself  and other terminated employees who were  participants in the ERISA pension plan, claiming  entitlement to the benefits as a result of a  partial termination of the plan. To prove partial  termination, he seeks to count both vested and  non-vested participants and, because he believes  that the partial termination was the result of a  multi-year corporate reorganization, to aggregate  terminations that occurred in multiple plan  years. The District Court ruled that he could do  both, and certified the issues to us for  interlocutory appeal. We affirm.

I.  BACKGROUND

2
In 1994, Household International, Inc. was the  parent corporation of a varied group of  companies. Its portfolio included mortgage  companies, banking institutions, retail  securities brokerages, insurance businesses and  credit card companies. In August, 1994, Household  began selling off some of its subsidiaries,  beginning with Hamilton Investments, Inc., the  company for which Robert Matz worked from March  28, 1989 until his termination on September 1,  1994.

3
Hamilton, through its parent corporation  Household, provided a retirement benefit plan  ("the Plan") to its employees. It was an employee  benefit plan within the meaning of 29 U.S.C.  sec.1002(2)(A). The Plan allowed participants to  make payroll contributions which were matched by  contributions from Hamilton. Although the  participant's contributions vested immediately,  Hamilton's contributions were subject to deferred  vesting. Section 14.1 of the Plan provided that  a participant became vested in Hamilton's  contributions at a rate of 20% per year. Thus, a  participant had to remain with Hamilton for five  years before he became fully vested. If his  service to the company ended before that time, he  forfeited the non-vested portion of Hamilton's  contribution.

4
When Matz's job ended he had a 60% vested  benefit in his employer's matching contribution.  He elected to take a distribution and was paid  $27,914.10, which represented 100% of his  contributions to the Plan and 60% of Hamilton's  contributions. The remaining 40%, $7,289.92, was  forfeited and used by Household to reduce its  matching contributions.

5
Matz sues to recover his forfeited amount. If  he can prove that there was a termination or  partial termination of the Plan,1 ERISA affords  him relief. 26 U.S.C. sec.411(d)(3) provides

6
A trust shall not constitute a qualified trust  under sec.401(a) unless the plan of which such  trust is a part provides that--

7
A.  Upon its termination or partial termination  . . . the rights of all affected employees to  benefits accrued to the date of such termination,  partial termination or discontinuance, to the  extent funded as of such date, or the amounts  credited to the employee's accounts are non-  forfeitable.

8
ERISA does not, however, define what constitutes  a partial termination. Treasury Regulation  sec.1.411(d)-2(b)(1) provides some guidance

9
Whether or not a partial termination of a  qualified plan occurs (and the time of such  event) shall be determined by the Commissioner  with regard to all the facts and circumstances in  a particular case. Such facts and circumstances  include the exclusion, by reason of a plan  amendment or severance by the employer, of a  group of employees who have previously been  covered by the plan; and plan amendments which  adversely affect the rights of employees to vest  in benefits under the plan.

10
(emphasis added).

11
Matz alleges that a partial termination of the  Plan occurred beginning in August, 1994 (with the  sale of Hamilton) and ending in May, 1996. During  that period, Household discontinued or sold  Household Mortgage Services, Inc., various  branches of Household Bank, F.S.B., and Alexander  Hamilton Life Insurance Company. Matz believes  that this series of corporate transactions were  part of a single reorganization plan and resulted  in the Plan's partial termination. For that  reason, he seeks to combine all of the  terminations by Household in all of those years.  He also seeks to count all fully vested employee  terminations as well as non-vested employee  terminations.

12
The Plan, by contrast, contends that a partial  termination analysis should look at individual  plan years, not aggregated years. Furthermore, it  argues that aggregation is inappropriate because  there was no corporate reorganization that would  justify such an approach. It also asks that only  non-vested participants be counted. Finally, the  Plan contends that any partial termination  analysis must end on September 30, 1995, the date  it issued a plan amendment vesting, fully and  immediately, all participants.2 Pointing to the  language of 26 U.S.C. sec.411(d)(3), the Plan  states that participants who separated from  service after September 30, 1995 cannot be  "affected employees" because all Plan accounts  became non-forfeitable at that time.

13
The parties briefed the issues to the District  Court. The court, after careful analysis, ruled  that both vested and non-vested participants  could be counted to determine whether a partial  termination occurred and that Matz could combine  all terminations for 1994 through 1996. Matz v.  Household International Tax Reduction Investment  Plan, 1998 WL 851491 (N.D.Ill. 1998); Matz v.  Household International Tax Reduction Investment  Plan, 1999 WL 754659 (N.D.Ill. 1999). Upon the  Plan's motion, the rulings were certified for  interlocutory appeal. Now before us are the  questions: (1) whether, for purposes of  determining if the Plan was "partially  terminated," the court's analysis should include  fully-vested employees terminated after the 1995  Plan amendment; and (2) whether the plaintiff's  partial termination analysis may include  terminations that take place over multiple (here,  three) plan years. We affirm the District Court.

II.  DISCUSSION

14
The question of whether a partial termination  has occurred is a question of law subject to de  novo review. Sage v. Automation, Inc. Pension  Plan and Trust, 845 F.2d 885, 890 (10th Cir.  1988). Although many courts have addressed the  issue of partial termination, few have addressed  the questions of whether fully vested  participants must be counted and whether the  counting period is an individual plan year or the  aggregation of multiple plan years. Indeed, they  are issues of first impression to this court. We  find that Matz has standing to raise these issues  and address each one in turn.

15
A.  Counting Of Vested And Non-Vested  Participants

16
When interpreting congressional statutes, we  look first at the plain language of the statute.  See Reves v. Ernst & Young, 507 U.S. 170, 177  (1993). If the language is clear and unambiguous,  we apply the statute so as to give effect to its  plain meaning. United States v. Hayward, 6 F.3d 1241, 1245 (7th Cir. 1993). We cannot do that here  because, although 26 U.S.C. sec.411(d)(3) refers  to a partial termination, it does not define it.  Nor does it provide us with the framework for an  analysis. Thus, we must search the legislative  history for instruction.

17
The legislative history provides little more  guidance than that found in the statute. The  House and Senate Reports state only that  "[e]xamples of a partial termination might  include, under certain circumstances, a large  reduction in the work force, or a sizable  reduction in benefits under the plan." H.R.Rep.  No. 807, 93rd Cong., 2d Sess., reprinted in 1974  U.S.C.C.A.N. 4670, 4731; S.Rep. No, 383, 93rd  Cong. 2d Sess., reprinted in 1974 U.S.C.C.A.N.  4890, 4935. Although this is somewhat more  helpful, it still does not provide us with a  clear standard by which to judge a particular  case.

18
Our sister circuit struggled with the same  dilemma before inviting an amicus brief from the  IRS. See Weil v. Retirement Plan Administrative  Committee, 933 F.2d 106, 109-10 (2nd Cir. 1991)  ("Weil III"). The Weil III decision, finding that  vested and non-vested participants must be  counted when determining whether a partial  termination occurred, was the culmination of  several decisions by the District Court and the  Second Circuit. Initially, the District Court  ruled that a partial termination had not  occurred. Weil, 577 F. Supp. 781 (S.D.N.Y. 1984).  The Second Circuit reversed. Weil, 750 F.2d 10  (2d Cir. 1984) ("Weil I"). On remand, the  District Court, counting both vested and non-  vested participants, found that a partial  termination had occurred. Weil, 1988 WL 64862  (S.D.N.Y. 1988). The Second Circuit reversed  again, holding that only non-vested participants  should be considered. Weil, 913 F.2d 1045, 1050-  51 (2nd Cir. 1990) ("Weil II").

19
On rehearing, the Weil III court had the  benefit of the IRS' position of the issue. Giving  "great weight" and deference to the IRS' view  that both vested and non-vested participants  should be counted, the Second Circuit vacated, in  part, its ruling in Weil II and held that both  classes of participants were to be considered in  a partial termination analysis. Weil, 933 F.2d at  110. In so doing, the court found that the IRS'  interpretation was reasonable and judicial  deference was required as the IRS was the agency  responsible for administering the partial  termination statute. Id.

20
"Courts have generally held that termination of  a number of employees does not constitute a  'partial termination' unless there is a  significant reduction in plan participants."  Matz, 1998 WL 851491, *2. To determine whether  there is a significant reduction in plan  participants, courts apply a "significant  percentage" test. Kreis v. Charles O. Townley,  M.D. & Associates, 833 F.2d 74, 79 (6th Cir.  1987). Partial termination is measured by using  the ratio of terminated plan participants over  total plan participants.

21
Matz urges us to include all terminated  participants (vested and non-vested) in the  numerator, while the Plan asks us to consider  only the non-vested participants in the top of  the equation. Both claim that their method best  furthers the purposes of the statute. Once again,  however, both the statute and its legislative  history are silent as to the purpose of the  partial termination statute. Courts, though, have  generally understood the statute's purposes to  be: (1) to protect employees' legitimate  expectation of pension benefits; and (2) to  prevent employers from abusing pension plans to  reap tax benefits. Weil, 933 at 106, 107;  Halliburton v. Commissioner of Internal Revenue,  83 T.C. 154, 161 (1984).

22
The Plan argues that the counting of vested  participants would further neither of these  purposes. It states "[t]he partial termination  remedy is aimed at protecting employees from a  forfeiture of unvested benefits, and preventing  employers from receiving sizable, tax-free  reversions of surplus plan assets." From a policy  standpoint, the Plan makes a logical argument.  Vested participants do not need further  protection for their pension benefits and do not  benefit from a finding of partial termination.  Their benefits, by virtue of vesting, are non-  forfeitable. The employer gains nothing either.  No monies revert back to it because the benefits  are vested and non-forfeitable. We agree with the  Plan's arguments. And, as the District Court  stated, "if [we] were writing on a blank slate,  [we] would be inclined to consider only non-  vested employees" in deciding whether a partial  termination had occurred. However, we are not  writing on a clean slate.

23
We are not alone in our view or our holding.  The District Court for the Eastern District of  Louisiana ruled that both vested and non-vested  terminees must be considered, "[e]ven though the  issue of partial termination affects only non-  vested participants." Morales v. Pan American  Life Insurance Company, 718 F. Supp. 1297, 1302  (E.D.La. 1989). Although the District Court's  decision was appealed, the Fifth Circuit did not  decide the issue, holding instead that plaintiff  Morales, a vested employee, did not have standing  to raise the issue on behalf of the non-vested  employees. Morales v. Pan American life Insurance  Company, 914 F.2d 83, 86 (5th Cir. 1990).

24
In a thorough and thoughtful opinion, the  District Court for the Southern District of Texas  also agreed that neither policy was furthered by  the counting of vested participants. But, it  ruled that only non-vested terminees would be  counted. In re Gulf Pension Litigation, 764 F. Supp. 1149, 1165 (S.D.Tex. 1991). Realizing  that approach would skew the percentage  calculation and cause it to be artificially low  (thereby increasing the chances of finding that  there had not been a significant reduction in  plan participants) the court excluded vested  participants from both halves of the ratio. Id.  at n.10. Having calculated in this manner, the  court found a partial termination of the plan. On  appeal, the Fifth Circuit did not consider  whether a partial termination occurred and  affirmed on other grounds. Borst v. Chevron  Corporation, 36 F.3d 1308, 1314, n.11 (5th Cir.  1994) ("Because we do not consider whether or not  a partial vertical (or horizontal) termination  occurred, the district court's ruling on this  issue is not conclusive between the parties.").

25
Purely from a policy standpoint, we believe  that the method adopted in Gulf Pension  Litigation best furthers the purposes of the  partial termination statute. However, we are  constrained in our analysis of the statute and  must decide only whether the IRS' construction is  reasonable. See Weil, 933 F.2d at 107-08. We  conclude that it is. Neither the statute, its  legislative history nor the Treasury Regulation  mentioned above differentiate between vested and  non-vested participants. Indeed, the Treasury  Regulation says that a partial termination may  occur when "a group of employees," previously  covered by the plan, are excluded from the plan  by reason of a severance from employment.

26
A finding of reasonableness is also supported  by the fact that the exclusion of vested  participants from the ratio calculation gives an  inaccurate assessment of whether there has been  a significant reduction in plan participation,  the benchmark against which partial termination  is measured. For the calculation to be accurate,  the circumstances as a whole must be considered.  This, we think, buttresses a finding that vested  participants must be included.

27
"To uphold [the agency's interpretation] we need  not find that [its] construction is the only  reasonable one, or even that it is the result we  would have reached had the question arisen in the  first instance in judicial proceedings. . . We  need only conclude that it is a reasonable  interpretation of the relevant provisions." Weil  III, 933 F.2d at 107-08 (internal quotation marks  and citations omitted.). For the above reasons,  we find that there is a factual basis for finding  that the IRS' interpretation of the statute is  reasonable. That is the only question on which we  must rule. The order of the District Court,  finding that both vested and non-vested terminees  must be considered in its partial termination  analysis, is affirmed.3

B.  Aggregation Of Multiple Plan Years

28
We next turn to the question of whether  terminations occurring in multiple plan years can  be combined in determining partial termination.  Initially, we note that this issue has been  addressed by only two other courts (excluding the  District Court below) and both have found that it  is permissible to aggregate terminations for  multiple years. Weil, 750 F.2d at 13, n.2; Gulf  Pension Litigation, 764 F. Supp. at 1167-68.4 We  add our voice to theirs.

29
Matz argues that it is proper to combine all  participant terminations in 1994, 1995 and 1996  because Household engaged in a corporate  reorganization during that time.5 The Plan  counters by arguing that because this a tax  event, the relevant period should be one year, as  are tax years. It also argues that "[a]ll of the  published Revenue Rulings dealing with the issue  of partial terminations" examined only  terminations occurring within a single plan year.  We note, however, that in all of the decisions  cited by the Plan, the event that affected the  plan participants occurred within one year. Thus,  those cases are inapposite and unpersuasive in  our analysis.

30
Neither the statute nor its legislative history  specify whether aggregation is permissible. The  IRS has taken no position on the issue and  because of that we receive no guidance from it.  The only instruction we have comes from Treasury  Regulation sec.1.411(d)-2(b)(1), which provides  that we must consider "all of the facts and  circumstances in a particular case." No framework  is provided beyond that.

31
We hold that because there is nothing in the  language of the rule itself that requires a  significant corporate event to occur within a  plan year, Matz can combine terminations from  1994, 1995 and 1996, provided that he show that  the corporate events of those years were related.  We believe this view reflects the realities of  the modern corporate world. Mergers and corporate  reorganizations have grown into large and complex  events, see e.g., In re Gulf Pension Litigation,  764 F. Supp. 1149, and often cannot be completed  in one year. Furthermore, to establish a rigid  rule that only terminations in individual plan  years can be counted allows an unscrupulous  employer to terminate some participants in  December of one year and January of the next  year, thereby eviscerating both the purpose of  protecting employee benefits and the purpose of  prohibiting employers from reaping unfair tax  benefits. We are convinced that the requirement  that the multiple year terminations be proven  related prevents a plaintiff from gaining undue  advantage too.

III.  CONCLUSION

32
For the foregoing reasons, the orders of the  District Court, holding that both vested and non-  vested participants both be counted and that  multiple plan years may be aggregated, in  considering whether the Plan was partially  terminated, are affirmed.

33
AFFIRMED.

Notes:

1
 There is no dispute that the Plan continued after  the sale of Hamilton. Thus, our inquiry focuses  on the issue of partial termination.

2
 The amendment provides that "if a Participant's  employment with [Household and its affiliates] is  terminated for any reason on or after September  30, 1995 he shall be 100% vested in his account."

3
 We make a special point of noting, for the sake  of clarity, that employees who were vested in  1995 by virtue of the Plan amendment are to be  counted. The fact that they vested because of the  Plan amendment and not because of years of  service is of no consequence.

4
  In dicta, the United States Tax court stated "we  do not agree that we should limit ourselves to  considering the events of only one plan year in  resolving the partial termination issue, as  events bearing on such issue may extend over more  than one year." Halliburton, 100 T.C. 246.

5
 The issue of whether the defendant's events of  1994, 1995 and 1996 were a corporate re-  organization or a corporate event is not before  this court and we do not decide that issue.