Court Opinion

ID: 8910131
Source: CourtListenerOpinion
Date Created: 2022-11-27 02:37:15.87125+00
Date Added: 2024-06-11T17:08:27.389265
License: Public Domain

BENSON, Chief District Judge,
concurring in part and dissenting in part.
I concur in the holding that the trustees acted reasonably in reducing Gibbons’ monthly pension from.$1,200 to $960 because of the decrease in his years of credited service, and in discontinuing Kavner’s pension because of a break in service. Further, I would concur in a holding that , the trustees had no authority to reduce Gibbons’ and Saffo’s monthly pensions to implement Amendment 4 unless such reduction was required to maintain the plan as a qualified plan, but will offer a further comment on the effect of such a holding. With respect to the holding of liability on the part of Occidental, I respectfully dissent.
When the trustees approached Occidental to negotiate the payment of benefits under a group annuity contract, they were interested in obtaining a benefit level that was more advantageous than under the original plan. Occidental’s first set of figures provided for a level of benefits that was almost identical to the original plan. This proposal was not acceptable to the trustees, so the pooling of the LHI-688 Plan funds was discussed. It is immaterial who initiated the discussion. It is clear that only the employees of Local 688 stood to gain from pooled funding, and that it was the trustees who pursued the idea. Occidental’s actuaries prepared a second proposed schedule of contributions and level of benefits based upon a pooled method of funding. Under this proposal, Local 688 retirees would receive a monthly pension of $40 per year of credited service, a figure which was considerably higher than the benefit level under the original plan.1 The trustees accepted this proposal and incorporated the $40 benefit level into Plan B. The proposed schedule of employer contributions, which was also based upon pooled funding, was attached to the group annuity contract as Exhibit C and made a part thereof.
*1280Both Occidental and the trustees expressed serious doubt as to whether the IRS would approve the LHI-688 Plan on a pooled funding basis. The trustees were responsible for filing an application with the IRS for a determination of tax-exempt status. Prior to the submission of the plan to the IRS, Occidental wrote to the trustees to confirm that the legal and binding effect of the group annuity contract was contingent upon IRS approval of the LHI-688 Plan. The trustees fully intended to submit the LHI-688 Plan to the IRS as a single plan with a common fund, but with different benefit and contribution levels for the two sub-plans. However, rather than filing a single application, they filed separate applications for determination as to Plans A and B. The applications indicated that not all of the contributions were to be paid by the employer in question, and the schedule of contributions (Exhibit C to the group annuity contract) was submitted as an explanatory reference. The explanation on the applications may not have been clear to the IRS because it issued separate determinations approving tax-exempt status for Plans A and B without comment on the fact that a pooled method of funding was being utilized. The trustees informed Occidental that the LHI-688 Plan had been approved, and both Occidental and the trustees thereafter proceeded on the assumption that the IRS had approved the pooled funding. Whether or not pooled funding was appropriate for the LHI-688 Plan, the evidence clearly and overwhelmingly shows that the trustees and Occidental both considered pooled funding to be a basis of their bargain, and that it was an integral part of the group annuity contract.
Under § 3.7 of the group annuity contract, Occidental guaranteed (1) during the first 25 years of the contract, to pay the pensions of the Exhibit B retirees to the extent the schedule of contributions was insufficient to support the level of benefits under the plan, provided all employer contributions were made as scheduled; and (2) if the contract were discontinued after 25 years, and all conditions had been met during that time, to pay the entire pensions of the Exhibit B participants.
If, at any time during the first 25 years of the contract, the amount in the deposit fund were insufficient to pay the full benefits owed to all retirees, the amount in the fund would be prorated among the retirees in proportion to the amounts of their monthly pensions. Occidental would then be required, under its guarantee, to pay the balance of the benefits owed to Exhibit B retirees, and the employer would be required to make a deposit sufficient to pay the balance of the benefits owed to non-Exhibit B retirees.
The trial court adopted as its finding the opinion of plaintiffs’ expert, Louis G. Prange, that Occidental’s guarantee had an actuarial value of approximately $800,000 at the time the contract was executed, which value increased to over $1,000,000 by 1974. This “value” represented the amount by which the present value of Local 688 contributions for Exhibit B participants was exceeded by the present value of benefits to be paid to Exhibit B participants, without taking into account any pooling of the funds of Plans A and B.
It is undisputed that Plan B standing alone was never actuarially sound. The Local 688 contribution schedule prepared by Occidental was never intended to fully support the benefit level for Local 688 employees. Pursuant to the parties’ agreement, Occidental’s actuaries prepared the schedule of contributions and benefit levels on a pooled funding basis.
Under the evidence, Occidental had no reason to suspect that the IRS had not approved the LHI-688 Plan as a pooled fund. The first indication to Occidental that the IRS had not granted such approval came in 1974 when the IRS requested segregated financial data for Plan B in connection with its consideration of Amendment 2. Under these circumstances, Occidental did not act inappropriately in calculating the contribution schedules and benefit levels on a pooled funding basis.
Occidental did not have an anticipated loss of approximately $800,000 at the time it entered into the contract. The intent of the parties was that the guarantee consti*1281tuted an undertaking on the part of Occidental to pay benefits to the Exhibit B retirees to the extent the pooled fund could not support the payment of such benefits. It is undisputed that the LHI-688 Plan was never aetuarially unsound when considered as a pooled fund. Consequently, there was no basis for the assignment of an actuarial value to Occidental’s guarantee. The trial court’s findings with respect to the actuarial value of the guarantee are clearly erroneous.
The trial court’s findings of breach of contract, malpractice, fraud and breach of fiduciary, duty on the part of Occidental are also clearly erroneous. The evidence clearly shows that the problems which arose from the “purported underfunding” of Plan B stemmed from the trustees and not from Occidental. The trustees’ applications to the IRS did not indicate clearly that a pooled method of funding was being employed.2 The IRS apparently did not become aware of the pooled funding until Amendment 2 was submitted in 1974. The trustees’ adoption of Amendment 4 was motivated in part by the IRS’s questioning of the financial soundness of Plan B. The adoption of Amendment 4 in turn resulted in the reduction of Gibbons’ and Saffo’s pensions.
The trustees’ adoption of Amendment 4 was also motivated in part by their desire to increase the number of Local 688 employees who would be eligible for benefits, particularly themselves. I agree that the trustees had no authority to reduce Saffo’s and Gibbons’ pensions to implement Amendment 4. However, the effect of this part of the court’s holding deserves further comment. A review of the history of Plan B will be helpful to this discussion.
Under the original version of Plan B, employees would receive a pension of $300 per month for the first 60 months of their retirement and $110 per month thereafter. In 1971, the plan was amended to increase monthly benefits to $40 per year of credited service. Amendment 2, which would have gone into effect on January 1, 1974 if approved by the IRS, provided for reduction of the monthly benefit level from $40 to $20 per year of credited service for all future retirees. Thus, it would not have applied to the four employees who had retired while the $40 benefit level was in effect, including Gibbons, Kavner and Saffo.
In ruling on Amendment 2, the District Director of the IRS held that the reduction of benefits after only a short time, without evidence of business necessity, created a presumption that the plan was not intended to be permanent from the time the $40 benefit level was added. The District Director also noted the unfunded liability of Plan B had been increasing, and that three of the four employees who had retired at the $40 benefit level were union officers, members of the class in whose favor discrimination is prohibited . by 26 U.S.C. § 401(a)(4). Amendment 2 was held to be a partial termination of Plan B, which would adversely affect the plan’s qualification.
The trustees appealed this decision to the Commissioner, who affirmed the adverse ruling both as to lack of business necessity and as to the discriminatory effect of the amendment. However, the Commissioner *1282ruled the discrimination question was dis-positive, stating:
As it turns out, the $40 per month rate obtains only during a relatively short period of time and benefits primarily officers of the Employer rather than employees in general.
Thus, it is our conclusion that the partial termination of the Plan resulting from Amendment No. 2 produced discrimination of the type prohibited by section 401(a)(4) of the Code. In this regard, it is immaterial whether or not there was a valid business reason for the partial termination, and whether or not Plan A and Plan B are treated as one plan or as separate plans.
The trustees subsequently adopted Amendment 4, which provided for a reduction of monthly benefits from $40 to $20.55 per year of credited service for all employees, including those who had already retired under the $40 level. When Amendment 4 was submitted for IRS approval, the District Director held that if the “excess” amounts already paid to the retired employees were recouped, Amendment 4 would remove the discriminatory treatment that had been apparent in Amendment 2, and would not adversely affect the plan’s qualification. Thereafter, Amendment 4 was put into effect, and the trustees began to recoup the “overpayments.”
Under the court’s holding, Gibbons and Saffo will be entitled to monthly benefits of $40 per year of credited service, just as they were prior to the adoption of Amendment 4.3 Employees who retire after the effective date of Amendment 4 will be entitled to monthly benefits of $20.55 per year of credited service as provided by Amendment 4. The effect of the court’s holding is to limit Amendment 4 to prospective application, just as Amendment 2 was intended to do. And, as was the case with Amendment 2, the $40 rate will primarily benefit officers of Local 688. Thus, the court’s holding will reinstate the discriminatory effect that was present in Amendment 2.4
In order to preserve the plan’s qualification as a tax-exempt plan, the trustees will have no choice but to eliminate the discrimination through revocation of Amendment 4 and reinstatement of the $40 benefit level for all Local 688 employees. Because a pooled method of funding is no longer being used, a substantial increase in Local 688’s contributions to the plan will be required to support the higher level of benefits. There is substantial evidence in the record which indicates that Local 688 will not be able to afford this increase in contributions and may be forced to abandon the plan.

. Occidental informed the trustees that Plan B would not be actuarially sound if it were isolated from Plan A, and that a considerably higher contribution rate would be necessary if Local 688 contributions were to fully support the $40 benefit level for Local 688 employees.

. The IRS “Application for Determination” form included three categories to describe the plan’s employer contribution formula: “All,” “Balance necessary,” and “Other (Specify).” The trustees checked the “other” category and designated Exhibit C to the group annuity contract as the explanation of the formula. Exhibit C provided:

SCHEDULE OF PARTICIPANT CONTRIBUTIONS (as referred to in Section 2.1 of Contract)

Scale of contributions payable under the Plan as of January 1, 1970 with respect to each active participant in the Plan:
As to St. Louis Labor Health Institute—
Full-time employees $12.00 per week per active participant
Part-time employees $ 6.00 per week per active participant
As to Teamsters Local 688—
Calendar year 1970 $22.00 per week per active participant
Calendar year 1971 $28.00 per week per active participant
Calendar year 1972 $34.00 per week per active participant
Calendar year 1973 $40.00 per week per active participant
This was the only explanation in the application as to how the LHI-688 Plan was funded.

. Other employees who retired prior to the effective date of Amendment 4 will also be entitled to reinstatement of their pensions at the $40 rate. This, of course, does not include Kavner. His pension was discontinued because of a break in service, not because of Amendment 4.

. Such discrimination is prohibited by 26 U.S.C. § 401(a)(4), and is also contrary to § 10.5 of the LH1-688 Plan, which provides in part:
In no event may any amendment be made to the Plan which:
* * * * * *
(c) will cause or effect any discrimination in favor of officers or individuals whose principal duties consist of supervising the work of others, or highly compensated employees.