                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-13-1994

Malia, et al v. General Electric Company, et al.
Precedential or Non-Precedential:

Docket 92-7487




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT



                          No. 92-7487



                SAM J. MALIA; JOHN A. GLUCKSNIS;
                        MATTHEW J. LOFTUS

                               v.

                  GENERAL ELECTRIC COMPANY; RCA
                CORPORATION; RETIREMENT PLAN FOR
              THE EMPLOYEES OF RCA CORPORATION AND
              SUBSIDIARY COMPANIES; GE PENSION PLAN

                         Sam J. Malia, John A. Glucksnis
                         and Matthew J. Loftus, for
                         themselves and all others
                         similarly situated,

                                        Appellants




         On Appeal From the United States District Court
             for the Middle District of Pennsylvania
                 (D.C. Civil Action No. 91-01743)



                     Argued on March 17, 1993


          Before: STAPLETON, ROTH and LEWIS, Circuit Judges

                  (Opinion Filed May 13, 1994)



Thomas W. Jennings, Esquire
Kent Cprek, Esquire (Argued)
Sagot, Jennings & Sigmond
1172 Public Ledger Building
Independence Square West


                                                              1
Philadelphia, PA 19106
         Attorneys for Appellants

Joseph J. Costello, Esquire
Robert J. Lichtenstein, Esquire
Mark S. Dichter, Esquire (Argued)
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103
          Attorneys for Appellees




                        OPINION OF THE COURT




ROTH, Circuit Judge:


                                 I.

     Appellants challenge the results of the merger of two large

pension plans.   The central issue of this case is whether pension

plan participants whose plan is merged with another pension plan

are entitled by law to receive only the defined benefits that

they had actually accrued under the previous plan or are also

entitled to receive a share of any surplus assets in their

pension plan.    Appellants allege that under two distinct sections

of the Employee Retirement Income Security Act of 1974 ("ERISA")

they are entitled to a share of the surplus assets that existed

in their pension plan at the time of the merger.    Appellants cite

no case law supporting this position, relying solely on statutory

language and legislative history.     Appellants also allege that

their employer's conduct of the merger violated its fiduciary

duty under ERISA.   Our detailed review of appellants' allegations



                                                                    2
and argument convinces us that the district court correctly

dismissed their claims.


                               II.

     Plaintiffs were entitled to receive benefits under RCA

Corporation's ("RCA") pension plan as long-time employees of RCA

and contributors to its pension fund.    RCA's pension plan was a

defined benefit plan that required employees to make

contributions to the plan in order to receive a specified level

of benefits upon retirement.   In 1986, General Electric ("GE")

bought out RCA, which became a wholly-owned subsidiary of GE.

General Electric also sponsored a defined benefits plan for its

employees.

     Upon hearing of GE's intention to merge the two plans,

appellant Sam J. Malia withdrew his contributions from the RCA

plan effective December 10, 1988.    In January 1989, the RCA and

GE pension benefit plans were merged, and Malia's two co-

appellants became participants in the GE pension plan.    At the

time of the merger, RCA's pension plan had residual assets --

assets in excess of liabilities -- of roughly $1.3 billion.     The

core of appellants' argument is that GE improperly "plann[ed] the

capture of more than $1 billion in residual assets of the RCA

Pension Plan for its own benefit."    They further allege that GE

intended to convert the RCA pension plan surplus to offset its

own liabilities to GE employees.     They contend that GE's capture

of the surplus was improper in that under 29 U.S.C. §§ 1058 and

1344(d)(3) the RCA pensioners were entitled to receive a share of


                                                                      3
the excess assets from the former RCA pension plan.1   However,

appellants fail to point out that the assets of the GE plan also

exceeded its liabilities by nearly $7.5 billion.   Thus, all

benefits that had accrued under the RCA plan were fully funded

and protected under the merged GE-RCA plan.
     Appellants further allege that GE intentionally misled RCA
plan participants in an effort to get them to cash out of the
plan in order to increase GE's share of any future distribution
of residual assets, that GE breached a fiduciary duty owed to
plaintiffs under 29 U.S.C. §§ 1021-25 by failing to inform them
of a possible forfeiture of their interest in residual assets
from the RCA plan, and that GE improperly failed to appoint an
independent representative of the pension plan participants to
review and approve the plan merger under 29 U.S.C. §§ 1104 and
1106(b)(1).

     On August 10, 1992, the district court granted defendants'

Rule 12(b)(6) motion to dismiss all counts.   This appeal

followed.   We conclude that the district court correctly

dismissed appellants' complaint on the ground that it failed to

state a claim.




1
GE did not, in fact, take steps to terminate the merged pension
plan in an effort to capture the surplus funds. Appellants
attribute this inaction to changes in the law which made
mandatory the distribution of a significant portion of the
surplus of a pension plan to employees upon termination of the
plan.

                                                                   4
                                 III.

     The jurisdiction of the district court rested on 29 U.S.C.

§1132(e).     The appellate jurisdiction of this Court rests on 28

U.S.C. § 1291.     As we are reviewing the district court's grant of

a Rule 12(b)(6) motion to dismiss for failure to state a claim,

our standard of review is plenary.      Unger v. National Residents

Matching Program, 928 F.2d 1392, 1394 (3d Cir. 1991).     In

addition, all facts alleged in the complaint and all reasonable

inferences that can be drawn from them must be accepted as true.

Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir.

1990).



                                 IV.

     Appellants' complaint alleges that GE violated ERISA.      As

this Court has stated, "ERISA provides for comprehensive federal

regulation of employee pension plans . . . . [T]he major concern

of Congress was to ensure that bona fide employees with long

years of employment and contributions realize anticipated pension

benefits."      Reuther v. Trustees of Trucking Employees of Passaic

& Bergen County Welfare Fund, 575 F.2d 1074, 1076-77 (3d Cir.

1978).    We will review appellants' contentions with this

regulatory concern in mind.



     A.      Distribution of Residual Assets

     In general, pension plans like the RCA and GE plans hold a

portfolio of investments that are managed by the plan

administrator in order to provide in the future a defined set of


                                                                      5
accrued benefits for the pension plan participants.   When the

investments of a pension plan increase in value more rapidly than

the anticipated liabilities of the plan, an actuarial surplus

results that fluctuates as the value of the plan's portfolio

changes.2   Employers are permitted to recover the surplus assets

of a pension plan under some circumstances if the plan is first

terminated.   See Edward Veal & Edward Mackiewicz, Pension Plan

Terminations 211-12 (1989).
     Appellants acknowledge that their accrued benefits under the
RCA plan were adequately protected under the merged plan. What
they seek is to have these benefits increased by a share of the
residual assets which existed in the RCA pension plan at the time
of its merger with the GE plan. For authority, appellants rely
on two distinct sections of ERISA, 29 U.S.C. §§ 1058 and
1344(d)(3). Appellants contend that these two sections, when
2
ERISA permits both defined benefit and defined contribution
plans to require employee contributions. Chait v. Bernstein, 835
F.2d 1017, 1019 n.7 (3d Cir. 1987). In a "defined benefit" plan
such as the RCA and GE plans, benefits are not dependent upon the
current or future assets of the plan. The employer must provide
a "defined benefit" to the plan participant upon retirement,
termination or disability, id., and the employer must satisfy
shortfalls if the actuarial assumptions of the plan prove
incorrect. In contrast, in a "defined contribution" plan, the
benefits paid upon retirement are dependent upon the amounts
contributed by the employee or employer on behalf of the plan
participant. 29 U.S.C. § 1002(34). On the surface, it may
appear that an employer profits from employee contributions when
the employer does not distribute residual assets to plan
participants. Residual assets are, however, a function of the
actual rate of return on plan investments exceeding actuarial
expectations of plan asset performance. In a defined benefit
plan, just as an employer would be required to fund any
deficiency in assets resulting from poor plan asset performance,
any excess in assets resulting from superior plan asset
performance typically accrues to the employer's benefit by
reducing the out-of-pocket contribution the employer must make to
maintain required funding levels for the present value of the
defined benefits. Therefore, a defined benefit plan containing
residual assets by its nature benefits an employer; the benefit
does not come about simply in the context of a merger or
termination. Cf. Bruce, Pension Claims: Rights and Obligations
at 18 (2d ed. 1993).


                                                                    6
read together, support their claim. The first section, § 1058,
protects pension plan beneficiaries from losing benefits through
the merger or consolidation of pension plans. It provides that:
"A pension plan may not merge or consolidate with, or transfer
its assets or liabilities to any other plan . . . unless each
participant in the plan would (if the plan were then terminated)
receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would
have been entitled to receive immediately before the merger,
consolidation or transfer (if the plan had then terminated).

The second, § 1344(d)(3), governs the distribution of residual

plan assets in the event of a plan termination.3

     We agree with appellants that the language of § 1058 should

be read together with § 1344 as a whole in order to understand

the "benefits" that would be payable at the time of the

hypothetical termination envisaged in § 1058.   The problem with

appellants' argument is that, in the situation of a merger of

pension plans, appellants equate the "benefits" receivable, as

defined in § 1058 as of the time of a hypothetical termination,

with the "residual assets" which may ultimately be distributed

under § 1344(d)(3) in the case of an actual termination.   An

examination of § 1344, however, demonstrates that "benefits" are

distinguished from "assets" in the language of § 1344.

     Section 1344(a) sets out the priority of allocation of

assets of the plan on termination, giving first priority to

accrued benefits derived from a participant's contributions to

the plan which were not mandatory contributions; second priority

to accrued benefits derived from mandatory contributions; third

3
§ 1344 controls the allocation of assets on the termination of a
single-employer plan. The GE pension plan is a single-employer
defined benefit plan. § 1344(d)(3)(A) sets out the priority of
residual asset distribution in connection with such a
termination.

                                                                   7
priority to benefits payable as an annuity; and fourth priority

to other and additional benefits.   Subsections 1344(b) and (c)

provide for adjustment of allocations and increase or decrease in

value of assets during the termination process.   Subsection

1344(d) then regulates the distribution of residual assets to the

employer after the satisfaction of all liabilities to plan

participants and their heir beneficiaries.   As described in

§1344(a), those "liabilities" are the designated benefits payable

to the participants.    Section 1344(d)(3)(A) then provides that,

before any residual assets are distributed to the employer, "any

assets of the plan attributable to employee contributions . . .

shall be equitably distributed to the participants who made such

contributions . . .."

     This language of § 1344 demonstrates clearly that "benefits"

are elements that are conceptualized and treated differently in a

plan termination than are the "assets" of that plan.   "Benefits"

are computed in a different manner than "assets."    Accrued

benefits are placed on the liability side, rather than on the

asset side of the balance sheet.    "Residual assets" are computed

only after liability for accrued benefits has been satisfied;

"residual assets" are payable to the employer only after assets

attributable to employee contributions have been returned to the

employees.




                                                                     8
     The Treasury Regulation, interpreting pension plan mergers,

corroborates this distinction between "benefits" and "assets"

which is made in § 1344. It provides:4
     (e) Merger of defined benefit plans -- (1) General
     rule. Section 414(1) compares the benefits on a
     termination basis before and after the merger. If the
     sum of the assets of all plans is not less than the sum
     of the present values of the accrued benefit (whether
     or not vested) of all plans, the requirements of
     section 414(1) will be satisfied merely by combining
     the assets and preserving each participant's accrued
     benefits. This is so because all the accrued benefits
     of the plan as merged are provided on a termination
     basis by the plan as merged. However, if the sum of
     the assets of all plans is less than the sum of the
     present values of the accrued benefits (whether or not
     vested) in all plans, the accrued benefits in the plan
     as merged are not provided on a termination basis.


     Moreover, the district court, in its opinion dismissing

appellants' claims, correctly noted that "benefits" under § 1058

have consistently been held under both regulations and case law

to refer to "accrued benefits" and not to include projected

residual assets of a plan after termination.   Malia v. General
Electric Co., slip op. at 6-7, (E.D. Pa., Aug. 10, 1992).     The

district court cited both Van Orman v. American Ins. Co., 608 F.

Supp. 13, 25 (D.N.J. 1984) and In re Gulf Pension Litigation, 764

F. Supp. 1149, 1185 (S.D. Tex. 1991) for the proposition that the

4
These regulations were promulgated under 26 U.S.C. § 414(1), the
Internal Revenue Code counterpart to ERISA § 1058 which has
almost the same language as § 1058. In the ERISA Reorganization
Plan of 1978 the Treasury Department was assigned responsibility
for issuing regulations under certain provisions of ERISA,
including § 1058. See 44 Fed. Reg. 1065 (attached to D's brief).
Thus, "all regulations implementing the provisions of [sections
1058 and 414(1)] have been promulgated by the Secretary of the
Treasury, mostly under § 414(1) of the Internal Revenue Code."
Van Orman v. American Ins. Co., 608 F. Supp. 13, 24 n.3 (D.N.J.
1984), on remand from 680 F.2d 301 (3d Cir. 1982).


                                                                    9
relevant Treasury Department regulations correctly interpreted

"benefits" under § 1058 as being limited to "accrued benefits,"

rather than including all benefits to which a plan participant

would be entitled upon termination.

     Appellants attempt to discredit the district court's opinion

as relying on "irrelevant and obsolete authority."   However, the

1987 changes in 29 U.S.C. § 1344(d)(3) raised by appellants are

not relevant to this issue, and the facts of Van Orman and Gulf

Pension are quite similar to the case at issue.

    Our interpretation of this ERISA language is supported by

the recent decision of the Seventh Circuit in Johnson v. Georgia-

Pacific Corp., No. 93-2357, 1994 WL 92167 (7th Cir. March 23,

1994).   Johnson involved a suit by pensioners who complained that

the promised pension benefits of current employees could not be

increased without a corresponding increase in the retirees'

pensions.   The retirees asserted that it was their contributions

that had produced the surplus by which the current employees'

benefits were increased; in other words, that they owned the

"surplus" of the plan which had enabled the employer to increase

the current employees' benefits.   In holding that the employer

did not exceed its powers under ERISA to amend the plan, the

court described the same distinction under an ERISA defined

benefit plan between "benefits" and "assets":
     A defined-benefit plan gives current and former
     employees property interests in their pension benefits
     but not in the assets held by the trust. (Citation
     omitted). If the investments appreciate, the plan need
     not devote that increase to improving benefits; it may
     retain the surplus as a cushion against the day when
     yields decrease, or the employer may cease making


                                                                  10
     contributions and allow the surplus to erode as
     liabilities continue to increase.

1994 WL 92167 at *6.

     We conclude, therefore, in light of the language of the

statute that §§ 1058 and 1344(d)(3) cannot be combined to provide

plan participants with a right to residual assets in the context

of a plan merger.   The district court correctly granted

appellees' motion to dismiss on this claim.




     B.   Fiduciary Duty to Notify
     Appellants next claim that RCA should have notified them

that they would not in the future be entitled to residual assets

if they withdrew their contributions from the RCA Pension Plan

prior to its merger with the GE plan.   However, the reporting and

disclosure provisions of ERISA, and regulations adopted pursuant

to these code sections, impose no requirement that a pension plan

sponsor notify beneficiaries of the possibility of forfeiture of

interest in residual assets resulting from the early withdrawal
of employee contributions.   See 29 U.S.C. §§ 1021-25.

     Under ERISA, stringent fiduciary duties attach when an

employer acts directly as the pension plan administrator or makes

decisions directly affecting the administration of the plan.    See

29 U.S.C. §§ 1002 (21)(A), 1104.   However, employers take on

fiduciary obligations of the type alleged in appellants' second

claim only to the extent that they act as the actual plan

administrators:
     Under ERISA, the roles of plan administrator and plan
     sponsor are distinct. The plan administrator owes a


                                                                  11
     fiduciary duty to the plan participants; the plan
     sponsor, as long as it is not acting as an
     administrator, generally does not.

Payonk v. HMW Indus., Inc., 883 F.2d 221, 231 (3d Cir. 1989)
(Stapleton, J., concurring in the judgment).

     Only plan administrators are required to disclose benefits

information to beneficiaries, and such information typically

involves an accounting of the plan's assets and liabilities and

of the actual benefits accrued by individual beneficiaries rather

than including notice of the existence of possible residual

assets which might be recouped should the plan be terminated. See

29 U.S.C. §§ 1021-25.     Thus, given that appellant Malia sought

relief under a fiduciary duty not borne by GE, the district court

correctly granted appellees' motion to dismiss on this claim.




     C.      Fiduciary Duty to Appoint Independent Manager
     The district court found that under the circumstances of a

pension plan merger as presented here, the only fiduciary duties

borne by the appellees were the anti-dilution obligations imposed
by § 1058.    As the district court held that GE complied with the

requirements of § 1058, it properly dismissed appellants' claim

on this issue.    Efforts by an employer to merge two pension plans

do not invoke the fiduciary duty provisions of ERISA.    Such

duties do not attach to business decisions related to

modification of the design of a pension plan, and in such

circumstances the plan sponsor is free to act "as an employer and




                                                                    12
not a fiduciary."   See Hlinka v. Bethlehem Steel Corp., 863 F.2d

279, 285 (3d Cir. 1983).




                                 V.

     For all the reasons discussed above, we will affirm the

opinion of the district court.




                                                                13
