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STOWE TWP. v. STANDARD LIFE INS. CO.

March 1, 1974

STOWE TOWNSHIP
v.
STANDARD LIFE INSURANCE CO. OF INDIANA


Snyder, District Judge.


The opinion of the court was delivered by: SNYDER

SNYDER, District Judge.

This matter came before the Court for Non-Jury Trial on the Complaint of Stowe Township, originally filed in the Court of Common Pleas of Allegheny County, Pennsylvania, and removed by the Defendant to this Court. Jurisdiction of the litigation is under 28 U.S.C. ยง 1332, a diversity action where more than $10,000.00 is claimed. The Defendant filed an Answer denying that the Plaintiff was entitled to any relief. On February 14, 1973, the Plaintiff filed a Petition for Mandatory Injunction alleging that the Defendant's refusal to comply with a contractual responsibility relating to termination of a contract with respect to the funding of the Township's Pension Funds was causing the Township extreme hardship and requested a mandatory injunction be issued requiring the Defendant to pay over to the Plaintiff the balance of the Purchase Payment Fund alleged to be due under the contract. On February 16, 1973, Judge Joseph F. Weis, Jr. (now a Member of the Bench of the Third Circuit) held a conference with counsel; at which time all counsel requested a continuance of the hearing. This was granted, subject to a report to the Court when the parties were ready to proceed.

 Upon Judge Weis' elevation to the Bench of the Third Circuit, this case was assigned to this member of the Court. In a conference held on May 15, 1973, the parties agreed that because of the complexity of the problem, the Court should determine whether the contract required on termination, the issuance of policies containing cash surrender values or the issuance of policies without cash surrender values. This determination would be made prior to pretrial. After the matter was thoroughly briefed, this Court, on July 27, 1973, D.C., 363 F. Supp. 341, determined that there was nothing in this contract which required annuities to be issued with cash surrender values. Further, since no cash surrender value was provided for in the contract, nor in the statutory provisions applicable thereto, it was the conclusion of this Court based upon the terminology of the contracts and the applicable law, that there was no right to demand a cash surrender value, or a policy containing such a provision.

 A Status Conference was then held on August 16, 1973, at which time the Court established deadlines for the completion of Plaintiff's Pretrial Narrative Statement and Defendant's Pretrial Narrative Statement in light of the Court's determination. The Plaintiff's Pretrial Narrative Statement set forth the following order in which its proof would be offered: (a) that the Defendant Company through its authorized agents proposed to change the manner of funding the Township's Pension Funds by entering into a Deposit Administration Contract; (b) that the value, benefits, and costs of the new plan would be equal to or more attractive than the Township's existing plans ; and (c) that the Plaintiff Township was never advised by the Defendant Company that the annuity contract provided in the Deposit Administration Contract would not carry cash surrender value as had all previous annuity policies issued by the Company, nor that the balance of the fund would not be returned to the Township upon termination of the contract. The Plaintiff thus claimed either the cash surrender value of the policies or the return of its money.

 The Defendant in its Pretrial Narrative Statement set forth that under the terms of the contract the Plaintiff was required to deposit with the Defendant the amounts actuarially necessary to fund the retirement annuity benefits provided for in the various pension plans. Termination of the contract could occur upon any one of three contingencies: (a) the payment of all annuity payments payable under the terms of the contract; (b) the termination of the Plaintiff's existence; or (c) the written notification to Defendant by Plaintiff of the termination of the contract. The contract further provided:

 
"If this Contract is terminated in accordance with Section I-1 the Company shall discharge its liabilities under this Contract by providing paid-up annuities to the participants in such amounts as they may be entitled to under the Plan as directed by the Employer. Such paid-up annuities shall be purchased with no less than 90% of the total amount held in the Purchase Payment Fund on the date of such termination." (Section I-2)

 It appears by letter dated October 25, 1972, the Plaintiff notified the Defendant of the termination of the Contract, and thereafter demanded that the Defendant fulfill its obligation under Section I-2 of the Contract by issuing paid-up annuities carrying cash surrender values. In addition, the Plaintiff did not make any annuity payments to the Defendant after August 4, 1972. Defendant replied that it had offered to fulfill its obligations under Section I-2 of the Contract by issuing paid-up annuities for the benefit of the annuitants covered by the Plaintiff's Pension Funds but had declined to pay to the Plaintiff any sum of money or to issue to the Plaintiff any paid-up contracts having cash surrender values.

 Thus, the matter was submitted to a Non-Jury Trial on the allegations of the Plaintiff that under the circumstances of the funding and the Regulations of the Commonwealth of Pennsylvania Department of Insurance or the Auditor-General's Office, paid-up contracts were to be issued by the Defendant, which were required to carry a cash surrender value; or, that under all the circumstances and since the Defendant did not advise the Plaintiff that paid-up annuities would not carry cash surrender values, that, upon the termination of the Contract, the funds deposited pursuant to the Contract would be required to be returned to the Township. The amount actually deposited to the Contract was in the sum of $233,829.40 and to the extent that the Plaintiff is entitled to recover, such recovery would have to be limited to the aggregate cash value of paid-up annuities carrying cash surrender values of 90% of $233,829.40 or the sum of $210,446.46.

 At the trial of the case the Plaintiff called for cross-examination Mr. James F. Bash, President of Standard Life Insurance Company of Indiana. Bash testified that his company had previously issued individual contracts to Stowe Township which carried cash surrender values. He testified that the instant Deposit Administration Contract (Contract) was initiated originally by having the Township execute an "Application for Group Annuity Contract" to signify their intention to purchase the Contract. As a result of the receipt of this Application, the Company then issued the Contract now before this Court, and the cash value of the prior individual contracts with Standard Life were credited by the Defendant Company to the new Contract.

 Reference to the Application *fn1" shows only that Stowe Township was applying for a "group annuity contract". Plaintiff's Exhibit 1 shows the Defendant proposed to issue the Contract to fund the Police Pension Fund, Service Employees' Pension Fund and Board of Commissioners' Pension Fund under a pension and group insurance program, based on an assumption that the existing contracts would be converted and that the values of these contracts would be transferred to the Deposit Administration Group Annuity Contract (Contract). In such conversion, the Township was to receive full credit for the total reserves held by the Company with no surrender charges. *fn2" Under the stated "Principles Of Operation" of the Proposal, it was set forth:

 
"The Deposit Administration contract is a contract between the Township of Stowe and Standard Life Insurance Company providing for the accumulation of funds to purchase pensions for members who retire in accordance with the Township's Pension Plan. The contributions to the Plan are accumulated at interest and are not allocated to specific individuals until their actual retirement."

 Certain provisions were proposed for the safety of the deposit funds by a guarantee by the Defendant that the funds deposited would not be impaired by investment losses. A minimum interest rate of 6 1/4% compounded annually for the first year was to be credited to the deposits held by the Company. The Township was to be informed of the guaranteed rate at the time of such deposit.

 It was also stated as part of the proposal that "when an employee retires under the plan, an annuity will be purchased for the employee by withdrawal of the amount required to purchase his pension from the Deposit Fund. * *" A specific schedule of benefits for each named policeman was proposed, including the eligible retirement age, the monthly pension which was to be integrated with Social Security and a Death Benefit of $10,000.00.

 On March 1, 1970, the Plaintiff and the Defendant entered into the Contract, issued in consideration of the Application by the Township, and of the payment in advance of a consideration to the Purchase Payment Fund (Fund) and further payments to the Fund as provided in the Contract. *fn3" By definition, "Fund" referred to the sum of all of the employer's deposits plus interest and dividends less the withdrawals, charges, and deductions as authorized in the Contract. The Company was not required to segregate specific assets or allocate them to the Fund and "no employee shall have any vested or contingent legal or equitable interest in the fund and the Company may use the fund for any Retirement Annuities or ...


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