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FECHTER v. CONNECTICUT GEN. LIFE INS. CO.

August 20, 1992

EDWARD C. FECHTER, EVELYN HOFFMAN, and RODERICK M. JACKSON, individually and on behalf of all others similarly situated
v.
CONNECTICUT GENERAL LIFE INSURANCE COMPANY



The opinion of the court was delivered by: BY THE COURT; FRANKLIN S. VAN ANTWERPEN

 VAN ANTWERPEN, J.

 AUGUST 20, 1992

 This matter is before us for a non-jury trial. Defendant Connecticut General Life Insurance Company has moved for judgment on partial findings of fact pursuant to Fed. R. Civ. P. 52(c). By way of background, we briefly describe the procedural history of this action, now in its fifth year of litigation.

 This ERISA *fn1" case involves the 1984 termination of the HMW Industries, Inc. Cooperative Retirement Income Plan for Salaried Employees (the "Plan"), a forty year old pension plan which was grossly over-funded at the time of its termination. Upon termination, eighty-three percent (83%) of the Plan's surplus assets reverted to the company, HMW Industries, Inc., its subsidiary Hamilton Technology, Inc., and its parent Clabir Corporation. The remaining assets, seventeen percent (17%) of the Plan's surplus, were distributed to the Plan participants. Plaintiffs, a group of approximately 650 current and former salaried employees of HMW Industries, Inc. and Hamilton Technology, Inc., filed this class-action *fn2" under ERISA, challenging the disproportionate distribution of assets in favor of their employer. We have original jurisdiction over plaintiffs' claims pursuant to 29 U.S.C. § 1132(e)(1) and 28 U.S.C. § 1331.

 On January 21, 1987, plaintiffs initiated this action against HMW Industries, Inc., Hamilton Technology, Inc., Clabir Corporation, and key management personnel. *fn3" One and one-half years later, following this Court's entry of a preliminary injunction, defendant's appeal of that injunction to the Third Circuit Court of Appeals, and a six-day non-jury trial, plaintiffs settled all their claims against each of these original defendants for $ 2.825 million. See Fechter v. HMW Industries, Inc., 879 F.2d 1111 (3d Cir. 1989); HUYETT, J., Order Granting Plaintiffs' Motion for Preliminary Injunction, dated March 3, 1989, docket entry no. 93; HUYETT, J., Order, dated July 3, 1998, docket entry no. 199; HUYETT, J., Stipulation and Agreement, dated, July 3, 1989, docket entry no. 201; CAHN, J., Order, dated July 21, 1989, docket entry no. 220; Defendant's Post-Discovery Motion for Summary Judgment, Ex. 45, docket entry no. 261. *fn4"

 During settlement negotiations with the Original Defendants, plaintiffs amended their complaint adding the Plan's insurance company and actuary, Connecticut General Life Insurance Company ("Connecticut General"), as a party-defendant. (Second Amended Complaint, filed July 19, 1989, docket entry no. 210). For purposes of clarity, plaintiffs further amended their complaint eliminating references to the Original Defendants. (Plaintiffs' Third Amended Complaint ("Complaint"), filed July 9, 1990, docket entry no. 242). In October 1991, this Court denied the parties' cross-motions for summary judgment finding, inter alia, that due process would require, at a minimum, that plaintiffs prove their case against Connecticut General based on a record and proceedings for which Connecticut General had been given a full opportunity to participate, rather than relying on the record adduced in the district court and Third Circuit proceedings prior to the time that Connecticut General was joined as a party to this action. (VAN ANTWERPEN, J., Order of October 8, 1991, docket entry no. 285). Thereafter, on June 30, 1992 through July 1, 1992 this non-jury matter *fn5" proceeded to trial in Easton, Pennsylvania against the only remaining defendant Connecticut General.

 In light of the extensive documentation in this case and since Connecticut General can only be liable to plaintiffs under their theories if plaintiffs prove that Connecticut General was an ERISA "fiduciary," *fn6" the trial against Connecticut General proceeded on a bifurcated basis. On the third day of trial, plaintiffs rested on the issues of liability, and defendant Connecticut General moved for judgment on partial findings of fact pursuant to Fed. R. Civ. P. 52(c). Plaintiffs offered more than 130 exhibits, *fn7" the testimony of John Markley and Gloria G. Strantz, and the deposition of David W. Greene *fn8" into evidence. Also in evidence is Exhibit B to Plaintiffs' Reply Brief in Further Opposition to Defendant's Motion For Judgment On Partial Findings. *fn9" Collectively, this evidence constitutes the record for this stage of the proceeding. On July 2, 1992, the Court ordered the parties to submit Proposed Findings of Fact, Conclusions of Law, and Memoranda in support of and in opposition to defendant's motion. In addition, both parties have filed reply briefs. *fn10" The Court further ordered that the parties would be limited at this stage to the issues and facts put forth in these submissions. Pursuant to Fed. R. Civ. P. 52(c) we make the following findings of fact and conclusions of law with regard to plaintiffs' evidence.

 FINDINGS OF FACT

 I. BACKGROUND

 A. The Parties

 1. This class-action involves the 1984 termination of the HMW Industries, Inc. Cooperative Retirement Income Plan (the "Plan"), a pension plan established in 1940, by HMW Industries, Inc., formerly the Hamilton Watch Company. *fn11" The Plan covered salaried employees of HMW Industries, Inc. and its various subsidiaries, including Hamilton Technology, Inc. (Pls.' Ex. 39 at 1-2). Hereinafter, unless the context indicates otherwise, HMW Industries, Inc. and its subsidiary, Hamilton Technology, Inc., are jointly referred to as "HMW". Clabir Corporation ("Clabir") acquired HMW in October 1983. (Complaint, P 9; Def.'s Proposed Finding P 4).

 2. The plaintiff class consists of all employees of HMW Industries, Inc. and Hamilton Technology, Inc. who were participants in the Plan on March 31, 1984, and all retired employees of such entities who retained employee contributions in the Plan on March 31, 1984. The named plaintiffs are Edward C. Fechter, Evelyn C. Hoffman, and Roderick M. Jackson. (HUYETT, J., Order, dated May 31, 1988, docket entry no. 53).

 3. Defendant Connecticut General Life Insurance Company ("Connecticut General") is a Connecticut insurance company licensed to do an insurance business in the State of Pennsylvania.

 B. The HMW Plan

 4. The HMW Plan was a defined benefit, contributory retirement plan, meaning that: (a) the Plan provided fixed, or "defined" benefits to participants based on criteria set forth in the Plan; (b) the participants were required to contribute between 2% and 4% of their salaries; and (c) the employer was required to contribute whatever amounts over and above employee contributions were necessary to provide the fixed benefits and maintain the Plan on a sound actuarial basis. (Pls.' Ex. 22; Pls.' Ex. 39). Because the Plan was over-funded, HMW did not have to make any contributions to the Plan during the last five years of its existence. (Pls.' Exs. 76-79; Pls.' Exs. 84-87; Pls.' Ex. 89).

 5. HMW Industries, Inc. and Hamilton Technology, Inc. jointly and severally were Employers and Plan Sponsors for the Plan. (Pls.' Ex. 39 at 2). HMW Industries, Inc. was the Plan Administrator and named fiduciary for the Plan. (Pls.' Ex. 39 at 36). Gloria Strantz, a member of the plaintiff class, held the position at HMW of Manager of Employee Benefits, and in that position she had the duty and responsibility to assist the Plan Administrator in carrying out its responsibilities. (Pls.' Ex. 39 at 36; 7/1/92 Tr. at 53-54, Strantz Direct).

 C. The Contract

 6. As a funding vehicle for the Plan, HMW entered into Group Annuity Contract GR-81 (hereinafter "GR-81) with Connecticut General in 1940. (Pls.' Ex. 1). Between 1940 and 1961, the Plan covered both salaried and union employees. (Pls.' Ex. 1). After 1961, only salaried employees accrued benefits under the Plan. (Pls.' Ex. 13).

 7. GR-81, a standard Deposit Administration contract, was a general account insurance contract which provided for a guaranteed, fixed amount of benefits to be paid to the Plan participants upon their retirement. From 1940 to 1984, HMW and its employees made annual contributions to the Plan in the form of premiums paid to Connecticut General. (Pls.' Ex. 22).

 8. Under GR-81, deposits made by HMW or its employees were not placed in a separate account, but rather were deposited into Connecticut General's unallocated proprietary general account. (Pls.' Ex. 143, Affidavit P 12; Pls.' Ex. 79 at 22; Pls.' Ex. 66 at 7).

 9. Connecticut General maintained accounting records that reflected contributions received under GR-81, plus interest credited, less payments and expenses incurred. The funds attributable to the Plan were accounted for and described as HMW's "Experience Rating Fund." (Pls.' Exs. 67-79).

 10. For accounting and record keeping purposes, Connecticut General divided HMW's Experience Rating Fund into two subaccounts. One subaccount was known as the "Deposit Administration Account." The terms and operation of the Deposit Administration Account were set forth in detail in GR-81. The Deposit Administration Account primarily kept record of that portion of the Experience Rating Fund attributable to so-called "active-lives," that is, employees who had not yet retired, but who would draw benefits in the future. (Pls.' Ex. 22; Pls.' Ex. 127 at 8; Pls.' Ex. 143 at P 13; 6/30/92 Tr. at 105-06, 137-38, Markley Direct).

 11. Another subaccount was known as the "Retired Lives Account," which kept a record of that portion of the Experience Rating Fund attributable to employees who had retired and were receiving guaranteed benefits. (Pls.' Ex. 22; Pls.' Ex. 143, Affidavit P 13; Pls.' Ex. 72; Pls.' Ex. 147; 6/30/92 Tr. at 105-06, 137-38, Markley Direct). The Retired Lives Account was not explicitly referenced in GR-81.

 12. Under GR-81, contributions made by HMW and its employees were always credited to the Deposit Administration Account. (Pls.' Ex. 22 at 8).

 13. Under GR-81, upon retirement of a participant, Connecticut General would "credit" the retiree with a Retirement Annuity which guaranteed retirement benefits to the participant for the remainder of the participant's life. (Pls.' Ex. 22 at 3, 5-7, 10; 6/30/92 Tr. at 105-09, 137-38, Markley Direct). Both the cost of the Retirement Annuity and the size of the participant's monthly pension were determined in accordance with the terms and actuarial tables of GR-81. (Pls.' Ex. 22 at 5 and 10; 6/30/92 Tr. at 105-09, 137-38, Markley Direct). The cost of the Retirement Annuity was then deducted from the Deposit Administration Account and credited to the Retired Lives Account. (6/30/92 Tr. at 105-07, Markley Direct). GR-81 provided in relevant part:

 
As of the Annuity Commencement Date [retirement date] of a Participant or other payee, the Insurance Company [Connecticut General] will withdraw from the Deposit Administration Fund a premium for the Retirement Annuity which is to be credited to him in accordance with Part 4. This premium shall be equal to the yearly amount of such Retirement Annuity as multiplied by the appropriate rate from TABLE A-3. Upon such withdrawal, the premium will be applied to purchase the Retirement Annuity (emphasis added).

 (Pls.' Ex. 22 at 10).

 14. In addition to crediting a retiree with a Retirement Annuity, GR-81 provided that Connecticut General issue an Individual Certificate to the retiree, as evidence that the credit had been made. (Pls.' Ex. 22 at 5 and 10; Pls.' Ex. 54; 6/30/92 Tr. at 107-08, Markley Direct). Thereafter, Connecticut General made all ensuing pension payments to the retiree, deducting the cost of each payment from the Retired Lives Account. (6/30/92 Tr. at 105-07, Markley Direct).

 15. Once credited, GR-81 prohibited the cancellation of a Retirement Annuity, except under very limited circumstances not present in this case. (Pls.' Ex. 22 at 6, 12).

 16. It is undisputed that the Individual Certificates constituted binding contracts which required Connecticut General to provide guaranteed benefits to retirees. (Pls.' Ex. 127 at 8-9; Pls.' Ex. 132, Answer 14; Pls.' Ex. 133, Answer 5; Deposition of David Greene ("Greene Dep.") at 153-54, 160; 6/30/92 Tr. at 106-09, 137-39, Markley Direct). *fn12"

 17. Under GR-81, HMW was required to make contributions to the Deposit Administration Account as necessary to maintain the actuarial soundness of the Account. At any given date, GR-81 required that the funds in the Deposit Administration Account be "equal to 105% of the total amount of Participant's Contributions together with credited interest . . . then living who have not elected to receive a cash refund of Contributions and who are not receiving retirement income in the form of Retirement Annuity" (emphasis added). (Pls.' Ex. 22 at 28). Therefore, the Deposit Administration Account contained only those funds necessary to provide benefits due the active-lives, that is, those non-retired employees who still had contributions in the Deposit Administration Account. (Pls.' Ex. at 11, 29).

 18. In the event that the actuarial assumptions of GR-81 turned out to be overly conservative and there were more funds than necessary in the Retired Lives Account to satisfy the benefits of retirees, GR-81 provided for a Rate Credit to be returned from the Retired Lives Account to the Deposit Administration Account. (Pls.' Ex. 22 at 13; 6/30/92 Tr. at 106-09, 137-38, Markley Direct). On the other hand, GR-81 contained no reverse mechanism under which additional premiums could be deposited into the Retired Lives Account in the event that it became under-funded. (Pls.' Ex. 22).

 19. Upon the employer's withdrawal from or discontinuance of the Plan, GR-81 provided two options for the disposition of "the amount remaining in the Deposit Administration Fund" as adjusted for interest. The relevant section of GR-81 provided in pertinent part:

 
EMPLOYER WITHDRAWAL AT DISCONTINUANCE. 1. As of the date of discontinuance, the amount remaining in the Deposit Administration Fund; after the adjustments provided for in the preceding section have been made, shall be withdrawn by the Insurance Company [Connecticut General] and shall be allocated or distributed in accordance with and subject to the further terms of this contract. The amount of such withdrawal shall be referred to hereafter as the Employer Withdrawal at Discontinuance (emphasis added).

 (Pls.' Ex. 22 at 21).

 20. Under, the first choice, Option A, HMW had the option of using the funds from the Deposit Administration Account to purchase a Retirement Annuity from Connecticut General. This annuity would satisfy those benefits due the active-lives, i.e. those non-retired employees who retained contributions in the Deposit Administration Account. The price and terms of the Retirement Annuity would be determined, at least in part, in accordance with the pre-determined terms and actuarial tables of GR-81. Under Option A, between 95%-100% of the funds remaining after the purchase of the Retirement Annuity would be returned to HMW. Option A provided in relevant part:

 
Under Option A the Employer Withdrawal at Discontinuance will be allocated and applied to purchase Retirement Annuity. The following terms shall apply to the allocation and purchase: . . .
 
. . . The Insurance Company [Connecticut General] will allocate the Employer Withdrawal at Discontinuance to provide Retirement Annuity in accordance with the rates in Table J. . . .
 
The Insurance Company [Connecticut General] will pay not less than 95% of any portion of the Employer Withdrawal at Discontinuance remaining unapplied, after completing the allocation and purchase of Retirement Annuity to the Contractholder HMW, in accordance with the terms of Option B.

 (Pls.' Ex. 22 at 22-23).

 21. Under, the other choice, Option B, HMW could withdraw all of the funds in the Deposit Administration Account, provided that it released Connecticut General from any obligation to the active-lives, i.e. those non-retired employees who retained contributions in the Deposit Administration Account. Connecticut General could elect to make payment of the withdrawn funds under this option over a period not exceeding ten years. Option B provided in relevant part:

 
Under Option B the Insurance Company [Connecticut General] will pay not less than 95% of the Employer Withdrawal at Discontinuance less the amount of Minimum Fund Liability relating to Participants' Contributions to an insurance company or trustee designated by the Contractholder. The following terms shall apply to the amount the Insurance Company [Connecticut General] determines is payable:
 
(a) The Insurance Company [Connecticut General] shall have the right to make payment under this Option in monthly installments over a period not to exceed ten years.
 
Payment under Option B . . . shall be in full discharge of all liability of the Insurance Company with respect to the Employer Withdrawal at Discontinuance.

 (Pls.' Ex. 22 at 23-24).

 22. Taken together, then, HMW had the option at Plan termination of purchasing a Retirement Annuity from Connecticut General with funds in the Deposit Administration Account, to satisfy the accrued benefits due the active-lives, or the option of withdrawing the funds in the Deposit Administration Account and purchasing the accrued benefits due the active-lives from another insurer. (Findings 19-22).

 23. Upon termination or discontinuance of the Plan, GR-81 contained no express provision regarding the disposition of assets held in the Retired Lives Account. (Pls.' Ex. 22). However, as already noted, GR-81 prohibited the cancellation of Retirement Annuities once issued (Finding 15), and required the issuance of Individual Certificates which imposed on Connecticut General a contractual obligation to provide a fixed level of retirement benefits (Finding 16). GR-81 contained no mechanism under which additional premiums could be deposited to the Retired Lives Account in the event it became under-funded (Finding 18). For these reasons, GR-81 effectively prohibited the withdrawal of funds in the Retired Lives Account at Plan termination and the repurchase of the guaranteed benefits due retired lives from another insurer.

 D. The Trust Fund

 24. In addition to GR-81, the HMW Plan utilized a Trust account as a funding vehicle and accumulated assets in the Trust Fund at The Chase Manhattan Bank. (Pls.' Ex. 79 at 22; Pls.' Ex. 50; Pls.' Ex. 87, last page; Pls.' Ex. 143 at P 11).

 25. At year ends 1983 and 1984, these Trust Fund assets amounted to more than $ 8 million. (Pls.' Ex. 65 at 3).

 II. TERMINATION OF THE HMW PLAN

 A. Clabir's Termination Decision

 26. In 1983, Clabir acquired HMW. (Finding 1). In acquiring HMW, Clabir was cognizant of the over-funded status of the HMW Plan and had in mind the goal of capturing such over-funded assets for itself. (7/1/92 Tr. at 130, Strantz Cross; Pls.' Ex. 109; Pls.' Ex. 118 at 3).

 27. In furtherance of its objective to capture such assets, by December, 1983, Clabir made the decision to terminate the HMW Plan and communicated the decision to HMW. (7/1/92 Tr. at 128, Strantz Cross).

 B. Clabir Effectuates Plan Termination

 28. Clabir directed HMW to convene a meeting to begin action to effectuate its decision to terminate the HMW Plan. (7/1/92 Tr. at 128, Strantz Cross). This meeting was held in Lancaster, Pennsylvania, on January 5, 1984. (7/1/92 Tr. at 127-28, Strantz Cross; Pls.' Ex. 115). In attendance were Richard Van Hoesen, Vice President of Administration for Clabir, Timothy O'Neill, of the New York, law firm of Donovan, Leisure, Newton & Irvine, and representatives of HMW, The Wyatt Company, an actuarial firm, Coopers & Lybrand, an accounting firm, and Connecticut General. (7/1/92 Tr. at 127-28, 135, Strantz Cross; Pls.' Ex. 115).

 29. Mr. Van Hoesen was a senior officer of Clabir who, along with other senior officers of Clabir, had the responsibility of overseeing Clabir's plan to terminate the HMW Plan and recapture surplus assets. (7/1/92 Tr. at 132-33, Strantz Cross). In this assignment, Mr. Van Hoesen reported to Henry D. Clarke, Jr., the President and Chief Executive Officer of Clabir. (7/1/92 Tr. at 132, Strantz Cross; Pls.' Ex. 109; Pls.' Ex. 110; Pls.' Ex. 111). Also involved at Clabir was James Schell, Vice President & Chief Financial Officer, and Bernard Marren, an in-house attorney for Clabir. (Pls.' Ex. 109; Pls.' Ex. 111; Pls.' Ex. 112; Pls.' Ex. 115; Pls.' Ex. 117).

 30. Timothy O'Neill and his law firm, Donovan, Leisure, Newton & Irvine, were retained by Clabir to be legal counsel for the plan termination and asset recapture process, to represent it before the Pension Benefit Guaranty Corporation ("PBGC") in obtaining government approvals needed and, generally, to coordinate the process. (7/1/92 Tr. at 134-35, Strantz Cross; Pls.' Ex. 115).

 31. Messrs. Van Hoesen and O'Neill led the January 5, 1984 meeting at Lancaster, PA. (7/1/92 Tr. at 135, Strantz Cross). At the meeting, timetables, responsibilities and details for the HMW Plan termination were discussed and assignments were given. (7/1/92 Tr. at 128, Strantz Cross; Pls.' Ex. 115; Pls.' Ex. 117). Benefit features of the terminating plan were discussed and it was left to Clabir to decide what action to take with regard to such features. (Pls.' Ex. 117).

 32. Wyatt was an actuarial firm that generally advised Clabir regarding pension matters. (7/1/92 Tr. at 130, Strantz Cross). Wyatt was retained by Clabir with respect to the HMW Plan to provide termination advice and to be the actuary for the new pension plan which would replace the terminating HMW Plan. Moreover, Wyatt was hired to review Connecticut General's actuarial work. (7/1/92 Tr. at 130, Strantz Cross; Pls.' Ex. 115).

 33. Connecticut General was invited to the January, 1984 meeting. Connecticut General did not lead the meeting, but was only a participant. (7/1/92 Tr. at 135, Strantz Cross). Connecticut General was assigned the responsibility to calculate the amount of surplus plan assets and the division of such assets between employer and employees. (7/1/92 Tr. at 137, Strantz Cross; Pls.' Ex. 115).

 34. A determination to terminate the HMW Plan was made by the Board of Directors of HMW on March 7, 1984, to be effective March 31, 1984. (Pls.' Ex. 66 at 5). The HMW Plan was terminated March 31, 1984. (Pls.' Ex. 105 at 1). In March, 1984, attorneys for Clabir and HMW filed an application with the Pension Benefit Guaranty Corporation ("PBGC") to terminate the HMW Plan and requested that the PBGC issue a Notice of Sufficiency with respect to the funds in the Plan. (7/1/92 Tr. at 136, Strantz Cross; Pls.' Ex. 105; Pls.' Ex. 115).

 C. Clabir's Termination Obligations

 35. HMW was required by federal regulations to provide an insurance company's guarantee of the accrued benefits under the Plan in order to terminate. 29 C.F.R. § 2617.4(a) (revised as of July 1, 1984).

 36. To that end, Clabir, with the assistance of the Wyatt Company, an international actuarial consulting firm, considered various options for providing accrued benefits to Plan participants at termination. One option was to provide benefits through a supplemental plan. (Pls.' Ex. 111; Pls.' Ex. 119). Another option was to use a portion of the Plan's assets to purchase a single premium, annuity or guaranteed cost contract, under which an insurance ...


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