Appeal from the United States District Court for the Central District of California. D.C. No. CV-92-04020-RG. Richard A. Gadbois, Jr., District Judge, Presiding.
Before: Fletcher, Pregerson, and Norris, Circuit Judges. Norris, Circuit Judge, Dissenting.
PREGERSON, Circuit Judge:
Plaintiffs appeal the district court's dismissal of their action brought under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et. seq. Plaintiffs are retired Hughes Aircraft Company employees who are participants in the Hughes Non-Bargaining Retirement Plan (the "Contributory Plan"). Plaintiffs allege in their complaint that the employer, defendant Hughes Aircraft Company ("Hughes"), breached its statutory and fiduciary duties under ERISA when it used the Contributory Plan's surplus assets--attributable in part to employee contributions--to fund an early retirement program for existing employees and a new non-contributory pension plan for some employees that were not participants of the Contributory Plan. Plaintiffs seek a variety of remedies, including a distribution of "all or a portion of the excess Plan assets" in the form of increased benefits. The district court dismissed plaintiffs' complaint under Fed. R. Civ. P. 12(b)(6), without leave to amend. The simple question before us is whether plaintiffs have alleged sufficient facts in their complaint to state any claim for relief under ERISA. Assuming plaintiffs can prove what they have plead in their complaint, we conclude their claims are cognizable. We, therefore, reverse.
According to the complaint,*fn1 defendant Hughes is an aerospace and electronics manufacturing company. Since 1951, Hughes has provided a retirement pension plan for its employees. At issue in this litigation is the use by Hughes of surplus assets from the Contributory Plan.
The terms of the Contributory Plan provide, in relevant part, that both Hughes and its employees must contribute to the Plan. The employees' contributions are automatically deducted from their pay. By 1986, as a result of both employer and employee contributions and as a result of investment growth, the Contributory Plan's assets exceeded the actuarial or present value of accrued benefits by almost one billion dollars.
Apparently, because of this surplus, and after being acquired by the General Motors Corporation, Hughes, in 1987, ceased making contributions to the Contributory Plan.*fn2 The employees, in contrast, despite the overfunding, were required to continue making contributions to the Contributory Plan. As of January 1, 1992, approximately half the surplus in the Contributory Plan was attributable to employee contributions and the other half to employer contributions.
In 1989, Hughes amended the Plan and used part of the asset surplus to provide an early retirement program for existing employees. According to plaintiffs, by offering this program, Hughes was able to reduce its workforce and save payroll costs.
Plaintiffs also allege in their complaint that Hughes terminated the Contributory Plan on January 1, 1991, when Hughes created a new defined benefit plan (the "Non-Contributory Plan") and froze new enrollment in the Contributory Plan. The new Non-Contributory Plan covers all new employees as well as those old employees who chose not to remain in the Contributory Plan.
Although created through an "amendment" to the Contributory Plan, the Non-Contributory Plan shares virtually no characteristics with the older plan, other than administration by the same trustees. The Contributory Plan is elective and requires monthly contributions by the employees. The Contributory Plan also provides health coverage, a cost of living adjustment, and unreduced early retirement benefits.
In contrast, the Non-Contributory Plan requires no employee contributions, and new employees are enrolled automatically. The new plan does not provide health coverage, cost of living adjustment, or unreduced early retirement benefits. In addition, the new plan pays lower monthly retirement benefits than the Contributory Plan, and the two plans use different formulas to compute benefits.
According to plaintiffs' complaint, Hughes used and continues to use the asset surplus generated by employee and employer contributions from the Contributory Plan to fund the new Non-Contributory Plan. Plaintiffs further allege that in so doing, Hughes is improperly using plan assets attributable in part to employee contributions for its own benefit.
Plaintiffs filed this class action in the United States District Court for the District of Arizona. The putative class consists of over 10,000 persons who were participants in the Contributory Plan on December 31, 1991. The court granted Hughes's motion to transfer venue to the Central District of California. Defendants filed a motion to dismiss under Federal Rules of Civil Procedure 12(b)(6). The district court granted the motion and dismissed plaintiffs' complaint without leave to amend. No discovery was ever taken in the district court.
We review de novo a district court's dismissal of a complaint for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6). Everest and Jennings v. American Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994) (citations omitted). We apply the same standard on appeal as the district court. Id. "It is axiomatic that a complaint should not be dismissed unless 'it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); see 5 C. Wright & A. Miller, Federal Practice & Procedure §§ 1202, 1205-1207, 1215-1224, 1228 (1969)." McLain v. Real Estate Bd. of New Orleans, 444 U.S. 232, 246, 62 L. Ed. 2d 441, 100 S. Ct. 502 (1979) (emphasis added).
The Supreme Court has consistently adhered to this standard. Most recently, in Hartford Fire Ins. Co. v. California, 509 U.S. 764, 113 S. Ct. 2891, 2916-17, 125 L. Ed. 2d 612 (1993), Justice Scalia, who concurred in the Court's decision, stated that, although he disagreed with Justice Souter's analysis as to what constitutes a boycott, he agreed that the action should not be dismissed because "other allegations in the complaints describe conduct that may amount to a boycott if the plaintiffs can prove certain additional facts." Id. (emphasis added). Justice Scalia further noted that allegations in a complaint are to be "liberally construed" at the 12(b)(6) stage. Id. at 2917.
Thus, a court's role at the 12(b)(6) stage is not to decide winners and losers or evaluate the strength or weakness of claims. See Everest and Jennings, 23 F.3d at 228; Abramson v. Brownstein, 897 F.2d 389, 391 (9th Cir. 1990). Nor can a court resolve factual questions at the 12(b)(6) stage. We must accept as true the allegations in the complaint and decide only whether plaintiff has advanced potentially viable claims.
With this standard in mind, we now examine plaintiffs' claims in this action.
B. Plaintiffs' ERISA Claims
At the heart of this dispute is whether Hughes is entitled to use and control for its own benefit the Contributory Plan's one billion dollar surplus, approximately half of which was generated by employee contributions. This is not a case in which the pension plan at issue was funded entirely by employer contributions. Nor is this a case in which the employer used the plan's asset surplus solely to benefit participants of the plan. Because plaintiffs allege that the employer used the Contributory Plan's asset surplus attributable in part to employee contributions for its own benefit and for the benefit of employees who were never participants in the Contributory Plan, we conclude that plaintiffs have stated cognizable claims under ERISA.
Plaintiffs first claim alleges that Hughes violated ERISA § 403(c)(1), 29 U.S.C. § 1103(c)(1), which provides that "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants of the plan." The term "inure" has been defined as "meaning broadly to 'become of advantage to the employer.'" Amato v. Western Union Int'l., Inc., 773 F.2d 1402, 1414 (2d Cir. 1985) (citing Teamsters Local 639 v. Cassidy Trucking, Inc., 646 F.2d 865, 868 (4th Cir. 1981)), cert. dismissed, 474 U.S. 1113 (1986).
The district court rejected plaintiffs' anti-inurement claim. We agree with the district court that Hughes did not violate § 1103(c)(1) by the mere fact that Hughes ceased its contributions to the Contributory Plan. The terms of the Contributory Plan require Hughes to contribute to the Plan only when necessary to ensure sufficient funding. ERISA does not require an employer to contribute to an overfunded plan. See Fetcher v. HMW Indus., Inc., 879 F.2d 1111, 1113 (3rd Cir. 1989).
This, however, does not mean that Hughes can use the Contributory Plan's asset surplus for its own benefit and for the benefit of employees who were never participants in the Contributory Plan. Hughes did not do anything so blatant as to distribute the surplus to itself and to the new employees. Instead, Hughes twice "amended" the Contributory Plan to its own advantage and used the asset surplus attributable in part to plaintiffs' contributions to offer an early retirement program and the Non -Contributory Plan for existing and new employees. By so doing, plaintiffs allege, Hughes reduced its labor costs while effectively increasing new employees' wages. Thus we find that, based on plaintiffs' allegations, Hughes has taken advantage of the plan's asset surplus for its own benefit.
Hughes, however, contends that its "amendments" creating two new benefits structures under the Contributory Plan did not violate ERISA's anti-inurement provision, because Hughes was not acting as a fiduciary when it "amended" the plan. To support its contention, Hughes relies on the Supreme Court's recent decision in Lockheed Corp. v. Spink, 135 L. Ed. 2d 153, U.S. , 116 S. Ct. 1783 (1996).
In Lockheed, the Supreme Court held that amending an existing pension plan to use surplus assets to fund an early retirement program for participants of the plan does not violate ERISA, so long as other ERISA provisions are not violated. Id. at 1790 ("While other portions of ERISA govern plan amendments, see, e.g., 29 U.S.C. § 1054(g) (amendment generally may not decrease accrued benefits); § 1085b (if adoption of an amendment results in underfunding of a defined benefit plan, the sponsor must post security for the amount of the deficiency), the act of amending a pension plan does not trigger ERISA's fiduciary provisions."). As the Supreme Court explained, generally "plan sponsors who alter the terms of a plan do not fall into the category of fiduciaries" under ERISA. Id. at 1789.
Lockheed, however, can be distinguished from this case. First, the Supreme Court in Lockheed did not address whether the early retirement program in that case violated ERISA's anti-inurement provision. Here, plaintiffs allege that Hughes improperly benefited from using plan assets. Second, the asset surplus that was used in Lockheed to fund the early retirement program was attributable only to employer contributions. Here, plaintiffs allege that the asset surplus Hughes used to fund the early retirement program and the new Non-Contributory Plan was attributable to both employer and employee contributions. Third, the early retirement program in Lockheed only benefited employees who were already participants in the existing pension plan. Here, some of the employees benefiting from the Non-Contributory Plan are new employees who were never participants in the Contributory Plan. Fourth, plaintiffs in Lockheed did not allege that the employer had terminated the pension plan. Here, plaintiffs allege that Hughes terminated the Contributory Plan when it froze new enrollment and created the Non-Contributory Plan. Lastly, the plaintiffs in Lockheed did not allege that the amendment resulted in the violation of any other ERISA provisions. Here, plaintiffs allege that by using the asset surplus attributable in part to employee contributions Hughes reduced plaintiffs' accrued benefits and violated ERISA's vesting, nonforfeiture, and distribution requirements under 29 U.S.C. §§ 1053(a) and 1344.
Thus, Lockheed is of little help in determining whether Hughes's use of the Contributory Plan's asset surplus attributable in part to employee contributions violates ERISA. Even if we were to hold that under Lockheed Hughes's "amendments" in this case did not trigger its fiduciary obligations under ERISA, that does not mean that we must also hold that Hughes's conduct did not trigger ERISA's anti-inurement provision.
We have found no case which holds that the anti-inurement provision is only triggered when an employer is acting as a fiduciary. Nor can we reasonably interpret 29 U.S.C. § 1103(c)(1) as establishing such a requirement. Unlike other provisions under ERISA, see, e.g., 29 U.S.C. § 1104 (specifically addressing fiduciary duties) and 29 U.S.C. § 1106 (specifically referring to a fiduciary), § 1103 makes no reference to fiduciaries or fiduciary obligations. Section 1103 refers only to employers, stating that "assets of a plan shall never inure to the benefit of any employer." 29 U.S.C. § 1103(c)(1). Thus, we hold that under a plan reading of § 1103, Hughes's alleged conduct in this case triggers ERISA's anti-inurement provision, whether or not the alleged conduct implicates ERISA's fiduciary obligations.
The Dissent, however, asserts that the fact that an asset surplus is attributable in part to employee contributions is irrelevant. According to the Dissent, an employer has sole discretion as settlor to use an asset surplus attributable in part to employee contributions. We disagree.
Under ERISA, Congress specifically provided protections for assets attributable to employee contributions. Congress enacted 29 U.S.C. § 1053, which establishes minimum vesting and nonforfeiture requirements for accrued benefits derived from employee contributions. In addition, section 4404 requires that, upon a plan's termination, any residual assets attributable to employee contributions "shall be equitably distributed to the participants who made such contributions," after all liabilities have been satisfied. 29 U.S.C. § 1344(d)(3)(A).
It is clear from these provisions that Congress intended to distinguish between plan assets attributable solely to employer contributions from plan assets attributable in part to employee contributions. As the Fifth Circuit has explained:
An entirely employer funded defined benefit plan pension trust is therefore more akin to a gratuitous trust so far as concerns surplus assets, as to which ERISA so markedly distinguishes between those attributable to employer contributions (thus suggesting that employer contributions are not a form of recontributed wages for such purposes). Where a gratuitous trust is fully performed without exhausting the trust estate, a resulting trust of the surplus is presumed to arise in favor of the settlor. RESTATEMENT (SECOND) OF TRUST § 430. This principle has been looked to in holding an employer entitled to surplus assets on termination of an employer funded defined benefit pension plan.
Borst v. Chevron Corp., 36 F.3d 1308, 1315 (5th Cir. 1994) (emphasis added).
Thus, to ignore the distinction between a plan funded solely by employer contributions and a plan funded by both employer and employee contributions would eviscerate the protections provided to employees under ERISA with respect to their employee contributions. We, therefore, hold that, when both the employer and its employees contribute to a pension plan, the employer does not have sole discretion to use that part of a plan's asset surplus attributable to employee contributions.
Hughes, alternatively, argues, that even if plaintiffs are entitled to some portion of the asset surplus, the anti-inurement provision has not been triggered in this case because Hughes has not withdrawn or threatened to withdraw plan assets. Hughes relies on a Second Circuit decision, Amato v. Western Union Int'l, Inc., 773 F.2d 1402, in support of its position.
Amato does not help Hughes. Like Lockheed, Amato involves an amendment to a non-contributory pension plan that reduced retirement benefits for a group of participants under an existing plan. As discussed above, this distinction is critical. While an employer may have the discretion to decide how to use an asset surplus attributable solely to employer contributions, so long as other provisions of ERISA are not violated, an employer does not have sole discretion to use a plan's asset surplus attributable in part to employee contributions to benefit itself and employees that were never participants in the plan. By its plain language, the anti-inurement provision requires that plan assets must "never inure to the benefit of any employer" and must be used "for the exclusive purposes of providing benefits to participants of the plan." 29 U.S.C. § 1103(c)(1) (emphasis added).
Further, to affirm the district court's dismissal on the ground that under Amato plan assets were never withdrawn in this case would require us to resolve disputed issues of fact. We would have to conclude that no termination has occurred and that only one plan exists. We, however, cannot resolve factual issues on a motion to dismiss.
In ruling on a 12(b)(6) motion, plaintiffs' allegations must be taken as true. Here, plaintiffs allege that by "amending" the Contributory Plan to freeze its enrollment and to create a separate Non-Contributory Plan for new employees, Hughes, in effect, terminated the Contributory Plan and "withdrew" the surplus assets for its own use and for the benefit of some employees who were never participants in the Contributory Plan.*fn3 If in fact plaintiffs can prove that two separate plans exist and that Hughes's amendment terminated the Contributory Plan, Hughes's withdrawal of assets from the Contributory Plan to create and fund the new Non-Contributory Plan for the benefit of some employees who were never participants in the Contributory Plan violated ERISA's anti-inurement provision.*fn4
Hughes, however, contends that any benefit it receives from using the surplus assets of the Contributory Plan is an "incidental side effect," insufficient as a matter of law to state a claim under the anti-inurement provision. Holliday v. Xerox Corp., 732 F.2d 548, 551 (6th Cir. 1984), cert. denied, 469 U.S. 917, 83 L. Ed. 2d 229, 105 S. Ct. 294 (1984). We reject this contention.
Whether Hughes gains an "incidental" economic benefit from being able to buy out its older employees through an early retirement program and by being able to offer new employees a pension plan that requires no employee contributions is a question of fact we cannot resolve on a 12(b)(6) motion. To resolve this factual question, we would have to look beyond the allegations in the complaint. This, we cannot do. We reiterate that on a 12(b)(6) motion we must take as true each allegation in plaintiffs' complaint and draw all reasonable inferences in favor of plaintiffs.
Based on the liberal 12(b)(6) standard, we believe that plaintiffs' allegations are sufficient to state a claim under ERISA's anti-inurement provision. Hughes, in effect, remained competitive in the labor market by using the asset surplus, created in part by employee contributions, to reduce its labor costs and to increase new employees' wages. Had Hughes not used the Contributory Plan's surplus, Hughes would have had to use its own revenues or offered fewer benefits to its new employees. We cannot say at the 12(b)(6) stage that Hughes's alleged benefit is an "incidental side effect" that does not violate ERISA's anti-inurement provision.
Plaintiffs' second claim alleges that Hughes breached its fiduciary duties under ERISA § 404, 29 U.S.C. § 1104, by using the Contributory Plan's surplus assets to fund the Non-Contributory Plan for some employees that never were participants in the Contributory Plan. Section 1104 requires that a fiduciary "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries." 29 U.S.C. § 1104(A)(1) (emphasis added). The complaint, by alleging that Hughes is using funds attributable to their employee contributions to fund a new plan for some employees who were never participants in the Contributory Plan, states a valid claim for relief.
Hughes, however, contends that its conduct did not violate ERISA's § 1104. Hughes maintains that it was not acting as a fiduciary when it "amended" the Contributory Plan to use the asset surplus. According to Hughes, an employer, as settlor, can change a plan's structure at any time, for whatever reason, and for anyone's benefit without implicating its fiduciary duties under ERISA.
The district court agreed. The district court concluded that Hughes's decision to amend the Contributory Plan to provide for asset surplus reversion to itself was a plan design decision that did not implicate ERISA's fiduciary obligations, regardless of the fact that the asset surplus was attributable in part to employee contributions and used to benefit some employees who were never participants in the Contributory Plan. The district court was wrong.
As discussed above, based on our reading of the relevant ERISA provisions, we hold that, when an employer is not the sole contributor of a pension plan, the employer does not have sole discretion to use the asset surplus of the plan. If employees contribute to the plan, the employer has a fiduciary duty to the employees when it amends the plan to use an asset surplus. In essence, when a plan is funded by both employer and employee contributions, both the employer and the employees are co -settlors of the plan.
The recent Supreme Court decisions construing ERISA's fiduciary provisions do not dictate otherwise. See Lockheed Corp. v. Spink, 135 L. Ed. 2d 153, 116 S. Ct. 1783; Varity Corp. v. Howe, 134 L. Ed. 2d 130, 116 S. Ct. 1065. It is true that in Lockheed, the Supreme Court held that an amendment to a plan to provide an early retirement program for existing employees did not trigger ERISA's fiduciary obligations because "when employers undertake those actions, . . . they do not act as fiduciaries, . . . but are analogous to the settlors of a trust." 116 S. Ct. at 1789. But as discussed above, the employer in Lockheed was the sole contributor of the plan and used the plan's surplus only to benefit the plan's participants. Here, plaintiffs allege that Hughes used the Contributory Plan's surplus assets attributable in part to employee contributions for Hughes's own benefit and for the benefit of some employees who were never participants in the Plan.
Thus, we cannot say that Hughes was simply acting like a settlor of a trust when it "amended" the plan to fund the Non-Contributory Plan for existing and new employees. We hold that, when an employer amends a plan to use for its own benefit an asset surplus attributable in part to employee contributions, the employer is wearing both its "fiduciary" and its "employer" hats. See Varity, 116 Ct. at 1073 ("reasonable employees, in the circumstances found by the District Court, could have thought that Varity was communicating with them both in its capacity as employer and in its capacity as plan administrator).
In Varity, the Supreme Court construed 29 U.S.C. § 1002(21)(A), which provides that a person acts as "a fiduciary with respect to a plan to the extent . . . he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or Disposition of its assets . . . or he has any discretionary authority or discretionary responsibility in the administration of such plan." The Supreme Court held that this definition ...