UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
May 7, 1979
Andre TANUGGI, Plaintiff,
GROLIER INCORPORATED, the Grolier Incorporated Profit Sharing Plan of December31, 1955, the Grolier Incorporated Retirement Plan, Americana Corp., Grolier Interstate, Inc., Defendants
The opinion of the court was delivered by: SWEET
In the course of the trial of this action, the court made certain rulings on the proposed special verdict form and granted defendant Grolier Incorporated's ("Grolier") motion pursuant to Rule 12, F.R.Civ.P. to dismiss, at the close of his case, one of plaintiff Andre Tanuggi's ("Tanuggi") causes of action. The principal issue raised was whether the retirement benefits claimed by Tanuggi upon his termination from Grolier's retirement plan constituted a "security" and thus gave rise to a cause of action under the Securities Act of 1933, 15 U.S.C. § 77a Et seq. and the Securities Exchange Act of 1934, 15 U.S.C. § 78a Et seq. ("Securities Acts") and the rules promulgated thereunder by the Securities and Exchange Commission ("SEC"). Tanuggi's complaint also included causes of action under the Employee Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. § 1001 Et seq., and state law theories of contract, waiver, and estoppel.
The motion to dismiss the Securities Acts claim was granted and relief under the remaining claims was limited. Because of the issues implicated in its rulings the court undertook to set forth at a later time its underlying reasoning. This opinion seeks to fulfill that undertaking and to resolve certain issues relating to the final relief.
Tanuggi, a French citizen, was employed by Grolier or its subsidiaries as a European sales representative for Grolier publications, principally the Encyclopedia Americana. At his own election in 1971, the plaintiff was enrolled in the Grolier Incorporated Retirement Plan (the "Plan"), the company's shared contribution, defined benefit pension plan. In August, 1974 plaintiff's participation in the Plan was terminated over his protest. The instrument governing the Plan, a January 1, 1971 Agreement and Declaration of Trust ("Agreement") entered into by Grolier and the manager-trustees, of the plan provides that:
An employee agrees to contribute a mandatory, minimum three per cent (3%) of his annual earnings to maintain his status as a participant.
Employer contributions are made annually at the direction of the Plan's trustees, according to an actuarial determination of the amount required to maintain the overall level of anticipated benefits. The employer contributions are not made on behalf of any individual employee.
The employee-participant, after ten years of credited service, becomes entitled to a fixed annuity, payable in monthly installments upon retirement.
The amount of deferred benefits to which an employee becomes entitled is determined by a formula with two variables: the employee's number of years of credited service and his highest average salary over a five-year period. The total amount is a function of each employee's life expectancy.
Participants' benefits do not in any significant way depend on the investment skill of the Plan's trustees because the annual employer contributions account for shortfalls in earnings.
A participant risks losing his benefit under the Plan only if the employer is legally dissolved, declared bankrupt, or permanently ceases to contribute its actuarially determined share. In such event, each participant shares equally in the loss. If the employer permanently ceases its contributions, the assets of the plan are used to purchase deferred annuities for the participants in the amount of their mandatory contributions, plus four per cent (4%) annual interest. Neither this nor other of the communications from the company indicated that a participant's income would fluctuate with the Plan's investment fortunes.
The issue thus presented is whether the securities acts apply to a voluntary, shared contribution, defined benefit pension plan,
under the principles recently enunciated by the Supreme Court in International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S. Ct. 790, 58 L. Ed. 2d 808 (1979) ("Daniel ").
The Daniel court held that the definitional scope of the securities acts was not broad enough to encompass interests in "non-contributory, compulsory" pension plans. Id. -- - U.S. at -- , 99 S. Ct. at 802.
Daniel involved a member of a Chicago Teamsters local whose rights to pension benefits under a collectively-bargained-for plan were extinguished for failure to meet a continuous service requirement. The pensioner sued, claiming that the alleged misrepresentations and omissions by the Union and his employer gave rise to a cause of action under the securities laws.
The Daniel court concluded that of the instruments included in the definition of a security under the Acts, only the term "investment contract" could be said to cover an interest in a pension plan. Id. -- - U.S. at -- , 99 S. Ct. at 795.
To determine whether the financial relationship represented by an employee's interest in his employer's pension plan constitutes an investment contract, the test is "whether the (pension plan) scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Id. -- - U.S. at -- , 99 S. Ct. at 796, Citing SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946). As reaffirmed in Daniel, "The touchstone (of the Howey test) is the presence of an investment in a common venture premised on a Reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." United Housing Corp. v. Forman, 421 U.S. at 852, 95 S. Ct. at 2060, (emphasis supplied).
The Daniel analysis of a pension plan divided the Howey test into two component parts: 1) an investment of money and 2) the expectation of profits from a common enterprise. Each element must be applied separately to the "economic realities" of the plan and in "terms of the Acts' purposes." Id. -- - U.S. at -- , 99 S. Ct. at 796. A pension plan interest cannot comport with the commonly held understanding of an investment contract if it fails to meet either element of the Howey test. Id.
The Supreme Court has defined "reasonable expectation of profits" to mean either capital appreciation Resulting from the development of the initial investment, . . . or a Participation in earnings resulting from the use of investors funds. United Housing v. Forman, supra, 421 U.S. at 852, 95 S. Ct. 2051 (emphasis supplied).
With respect to a pension plan, the profit element of the Howey test is not satisfied when the benefits due a participant upon retirement are not primarily dependent on the success or failure of the trustees' investment efforts to generate asset earnings. Daniel, supra, -- - U.S. at -- - -- , 99 S. Ct. at 797-798. The prospect of participating in asset earnings must be more than "speculative and insubstantial" to fall within the scope of the Securities Acts. Id. When an employee's participation in a pension plan does not include this substantial profit characteristic of a security, the fact that such participation is voluntary and involves giving up a specific consideration in return for a financial interest does not make the absence of the profit characteristic less conspicuous. That an employee has acquired a financial interest by electing to participate in a contributory plan does not automatically make his interest a security. Further analysis of the plan's benefit and payout provisions in light of the "total compensation plan" is required before that interest can be called a security under Daniel. See Id. -- - U.S. at -- , 99 S. Ct. at 798. Applying Daniel's interpretation of the profit element to Tanuggi's interest in the Grolier Plan, the court concludes that he does not have an interest in an investment contract and that he therefore does not have a security. The court need not address therefore, the "investment of money" or "common enterprise" elements of the Howey test.
Under the terms of the Plan and in the wording of the informational brochures which were sent to the plaintiff, and other employees whom Grolier considered eligible, the benefits an employee participant receive have only a tenuous connection to the investment success of the pension fund.
There is no provision for any employer's individual participation in the fund's asset earnings. The employer (Grolier) is required to make an annual contribution to the fund of the total amount necessary to cover any shortfalls in earnings and the balance of the defined benefit account. Unlike a profit sharing plan, these fixed benefit provisions are substantially the same as those of the plan analyzed in Daniel. Here the sole effect of the fund's investment success or failure is an amount of mandatory contributions needed to maintain the financial health of the Plan. Conversely, a participant's benefits are affected to a much greater degree by the Plan's 10-year vesting and credited service requirements.
The amount a participant will receive is a function of his earnings and length of service and only remotely a function of investments made by the trustees. As in Daniel, "the importance of asset earnings in relation to the other benefits received from employment is diminished . . ." Id. -- - U.S. at -- , 99 S. Ct. at 798.
Tanuggi's interest in the Plan is more like an interest in a deferred, fixed annuity than an investment contract. See SEC v. Variable Annuity Life Insurance Company of America, 359 U.S. 65, 89-90, 79 S. Ct. 618, 3 L. Ed. 2d 640 (1958), (Brennan, J. concurring); SEC v. United Benefit Life Insurance Company, 387 U.S. 202, 87 S. Ct. 1557, 18 L. Ed. 2d 673 (1966); 1 Loss, Securities Regulation 506-11 (1961). Here, the plan's appeal to the participant is its insurance-like "stability and security" and not the prospect of growth. See SEC v. United Benefit, supra, at 211, 87 S. Ct. 1557. The Plan simply receives the employee contributions from the employer and applies them towards a group annuity. See, Loss Supra, at 508.
Consequently Tanuggi's minimum interest in the defined benefit plan is not a security lacking as it does a sufficient connection to the profits earned by the fund. Further support for the court's conclusion derives from analysis of the Plan under the "risk capital" approach commented upon in United Housing Corp. v. Forman, supra, 421 U.S. at 857 n. 24, 95 S. Ct. 2051, and used extensively in the Ninth Circuit. See generally United California Bank v. THC Financial Corp., 557 F.2d 1351 (9th Cir. 1977); Great Western Bank and Trust v. Kotz, 532 F.2d 1252 (9th Cir. 1976); El Khadem v. Equity Securities Corp., 494 F.2d 1224 (9th Cir.), Cert. denied, 419 U.S. 900, 95 S. Ct. 183, 42 L. Ed. 2d 146 (1974), and cases cited therein.
The risk of loss arising from the failure of the employer to contribute and inadequate investments is a different type of risk than that commonly associated with a security. See Teamsters v. Daniel, supra, -- - U.S. at -- , 99 S. Ct. at 798; SEC v. Variable Annuity, supra, 359 U.S. at 90-91, 79 S. Ct. 618 (Brennan, J. concurring); Robinson v. UMW, Health and Retirement Funds, 435 F. Supp. 245, 247 (D.D.C.1977). Cf., El Khadem v. Equity Securities Corp., supra, at 1228. Neither the terms of the plan nor Grolier's characterization of it in commerce indicate that Tanuggi intended to make, or was given to believe, that he was making an "investment for profit". The securities laws were not designed to regulate this type of transaction.
The Plan cannot be characterized as one of the countless and variable schemes devised by those who seek the use of money of others on the promise of profits. Daniel, supra, at 8; United Housing Corp. v. Forman, supra, 421 U.S. at 854, 95 S. Ct. 2051; Robinson v. UMW, supra, at 247.
Lastly, the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 832, 29 U.S.C. § 1001 Et seq. is adequate protection for this plaintiff. "Whatever benefits employees (with interests in non-contributory, compulsory plans) might derive from the effect of the Securities Acts are now provided in more definite form through ERISA." Daniel, supra, -- - U.S. at -- , 99 S. Ct. at 802. The same reasoning applies here. See, Robinson v. UMW, supra, at 247.
The Appropriate Relief
The relief demanded by Tanuggi was immediate money damages. The court concluded that such relief was inappropriate, and informed counsel before trial that the relief, if any, to be awarded would consist of a determination by the court of periodic defined benefit which Tanuggi would receive in 1988, his normal retirement date.
The amount of the periodic benefit would be computed by the court, based upon information supplied by the jury in the special verdict form.
In effect, the court held that by bringing this action Tanuggi elected to become an "ineligible participant" as that term is used in Section 7.04 of the Trust Agreement. In pertinent part, Section 7.04 reads as follows:
"The benefits accrued for such a Participant under this Plan through the date of his becoming ineligible shall be retained hereunder for the benefit of the ineligible Participant until the happening of a contingency calling for a disposition thereof at which time the applicable provision of this Plan shall be applied with respect to such benefits."
Accordingly, the court has determined that Tanuggi's defined benefit as an ineligible participant must be retained by the Trustees until 1988, at which time the periodic payments to Tanuggi shall commence.
This approach is consistent with the holding of the New York Supreme Court in Alt v. Long Island Railroad Co., 81 Misc.2d 99, 365 N.Y.S.2d 480. Alt was a declaratory judgment action under New York law, where plaintiff sought determinations of their rights under a company pension plan. In its opinion, the court held that:
Until an employee qualifies for a pension, he acquires no contractual right in the fund beyond those sums actually contributed by him plus such interest that the Managers of the fund might fix (Gould v. United Traction Co., 282 App.Div. 812, 122 N.Y.S.2d 662). It is not until retirement age is reached that an inchoate right ripens into a pension right in such amount as shall be determined by the age, wage, and years of service of the member (Silfen v. United Whelan Corporation, 30 A.D.2d 523, 290 N.Y.S.2d 417).
Here, the jury found that Tanuggi qualified for a pension because he was a participant in the plan who had more than ten years of credited service. As in Alt, Tanuggi's right to benefits under his state law theories of recovery remain inchoate until the year he reaches retirement age. This approach to the issue of what constitutes appropriate relief mirrors the text of Section 502 of ERISA, 29 U.S.C. § 1132. In pertinent part that Section provides that
(a) A civil action may be brought
(1) by a participant or beneficiary
(B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan
Id. As demonstrated above, Tanuggi has no benefit due to him under the Plan until he reaches retirement age. Therefore, his sole remedy is to clarify his rights to future benefits.
For the foregoing reasons, defendants' motion to dismiss the securities acts count is granted. The relief to be awarded plaintiff shall be as indicated above.
IT IS SO ORDERED.