The opinion of the court was delivered by: GOETTEL
[EDITOR'S NOTE: The page numbers of this document may appear to be out of sequence; however, this pagination accurately reflects the pagination of the original published document.]
This is the fifth in an apparently never ending series of litigations resulting from the purchase of Harold Faggen Associates, Inc. by Titan Group, Inc. Although the major business of Harold Faggen Associates was in servicing pension plans, most of the recent litigation has revolved around problems with the company's own pension plan.
The plan and the trust were first established on June 3, 1957.
/ The pension plan was a defined benefit plan -- one that contains a formula setting forth the benefits to be received by participants upon retirement. The effect is to fix the employee's interest by a formula applicable to him individually rather than by granting a share of the trust fund.For many years the Internal Revenue Service ("IRS") allowed such plans to be funded by contributions made under a number of different formulas. All contributions to this plan came from the employer; the employees never made any contributions. At one extreme the contributions would be adequate merely to pay accrued benefits -- those which would be due to the participants if the plan were terminated. At the other extreme, the funding would be adequate to pay total benefits that might ultimately be required of the plan. During the time that Harold Faggen owned the company, the contributions made were well in excess of those necessary to pay accrued benefits, but within the limits allowed by the IRS. The result was that, by the end of 1970, when the value of accrued benefits was about $200,000 and the value of total benefits nearly $800,000, the market value of the fund's assets was $526,549 -- about halfway between the two extremes.
In December of 1968 Harold Faggen sold his business to the Titan Group, Inc., a public corporation which was a mini-conglomerate. Faggen was kept on as president of the company under an employment contract executed at the time of the sale. At about the same time, the individual defendant in this action, Basil Castrovinci, was hired as a vice president and actuary.
Titan was aware of the overfunding of the pension plan and wanted to recapture this surplus, which was estimated to be in the $300,000 to $400,000 range. There were a number of ways by which this might have been accomplished, but all of them created other problems for Titan. One suggestion was to merge the Faggen plan with other existing Titan Group plans, which would have provided a cushion sufficient that no contributions to the merged plan would be necessary for a couple of years. This proposal was apparently unacceptable to management since its wish was to end all existing Titan pension plans and to replace them with a single corporate-wide profit sharing plan. This goal was achieved in 1973, effective as of November, 1972. To accomplish this change, all of the 26 salaried employees of Faggen's company (then known as Titan Actuarial Services, Inc.) were removed from its plan and their termination benefits of $217,546 paid to them, leaving only hourly union employees in the plan. The result of this charge was to increase enormously the amount of overfunding of accrued benefits in the fund.
At this point another possible solution was to terminate the plan as to the union employees and place them in the profit sharing group. (The plan always gave the employer the right to terminate it.) The problem with this idea was that Titan, which was primarily in the construction business, had a great number of unionized workers in its other division and did not desire to put them in the profit sharing plan. (Uniform treatment of classes of employees was necessary in order to have a plan qualified for tax purposes under the Internal Revenue Laws.) The situation became even more unbalanced when, in 1973, the date processing division of the company was sold, taking with it most of the remaining union employees. After their termination benefits were paid out, there remained only a half dozen or so union employees in the plan, which still had an overfunding of several hundred thousand dollars. The chairman of Titan directed the subsidiary to find a way so that "the $400,000 cash will flow back into Titan...." But no way to accomplish this could be found consistent with the company's other wishes.
In 1972 a dispute had arisen between the Titan owners and Faggen concerning the purchase of his company.Titan ultimately sued Faggen in this district, alleging securities law violations in concealing certain facts material to the sale. While it was apparently only a collateral issue, Castrovinci testified in March, 1974 in that action, on behalf of Titan, concerning the overfunding of the pension plan and the ability of the employer to recapture the excess.During the time that this dispute was evolving, Faggen continued his employment. He was, however, stripped of his title, President of the company, and Castrovinci was substituted in his place although, for all practical purposes, Faggen still continued as the head of the business. This arrangement proved unworkable and in January, 1973, on Castrovinci's request, Titan finally discharged Faggen. The prior federal litigation persisted in the courts for some years. Faggen prevailed in the district court, and the verdict was upheld on appeal. Titan Group, Inc. v. Faggen, 513 F.2d 234 (2d Cir. 1975). A petition for certiorari was denied. 423 U.S. 840 (1975).
While the first action was pending in federal court Faggen sued Titan in the New York State courts. Titan asserted a number of counterclaims unrelated to the claim of securities violations. This case has dragged through the state court for more than six years and is still pending. Another action was commenced in the state court by Titan against Faggen to compel him to relinquish his position as trustee of the pension plan.1A That action was settled and Faggen withdrew as trustee.
With the departure of Faggen the pension business of Titan Actuarial Services fared poorly. Faggen took a substantial number of his clients with him.Certain morale problems and the continuous litigation did not help the situation.
Starting in 1974 Titan made efforts to dispose of its subsidiary. In the spring of 1975 Castrovinci made an offer to purchase the company himself. Ultimately, in October 1975 he did buy out the company. The purchase was for a nominal amount, $30,000 in notes, but Castrovinci also had to give to Titan his own notes covering the receivables of the company (whether collected or not) and had to undertake to meet several obligations of Titan, including the payments on the lease-purchase of a computer which was then allegedly worth substantially less than the amounts still due on the lease. In order to secure these notes Castrovinci executed a second mortgage on his house in favor of Titan.
At the time of the sale two documents were executed.One related to the purchase of the business by Castrovinci, who called the new company "Basil Castrovinci Associates, Inc." The other, a separate document not referred to as a sales agreement, released Castrovinci from certain noncompetitive aspects of his earlier contracts, and also transferred to him all of the assets and liabilities of the pension plan and trust.
From the evidence presented at this trial, it is apparent that the executives of the Titan mini-conglomerate did not understand that the problems in recapturing the grossly excessive pension contributions were unique to it, and that a new company, particularly one that had no existing pension plan, would not encounter the same difficulties. Castrovinci and other actuaries associated with him, however, did not exhibit the same lack of understanding. Shortly after purchasing the company, Castrovinci took steps to terminate the plan and recapture the surplus. When Titan learned of this it sued Castrovinci in New Jersey for the pension plan assets. That action is also still pending.
While Castrovinci's new company did not have the problems that Titan did in altering its pension plan, new problems were caused by the passage of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. ("ERISA"). Section 403(c)(1) of the Act provides that "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participated in the plan." Section 4044 of the Act allows recapture of the surplus assets upon ...