and denied defendant's cross-motions to dismiss and for
summary judgment. The court then referred the case to
Magistrate Amon for a report and recommendation as to
The magistrate conducted a hearing and issued her report
recommending that 1) the Guaranty Corp. be awarded $185,640,
the amount of the unpaid contributions when the Plan
terminated; 2) interest be allowed from October 18, 1981, the
date the Plan terminated to the date of judgment; 3) the
interest be at the 52-week Treasury bill rate; and 4)
defendant's guaranteed benefits be set off against the award.
Guaranty Corp. objected to the recommendation, arguing that
the magistrate had adopted an improper prejudgment interest
rate and that the defendant's total accrued benefits, not
just guaranteed benefits, should be set off against the
award. This court again referred the case to the magistrate.
In February 1990, the magistrate issued a Supplemental
Report and Recommendation, recommending that defendant's full
accrued benefit be set off against the damage award, and
adhering to the recommendation that the court adopt the
52-week Treasury bill rate.
Guaranty Corp. now objects to the use of the Treasury bill
rate as insufficient to compensate the Plan for losses
suffered by defendant's breach.
The Guaranty Corp. is, as noted, a wholly owned United
States Government Corporation, whose Board of Directors
consists of the Secretaries of the Treasury, Labor and
Commerce. 29 U.S.C. § 1302(d). Its function is to administer
and enforce ERISA's Title IV, which includes a mandatory
government insurance program protecting the pension benefits of
many millions of private sector workers.
When a Title IV plan terminates with insufficient assets to
satisfy its pension obligations to employees, the Guaranty
Corp. takes over the plan's assets and liabilities and uses
those assets to cover, to the extent possible and in
accordance with statutory priorities, the benefit
obligations. 29 U.S.C. § 1344. The Guaranty Corp. must then add
its own funds to ensure payment of some of the remaining
"nonforfeitable" benefits, that is, benefits to which
participants have earned entitlement as of the termination
Employers that maintain pension plans bear most of the cost
of the Guaranty Corp. insurance, paying annual premiums.
29 U.S.C. § 1306, 1307. Part of the cost is financed by the
statutory liability imposed on employers that terminate
underfunded pension plans. They become liable to Guaranty Corp.
for the benefits it will have to pay out. Historically the
Guaranty Corp. has recovered only a small part of the
employers' liability, and Congress has had to increase the
premiums repeatedly over the years. See Pension Benefit
Guaranty Corp. v. LTV Corp., ___ U.S. ___, 110 S.Ct. 2668, 110
L.Ed.2d 579 (1990).
In the present case, the plan was underfunded and Guaranty
Corp. was required to allocate the remaining plan assets and
its own funds in accordance with the categories of statutory
priorities set forth in 29 U.S.C. § 1344, and
29 C.F.R. § 2618-2618.16. Only three of those categories, namely, 2, 3, and
4, are pertinent here.
Category 2 consists of accrued benefits derived from
mandatory employee contributions. This Category is divided
into basic-type and non-basic-type benefits. Basic-type
benefits are the sum of the present values of the annuity
benefit and pre-retirement death benefit. Non-basic-type
benefits only apply to participants who have elected a lump
sum benefit, and consist of that portion of the lump sum
benefit exceeding the value of the basic-type benefit for
Category 3 consists of those annuity benefits in pay status
at the beginning of the three year period ending on the plan
termination date, and those annuity benefits that could have
been in pay status for participants who were eligible to
receive annuity benefits before the beginning of the three
year period ending on the plan termination date.
Category 4 consists of other "basic-type" benefits
guaranteed by the Guaranty Corp.
As guarantor of the Plan, the Guaranty Corp. provides the
"basic-type" benefits promised by these three Categories
whether or not the Plan has sufficient assets to fund those
categories. The Guaranty Corp. guaranteed the Plan benefits
worth $241,562 in 1981 dollars.
In the present case, had defendant not breached his duty to
the Plan, on its date of termination in October 1981 the Plan
would have had $185,640 more in funds. The present value of
the Plan assets at that time would have totalled $271,234.
The administrator would have then paid back or invested the
amounts according to the priority categories.
Payments would have first been made to Category 2. There
was due $90,317 for basic-type and $75,963 for non-basic-type
benefits. Because of the breach, only $85,594 in assets were
available. Thus, the beneficiaries did not receive $4723 in
basic-type and $75,963 in non-basic-type benefits. As the
$75,963 was not guaranteed by the Guaranty Corp., the
beneficiaries, absent reimbursement from this action, will
not recover the benefits that would have come from these lost
The Guaranty Corp., however, did guarantee $151,245 of
basic benefits due under Category 3 and 4 ($241,562 minus
$90,317). Even if defendant had fulfilled his fiduciary duty,
the Plan assets available for Category 3 and 4 would have
only been $104,954 ($271,234 minus ($90,317 plus $75,963)).
The $104,954 would not have been sufficient to provide the
beneficiaries benefits in excess of those already guaranteed.
In other words, had there been no breach, the beneficiaries
would have received from the Plan in 1981 no more than the
$75,963, plus the already guaranteed benefits.
Section 1109(a), 29 U.S.C. provides in pertinent part:
any person who is a fiduciary with respect to a
plan who breaches any of the responsibilities,
obligations, or duties imposed upon fiduciaries
by this subchapter shall be personally liable to
make good to such plan any losses to the plan
resulting from each such breach, and to restore
to such plan any profits of such fiduciary which
have been made through use of assets of the plan
by the fiduciary, and shall be subject to such
other equitable or remedial relief as the court
may deem appropriate.
Under this Section, the court has "wide discretion" in
formulating appropriate equitable relief to put the pension
plan in the same position at the time of judgment that it
would have been had the breach not occurred. Katsaros v. Cody,
744 F.2d 270, 281 (2d Cir.), cert. denied, 469 U.S. 1072, 105
S.Ct. 565, 83 L.Ed.2d 506 (1984). The court may award
prejudgment interest to make the Plan whole. Id.
The question is what interest rate would approximate the
rate of return the Plan would have achieved during the period
at issue. In many cases, the courts look to the investment
return of the ongoing plan. See, e.g., See Donovan v.
Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985). The difficulty
in the present case is that the Plan was "terminated" and the
assets mingled with those of Guaranty Corp.'s trust fund, which
earned an approximately 12% per year return over the period.
The Guaranty Corp. advocates this trust fund rate as the
proper prejudgment interest. This was the return the Plan
assets arguably earned while in the trust, and was the rate
the assets would have earned even had there been no fiduciary
breach, as the Guaranty Corp. would still have assumed
management of the assets at termination. 29 U.S.C. § 1341(e).
However, the court only has discretion under § 1109(a) to
compensate the Plan, not the Guaranty Corp., for lost
investment opportunities caused by the breach. The cases cited
by Guaranty Corp. do not suggest otherwise. See Donovan, supra,
754 F.2d at 1056 (compensating the plan for lost profits);
Dardaganis v. Grace Capital,
Inc., 684 F. Supp. 1196, 1199 (S.D.N.Y. 1988), aff'd in part and
vacated in part, 889 F.2d 1237 (2d Cir. 1989) (same).
Thus, the court considers what rate would approximate the
Plan's return were the Plan considered separate from the
Guaranty Corp.'s trust fund.
The court has only the Plan's investment strategy before
termination to predict the investments of the hypothetical
ongoing Plan. While many funds adopt aggressive investment
strategies, with the beneficiaries taking the risks and
reaping the rewards or absorbing the losses, this Plan did
not. Rather than investing in higher risk and correspondingly
higher yield equities or bonds, the Plan bought standard
annuities from an insurance company. Neither the Plan nor the
beneficiaries would have expected a greater return.
Thus, the appropriate interest rate attributable to the
Plan is the return the Plan could have received buying
annuities with its assets at the time of termination. Indeed,
had the Plan been fully funded, it would have been required
to buy annuities from an insurer at the time of termination,
29 C.F.R. § 2617.21, locking in a specific return for the
Plan's beneficiaries. This return was less than the return
earned by the Guaranty Corp. with its more aggressive
investment strategy and much larger pool of assets.
The Guaranty Corp. has calculated its annuity rate, that
is, the rate required to provide today the same benefits that
could have been purchased in 1981 and cover the Guaranty
Corp.'s costs in managing the annuity contracts. This rate is
the most equitable prejudgment rate. Any higher rate,
including the Guaranty Corp.'s trust fund rate, would more
closely estimate Guaranty Corp.'s, rather than the Plan's,
Guaranty Corp. further argues that under 29 U.S.C. § 1344(c)
the "increase . . . in the value of assets" of the Plan after
the date of termination is "credited to" the Guaranty Corp.,
having assumed control of the underfunded Plan. Guaranty Corp.
contends that prejudgment interest should be considered
interest earned by the Plan after the date of termination and
should be credited to it. In this case, the practical effect of
treating prejudgment interest as a post termination "increase .
. . in the value of assets" is that the beneficiaries of the
Plan might not receive lost interest on the non-guaranteed
category 2 assets they would have earned had the assets been
distributed to them in 1981.
It is hard to see, however, how the Guaranty Corp. — rather
than the Plan and beneficiaries — should recover such lost
interest. Had there been no breach, it would not have had the
assets to invest. In so far as the awarded prejudgment interest
rate is required to compensate the Plan and beneficiaries for
lost interest on Category 2 benefits, it should not be
considered an increase in asset value for purposes of 1344(c).
While Guaranty Corp. will still pay out more in benefits
than it has received in Plan assets, this is not attributable
to defendant's breach. Absent a breach, the Plan would have
still been underfunded.
Guaranty Corp. also notes that several courts in this
circuit have adopted as prejudgment interest the adjusted
prime rate set by the Secretary of the Treasury pursuant to
26 U.S.C. § 6621. See, e.g., McLaughlin v. Cohen, 686 F. Supp. 454,
458 (S.D.N.Y. 1988); Whitfield v. Tomasso, 682 F. Supp. 1287,
1305 (E.D.N.Y. 1988); Benvenuto v. Schneider, 678 F. Supp. 51,
55 (E.D.N.Y. 1988). In those cases, the prime rate
approximated those courts' estimates of lost investment
returns. As discussed above, this terminated Plan reasonably
could have expected only a return approximating the annuity
Finally, Guaranty Corp. argues that because the statute
permits it to impose the adjusted prime rate when calculating
"employer" liability with respect to payments overdue a plan,
see 29 U.S.C. § 1362(b); 29 C.F.R. § 2622.7, it is only fair to
adopt that rate here. While the adjusted prime rate serves to
make it economically unwise for an "employer," usually a
corporation, to defer payment to a plan, the same deterrent is
hardly required to prevent a fiduciary,
who may be held personally liable, from violating his
The court finds plaintiff's annuity rate to be the
equitable prejudgment interest rate.
The Guaranty Corp. also requests that the defendant's claim
to benefits be set off against the judgment. Defendant
objects, arguing that such a set-off would violate ERISA's
anti-alienation provision, 29 U.S.C. § 1056(d)(1), providing
that "[e]ach pension plan shall provide that benefits provided
under the plan may not be assigned or alienated."
The remedy of set-off in fiduciary breach cases has been
recognized as a narrow exception to the anti-alienation
provision. See, e.g., Crawford v. La Boucherie Bernard, Ltd.,
815 F.2d 117 (D.C. Cir.), cert. denied, 484 U.S. 943, 108 S.Ct.
328, 98 L.Ed.2d 355 (1987). Defendant relies on Herberger v.
Shanbaum, 897 F.2d 801 (5th Cir. 1990). In Herberger, the court
rejected the offset remedy as applied to a third party who
participated in the fiduciary breach, interpreting the decision
in Guidry v. Sheet Metal Workers Nat. Pension Fund, ___ U.S.
___, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990), to preclude such
In Guidry, the Court said that it need not decide whether the
broad remedial provisions of ERISA, 29 U.S.C. § 1109(a), supra,
supercede the anti-alienation provision because the defendant
there had "not been found to have breached any fiduciary duty
to the pension plans." 110 S.Ct. at 685 (emphasis in the
original). Here there has been such a breach.
The court agrees with the reasoning of Crawford. ERISA's
legislative history and common sense suggest that set-off is
permissible. No good reason appears as to why Guaranty Corp.
should have to pay benefits to a person who has wronged the
Plan, and the beneficiaries of it, before he has made good the
wrong. To the extent Herberger, supra, is contrary, this court
respectfully declines to follow it.
The court adopts the magistrates recommendation entering
judgment in the principal amount of $185,640. The court
awards prejudgment interest at plaintiff's annuity rate and
permits set off of defendant's benefits against the judgment.
Plaintiff shall submit an affidavit informing the court of
the total damage award and a corresponding order.
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