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September 30, 1992



The opinion of the court was delivered by: ARTHUR D. SPATT


SPATT, District Judge.

 This case arises from a complicated set of twists and turns in the professional lives of the plaintiffs as well as the impact of certain entrepreneurial maneuverings by outside parties upon the plaintiffs' post-professional lives. Raymond and Roberta Auwarter brought this lawsuit to obtain a lump sum benefit which they contend is due them under the terms of their pension plan. Adjudicating these claims requires the court to journey into the complex sphere of ERISA law, the U.S. Treasury Regulations, and the Internal Revenue Code.

 Both the plaintiffs and defendants move and cross-move for partial summary judgment on the various causes of action. All of the parties concur that summary judgment is appropriate in this case because the questions raised by the motions present issues of law rather than fact.

 There are presently three motions before the Court:

 (I) a motion by the plaintiffs for partial summary judgment on their first claim for relief, directing the defendants to pay the plaintiffs the accrued pension benefits in the form of lump sums calculated under the DPSC Defined Benefit Pension Plan, plus accruals and interest;

 (II) a cross-motion for partial summary judgment by the defendants on the first, second and fourth causes of action related to the DPSC plan, ERISA § 204(g), 29 U.S.C. § 1054(g), and the defendants' fiduciary duty to the Plan;

 (III) a cross-motion by the plaintiffs' for partial summary judgment on the second claim for relief for violations of the ERISA statute, directing the defendants to pay the plaintiffs their accrued benefits in the form of lump sums, plus accruals and interest.


 The Court has jurisdiction over this matter pursuant to § 502 of the Employee Retirement Income Security Act, codified as amended at 29 U.S.C. § 1132 ("ERISA"), as well as 28 U.S.C. § 1331.

 A. The Parties

 The plaintiffs are former employees of the Donohue Paper Sales Corporation and are participants in the defendant Donohue Paper Sales Corporation Defined Benefit Pension Plan (the "Plan") and have been since its inception on October 1, 1980. The Plan is an employee retirement benefit plan providing benefits for all qualified employees.

 The defendant Donohue Paper Sales Corporation is the Administrator of the Plan ("DPSC" or "Plan Administrator"). The Plan is administered at DPSC's principal place of business, namely, 100 Jericho Quadrangle, Jericho, New York. DPSC is also the Plan Sponsor and is responsible for its funding.

 The defendants Richard Garneau, P. Denis Hamel and Edward B. Danz are Trustees of the Plan Trust and are responsible for its administration. Garneau is Vice-President of Finance, Hamel is Chairman of the Board of Directors, and Danz is Executive Vice-President of DPSC.

 B. The Causes of Action

 The plaintiffs allege the following causes of action against the defendants: (1) an initial claim against all of the defendants under the general ERISA statute based on the defendants' alleged attempt to reduce the lump sum benefits due the plaintiffs under the terms of the DPSC Plan and/or attempting to eliminate the lump sum option in violation of the express terms of the Plan; (2) a second claim against all of the defendants for [a] allegedly violating ERISA § 204(g), 29 U.S.C. § 1054(g) which provides that a plan cannot be amended to eliminate an optional form of benefit and [b] failure to follow Treasury Regulations under the Internal Revenue Code § 411(d)(6) which sets strict rules for permitting plan sponsors to amend their plans to reduce an accrued benefit; (3) a claim against DPSC for allegedly violating ERISA § 502(c), 29 U.S.C. § 1132(c) by failing to provide to the plaintiffs within 30 days of their request the values and calculations of lump sum benefits under terms of the Plan prior to any alleged modification by the Board; (4) a claim against DPSC, Garneau, Hamel and Danz, pursuant to ERISA §§ 404 and 405, for breach of their fiduciary duty in withholding the plaintiffs lump sum benefits.

 C. The Chronology of Events

 From 1970 to 1974, the plaintiff Raymond Auwarter performed marketing studies and sales services for the Donohue Company Limited, a company which owned and operated newsprint and paper production facilities with mills in Quebec. The Company subsequently became known as Donohue, Inc. ("Donohue").

 In 1974, Raymond Auwarter acquired the shares of Donohue Paper Sales Corp. ("DPSC"), a shell corporation set up by Donohue Inc., and became DPSC's president. His wife, Roberta Auwarter, became the vice-president and secretary of DPSC. In October, 1980, Donohue and DPSC entered into a global sales agreement which was later amended to terminate in 1994.

 According to Raymond Auwarter, in September 1981, he directed Miller & Miller Consulting Actuaries, Inc. ("M & M") to draft a pension plan for DPSC -- the "DPSC Defined Benefit Pension Plan" (the "Plan"). DPSC funded the Plan at Auwarter's direction "as established by law with the actuarial advice of M & M" (Auwarter Affidavit, P 6).

 Roberta and Raymond Auwarter became participants in the plan on October 1, 1980, the Plan's effective date, and began accruing benefits. Section 7.1 of the Plan provides that participants may elect to receive their pensions in a single lump sum at the discretion of the Pension Committee. Auwarter was chairman of the Pension Committee and "it had always been his intention" to approve lump sum election. He states that no one was ever denied a lump sum benefit.

 In June, 1987, the well-known publishing impresario Robert Maxwell acquired a controlling interest in Donohue Inc. along with Pierre Peladeau, a Quebec businessman. At that point, the officers of Donohue changed as did Auwarter's relationship with the company. On May 5, 1989, Auwarter sold the shares of DPSC to Donohue Inc. One condition of the sale was that Raymond and Roberta Auwarter retire. Roberta Auwarter terminated her employment on March 31, 1989. Although Raymond Auwarter ceased his employment with DPSC on April 30, 1989, he remained as Chairman of DPSC and as Chairman of the Pension Committee until May 1, 1991.

 According to the plaintiffs, DPSC had fully funded the Plan to anticipate the lump sum election by employees nearing retirement age, and Raymond Auwarter had directed that DPSC make annual contributions to the plan at or near the maximum recommended amount asset each year by M & M. Auwarter claims that in a July 26, 1989 phone conversation with defendant Denis Hamel, DPSC's Chairman of the Board, he advised Hamel that he and Roberta would be electing a lump sum benefit under the Plan and asked for information regarding that benefit option.

 M & M provided its actuarial report for the 1988-89 year in November, 1989, which indicated the minimum and maximum funding levels for the year based on the assumption that lump sum payments would be made to Roberta and Raymond Auwarter. In a December 12, 1989 letter to defendant Plan Trustee Garneau, M & M states that in response to Garneau's request, the firm estimated the "approximate benefit liability values for Mr. & Mrs. Auwarter," with figures arranged by actual termination date and by normal retirement date (Complaint, Exhibit 4). Both sets of numbers reflect a lump sum distribution.

 At a DPSC Board of Directors meeting in Quebec City on May 11, 1990, the Board adopted a resolution to amend the Plan, eliminating the lump sum option. Prior to the meeting, Raymond Auwarter had requested copies of the written proposals to be reviewed, but he states that those documents were never sent to him. Auwarter was at the meeting and abstained from the vote. By letter dated May 24, 1990, Garneau advised the Auwarters that they were not entitled to lump sum payments because that option was no longer available under the Plan.

 However, despite their statement, DPSC sent a letter to the Auwarters dated July 4, 1990, "proposing to grant" them the lump sum benefits, but at rates specified by the Pension Benefit Guaranty Corporation, which resulted in reduced benefit amounts. The Auwarters protested in a July 9, 1990 letter, and again asked for their entitlement of a lump sum benefit under the terms of the Plan prior to the alleged modification. On August 15, 1990, DPSC again denied the lump sum benefits to the Auwarters, stating that the lump sum option was legally and effectively removed from the Plan.

 According to Auwarter, M & M sent a letter to the IRS on January 8, 1991, requesting information about IRC § 411(d)(6). The reply received from the IRS stated that the Auwarters' benefits could not be reduced by plan amendments and that such a plan violated the IRC.

 Auwarter alerted DPSC to the IRS determination and asked for a resolution, further advising DPSC that its failure to "select" an operational alternative before October 1, 1989, effectively barred DPSC from retroactively eliminating the lump sum benefit option from the Plan with respect to all participants. In response, DPSC continued to state that since no lump sum payments were offered or made since October 1, 1989, DPSC could legally amend the Plan retroactively, despite the IRS determination letter.


 I. Plaintiffs' Motion for Partial Summary Judgment on First Cause of Action Under ERISA and the DPSC Plan.

 The plaintiffs move for summary judgment claiming that, in seeking to amend the DPSC Plan to eliminate the lump sum option, the defendants failed to comply with certain ERISA provisions and related Treasury Regulations.

 In support of the motion, counsel for the plaintiffs has provided the affidavit of Raymond Auwarter which has been discussed at length in the Chronology above. The first cause of action seeks relief under the general ERISA statute, namely the lump sum distribution under the terms of the Plan.

 Plaintiffs were 100% vested in their accrued benefits under the terms of the Plan on their respective termination dates and they argue that the lump sum option existed at the time of their terminations (Plaintiffs' Rule 3[g] Statement, PP 10, 12). According to the plaintiffs, the defendants did not amend the Plan to eliminate the lump sum option until after the Auwarters indicated their desire to elect their benefits in lump sums.

 The plaintiffs also contend the defendants did not comply with the regulations which permit retroactive amendments because they did not make a "selection" by the first day of the Plan year after January 1, 1989 (in this case, October 1989). The defendants acknowledge that they did not decide to eliminate the lump sum option ("selection") until a Board of Directors meeting in May, 1990, eight months later.

 The plaintiffs further contend that under ERISA, an optional form of benefit cannot be eliminated by plan amendment. However, the plaintiffs do admit that ERISA § 204(g)(2) gives the Secretary of the Treasury the authority to promulgate regulations that sanction amendments to that effect (29 U.S.C. § 1054[g][1] and [2]).

 The defendants acknowledge that ERISA prohibits the elimination of an optional benefit form, but argue that they have complied with a limited exception to that rule as provided in the Treasury Regulations, which permits retroactive amendments as long as the Plan makes a "selection" by the first day of the Plan year after January 1, 1989, and operates the Plan in conformity with that selection. In this case, the applicable date would be October 1, 1989.

 The defendants maintain that the normal form of benefit under the DPSC Plan is an annuity, and that prior to its amendment, Article 7.1 of the Plan provided that a participant could elect to convert the Normal Form of Benefit to certain Optional Forms of Benefit, including a lump sum, subject to the approval of the Pension Committee. Article 7.1 requires that a Plan participant give written notice of such election to the Plan's Pension Committee (Defendants' Rule 3[g] Statement, PP 3, 4).

 The defendants argue that the plaintiffs did not give written notice of election of an optional lump sum form of benefit until March 13, 1990, and that the written notice did not include "notarized spousal consent letters" required by Article 6.6. According to the defendants, the plaintiffs have not given written notice of the date on which they wish their benefits to commence.

 Defendant DPSC also maintains that no lump sum benefits have ever been approved by the Pension Committee or distributed under the DPSC Plan. The defendants also state that Plan Sections 8.3 through 8.3.5 have "always prohibited lump sum payments to highly compensated employees, such as the Auwarters, where the full current costs of the Plan are ...

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