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KINEK v. GULF & WESTERN

March 18, 1993

CHARLES KINEK, STEVE KONIK, ERNEST MORENO, and STEVEN YANECKO, and all persons similarly situated, Plaintiffs,
v.
GULF & WESTERN, INC., and THE PENSION PLAN OF THE NEW JERSEY ZINC COMPANY FOR BARGAINING UNIT EMPLOYEES, Defendants. PENSION BENEFIT GUARANTY CORPORATION, Plaintiff, v. GULF & WESTERN, INC., and THE PENSION PLAN OF THE NEW JERSEY ZINC COMPANY FOR BARGAINING UNIT EMPLOYEES, Defendants.


Sand


The opinion of the court was delivered by: LEONARD B. SAND

SAND, J.

 In October 1982, NJ Zinc notified the United Steel Workers of America, AFL-CIO ("USWA"), which represented certain of the employees covered by the NJ Zinc Plan, of its intent to terminate the NJ Zinc Plan "for economic reasons." See United Steelworkers of America v. New Jersey Zinc Co., 828 F.2d 1001, 1003 (3d Cir. 1987). Actual termination of the NJ Zinc Plan occurred on January 1, 1983, at which time the Pension Benefit Guarantee Corporation (the "PBGC") became trustee of the plan pursuant to ERISA § 4042(b)(1), 29 U.S.C. § 1342(b)(1). Since the PBGC determined that the Plan's assets were insufficient to provide the benefits that had been promised, the PBGC was required to guarantee payment, from its insurance fund, of certain benefits. See 29 U.S.C. § 1322. However, the guaranteed benefits are lower than the benefits that had been promised under the G & W and NJ Zinc Plans. Therefore, many of the Plan beneficiaries have received (and presently continue to receive) benefits from the PBGC which are lower than the benefits they would have received under the G & W and NJ Zinc Plans.

 In September of 1987, a class of persons (the "Kinek plaintiffs") who had been vested participants in the G & W Plan as of September 30, 1981 -- the date of the spin-off -- and who thereafter were transferred to NJ Zinc and became participants in the NJ Zinc Plan, brought suit against G & W and the G & W Plan claiming breach of a contractual obligation to fund vested accrued pension benefits fully in the event of an asset transfer or spin-off. The PBGC filed a separate action against the same defendants at approximately the same time. The cases were consolidated for pre-trial purposes.

 In 1989 the parties cross-moved for summary judgment on the issue of liability. In a published opinion, this Court held that the Kinek plaintiffs had standing to bring a direct action to collect benefits owed them under the G & W Plan pursuant to § 502 of ERISA, 29 U.S.C. § 1132(a)(1)(B). Kinek v. Gulf & Western, Inc., 720 F. Supp. 275, 278-79 (S.D.N.Y. 1989). We also held that the PBGC had standing "to collect any amounts due the plan" pursuant to ERISA § 4042, 29 U.S.C. 1342(d)(a)(B)(ii). Kinek, 720 F. Supp. at 280. On the merits, the Court held that two clauses in the G & W Plan -- the Full Funding Clause and the Transfer of Assets Clause -- obligated defendant G & W to transfer assets sufficient to fully fund the vested benefits of employees that were transferred to Horsehead, i.e., the Kinek plaintiffs. Id. at 284. Accordingly, summary judgment was granted in favor of the Kinek plaintiffs. The PBGC was granted summary judgment by this Court in a subsequent, unpublished opinion. Kinek v. Gulf & Western, 87 Civ. 6973 (LBS), 1989 U.S. Dist. LEXIS 15180, 1989 WL 156288 (S.D.N.Y. Dec. 20, 1989). The Court did not address -- nor was it asked to address -- the issue of damages in either of its previous rulings.

 The parties agreed by stipulation, dated March 18, 1992, that this Court should determine the amount of G & W's liability on the basis of written submissions. The parties further stipulated that the issues controlling the amount of G & W's liability are:

 
(a) The appropriate actuarial assumptions regarding participants' expected age of retirement, for use in calculating the sum of money that should have been transferred by defendants to the spin-off pension plan as of September 30, 1981; and

 All parties agree, at least as a matter of theory, that the plaintiffs are entitled to be put "in the same position they would have been in but for G & W's breach." See, e.g., Defs.' Mem. at 3, 15; Kinek Pls.' Mem. at 19; Kinek Pls.' Reply at 2; PBGC's Reply at 3, 8. The parties disagree dramatically, however, as to what amount will accomplish this goal. As an illustration, the defendants' favored formula for computing damages would require them to pay $ 637,017, plus future non-guaranteed benefits payable when due, directly to the Kinek plaintiffs. Affidavit of Albert J. Kleinberg, Jr., ("Kleinberg Aff.") at P 16. *fn1" The PBGC's theory of damages would require the defendant to pay $ 11,298,953.24 directly to the NJ Zinc Plan. PBGC's Mem. at 3. The Kinek plaintiffs' proposed remedy would require the defendant to pay $ 12,113,929 -- $ 1,060,888 directly to the Kinek plaintiffs, and the remaining $ 11,053,041 to the N.J. Zinc Plan. Kinek Pls.'s Reply at 9-10.

 Therefore this Court must determine, in the specific context of this ERISA proceeding, what amount it would take to put the plaintiffs in the position they would have been in but for the defendants' breach. This case raises complicated questions involving the proper actuarial assumptions to be used to calculate future pension benefits and the availability of prejudgment interest. The factual setting presented by this case is unique, and no party has cited authority directly on point to guide us in our determination.

 I.

 THE STRUCTURE OF THE REMEDY

 The plaintiffs and the defendants propose two very different methods to accomplish the goal of putting the plaintiffs in the position they would have been in absent the defendants' breach. The defendants take the position that they should make direct payment to the Kinek plaintiffs for all past benefits the Kinek plaintiffs have not received (plus interest), and all future, non-guaranteed benefits. The Kinek plaintiffs and the PBGC, on the other hand, propose that the Court calculate the amount that G & W should have contributed to the NJ Zinc Plan on September 30, 1981 (the "Full Funding Amount"), and then add interest at the then-prevailing market rates to that portion of the Full Funding Amount which the defendants in fact did not transfer (the "Shortfall"), to approximate -- or attempt to "recreate" -- what would have happened had G & W fully funded the NJ Zinc Plan in 1981, as it was contractually obligated to do. *fn2"

 After carefully considering the arguments advanced by the parties, we conclude that the proper measure of damages is the amount that G & W should have transferred to the NJ Zinc Plan in 1981 less the amount which G & W in fact transferred to the Plan at that time. That is, this Court adopts the approach advocated by the Kinek plaintiffs and the PBGC. Before we calculate the sum that the defendants owe to the plaintiffs, we will briefly discuss the defendants' proposal and our reasons for rejecting it.

 A. The Defendants' Proposal

 Defendants propose that the Kinek plaintiffs are entitled to the following in order to make them "whole": (1) recovery of the difference between the benefits, vested as of September 30, 1981, that the Kinek plaintiffs have received and the benefits they would have received had G & W fully funded the NJ Zinc Plan upon spin-off in 1981; (2) incidental damages at the statutory rate of interest set forth in 28 U.S.C. § 1961; and (3) future benefit payments equal to the benefits the Kinek plaintiffs would have received had G & W fully funded the NJ Zinc Plan in 1981, less the guaranteed benefits they will continue to receive from PBGC in its capacity as insurer of the NJ Zinc Plan. Defs.' Mem. at 15-20. Defendants propose that G & W could pay these future benefits directly to Kinek plaintiffs on a monthly basis or through the purchase of annuities. Id. at 16.

 Several aspects of this proposal are unique. First, the defendants propose that payments be made directly to the Kinek plaintiffs, instead of to the NJ Zinc Plan itself. The defendants claim this comports with this Court's holding that the Kinek plaintiffs have standing to seek benefits directly from the defendants. See Kinek, 720 F. Supp. at 278-79. They also argue that this is the most direct way to ensure that the Kinek plaintiffs receive their "expectation" -- i.e., the full amount of all past, present, and future benefits owed. In other words, defendants believe that their proposal will make the Kinek plaintiffs "whole."

 Defendants also believe that the NJ Zinc Plan will be made "whole" under their proposal even though they do not propose to transfer any assets directly to the Plan. Defendants argue that the NJ Zinc Plan is owed only that amount which would enable it to meet all past, present, and future benefits owed to the Kinek plaintiffs. Since, under the defendants' proposal, the Kinek plaintiffs will receive all benefits to which they are entitled, the defendants conclude that the Plan will be owed nothing further. *fn3" Essentially defendants regard the NJ Zinc Plan as a mere conduit for providing pension benefits to the Plan beneficiaries. Indeed the defendants believe it is a "fiction" to treat the Plan and the Kinek plaintiffs as separate entities, at least for remedial purposes.

 A second significant aspect of the defendants' proposal is that it neither reimburses the PBGC for its past outlays of guaranteed benefits to the Kinek plaintiffs nor relieves the PBGC of the burden of making these outlays in the future. Defendants contend that they need not reimburse the PBGC for past or future guaranteed payments because the PBGC made these payments in its capacity of insurer. Moreover, defendants argue that the PBGC is statutorily barred from seeking reimbursement of the guaranteed benefits from G & W or the G & W Plan. Defendants note that ERISA § 4062, 29 U.S.C. § 1362, authorizes the PBGC, as guarantor of the NJ Zinc Plan, to recoup the value of guaranteed benefits only from Horsehead, the employer that terminated the NJ Zinc Plan, and not from G & W. Defendants also note that this Court previously held that PBGC's standing in this suit derives from ERISA § 4042, which only permits the PBGC, in its capacity of trustee, to "collect for the plan amounts due the plan." See 29 U.S.C. § 1342. Defendants ask that this Court not allow PBGC to recoup from them its guaranteed payments indirectly through § 4042 since it is prohibited from doing so directly by § 4062. *fn4"

 The PBGC concedes that it may not directly collect the value of guaranteed benefits from defendants. PBGC's Mem. at 6. Nor, apparently, does the PBGC deny that it may, as trustee of the NJ Zinc Plan, use a portion of any amount this Court awards to the NJ Zinc Plan to reimburse itself for money it has paid as guaranteed benefits to NJ Zinc Plan beneficiaries over the years. *fn5" However, the Kinek plaintiffs and the PBGC both maintain that the fact that the PBGC may reimburse itself for guaranteed benefits from any recovery obtained "on behalf of the plan" under § 4062 is irrelevant.

 The PBGC and the Kinek plaintiffs have other objections to the Defendants' proposed damages formulation. The PBGC argues that the amount owed to the NJ Zinc Plan cannot be equated with the benefits owed by the Plan to the Kinek plaintiffs. First, the PBGC contends that "funding obligations inure to plans, not plan participants." PBGC's Reply at 4. Second, the PBGC points out that G & W never had the obligation to pay the Plan participants directly; on the contrary, its only obligation was, at the time of the spin-off, to fully fund the NJ Zinc Plan itself. Finally, the PBGC contends that when the defendants failed to fully fund vested benefits at the spin-off, they created a shortfall in the NJ Zinc Plan that still exists today. The NJ Zinc Plan, according to PBGC, is entitled to be put in the position it would have occupied but for defendants' breach -- a result which is not brought about by the direct payment of benefits to the Kinek plaintiffs. *fn6"

 The defendants' proposal is appealing in a number of respects, most notably because it is the most direct way to ensure that the Kinek plaintiffs receive all past, present, and future benefits owed them. Nevertheless, we believe the defendants' proposal suffers from a fundamental flaw: the obligation that G & W assumed, and on which the plaintiffs base their suit, was the obligation to fully fund the NJ Zinc Plan itself in the event of a spin-off; G & W never assumed the obligation to pay the Plan participants directly in the event of a spin-off. The parties have stated repeatedly in their submissions, and again at oral argument, that the Court should draw on ordinary principles of contract law to resolve this dispute. Looking to the agreement to which the G & W was bound -- the collectively bargained G & W Pension Plan -- it is undisputed that G & W was under the obligation, in the event of a spin-off, "to fully fund on a sound actuarial basis all vested benefits currently payable or payable in the future under the eligibility provisions of the Plan in effect at the time of termination." Kinek, 720 F. Supp. at 278 (quoting the Full-Funding Clause). In other words, G & W's only obligation was to estimate on September 30, 1981, using sound actuarial principles, the sum that should be transferred to fully fund the Plan on that date. This is the only obligation that this Court will enforce. *fn7"

 We do not think that § 4062 of ERISA, which does not allow the PBGC to recoup the value of guaranteed benefits from G & W, requires a different result. We hold today that the G & W is liable to the plaintiffs for the Full Funding Amount (less that amount which G & W in fact transferred after the spin-off) as that amount would have been calculated at the time of the spin-off. It is true that once the Plan is paid this amount, the PBGC may, pursuant to its regulations, use some of the money to reimburse itself for past outlays of guaranteed benefits. However, we do not believe that § 4062 was meant to limit the permissible uses of funds that the PBGC has collected "for the plan" pursuant to § 4042. We therefore reject defendants' creative § 4062 argument in its entirety.

 Finally, at several points the defendants have stated that their proposed remedy was the best guarantee that the Kinek plaintiffs would receive their "expectation interest," meaning full pension benefits. We believe that the only possible relevant "expectation interest" any of the parties could have had at the time the agreements giving rise to this lawsuit were entered into was the expectation that G & W would transfer a sum of money to the NJ Zinc ...


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