United States District Court, Eastern District of New York
March 3, 2000
L.I. HEAD START CHILD DEVELOPMENT SERVICES, INC., ANTHONY MACALUSO AND PAUL ADAMS, INDIVIDUALLY ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHER PERSONS SIMILARLY SITUATED, PLAINTIFFS,
JOHN L. KEARSE AND ALPHONSO ANDERSON, AS TRUSTEES OF THE COMMUNITY ACTION AGENCIES INSURANCE GROUP, AND COMMUNITY ACTIONS AGENCIES INSURANCE GROUP, DEFENDANT.
The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM OF DECISION AND ORDER
The fiduciary duty of loyalty imposed by ERISA is
designed to ensure that fund assets are held and
administered for the sole and exclusive benefit of
O'Neil v. Retirement Plan for Salaried Employees of RKO General,
Inc., 37 F.3d 55
, 61 (2d Cir. 1994) (citing Levy v. Local Union
Number 810, 20 F.3d 516
, 519 [2d Cir. 1994]).
On April 1, 1993, this action was commenced by the plaintiffs
L.I. Head Start Child Development Services, Inc. ("Head Start")
and two class representatives, pursuant to the Employee
Retirement Income Security Act ("ERISA"), 20 U.S.C. § 1000, et
seq. The action was brought against individual trustees of the
Community Action Agencies Insurance Group and the Community
Action Agencies Insurance Group Fund (the "CAAIG Trust"), a
health and welfare benefit fund in which the plaintiffs
participated between the years of 1986 and 1992. Head Start is a
not-for-profit corporation that operates a Head Start program
under a direct guarantee of funds from the federal government.
The program provides early childhood education to children from
On September 1, 1992, Head Start withdrew from the CAAIG Trust
and formed a new health and welfare benefit fund. It is alleged
by the plaintiffs that the CAAIG trustees were under a fiduciary
duty imposed by ERISA, 29 U.S.C. § 1103, 1104, to hold the
shares of the CAAIG Trust assets attributable to contributions
made by Head Start employees for the exclusive purpose of
providing benefits to those employees.
The complaint further alleges that the defendant CAAIG trustees
violated their fiduciary duties by refusing to transfer or return
Head Start's past contributions so that they could augment Head
Start's newly formed health and welfare benefit fund. The
plaintiffs complaint seeks to compel the defendants to account
for reserves in the CAAIG Trust that represent contributions made
by Head Start on behalf of the plaintiff employees and to
transfer those assets to the newly formed fund.
The plaintiff's complaint sets forth five separate causes of
action. The first claim alleges that the CAAIG trustees violated
the "exclusive benefits" rule of ERISA § 1104(a)(1)(A) by
refusing to transfer Head Start's share of CAAIG's reserves held
for the exclusive purpose of providing benefits to its
participating employees. The second cause of action seeks an
accounting by the trustees to ascertain the share of the CAAIG
reserves attributable to Head Start's past contributions. The
third claim alleges that by failing to return the portion of
reserves attributable to Head Start's past contributions, the
CAAIG Trust has been unjustly enriched and received a windfall to
the extent of such share of reserves wrongfully retained. The
fourth claim asserts that the trustees breached their fiduciary
duties to the plaintiff class members under the "exclusive
benefit" rule of ERISA § 1104(a) by refusing to act upon the
demands of Head Start for the transfer of the reserves reflecting
past contributions made to CAAIG on behalf of its employees. The
fifth cause of action alleges that the trustees violated their
fiduciary duties under ERISA § 1103 by failing to hold the
portion of reserves attributable to past contributions made by
Head Start for the exclusive purpose of providing benefits to
Head Start's participating employees and their beneficiaries.
Based on these allegations, the plaintiffs seek an order
directing the defendant trustees to transfer Head Start's portion
of the reserves to a trust fund to be held for the exclusive
benefit of Head Start's employees and their beneficiaries.
A non-jury trial was held on January 26, 27 and 28, February 12
and 19, April 9 and 30, and September 17, 1999.
II. THE TRIAL — FINDINGS OF FACT
This opinion and order includes the Court's findings of fact
and conclusions of law as required by Fed.R.Civ.P. 52(a) See
Rosen v. Siegel, 106 F.3d 28, 32 (2d Cir. 1997); Colonial
Exchange Ltd. Partnership v. Continental Casualty Co.,
923 F.2d 257 (2d Cir. 1991). During this portion of the opinion, the Court
will make findings of fact which will be supplemented by
additional findings later in the opinion. Most of the facts are
not controverted and were set forth in the proposed findings of
facts submitted by the respective parties upon the conclusion of
A. The Uncontested Facts
The plaintiff, Head Start is a not-for profit corporation
organized and existing under the laws of the State of New York.
Defendant CAAIG is an employee welfare benefit plan within the
meaning of ERISA § 3(1), 29 U.S.C. § 1002(1). The CAAIG Trust was
established for the sole and exclusive purpose of providing
health and welfare benefits to employee participants and their
beneficiaries within the meaning of ERISA §§ 1103(c)(1) and
1104(a)(1)(A), 29 U.S.C. § 1103(c)(1) and 1103(a)(1)(A). The
CAAIG Trust was formerly known as the Community Action Agencies
Trust Fund II.
The CAAIG Trust was established by a written trust agreement
dated October 4, 1983. The fund was to provide health, medical,
dental and other benefits for the employees of the Economic
Opportunity Commission of Nassau County, Inc. ("Nassau EOC"), the
Economic Opportunity Council of Suffolk, Inc. ("Suffolk EOC") and
any other employer who became a participating employer. The
was signed by John Kearse, the chief executive officer of the
Nassau EOC, and Lorenzo Merritt, the Director of the Suffolk EOC,
on behalf of those organizations. Both Kearse and Merritt also
signed as Trustees under the terms of the agreement.
Prior to November 30, 1985, the employees of Head Start were
employed by Suffolk EOC and were covered under the CAAIG as such
employees. On November 30, 1985 Head Start became a separate
participating employer in the CAAIG Trust. From that time, the
former employees of Suffolk EOC hired by Head Start were covered
under the CAAIG Trust as participating employees of Head Start
without any break in coverage. At the time that Head Start became
a participating employer in the CAAIG Trust, Nassau EOC, Suffolk
EOC and Yonkers Community Action Program, Inc. also were
participating employers in the CAAIG Trust.
Pursuant to the terms of the October 4, 1983 Trust Agreement,
the participating employers, including Head Start, were required
to and did make payments to the CAAIG Trust on behalf of their
covered employees. The monetary payments made by the
participating employers were used to provide health and insurance
benefits to the participating employees and to pay the
administrative expenses of the CAAIG Trust. They did this by
purchasing health coverage from private insurance carriers. On
September 1, 1986, the CAAIG Trust began providing health, dental
and hospitalization benefits on a self-insured basis while
continuing to purchase life insurance and disability insurance
from insurance carriers. The Nassau EOC Board of Directors
approved participation in the self-insured benefits plan at its
Board Meeting on September 25, 1986. The Yonkers Community Action
Program, Inc. approved participation in the self-insured benefits
plan at its September, 1986 Board of Directors Meeting. The
Suffolk EOC Board of Directors also approved participation in the
self-insured benefit plan at its Regular Board of Directors
Meeting on November 20, 1986.
From November 30, 1985 through August 31, 1992, Head Start made
payments to the CAAIG Trust on behalf of all its covered
employees, including all of the members of this class action.
During the entire period Head Start was a contributing employer,
the CAAIG Trust accumulated reserves. As of August 31, 1992, the
financial statements of the CAAIG Trust indicated that the total
amount of the reserves for all contributors was $1,117,507.00.
The portion of reserves attributable to Head Start's past
contributions made on behalf of its employees, including
interest, was $499,736 (Pl.Ex. 70).*fn1
On July 29, 1992, Head Start notified the CAAIG Trust that it
was discontinuing its participation in the Fund as of September
1, 1992. In that notification, it requested the return of that
portion of the remaining reserves attributable to past
contributions made by Head Start on behalf of its participating
employees. The letter stated:
please be informed that effective September 1, 1992,
L.I. Head Start Child Development Services Inc.,
shall discontinue its participation in CAAIG's
Health, Life AD & D, LTD. and DBL plans. We would
appreciate the immediate return of our Health
Insurance reserve funds held in escrow by CAAIG so
that we may make the appropriate distribution.
(Pl.Ex. 46). On September 1, 1992, Head Start terminated its
participation in the CAAIG Trust. On September 24, 1992, Head
Start again requested the return of that portion of the assets
attributable to its past contributions on behalf of its
employees. The letter stated:
By our letter dated July 29, 1992, Mrs. Phyllis
Simmons informed you that effective September 1,
1992, L.I. Head Start Child Development Services,
Inc., would discontinue its participation in CAAIG's
Health, Life, AD & D, LTD and DBL plans. She also
asked for the immediate return of our health
insurance reserve funds. To date, we have not
received a response to our request. Please contact us
as soon as possible. We would like to avoid turning
this matter over to out attorney.
(Pl.Ex. 47). The defendants refused to transfer, relinquish or
return any portion of the CAAIG Trust assets allocable to past
contributions by Head Start.
Defendants John L. Kearse and Alphonso Anderson were trustees
of the CAAIG Trust at the time the demands were made by Head
Start for the transfer of the reserves and at the time this
action was commenced. By Order dated October 26, 1994, this Court
certified this action as a class action. The certified class
consists of Head Start employees who were also past participants
in the CAAIG Trust. By Order dated October 26, 1994, this Court
approved the plaintiffs Anthony Macaluso and Paul Adams as
representatives of the class.
B. The Contested Facts
The parties essentially disagree as to three material facts.
The first material fact at issue is whether the CAAIG assets were
held in a single pooled account in the name of CAAIG without
segregating the contributions from the various employers. The
second material fact requires a determination as to the validity
of a modified Trust Agreement purportedly signed by Kearse and
Meritt on October 6, 1983, which prohibits the transfer of
reserves to any employer who withdraws from CAAIG. The third
material fact, which is actually a mixed question of law and
fact, concerns the validity of an alleged amendment to the
original Trust Agreement, dated August 7, 1986, which prohibits
the transfer of reserves to any employer who withdraws from
1. Were the Funds Segregated or Pooled?
The defendants claim that the CAAIG assets were held in a
single pooled account in the name of CAAIG without segregating
payments from various participating organizations. In other
words, the defendants argue that the funds were pooled and not
The Court finds that the credible evidence presented at the
trial demonstrates that the CAAIG was not a pooled fund and that
each of the contributing employer's funds were segregated. The
annual financial reports of CAAIG indicate that the funds were
segregated. In addition, the financial reports reveal the direct
allocation of benefits paid and the proportionate administrative
expenses from each segregated portion of the fund.
The plaintiffs first witness at the trial was Michael
Monteforte, Jr., the accountant for the CAAIG Trust from 1985 to
1992. Monteforte testified, in pertinent part, that:
Q: And you broke down under each agency, you
allocated to each agency the gross billings, the
premiums incurred, the professional fees, the bank
charges and the interest to arrive at the reserves at
the end of the fiscal year for each agency is that
(Tr. at 48).*fn2
A: I take the information CAAIG gives me regarding
the gross bills, the — billings, the cash receipts,
disbursements, whether buying insurance or paying
claims or other administrative expenses. And based on
the information they give me, it is generally broken
down by each of the individual participating
Those items which are not directly given to me for
each agency as in the case with expenses in some
cases and the interest earned, they are allocated.
Q: You would determine the amount — you would
calculate the amount at the end of the fiscal year,
and after deducting the billings information they
gave you and the expense information they give you,
you would arrive at the reserve at the end of the
year allocated to each company?
(Tr. at 62). In addition, the Schedule of Reserves contained in
the annual financial reports indicate that each of the
contributing employer's contributions were segregated according
to each employer and CAAIG's income and expenses were allocated
to each employer. (Pl.Exhs.27-42). Furthermore, the testimony of
Kearse, one of the trustees of CAAIG and its administrator,
acknowledged in his deposition which was read into the record at
trial, that if CAAIG was terminated, each of the contributing
employers would receive its share of the remaining reserves.
[s]o that for my purposes, and the reason why this
chart is included in the report, it was important to
me to know and understand, I thought, how each
individual participant agency was performing and what
the claims experiences were; that premiums were paid
and if I had in 1988 to dissolve this plan I needed
to have some notion after we had met all of our
obligations as to what, if any, part or portion of
any excess, what may have proven to have been excess
reserves, would have been available and I would have
had, as was original (sic) thought, have been able to
provide those back to the individual entities. . . .
(Tr. at 948).
Based on the documentary evidence and the testimony adduced at
the trial, the Court finds that CAAIG segregated the
contributions of each of the participating employers and directly
allocated the benefits paid and the proportionate CAAIG
administrative expenses to each of the contributing employers.
2. As to the Validity of the October 6, 1983 Agreement
The defendants contend that the terms of the Trust Agreement
dated October 4, 1983 were superseded, modified and amended by a
Second Trust Agreement that was executed by Kearse and Meritt on
October 6, 1983. (Def.Ex. B). While the October 3, 1983 Agreement
was silent as to the transfer of reserve funds, the October 6,
1983 Amendment stated that "[v]oluntary withdrawal or termination
of any of the member CAA, shall result in forfeiture of any and
all monetary participation in the accumulated funds in the Trust
Fund." Id. The defendants contend that the document was
executed at the offices of the Nassau EOC as authorized at a
joint meeting of Nassau and Suffolk EOC Executive Committees on
October 4, 1983 at the Suffolk EOC office. Also, the defendants
submit that the signatories signed the document on behalf of
their respective Community Action Agencies for the benefit of
their employees. As stated above, the October 6, 1983 agreement
prohibits the transfer of reserves to any employer who withdraws
The Court finds that the October 6, 1983 "agreement" has no
effect on the rights of the parties as there is no credible
evidence that the document was executed at any time relevant to
the disposition of this action. The Court does not credit the
testimony of Kearse and Charlotte Singer, the notary public, with
regard to the execution of this "agreement." Kearse testified
that all of the signatures, including that of the notary public,
were placed on the document on October 6, 1983.
Q: Mr. Kearse, when was this document prepared ?
A: This document was prepared, typed on — it is dated
October 6th. I don't
know whether it was prepared October 6th or 5th.
Q: Who was present when that document was signed ?
A: This document is signed by me and Mr. Lorenzo
Merritt who represented the Suffolk program.
Q: Was anybody else present at the time you signed
the document ?
A: At the time of the signing of the document present
was Ms. Charlotte Singer. Ms. Singer in fact
notarized he signing of the document.
Q: When did she notarize the signing of the document?
A: Same date. We signed it in front of her.
(Tr. at 167-168). Charlotte Singer, the notary public, testified
that the document was signed by Kearse and Merritt in her
presence and at the same time, on October 6, 1983, she notarized
Q: You've seen that document before ?
A: Yes, sir.
Q: I direct your attention to the last page. Is that
your signature ?
A: Yes, that's my signature.
Q: Were you present when that document was signed by
Mr. Kearse and Mr. Merritt?
A: Yes, I was.
Q: Did you witness signing that document ?
A: Yes, sir, I was.
Q: Did you affix your notary signature to that page ?
Q: Did you affix it set forth therein ?
Q: Did you see them sign it on that date ?
A: Yes, I did.
(Tr. at 371-372).
Curiously, when Singer was deposed on March 10, 1997, almost
two years prior to the trial and closer in time to the events at
issue, her memory of these circumstances was not very clear.
Q: Ms. Singer, do you recall being deposed by me in
this courthouse on March 10, 1997 ?
"Question: Did you follow your custom at the time
that you acted as a Notary Public with respect to
Plaintiff's Exhibit 138 in notarizing the signatures
on the last page ?"
"Answer: I believe I did."
"Question: When you say `you believe that you did,'
do you actually remember the circumstances
surrounding the execution of this agreement ?"
"Answer: I don't remember the circumstances of this
particular document, but my custom was I either
signed it at my desk which is right outside Mr.
Kearse's door or he called me in his office. That was
the procedure. I never signed or would have taken it
away from there. It would have been just in that
area, that vicinity, either place."
"Question: You already testified as to what your
custom is. What I am trying to find out from you, Ms.
Singer, if you actually remember where the act of
notarization took place when you notarized this
document, the signatures on this document marked
Plaintiff's Exhibit 138 ?"
"Answer: No, I do not."
"Question: Listen to the question. You initially
said you don't remember the circumstances. You don't
remember if you notarized their signature. Now I am
asking a further question. Do you remember if the
individuals who signed
this document appeared before you when you notarized
the document ?"
"Answer: I don't remember the document."
"Question: Do you remember if any individuals
appeared before you when you notarized this document
"Answer: The answer would have to be no."
(Tr. at 372, 374-378).
The testimony of Kearse and Singer with regard to the signing
of the purported amendment is highly questionable. Further
evidence putting the validity of the purported amendment in doubt
was furnished by the plaintiff's expert witness, Robert L.
Kuranz, who analyzed the ink used by Singer to notarize the
purported October 6, 1983 document, and concluded that the type
of ink used was not manufactured prior to January 1, 1984. Kuranz
is a forensic ink analyst who was employed as a research ink
chemist, product engineer and quality control manager in the ink
writing instrument industry from 1956 to 1993. Kuranz testified
that he was able to determine that the ink used on the purported
October 6, 1983 document was manufactured by a company called
Formulab's Inc. He further testified that the ink used by Singer
to sign her name on the purported October 6th document contained
"tags" used only in inks manufactured by Formulab in 1984. Kuranz
concluded that Singer could not have signed her name to the
original document on October 6, 1983. (Tr. at 263). The Court
finds that Kuranz's testimony was believable and was unrefuted.
In view of the equivocal testimony of Notary Public Singer and
the uncontradicted expert testimony by Kuranz, the testimony by
Kearse and Singer that the document was signed and notarized on
October 6, 1983 is not credible. In addition, the Court notes
that Kearse's testimony is further undermined by the fact that
the purported October 6, 1983 document was allegedly not located
until 1996, three years after this action was commenced. (Tr. at
203-205). Kearse's explanation was unconvincing.
Q: Mr. Kearse, when this suit was instituted on April
1, 1983, I asked as part of plaintiff's discovery and
inspection, all trust agreements and amendments
thereto that would relate to the CAAIG plan. CAAIG
produced for my inspection, the October 4, 1983
agreement. . . . You referred to you testimony
yesterday about an October 6, 1983 agreement. Could
you tell us what in you affidavit you referred to the
October 4th agreement rather that the October 6th
A: We were forced to continuously inspect and/or
review whatever it was that we could lay our hands on
in terms of files or records, to be responsive to
your request as possible.  I went into the
hospital, and I was away from my work for [an] excess
of four months. . . . But I knew coming back I had to
look forward to a continuation of this process.  I
wanted to know whether or not we were still
financially sound, and whether I was being
responsible as a manager and administrator, in terms
of that particular program. [W]e were consistently
directed to produce the files of CAAIG. And that's
what we were diligently applying ourselves to. I now
injected into the scenario a name that is connected,
but never have we thought to look in those files of
Mass. Mutual, Mass. Mutual Insurance. Lo and behold, we
go to that file and in that file, the beginning where
we started from, in a manila folder is the agreement
dated October 6th of '83. And that is how that
infamous agreement came on to the scene. . . .
(Tr. at 468-471).
Moreover, Kearse was unable to explain why a further amendment
was required on August 7, 1986 prohibiting the transfer of the
reserve funds, if the October 6, 1983
amendment was already in force. In addition, Kearse submitted an
affidavit in which he identified the Trust Agreement dated
October 4, 1983 as the "Trust Agreement." (Ex. 58). Finally,
Kearse admitted that the Trust Agreement dated October 4, 1983
was the document that was distributed to the participating
employer agencies. (Tr. at 220, 502). Accordingly, the Court
finds that the purported October 6, 1983 document is not
authentic and cannot be considered by the Court.
3. Was the August 7, 1986 Amendment Properly Ratified?
The final issue of fact to be resolved centers on the
implications, if any, of the purported August 7, 1986 amendment
to the trust agreement. The amendment states that ". . . [T]he
Trustees amend the above named Trust Agreement by adding [the
following language]. In no event may any unit . . . withdraw any
accumulated portion of the reserve fund, whether or not that
unit's participation in the Trust is to be continued. Such
reserve funds are to remain in the Trust, to be used or
distributed in accordance with the provisions and purposes of
this Trust. . . ." (Def.Ex. C).
The Court finds that the August 7, 1986 amendment was never
formally adopted and is not a valid and binding agreement. The
October 4, 1983 Trust Agreement sets forth the following
procedure for amending the Agreement: "The Corporation reserves
the right to amend the Trust Agreement at any time by action of
its Board of Directors." Based on the evidence adduced at the
trial, the Court finds that the amendment was never formally
adopted "by action of its Board of Directors." As previously
stated, the "Amendment" states that "the Trustees amend the above
named Trust Agreement." The signature line of the "Amendment"
indicates that Kearse and Judith Wilson signed the document as
Trustees. No evidence was offered to establish that the Board of
Directors of the CAAIG Trust, which included the four
contributing employers, adopted or approved of the "Amendment."
Thus, the Court finds that the Board of Directors did not sign,
approve or ratify this Amendment.
As the "Amendment" was never signed, adopted or ratified by the
Board of Directors, which was required by the terms of the
October 4, 1983 Trust Agreement, the Court finds that the August
7, 1986 Amendment was not properly adopted and is not valid.
Accordingly, based on the findings set forth above, the Court
finds that the October 4, 1983 Trust Agreement is controlling.
This agreement does not contain any provision prohibiting the
return of the reserves to the departed contributing employer.
III. DISCUSSION AND CONCLUSIONS
A. The "Exclusive Benefits" Rule of ERISA
While typically, an individual is unable to recoup her premiums
paid to a health insurance company if she decides to change
insurers, in this case, Head Start made contributions on behalf
of its employees into a Trust that was governed by the provisions
The applicable statute, 29 U.S.C. § 1103(c)(1) states, in
pertinent part, that "the assets of a plan shall never inure to
the benefit of any employer and shall be held for the exclusive
purposes of providing benefits to participants in the plan and
their beneficiaries and defraying reasonable expenses of
administering the plan." In addition, 29 U.S.C. § 1104(a)(1)(A)
states, in pertinent part, that "a fiduciary shall discharge his
duties with respect to a plan solely in the interest of the
participants and beneficiaries and for the exclusive purpose of
(i) providing benefits to participants and their beneficiaries;
and (ii) defraying reasonable expenses of administering the plan.
As previously noted in the opening statement of this opinion,
[t]he fiduciary duty of loyalty imposed by ERISA is designed to
ensure that fund
assets are held and administered for the sole and exclusive
benefit of plan participants." O'Neil v. Retirement Plan for
Salaried Employees of RKO General, Inc., 37 F.3d 55, 61 (2d Cir.
1994) (citing Levy v. Local Union Number 810, 20 F.3d 516, 519
[2d Cir. 1994]).
As the Court has previously determined that the CAAIG was not a
pooled fund, the plain meaning of ERISA requires the transfer of
the portion of surplus reserves attributable to past
contributions made by Head Start on behalf of its employees to a
new health and welfare trust fund for the benefit of its
employees. Any other conclusion would undermine the fiduciary
duty that the Trustees owe to the employees of each contributing
employer. As the Second Circuit stated in The John Blair
Communications, Inc. Profit Sharing Plan v. Telemundo Group, Inc.
Profit Sharing Plan, 26 F.3d 360, 367 (2d Cir. 1994):
Where fiduciary duties arise under ERISA, they must
be enforced without compromise to ensure that
fiduciaries exercise their discretion to serve all
participants in the plan. See Williams v.
Williamson-Dickie Mfg. Co., 778 F. Supp. 1197,
1198-99 (S.D.Ala. 1991). As Judge Friendly aptly
stated in Donovan v. Bierwirth, 680 F.2d 263 (2d
Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74
L.Ed.2d 631 (1982), § 404 of ERISA requires that the
decisions of a fiduciary "must be made with an eye
single to the interests of the participants and
beneficiaries." Id. at 271.
26 F.3d at 367. (other citations omitted). If the surplus
reserves at issue were held by CAAIG for the benefit of non-Head
Start employees, the plain language requirements of ERISA
Sections 1103(c)(1) and 1104(a)(1)(A) that the plan be
administered "solely in the interest of the participants and
beneficiaries" and "for the exclusive purpose of providing
benefits to participants and their beneficiaries," would be
violated. It is well-settled that Courts should interpret a
statute to give effect to the plain meaning of the statutory
language. See Patterson v. Shumate, 504 U.S. 753, 757, 112
S.Ct. 2242, 119 L.Ed.2d 519 (1992). Indeed, "[a]bsent a clearly
expressed legislative intention to the contrary, the language
must ordinarily be regarded as conclusive." Consumer Prod.
Safety Comm'n. v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100
S.Ct. 2051, 64 L.Ed.2d 766 (1980).
The plain meaning of the applicable ERISA sections is that an
employer's contributions must be used for the benefit of its own
employees. An employer's contributions may not be used for the
benefit of employees of other contributing employers. As a
result, the provisions of ERISA require that the reserve funds be
returned to Head Start to be used for the benefit of their
employees. Any other result would create a windfall for the
non-Head Start employees who would be using the funds contributed
by Head Start and would violate the Trustees' fiduciary duty.
See Demisay v. Local 144 Nursing Home Pension Fund,
935 F.2d 528 (2d Cir. 1991), rev'd on other grounds, 508 U.S. 581, 113
S.Ct. 2252, 124 L.Ed.2d 522 (1993) (recognizing that when all the
employees of an employer are removed from a fund, there is no
chance that any of those employees will benefit from the past
contributions made on their behalf unless there is a reallocation
In addition to the plain meaning of Sections 1103(c)(1) and
1104(a)(1)(A), the Court is of the view that the Second Circuit
decision in Trapani v. Consolidated Edison Employees' Mutual Aid
Society, Inc., 891 F.2d 48 (2d Cir. 1989), mandates the return
of Head Start's share of the reserves. In Trapani, a class
action was brought on behalf of union members seeking the
transfer of the aliquot shares of Mutual Aid's assets
attributable to payments made by their employer on their behalf.
The employees withdrew from Mutual Aid's fund and became
participants in a different fund. Relying on the provisions of
Section 1103(c)(1), the Second Circuit
held that Mutual Aid violated ERISA by refusing to transfer the
aliquot share of its benefit assets attributable to contributions
made on behalf of the class members. In so holding, the Second
Circuit reviewed two of its prior decisions:
Mutual Aid contends that the above quoted language
does not proscribe Mutual Aid's continued retention
of the $114,778.35, citing O'Hare v. General Marine
Transport Corp., 740 F.2d 160 (2d Cir. 1984), cert.
denied, 469 U.S. 1212, 105 S.Ct. 1181, 84 L.Ed.2d
329 (1985), as authority for its position. In that
case a small number of employees of a single
employer, who participated in a multi-employer
pension fund, left the union and joined another union
with its own pension fund. This court held that the
monies contributed by the employer on behalf of these
employees should not be returned to the employees or
to the new fund. 740 F.2d at 173-74.
The court distinguished the case of Local 50, Bakery
and Confectionery Workers Union v. Local 3, Bakery
and Confectionery Workers Union, 733 F.2d 229 (2d
Cir. 1984), in which it was held that an employer's
contributions to one union's health benefits fund
should be transferred to a successor health benefits
fund when all of the employees of the employer chose
a new bargaining unit.
The facts in this case are akin to those found in
Local 50, and come within the distinguishing
factors set forth in O'Hare. These factors were that
all of the employees of a single employer changed
their bargaining representative in Local 50, while
in O'Hare, only a small portion of the employees of
a single employer made such change. Local 50 was
concerned with a health benefits plan, while O'Hare
dealt with a pension plan. The latter has different
actuarial projections than health benefit plans,
including the assumption that a certain percentage of
the members will never receive benefits. We further
noted that equitable considerations supported our
conclusion in Local 50, since those workers who
retained Local 50 as their bargaining
representative would be unjustly enriched were the
funds not transferred. Finally, we stated in Local
50 that the successor fund was entitled to the
aliquot share of the assets, for otherwise, the
assets "would have inured solely to the benefit of
the remaining participants in the Local 50 fund,
and Entenmann's workers would have derived no benefit
from that portion of their past contributions."
Local 50, 733 F.2d at 231.
In this case there are stronger equitable
considerations in favor of plaintiffs than in Local
50, since here the fund includes both employee and
employer contributions. In addition, the change of
funds in this case was initiated by Con Edison rather
than by the employees. The decision in Local 50
controls our resolution here that Mutual Aid is not
permitted to retain the funds in question.
Id. at 50.
The decisions in Local 50 and Trapani are analogous to the
facts presently before the Court as they involve holdings where
the Second Circuit found that ERISA mandated the transfer of
assets to a new health plan so that the former participants of
the old plan could receive future benefits under the new plan.
The decisions in Local 50 and Trapani involved similar
factual scenarios as is presently before the Court. As such,
based upon those decisions, the Court concludes that Sections
1103(c)(1) and 1104(a)(1)(A) mandate that the portion of CAAIG's
reserves that are attributable to Head Start's past contributions
be transferred to a trust for the benefit of its employees.
The defendants attempt to distinguish Trapani on the basis
that the funds involved in Trapani were from both the employer
and the employees and that the funds were contributed pursuant to
a collective bargaining agreement, is without merit. While the
Court acknowledges that Head Start employees did not make
to the CAAIG Trust and that the contributions made were not
pursuant to a collective bargaining agreement, nothing in the
Trapani opinion suggests that the these underlying facts were
dispositive. Similarly, the defendants' reliance on Ganton
Technologies, Inc. v. National Industrial Group Pension Plan,
76 F.3d 462 (2d Cir. 1996) to support the position that the surplus
reserves are non-transferable, is misplaced. The Ganton case
involved a pension plan, not a health benefit plan, a distinction
noted by the Second Circuit in Trapani. As stated above, the
Court in Trapani recognized that "Local 50 was concerned with
a health benefits plan, while O'Hare dealt with a pension plan.
The latter has different actuarial projections than health
benefit plans, including the assumption that a certain percentage
of the members will never receive benefits." Trapani, 891 F.2d
In addition, in Ganton, the Second Circuit pointed out that
the trustees relied on the advice of actuaries that a transfer of
assets would threaten the financial well being of the pension
fund, to the detriment of the remaining employees. Unlike the
situation in Ganton, this case is concerned with a health
benefits plan. In addition, the record does not demonstrate that
a transfer of $497,736, representing the Head Start reserve
funds, would threaten the financial well being of the CAAIG
Trust. It should be noted that while the defendants' post trial
memorandum of law states that a report by Sedgewick Noble Lowndes
on May 13, 1998 indicates that an award to the plaintiff would
bankrupt the CAAIG Trust (defendants' post trial memorandum of
law at 5-6), the Court sustained the plaintiffs objection as to
the admissibility of the report, after which counsel for the
defendants' withdrew the exhibit. (Tr. at 283-284). As such, the
record is silent as to the ramifications that would result if
judgment were rendered in favor of the plaintiffs.
While the Court recognizes that a judgment in the sum of
$497,736 will undoubtedly have a negative effect on the CAAIG
Trust and the remaining three employer agencies, there is no
compelling evidence presently in the record that demonstrates
that a judgment in favor of the plaintiffs would seriously
threaten the financial well being of the Trust. To the contrary,
as of August 31, 1992, the total reserves remaining in the Fund
was $1,117,507. In addition, the financial history of CAAIG from
the time Head Start entered the plan to the time of its
withdrawal indicates that the plan was never in danger of
becoming underfunded. (Exhs.29-38). Finally, and as previously
stated, to permit the remaining employer agencies still in CAAIG
to use the contributions made by Head Start, would violate the
purpose and plain meaning of ERISA that an employer's
contributions must be used for the benefit of its employees. As
such, the Court finds the defendants' reliance on Ganton to be
The defendants' remaining arguments, including the claim that
the plaintiffs lack standing under ERISA, are without merit. The
Court adheres to its previous Orders of October 14, 1994 and
September 11, 1995 and declines to address the issue for a third
time. In addition, as the plaintiffs' complaint does not request
prejudgment interest and because the $497,736 figure consists of
$156,916 in interest earned by CAAIG allocable to Head Start (Ex.
70), the Court will not address that issue.
The provisions of the applicable ERISA statute, 29 U.S.C. § 1103
(c)(1) and 1104(a)(1)(A) require the defendants to return to
Head Start the sum of $497,736, the portion of surplus reserves
segregated for and attributable to them.
Accordingly, it is hereby
ORDERED, that the defendants are directed to transfer the sum
of $497,736 to a trust fund for the benefit of the class
plaintiffs; and it is further
ORDERED, that the transfer of funds is to be completed within
60 days from the date of this order; and it is further
ORDERED, that any request for attorneys' fees and costs be
served on the Court by counsel for the plaintiffs by April 3,
2000. Opposition to the request must be served by April 21, 2000,
and a reply by May 5, 2000.