Entitlement to Surplus Assets in Employer-Funded Defined Benefit Plans: Analysis of Borst v. Chevron: 5th Cir.

Introduction

The case of Dean Borst, et al. v. Chevron Corp., et al. (36 F.3d 1308) adjudicated by the United States Court of Appeals for the Fifth Circuit in December 1994, centers on a class action under the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs, comprising approximately 40,000 former participants of Gulf Oil Corporation's pension plan, challenged the distribution of surplus assets following the merger of Gulf Oil Corporation and Chevron Corporation in the mid-1980s. Key issues revolved around fiduciary duties, partial termination of the pension plan, and the rightful allocation of residual assets.

Summary of the Judgment

The Fifth Circuit affirmed the district court's decision, holding that the plaintiffs were not entitled to the surplus assets of the Gulf Plan upon its partial or full termination post-merger. The court reasoned that ERISA does not mandate the distribution of surplus assets to plan participants in the event of a partial termination and that the plan's language allowed for surplus reversion to the employer upon complete termination. Additionally, claims related to alleged misrepresentations by Chevron regarding the establishment of reserves were deemed non-actionable under ERISA and common law.

Analysis

Precedents Cited

The court referenced several key precedents in shaping its decision:

WILSON v. BLUEFIELD SUPPLY CO. (4th Cir. 1987): Defined surplus assets in ERISA contexts.
Albedyll v. Wisconsin Porcelain Co. (7th Cir. 1991): Highlighted the necessity of explicit reversion provisions for surplus asset distribution.
CHAIT v. BERNSTEIN (3rd Cir. 1987): Clarified that partial termination does not entitle participants to surplus assets.
Outzen v. FDIC (10th Cir. 1991): Validated employer reversion amendments in pension plans.
CALAMIA v. SPIVEY (5th Cir. 1980): Established that ERISA claims do not inherently warrant jury trials.

These cases collectively reinforced the court's stance on the limited entitlement to surplus assets and the procedural rigidity surrounding pension plan amendments under ERISA.

Legal Reasoning

The court's legal reasoning centered on interpreting ERISA's provisions regarding the handling of surplus assets in pension plans. Key points included:

Partial Termination: The court recognized both vertical and horizontal partial terminations but determined that such terminations did not automatically confer rights to surplus assets under ERISA.
Surplus Asset Reversion: Citing ERISA sections 403(c)(1), 4044(d)(1), and 411(d)(3), the court concluded that reversion of surplus assets to the employer is permissible upon complete termination of the plan, provided the plan's language allows for such distribution.
Trust Law Considerations: While common law trust principles were considered, the court emphasized that ERISA's statutory framework took precedence, particularly regarding the nonforfeiture and exclusive benefit requirements.
Amendment Provisions: The court upheld the plan's amendment clauses, allowing for explicit reversion provisions, and dismissed arguments that existing language precluded such amendments.
ERISA Claims and Jury Trials: The court rejected plaintiffs' demands for a jury trial, aligning with precedents that classify ERISA claims as equitable rather than legal, thereby not entitling them to jury determination.

Impact

This judgment has significant implications for the administration of employer-funded defined benefit pension plans under ERISA:

Clarification of Surplus Entitlements: It reinforces that participants in defined benefit plans are not automatically entitled to surplus assets unless explicitly provided for in the plan's language.
Employer Reversion Rights: Employers retain the ability to reclaim surplus assets upon complete plan termination, ensuring that overfunding due to actuarial errors or other factors does not result in undue windfalls to participants.
Plan Amendment Flexibility: The decision upholds the flexibility of employers to amend pension plans to include reversion provisions, as long as such amendments do not infringe upon the accrued rights of participants.
Jury Trial Limitations: It underscores the limitations within ERISA for participants seeking jury trials, maintaining that such claims are typically resolved within the judge's purview.

Future cases involving pension plan mergers and terminations will likely reference this judgment to assess the distribution of surplus assets and the enforceability of plan amendment provisions.

Complex Concepts Simplified

Partial Termination

Definition: Partial termination occurs when a subset of the pension plan is affected, such as through the exclusion of certain employee groups or a reduction in future benefit accruals.

Surplus Assets (Residual Assets)

Definition: Surplus assets refer to funds in a pension plan that exceed the liabilities needed to fulfill the defined benefit obligations to participants.

Reversion Provision

Definition: A reversion provision is a clause within a pension plan that allows any surplus assets to return to the employer upon the plan's termination.

ERISA Sections:

Section 403(c)(1): Stipulates that plan assets must be used exclusively for providing benefits and covering administrative expenses.
Section 4044(d)(1): Governs the distribution of residual assets, allowing them to revert to the employer if certain conditions are met upon plan termination.
Section 411(d)(3): Ensures nonforfeiture of accrued benefits upon termination, thereby protecting participants' rights.

Vertical and Horizontal Partial Termination

Vertical Partial Termination: Involves the exclusion of a group of employees from the pension plan.

Horizontal Partial Termination: Involves a decrease or cessation in future benefit accruals for plan participants.

Conclusion

The Borst v. Chevron decision serves as a pivotal reference in ERISA-related jurisprudence concerning pension plan terminations and surplus asset distributions. By affirming that participants are not automatically entitled to surplus assets unless explicitly provided for, and by upholding employers' rights to reclaim such assets upon complete termination, the court reinforced the statutory framework governing pension plans. This ensures a balanced approach that protects participants' accrued benefits while allowing employers flexibility in managing pension plan finances. Additionally, the judgment clarified procedural aspects, particularly regarding the non-entitlement to jury trials for ERISA claims, thereby streamlining the resolution process within the specialized realm of pension law.

Entitlement to Surplus Assets in Employer-Funded Defined Benefit Plans: Analysis of Borst v. Chevron