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Docket Number

Nos. 89-56116, 89-56119, 89-56120, 89-56122 to 89-56124, 89-56127, 89-56130 to 89-56132, 89-56135 and 89-56136.

Attorney(S)

Donald H. Dye, Dye, Thomas, Luebs Mort, Riverside, Cal., for plaintiffs-appellants. Julia A. Molander, Bronson, Bronson McKinnon, San Francisco, Cal., for defendants-appellees Kaiser Steel Retirement Plan, Miles Yeagley, George Seplak, Richard Hoges, Monty H. Rail, Patrick J. Hunt, Charles Holmes and Robert Merrick. Roy G. Weatherup, Haight, Brown Bonsteel, Santa Monica, Cal., for defendant-appellee Charles H. Black. Jean Marie Breen, Office of Gen. Counsel, Washington, D.C., for amicus curiae Pension Benefit Guar. Corp.

Judges

David R. Thompson

Acts

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Smart Summary

Case Summary: Horan, et al. v. Kaiser Steel Retirement Plan, et al. (9th Cir. Nov. 4, 1991)

Factual and Procedural Background

Twenty-four former employees of Kaiser Steel Corporation (the "plaintiffs") sued the Kaiser Steel Retirement Plan (the "Plan") and former members of the Plan's Investment Committee. The plaintiffs were beneficiaries of a defined benefit ERISA plan. From 1977 to 1984 the Plan purchased annuities for retirees by paying insurance companies sums (approximately $150,000–$200,000 per retiree) which then made the monthly pension payments.

In 1984 Kaiser decided to close its Fontana mill, producing an unusually large number of retirees (199 in 1984). The Plan purchased annuities costing $15.1 million for those retirees. By January 1985 the Plan's assets had dwindled to about $1.1 million, and the Investment Committee adopted a February 1985 resolution discontinuing the purchase of annuities and instead paying benefits directly from the trust. Those receiving direct trust payments received the same monthly amounts initially but experienced a reduction in benefits after the Pension Benefit Guaranty Corporation (PBGC) became statutory trustee following Kaiser's Chapter 11 and Plan termination in February 1987. Plaintiffs who had annuities purchased for them did not suffer a reduction.

The plaintiffs sought annuities (or equivalent relief) either as benefits due under the Plan (29 U.S.C. § 1132(a)(1)(B)) or as relief for alleged fiduciary breaches (under 29 U.S.C. §§ 1109 and 1132(a)(2), or § 1132(a)(3)). The district court granted summary judgment for the defendants and dismissed the plaintiffs' claims. The plaintiffs appealed; the Ninth Circuit affirmed.

Legal Issues Presented

Whether the plaintiffs were entitled to annuities under the terms of the Plan (a benefits claim under 29 U.S.C. § 1132(a)(1)(B)).
Whether the plaintiffs were required to exhaust Plan administrative remedies before pursuing their benefits claim, and whether exhaustion should be waived.
Whether the Investment Committee had discretion to terminate the practice of purchasing annuities, and if so, whether its termination of annuity purchases was arbitrary or an abuse of discretion.
Whether the individual defendants breached their fiduciary duties and whether the plaintiffs may obtain the annuity-type remedies they seek through fiduciary breach claims under 29 U.S.C. §§ 1109 and 1132(a)(2), or § 1132(a)(3).

Arguments of the Parties

Plaintiffs' Arguments

The plaintiffs argued the Plan's terms entitled them to annuities and that the Investment Committee did not have discretion to stop purchasing annuities.
They claimed past practice (the committee's historical purchases of annuities for retirees) deprived the Investment Committee of discretion to stop the practice.
They alternatively argued the Investment Committee was equitably estopped from refusing to purchase annuities because committee members allegedly promised annuities and plaintiffs detrimentally relied on those promises (e.g., delayed retirement to assist with the mill closure).
In the alternative to denying discretion, plaintiffs argued the decision to stop purchasing annuities was arbitrary and capricious and thus an abuse of discretion.
As to fiduciary breach claims, plaintiffs sought remedies (declaratory relief and injunctions requiring annuity purchases) that would give each plaintiff an annuity.

Defendants' / Appellees' and Amicus Positions

The Investment Committee and other defendants moved for summary judgment; the district court granted summary judgment and dismissed the plaintiffs' claims.
The PBGC, as amicus and as statutory trustee administering the Plan at the time of appeal, unequivocally stated in its amicus brief that the plaintiffs were not entitled to annuities under the Plan.
The appellees alleged that the 1985 resolution affected a large number of future retirees (the opinion notes appellees allege 600 future retirees were affected).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Amato v. Bernard, 618 F.2d 559 (9th Cir. 1980)	Beneficiaries must first exhaust administrative remedies; exhaustion requirement may be waived when futile.	Supported the general exhaustion rule and the court's authority to waive exhaustion when appropriate; court waived exhaustion here because PBGC was administering the Plan and had taken a position on entitlement.
Southeast Alaska Conservation Council v. Watson, 697 F.2d 1305 (9th Cir. 1983)	District courts have discretion to waive exhaustion requirements.	Cited to support the court's discretionary waiver of the Plan's exhaustion requirement in this case.
Graphic Communications Union v. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184 (9th Cir. 1990)	Exhaustion requirement applies to benefits claims but does not apply to fiduciary breach claims alleging statutory violations rather than Plan-only claims.	Used to explain that exhaustion was required for the benefits claim but not for the fiduciary breach claim; helped frame the court's exhaustion analysis.
Oster v. Barco, 869 F.2d 1215 (9th Cir. 1988)	Past practice does not necessarily deprive a fiduciary of discretion; decisions reviewed for arbitrary or unreasonable conduct and not disturbed unless arbitrary.	Applied to reject plaintiffs' argument that past annuity purchases bound the Investment Committee; used to frame the standard of review for the Committee's decision.
Fine v. Semet, 699 F.2d 1091 (11th Cir. 1983)	Binding a fiduciary based on past practice can impair necessary flexibility for proper financial management of plans.	Quoted and applied to support the proposition that past practice did not eliminate discretion to change annuity purchase practice.
Elser v. I.A.M. Nat'l Pension Fund, 684 F.2d 648 (9th Cir. 1982)	A decision is arbitrary only if it is not grounded on any reasonable basis.	Used to define the threshold of arbitrariness in reviewing the Investment Committee's decision; court found a reasonable basis existed.
Massachusetts Mutual Life Ins. v. Russell, 473 U.S. 134 (1985)	Individual beneficiaries bringing fiduciary breach actions under ERISA must sue for the benefit of the plan; §§ 1109 and 1132(a)(2) do not provide causes of action for extra-contractual damages to individuals.	Applied to hold that plaintiffs' fiduciary breach claims could not be pursued to obtain individual annuity remedies because such relief would not be on behalf of the Plan.
Sokol v. Bernstein, 803 F.2d 532 (9th Cir. 1986)	Extended Russell's reasoning to § 1132(a)(3): equitable relief under that section is not a vehicle for individual extra-contractual remedies.	Applied to conclude § 1132(a)(3) likewise did not authorize the plaintiffs to obtain annuity-type relief for themselves rather than for the Plan.

Court's Reasoning and Analysis

The court addressed the plaintiffs' two main lines of claim separately: the benefits claim under § 1132(a)(1)(B) and the fiduciary breach claim under §§ 1109 & 1132(a)(2) or § 1132(a)(3).

On exhaustion and the benefits claim, the court recognized the standard rule that beneficiaries must exhaust plan administrative remedies (citing Amato), but retained discretion to waive exhaustion where futile (Southeast Alaska). The court found waiver appropriate because the PBGC, now administering the Plan, had unequivocally stated in an amicus brief that the plaintiffs were not entitled to annuities; thus the court was fully apprised of the administrator's decision and expertise and declined to require administrative exhaustion.

Turning to the merits of the benefits claim, the court examined the Plan language (Section F(3)(b)) which provided that the Investment Committee "may elect" to have a pension paid by the purchase of an annuity. The court concluded the word "may" conferred discretion and did not obligate the Committee to purchase annuities for each retiree.

The plaintiffs' two arguments that this discretion was effectively lost were rejected. First, the court held past practice of purchasing annuities did not eliminate discretion and bind the fiduciary to continue purchases; the court relied on Oster and Fine for the proposition that binding fiduciaries to past practices would impair necessary financial flexibility. Second, the court rejected equitable estoppel because the record did not show any Plan administrator or Investment Committee member promised to purchase annuities for the plaintiffs; the statements plaintiffs relied on generally promised continuation of Plan benefits, not a specific form of benefit. A single letter promising an annuity to one appellant (Nauta) came from a Kaiser employee with no role in Plan administration, and therefore did not establish estoppel.

Regarding the standard of review for the Committee's exercise of discretion, the court noted it will not disturb a discretionary decision unless arbitrary, meaning not grounded on any reasonable basis (Elser / Oster). Even applying either the usual deference or the lesser deference appropriate when employer interests conflict with beneficiaries, the court found no abuse of discretion. Given the Fontana closure, the large number of retirees in 1984, the $15.1 million cost of purchasing annuities for those retirees, and the Plan's assets of only $1.1 million by January 1985, the Committee's choice to cease purchasing annuities and to pay benefits from the trust was a reasonable measure to preserve a financially depleted Plan and to protect future retirees.

On the fiduciary breach claim, the court explained that under Russell an individual beneficiary's fiduciary breach action under §§ 1109 and 1132(a)(2) must be brought for the benefit of the Plan; those sections do not permit recovery of extra-contractual damages for individuals. The court further noted that Sokol extended Russell to § 1132(a)(3): equitable relief under that section likewise is not to be used to obtain individual extra-contractual remedies. Because the plaintiffs sought annuities and relief that would benefit them individually (declaratory judgment and injunctions requiring annuity purchases), not remedies on behalf of the Plan as a whole, their fiduciary breach claims could not proceed. The court therefore concluded the district court should have dismissed the fiduciary breach claim for failure to state a claim; it did not need to reach whether any fiduciary had in fact breached duties.

Holding and Implications

AFFIRMED.

Holding: The Ninth Circuit affirmed the district court's grant of summary judgment to the defendants. The court held (1) the Investment Committee had discretion under the Plan to discontinue purchasing annuities; (2) the Committee's decision to stop annuity purchases in 1985 was not an abuse of discretion given the Plan's dire financial condition and the large number of retirees resulting from the Fontana mill closure; and (3) the plaintiffs' fiduciary breach claims failed because ERISA does not permit individual beneficiaries to obtain extra-contractual remedies (such as individual annuities) through §§ 1109/1132(a)(2) or § 1132(a)(3); such claims must be brought for the benefit of the Plan.

Implications: The direct effect is that the plaintiffs are not entitled to the annuities they sought and their fiduciary breach claims were properly dismissed for failure to state a claim as pleaded. The decision enforces the discretion conferred by Plan language ("may elect") and applies existing Ninth Circuit and Supreme Court precedent (e.g., Amato, Oster, Russell, Sokol) to bar individual recovery of extra-contractual annuity-type remedies when those remedies would not be on behalf of the Plan. The opinion does not announce a new legal doctrine beyond applying established precedent to the facts of this case.

This summary is based exclusively on the text of the provided opinion and does not add information beyond that opinion.

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ROBERT PATRICK HORAN, ET AL., PLAINTIFF, AND JONNIE S. KOCH, PLAINTIFF-APPELLANT, v. KAISER STEEL RETIREMENT PLAN; PERMA PACIFIC, INC.; MONTE H. RIAL; CHARLES H. BLACK, ET AL., DEFENDANTS-APPELLEES. ROBERT PATRICK HORAN, ET AL., PLAINTIFF, AND ERNEST G. DICK, PLAINTIFF-APPELLANT,

DAVID R. THOMPSON, Circuit Judge:

OVERVIEW

The plaintiffs are former employees of Kaiser Steel Corporation. They brought this suit under the Employee Retirement Income Security Act to recover annuities they contend they are entitled to under the terms of Kaiser's pension plan, and/or as a result of the individual defendants' breach of their fiduciary duties. The district court granted the defendants' summary judgment motion and dismissed the plaintiffs' claims. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

FACTS AND PROCEDURE

Twenty-four former Kaiser Steel Corporation ("Kaiser") employees brought this action against the Kaiser Steel Retirement Plan ("Plan") and former members of the Plan's Investment Committee. The plaintiffs were beneficiaries of the Plan, which was a defined benefit plan under the Employee Retirement Income Security Act ("ERISA"). The Investment Committee was responsible for directing Plan investments.

From 1977 to 1984, the Plan purchased annuities for each retiree. To purchase an annuity, the Plan would pay between $150,000 to $200,000 per retiree to an insurance company. The insurance company would then assume responsibility for the monthly pension payments.

In the late 1970s, Kaiser began facing economic difficulties. In 1983, Kaiser decided to close its Fontana mill. All the plaintiffs were employed at the Fontana mill at this time. As a result of the closure, an unusually large number of employees became eligible for retirement. In 1984, 199 employees retired, and the Plan spent $15.1 million to purchase an annuity for each of these retirees. By 1985, the Plan was facing a financial crisis. A memo directed to the Investment Committee stated that the Plan assets totaled only $1.1 million and that the continued purchases of annuities would completely exhaust the Plan by February 1985.

In February 1985, the Investment Committee responded by adopting a resolution ("1985 resolution") to discontinue the purchase of annuities. The Investment Committee decided to begin paying pension benefits directly from the Plan trust. The 1985 resolution stated that annuities would not be purchased for employees retiring after January 1985, or for those employees who had retired prior to January 1985 but had not had annuities purchased for them.

The amount received in monthly payments directly from the trust was the same amount the retirees would have received had an annuity been purchased for them. The Plan's assets were sufficient to continue these monthly payments until February 1987, when Kaiser filed for Chapter 11 bankruptcy. The Plan then terminated under Title IV of ERISA, and the Pension Benefit Guaranty Corporation ("PBGC") became the statutory trustee of the Plan and began making the payments to the beneficiaries. The retirees who were receiving monthly benefits directly from the trust suffered a reduction in monthly benefits when the PBGC took control. In contrast, the amount of monthly payments remained the same for those employees for whom an annuity had been purchased.

The plaintiffs brought suit in an attempt to gain an annuity for each individual plaintiff. The district court granted the defendants' motion for summary judgment and dismissed the case. This appeal followed.

DISCUSSION

The plaintiffs present two claims which they allege entitle them to annuities. The first claim arises under 29 U.S.C. § 1132(a)(1)(B) (the "benefits claim"), and alleges the terms of the Plan entitle the plaintiffs to an annuity. The second claim arises under either sections 1109 and 1132(a)(2), or section 1132(a)(3) (the "fiduciary breach claim"). This claim alleges the individual defendants breached their fiduciary duties. We address each claim in turn.

A. Benefits Claim [13] 1. Exhaustion of Administrative Remedies

The plaintiffs first contend the district court erred by requiring the plaintiffs to exhaust their administrative remedies pursuant to the Plan. We conclude a waiver of the exhaustion requirement is appropriate in this case.

A beneficiary seeking a determination of rights or benefits under a plan must first exhaust the administrative remedies provided by the plan. Amato v. Bernard, 618 F.2d 559, 567 (9th Cir. 1980). A district court has discretion to waive the exhaustion requirement, Southeast Alaska Conservation Council v. Watson, 697 F.2d 1305, 1309 (9th Cir. 1983), and should do so when exhaustion would be futile. Amato, 618 F.2d at 568.

The exhaustion requirement applies to the plaintiffs' benefits claim, but does not apply to the plaintiffs' fiduciary breach claim because this claim alleges a violation of the statute, ERISA, rather than the Plan. See Graphic Communications Union V. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184, 1187 (9th Cir. 1990).

We believe it would be unnecessary to require the plaintiffs to exhaust their administrative remedies. The PBGC is now administering the Plan and unequivocally states in its amicus brief that the plaintiffs are not entitled to an annuity under the terms of the Plan. Thus, we are fully apprised of the administrator's expertise and its decision as to the merits of the plaintiffs' claim. Therefore, we will waive the exhaustion requirement and address the merits of the plaintiffs' benefits claim.

2. Benefits Claim

The plaintiffs contend they are entitled to an annuity under the terms of the Plan. The plaintiffs argue the Investment Committee did not have discretion to terminate the practice of purchasing annuities. In the alternative, if we conclude the Investment Committee did possess discretion over whether to purchase annuities, the plaintiffs argue the decision to terminate the purchase of annuities was arbitrary and capricious. We reject both arguments.

Section F(3)(b) of the Plan gives the Investment Committee the option of purchasing annuities:

The Investment Committee may elect to have any pension under this Plan paid by purchase of an annuity from an insurance company. The purchase of such an annuity shall discharge all payment obligations under the Plan.

(emphasis added). By using the word "may," the Plan does not obligate the Investment Committee to purchase an annuity for each retiree. The plaintiffs, however, rely on two arguments to contend the Investment Committee was deprived of its discretion and obligated to purchase annuities for the plaintiffs: (1) the past practice of purchasing annuities obligated the Investment Committee to continue to purchase annuities, and (2) the Investment Committee is equitably estopped from refusing to purchase annuities based on their alleged promises to purchase annuities.

Until 1985, the Investment Committee purchased annuities for each retiree. This past practice does not deprive the Investment Committee of its discretion and obligate it to purchase annuities for all future retirees. See Oster v. Barco, 869 F.2d 1215, 1219 (9th Cir. 1988). To hold otherwise would require a fiduciary to continue purchasing annuities when it is financially unsound to do so. Binding a fiduciary based on past practice "would impair the flexibility necessary for proper financial management" of plans. Id. (quoting Fine v. Semet, 699 F.2d 1091, 1094 (11th Cir. 1983)).

The plaintiffs next argue the Investment Committee is equitably estopped from refusing to purchase annuities for the plaintiffs based on alleged promises made by members of the Investment Committee. The plaintiffs allege members of the Investment Committee promised to buy annuities for the plaintiffs, and the plaintiffs detrimentally relied on these promises by delaying their retirement to help with the closure of the Fontana mill.

We need not decide whether the plaintiffs can invoke equitable estoppel to deprive the defendants of their discretion under the Plan. The record does not indicate that any member of the Investment Committee or any other person associated with the administration of the Plan promised to purchase annuities for the plaintiffs. The statements referred to by the plaintiffs merely state that Kaiser would continue to provide benefits under the existing Plan in the event the Fontana mill ceased operations. The statements do not promise a specific form of benefit. See CR 139, Exhs. 1-25, ¶¶ 5-7; CR 139, Exh. 19, para. 6(f); CR 140, Exh. 84, ¶¶ 2, 3; CR 140, Exhs. 8, 13, 18, 23, 24, 27, 36, 41, 48, 57, 61, 68, 72, 76, 80, 92, 97, 99, 103, and 108. A letter to appellant James Nauta does state that an annuity will be purchased for Nauta. See CR 140, Exh. 88. However, this letter is from a Kaiser employee who does not have any relationship with the administration of the Plan. See id. We, therefore, reject the plaintiffs' arguments and conclude the Investment Committee did have discretion to terminate the practice of purchasing annuities.

We will not disturb the Investment Committee's exercise of its discretion unless the Investment Committee acted arbitrarily. Oster, 869 F.2d at 1217. A decision is not arbitrary unless it is "not grounded on any reasonable basis." Id. at 1218 (emphasis in original) (quoting Elser v. I.A.M. Nat'l Pension Fund, 684 F.2d 648, 656 (9th Cir. 1982), cert. denied, 464 U.S. 813, 104 S.Ct. 67, 78 L.Ed.2d 82 (1983)). We, however, will review decisions with "lesser deference" if the employer administers the plan and other circumstances "implicate a serious conflict between the interests of the employer and the beneficiaries." Oster, 869 F.2d at 1217. We need not resolve the appropriate standard because, under either standard, we conclude the Investment Committee did not abuse its discretion.

Because of the closure of the Fontana mill in 1984, an unusually large number of employees retired (199 employees). The Investment Committee purchased an annuity for each of these retirees, at a cost of $15.1 million. Each annuity cost between $150,000 to $200,000 per retiree. By January 1985, the plan assets totaled $1.1 million. The continued purchases of annuities would have depleted the Plan by February 1985. In response, the Investment Committee terminated its practice of purchasing annuities and started making monthly payments directly from the Plan. This manner of payment was less costly than a lump sum payment to an insurance company for an annuity. Thus, the decision to terminate the purchases of annuities was a reasonable attempt to salvage a financially depleted Plan and to protect future retirees.

The appellees allege there were 600 future retirees who were affected by the 1985 resolution.

B. Fiduciary Breach Claim

The plaintiffs next contend the defendants breached their fiduciary duty to administer the Plan prudently. The plaintiffs seek to impose personal liability on the defendants pursuant to either sections 1109 and 1132(a)(2), or section 1132(a)(3). For purposes of this appeal, the particular section does not affect the resolution of the issues appealed. As a remedy for the alleged breach, the plaintiffs seek remedies which would furnish them with annuities. We conclude the plaintiffs cannot pursue this claim because ERISA does not provide recovery for the remedies sought.

An individual beneficiary may bring a fiduciary breach claim, but must do so for the benefit of the plan. Massachusetts Mutual Life Ins. v. Russell, 473 U.S. 134, 144, 105 S.Ct. 3085, 3091, 87 L.Ed.2d 96 (1985). An individual beneficiary may not pursue a fiduciary breach claim to recover benefits or remedies beyond those provided by a plan. Id. at 144, 148, 105 S.Ct. at 3091, 3093 (holding sections 1109 and 1132(a)(2) do not provide "a cause of action for extra-contractual damages"). Any recovery for a violation of sections 1109 and 1132(a)(2) must be on behalf of the plan as a whole, rather than inuring to individual beneficiaries. Id. at 140, 105 S.Ct. at 3089. The Supreme Court reasoned the fiduciary duty provisions in ERISA are primarily concerned with protecting the integrity of the plan, which in turn protects all the beneficiaries, rather than remedying each wrong suffered by individual beneficiaries. Id. at 142, 105 S.Ct. at 3090.

We have extended the reasoning of Russell to section 1132(a)(3), which allows recovery of "other appropriate equitable relief." Sokol v. Bernstein, 803 F.2d 532, 536 (9th Cir. 1986). Section 1132(a)(3) also does not provide an action for an individual beneficiary to recover extra-contractual remedies. Id. Under Russell and Sokol, the plaintiffs fail to present a fiduciary breach claim if the only remedy sought is for their own benefit, rather than for the benefit of the Plan as a whole.

The remedies sought by the plaintiffs are for their own benefit, and not for the benefit of the Plan. The objective of the plaintiffs' suit is to recover an annuity for each individual plaintiff. The plaintiffs' third amended complaint focuses largely on requesting a declaratory judgment that the plaintiffs are entitled to an annuity and an injunction requiring the defendants to purchase annuities for the plaintiffs. See CR 111. If the individual defendants were required to purchase an annuity for the plaintiffs, this remedy would only benefit the plaintiffs and not the Plan. This remedy would further deplete a financially unstable plan. We conclude, therefore, the district court should have dismissed the fiduciary breach claim for failure to state a claim. Because we conclude the plaintiffs did not bring a claim on behalf of the Plan, we need not address whether the defendants breached their fiduciary duties.

CONCLUSION

We conclude that the Investment Committee had discretion to terminate the purchase of annuities and that this decision was not an abuse of its discretion. We also conclude the plaintiffs failed to state a claim for breach of the defendants' fiduciary duties because their claim was not on behalf of the Plan.

AFFIRMED.

HORAN v. KAISER STEEL RETIREMENT PLAN