Schultz v. PLM International, Inc.

ALDISERT, Circuit Judge,

dissenting:

I disagree with the selected major premise of the basic categorical syllogism that under-girds the majority’s view:

The payment made to Schultz in January of 1996 was a distribution of benefits to which Schultz was entitled at the time he filed his lawsuit. Under Crotty, then, the fact that Schultz received those benefits during the pendency of the litigation would not serve as a bar to his suit. Rather, because Schultz was eligible to receive a benefit at the time he filed suit in August of 1995, he was a participant and had standing to maintain his suit.

Maj. Op. at 1142 (emphasis added).

For the conclusion to stand the content of the premises must be true.1 Here the major premise of Appellant’s argument, which was accepted by the majority-that the January 1996 payment to Schultz was a “benefit” to which he was entitled at the time he filed his lawsuit-is not true. What he received after filing suit was not “benefits”, but mere “residual assets.” Borst v. Chevron Corp., 36 F.3d 1308, 1311 (5th Cir.1994). The distinction between “benefits” and “residual assets” set forth in Borst has been accepted by this court. Jacobson v. Hughes Aircraft Co., 105 F.3d 1288, 1294 (9th Cir.1997).

I.

A brief reference to the facts in this case is now necessary in order to apply the foregoing precepts. PLM borrowed over $63 million in 1989 and lent it to the ESOP, which in turn purchased PLM stock. The ESOP began to repay the loan to PLM with PLM’s contributions to the ESOP or dividends on the stock. As the loan was repaid, shares of stock were allocated to a trust fund made up of the individual accounts of the participants. The participants gained entitlement to the benefits in their accounts by the ESOP’s terms, which are subject to the minimum standards of ERISA. Each participant’s “Account” was “his or her interest under the Plan and in the Trust Fund.” ERISA defines an “accrued benefit” as “the balance of the individual’s account.” 29 U.S.C. § 1002(23)(B).

When the ESOP terminated in January 1995, it distributed to Schultz the stock and cash that had been allocated to his individual account, which became vested as of the date of termination. These were his “benefits.” 29 U.S.C. § 1002(34). The unallocated assets in the ESOP were returned to PLM, canceling the ESOP’s debt to PLM. The remaining assets were used, as contemplated by the ESOP’s terms, for administrative “wind-up” activities. In January 1996, after PLM determined that the actual administrative costs *1144 were less than originally contemplated, it distributed the remaining $45,000 in unallocated assets to the former participants.

Under ERISA, these residual assets were not “accrued benefits” because they were never allocated to the individual accounts of participants. In fact, by the ESOP’s own terms:

As of the date of termination, the shares and cash, if any, credited to the Account of each Member ... shall be paid in kind in a lump sum as soon as practicable from the Trust to each Member.... Any amounts remaining unallocated in a suspense account ... shall, after application to the extent necessary to satisfy the outstanding balance on any ESOP Loan, be returned to the Company specified by PLM.

ER 15, Ex. C § 17.4. The ESOP did not provide for a further allocation; rather, Schultz’s allocated benefits vested on termination, in January 1995.

ERISA also provides 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.” 29 U.S.C. § 1103(c)(1). It is because of this rule that PLM distributed the residual assets to Schultz.

II.

Case law that distinguishes between “benefits” and “residual assets” arises in the context of defined benefit plans that allow employers to recover residual assets. The PLM ESOP was not a defined benefit plan; however, these cases are instructive in determining if the PLM ESOP’s residual assets were benefits. Notwithstanding the majority’s contention that a Firestone analysis is unnecessary, to have standing under ERISA Schiiltz must have been a “participant” upon filing suit. 29 U.S.C. § 1132(a). This means, as a former employee, he must “have [had] ‘a colorable claim’ to vested benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117, 109 S.Ct. 948, 958, 103 L.Ed.2d 80 (1989) (quoting Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.1986)) (emphasis added).

To this end, Borst is instructive. In that case former participants of a plan sued their employer to recover the plan’s residual assets, which reverted to the company after all benefits and expenses were paid. Like the PLM ESOP, the plan was subject to ERISA’s anti-inurement provision, 29 U.S.C. § 1103(c)(1). But because it was a defined benefit plan it was also subject to § 1344(d)(1), which is an exception to the general rule that plan assets can never inure to the benefit of any employer. Section 1344(d)(1) provides that residual assets of defined benefit plans may be distributed to the employer, not the participants, if certain conditions are met. The participants in Borst were fully vested in their accrued plan benefits, as was Schultz when he filed his complaint. The court held that the participants were entitled only to those benefits, not to the surplus, because § 1344(d)(1) was satisfied by implication. 36 F.3d at 1315-16. The plan was like a “gratuitous trust,” because the employer was the sole contributor to the plan. Id.

Likewise, PLM was the sole contributor to the ESOP. Unlike the employer in Borst, PLM is not arguing that it should retain the assets; pursuant to ERISA’s anti-inurement provision, it distributed the residual assets to all former participants in the benefit plan. The relevant rule of law, however, is clear: There is a basic distinction between “benefits” and “residual assets.” The mere fact of distribution does not change the character of the assets, and does not change the status of a non-participant.

We have previously adopted the reasoning of Borst as it applies to the narrow question before this court. In Jacobson, which analyzed whether a plan’s residual assets were benefits to which participants were entitled, we recognized a distinction between a plan funded partially by employees or solely by the employer: “It is clear that Congress intended to distinguish between [the two, and] to ignore the distinction ... would eviscerate the protections provided to employees under ERISA with respect to their employee contributions.” 105 F.3d at 1294. We quoted Borst: “An entirely employer funded defined benefit plan pension trust is therefore more akin to a gratuitous trust so far as concerns surplus assets____ This principle has been looked to in holding an employer *1145 entitled to surplus assets on termination of an employer funded defined benefit pension plan.” Id. (quoting Borst, 36 F.3d at 1315).

It unerringly follows from these concepts that the ESOP’s residual assets, having been solely funded by PLM and never allocated to individual accounts, were not benefits. In defined benefit single-employer plans, this distinction is crucial in determining whether an employer may keep its plan’s residual assets. Malta v. General Elec. Co., 23 F.3d 828, 831-832 (3rd Cir.1994) (ERISA “demonstrates clearly that ‘benefits’ are elements that are conceptualized and treated differently in a plan termination than are the ‘assets’ of that plan.”)

This analogy to defined benefit plans is helpful in order to characterize the 1996 distribution. It was not benefits.

III.

The majority state as their major premise that the residual assets distributed to Schultz in January 1996 were “benefits.” The majority’s conclusion, standing on the weight of this premise, is that Schultz was a participant when he filed suit. However, the content of the major premise is not true; it is contrary to the law of this court. Because the premise is faulty, the conclusion is likewise faulty.

Schultz received every cent of the vested benefits in his account prior to his filing suit. When the ESOP made a further distribution in January 1996, Schultz did not receive “benefits.” Instead, he received a portion of the “residual assets,” something entirely different from benefits. Accordingly, he was not a participant under the plan when he filed suit in August 1995. Not being a participant, he lacked standing to pursue his claim in federal court under the rubric of ERISA. The retroactive effect of Crotty was not triggered.

I would affirm the judgment of the district court. Accordingly, I dissent.

. "The validity of a syllogism and the soundness of the argument's structure deal only with the relations between the premises. Validity deals only with form. It has absolutely nothing to do with content. Arguments, therefore, may be logically valid, yet absolutely nonsensical. Assuming valid form, the essence of argument must always be a search for the truth or falsity of the premises.... Once this determination is made in constructing the premise in a deductive syllogism, however, we do not say that the conclusion probably will follow; the conclusion must follow.” Ruggero J. Aldisert, Logic for Lawyers: A Guide to Clear Legal Thinking 68-69 (3d ed.1997).