source: Caselaw Access Project

author: JAMES R. MILLER, Jr., District Judge.

license: Public Domain

text:
    Rebecca DAMERON, on behalf of herself and all others similarly situated v. SINAI HOSPITAL OF BALTIMORE, INC.; Administrative Committee of Sinai Hospital of Baltimore, Inc.; Grace Pryor; Sinai Hospital of Baltimore, Inc. Pension Plan for Employees Covered Under the Collective Bargaining Agreement Between the National Union of Hospital and Health Care Employees, Division of R.W.D.S.U., AFL-CIO, and its Affiliate Local District 1119 E, and Sinai Hospital of Baltimore, Inc.
    Civ. A. No. M-83-2835.
    United States District Court, D. Maryland.
    Jan. 16, 1986.

      Luther Blackiston, Legal Aid Bureau, Inc., Towson, Md., Gill Deford and Neal S. Dudovitz, Nat. Senior Citizens Law Center, Los Angeles, Cal., for plaintiffs.
    Leonard E. Cohen, Jeffrey Rockman, Rudolph E. DeMeo and Frank, Bernstein, Con-away & Goldman, Baltimore, Md., for defendants.
   MEMORANDUM

JAMES R. MILLER, Jr., District Judge.

On October 4, 1984, this court granted the plaintiff’s motion for class certification, but found that the named class representative’s claim was barred by the statute of limitations and laches. Therefore, leave to substitute appropriate named plaintiff(s) was granted. At that time, the court held in abeyance any decision on the merits of the parties’ cross motions for summary judgment pending a decision on the substitution of named class representatives. Dameron v. Sinai Hospital, 595 F.Supp. 1404 (D.Md.1984).

The plaintiffs have since filed a motion for leave to substitute class representatives (Paper Nos. 31 & 33), and the defendants have responded (Paper No. 32).

Also pending before the court are the parties’ cross motions for summary judgment (Paper No. 13, Defendants’ Motion for Summary Judgment; Paper No. 20, Plaintiffs’ Motion for Summary Judgment; Paper No. 25, Defendants’ Opposition; Paper No. 26, Plaintiffs’ Reply). A hearing was held on all pending matters on November 8, 1985.

A. Substitution of Class Representatives

The class certified by the court consists of current retirees who are beneficiaries of the Sinai Pension Plan and have had or are having their benefits reduced by an amount derived by using an estimated Social Security benefit which is in excess of the amount of the Social Security benefits which they have actually received after leaving the service of Sinai Hospital to retire. Dameron, 595 F.Supp. at 1417. Florence McLean and Pinkie Ricks have moved for leave to represent that class.

Florence McLean worked for Sinai Hospital for 15 years, from September 1968 through January 1983. Upon retiring at age 63, she applied for Social Security early retirement and her Sinai pension. She began to receive monthly Social Security benefits of $278.50. When Sinai calculated her pension benefits, it used an estimated Social Security benefit figure, rather than the actual amount she received, to offset against the pension benefits Sinai Pension Plan would pay. Therefore, it calculated her pension to be $82.18 per month (Paper No. 31, Affidavit of McLean, Ex. A).

Pinkie Ricks worked for Sinai Hospital for 9 years, from 1973 to August 1982, at which latter time she was 62 years old. She applied for early Social Security retirement benefits and her Sinai pension. At the time of her retirement, she began receiving $262.40 monthly in Social Security benefits. Sinai calculated her pension using estimated Social Security benefits, and she received, therefore, $36.07 per month in Sinai pension benefits (Paper No. 31, Affidavit of Ricks, Ex. C).

Pursuant to Fed.R.Civ.P. 23(a), this court has ruled previously that the class is so numerous that joinder of all members is impracticable and that there are common questions of law and fact among them. Dameron v. Sinai Hospital, 595 F.Supp. at 1407-08. Because Ms. McLean and Ms. Ricks seek to enjoin the Sinai Pension Plan from using estimated Social Security benefits which are larger than the actual benefits they have received upon retirement, their claims are typical of the claims of the class, and if they prevail, all class members will benefit. Finally, the claims of the proposed class representatives do not conflict with those of the class, and it appears Ms. McLean and Ms. Ricks will fairly and adequately represent the class. Therefore, for these reasons and those explained below, Ms. McLean and Ms. Ricks will be substituted as class representatives, despite the defendants’ argument that they are not proper plaintiffs or proper class representatives.

The defendants argue that neither Ms. McLean nor Ms. Ricks exhausted her administrative remedies. Exhaustion of administrative remedies usually is required before an action may be brought under ERISA, see, e.g., Dameron v. Sinai Hospital, 595 F.Supp. at 1414 and cases cited therein, and under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185; see, e.g., Republic Steel Corp. v. Maddox, 379 U.S. 650, 652, 85 S.Ct. 614, 616, 13 L.Ed.2d 580 (1965); Fabian v. Freight Drivers and Helpers Local 557, 448 F.Supp. 835, 838-39 (D.Md.1978). It is undisputed that the two proposed class representatives did not exhaust their administrative remedies.

“Exhaustion is generally required as a matter of preventing premature interference with agency processes, to afford the parties and the courts the benefits of agency experience and expertise, to compile a record which is adequate for judicial review, and to allow the agency to function efficiently and have an opportunity to correct its own errors.” Eastern Band of Cherokee Indians v. Donovan, 739 F.2d 153, 156 (4th Cir.1984).

The requirement of exhaustion, however, may be waived. See, e.g., Weinberger v. Salfi, 422 U.S. 749, 765-67, 95 S.Ct. 2457, 2466-67, 45 L.Ed.2d 522 (1975); Mandel v. U.S. Department of Health, Education and Welfare, 411 F.Supp. 542, 546-47 (D.Md.1976), affd, 571 F.2d 1273 (4th Cir.), cert. denied, 439 U.S. 862, 99 S.Ct. 184, 58 L.Ed.2d 171 (1978). One of the major reasons for waiving the exhaustion requirement is futility. See, e.g., Davis v. Southeastern Community College, 574 F.2d 1158, 1160 (4th Cir.1978), rev’d on other grounds, 442 U.S. 397, 99 S.Ct. 2361, 60 L.Ed.2d 980 (1979). Futility has been recognized as an exception to the exhaustion doctrine in the pension area. See, e.g., Jenkins v. Local 705, 713 F.2d 247, 254 (7th Cir.1983); Taylor v. Bakery & Confectionary Union & Industry Int’l Welfare Fund, 455 F.Supp. 816, 820 (E.D.N.C.1978).

In this action, the Sinai Pension Plan has determined that its method of calculating pension benefits will not be changed. Ms. Rebecca Dameron, the original named class representative in this action, challenged the Plan’s method of calculating her benefits, exhausted her administrative remedies, and was informed on appeal that the Plan would not change the method of calculating her pension benefits. See Dameron v. Sinai Hospital, 595 F.Supp. at 1410-11. Where “[t]he Board [of Trustees] has already determined [the] question ... [and] there is no reason to believe that it will change its position,” exhaustion would be futile. Morgan v. Laborers Pension Trust Fund, 433 F.Supp. 518, 529 (N.D.Cal.1977).

The Board of Trustees of the Sinai Pension Plan has indicated clearly that it does not intend to stop using the estimated Social Security benefit to calculate pension benefits of class members. A change of position occurring during the named class representatives’ exhaustion of administrative process is highly unlikely to say the least. This court will not require the plaintiffs to undertake a futile administrative challenge to the Plan’s method of calculating benefits.

The defendants challenge the propriety of the claims of the newly named class representatives on an additional ground. They argue that because these class representatives do not have a full work history back to 1951, they are not receiving the full Social Security benefit which a person with a full work history would receive. Therefore, the defendants assert that the actual Social Security benefits granted to these plaintiffs, of necessity, will be lower than their estimated benefits. That proposition certainly is true, but it does not lead to the defendants’ conclusion that neither “Ms. McLean nor Ms. Ricks has suffered any real injury.” (Paper No. 32 at 7).

The injury complained of here is that the defendants’ method of calculating and offsetting pension benefits by using estimated Social Security benefit figures, rather than actual Social Security benefits received, violates federal law, and, consequently, results in the receipt by them of less money in combined pension and Social Security benefits than- they would have received if the calculations by defendants were in accord with federal law. That surely alleges a cognizable injury.

B. Expanding the Scope of the Class

The court previously considered whether the class representatives who were current retirees could represent the interests of future retirees without conflict. Accordingly, the parties were directed to seek the opinion of the union representing current employees. In a letter to the court on November 12, 1984, the counsel for the union responded that no conflict existed between the current and future retirees regarding the issue before the court. (See Paper No. 33, Ex. A).

As a result, the class will be defined as consisting of current and future retirees who are or will be beneficiaries of the Sinai Pension Plan and who have had, are having, or will have their benefits reduced by an amount derived by using an estimated Social Security monthly benefit which is in excess of the amount of the Social Security monthly benefit which they actually have received or will receive after leaving the service of Sinai Hospital to retire.

C. Merits of the Class Claim

The named plaintiffs and the class they represent seek a declaration that the use of the estimated Social Security monthly benefit to calculate pension benefits violates each of two specific provisions of ERISA, the nonforfeitability rule, 29 U.S.C. § 1053(a), and the anti-assignment rule, 29 U.S.C. § 1056(d), along with the general fiduciary duty provisions of ERISA, 29 U.S.C. § 1104(a)(1), and the Labor Management Relations Act, 29 U.S.C. §§ 185, 186(c)(5), which prohibit arbitrary and capricious behavior by fiduciaries.

Both sides to this dispute agree that the central issue in this case is the legality under ERISA of using an estimated Social Security offset as opposed to an offset based upon the actual Social Security award to an employee (Paper No. 25 at 3; Paper No. 26 at 1).

1) Description of the Sinai Pension Plan

The Sinai Pension Plan is an integrated pension plan. “ ‘Integrated’ [is] a calculation practice under which benefit levels are determined by combining pension funds with other income streams available to the retired employees. Through integration, each income stream contributes for calculation purposes to the total benefit pool to be distributed to all retired employees, even if the nonpension funds are available only to a subgroup of the employees. The pension funds are thus integrated with the funds from other income maintenance programs, such as Social Security, and the pension benefit level is determined on the basis of the entire pool of funds.” Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 514, 101 S.Ct. 1895, 1901, 68 L.Ed.2d 402 (1981). “... Congress expressly preserved the option of pension fund integration with benefits available under ... the Social Security Act” when it passed ERISA. Id.

One method by which integration is accomplished is the offset plan method. “ ‘Offset plan’ means a plan under which ... all provisions including the benefit rates apply uniformly to all covered employees regardless of compensation, except that an employee’s benefit otherwise computed under the plan formula is reduced or offset by a stated percentage of such employee’s old-age insurance benefit under the Social Security Act.” Rev.Rule 71-446 § 2.07(3). Sinai Pension Plan uses the offset plan method of integration (Paper No. 25, Ex. 3, Duffy Affidavit, ¶ 4).

The Sinai Pension Plan has a target goal that at retirement an employee with 30 years of service will receive 50%-60% of his pre-retirement income allocated between the Plan’s pension benefit and Social Security (see Paper No. 25 at 12; Ex. 3, ¶ 9; Ex. 6, 114). It also seeks to compensate employees with identical lengths of service and compensation at Sinai with the same pension benefits from Sinai without regard to their earning histories in non-Sinai employment (Paper No. 13 at 9; Ex. 1, 1111).

2) How Sinai Pension Plan Calculates Benefits

The basic formula for computing retirement benefits is contained in Article 4 of the Plan (Paper No. 24, Ex. A setting forth Article 4 and amendments thereto in 1978 and 1983). Despite the amendments of Article 4, all parties appear to agree that there are several common key steps in the calculation relevant to this action. (See Proposed Pre-Trial Order at 3). They are quite simple on the surface. First, the Plan establishes the employee’s “base pension” and subtracts from that amount the “estimated Primary Social Security Benefit.” (See Paper No. 13 at 3; Paper No. 20 at 8; Proposed Pre-Trial Order at 3). That deduction is called the offset. Two other deductions may be made if applicable: 1) a deduction for not having worked 30 years, the period for which a full pension is calculated; 2) a deduction for early retirement. (See id.).

The plaintiffs challenge only the offset deduction and the methodology used to arrive at the offset figure, i.e., the estimated Primary Social Security Benefit [hereinafter the estimated benefit].

a) Calculation Methodology

From the base pension figure calculated under the formulae in the Plan is subtracted the estimated Social Security benefit, but the Plan is silent as to precisely how the estimated benefits will be calculated (Paper No. 25, Ex. 3, Duffy Affidavit, 11 5).

To arrive at the estimated benefit figure, the Plan computes the average monthly wage in the year of highest earnings in the last five years (Paper No. 20 at 8, 10). It then plugs that figure into a Table, prepared in 1976 by an actuarial consulting firm, William M. Mercer, Inc., which apparently is “typical of the type of table that actuaries use in the calculation of benefits under offset pension plans.” (Paper No. 25, Ex. 3, Duffy Affidavit, Actuary, ¶ 5). (See Paper No. 20, Ex. B for TABLE).

The actuary constructed the Table to create an estimated earnings history for each beneficiary “by taking 1976 salaries and projecting backwards [to 1951], using a salary scale of a level 4% per annum increase in past wages.” (Paper No. 25, Ex. 3, Duffy Affidavit at 5). In 1976, when the Table was created, the Social Security Administration “used a formula to determine the average monthly wage ... and then applied an [estimated] benefit formula to the [average monthly wage] to determine actual [benefits].” Id. at 3. The Table, which apparently has not been changed since 1976, calculates estimated Social Security benefits for “each of its 1976 current earnings points and for each year of birth in the table by applying the [Social Security Administration] formulae, previously described, to the table’s estimated earnings history.” Id. at 6.

The Plan enters the Table at the claimant’s year of birth and moves to the figure representing his/her “average monthly wage.” The table at that intersection reveals, what the Plan calls, the estimated benefit.

Pursuant to Revenue Ruling 71-446, § 7.01, which prohibits a tax qualified pension plan from offsetting more than 8373% of the Social Security benefit, the Plan then calculates 8373% of the estimated benefit. That produces the offset figure which is subtracted from the “base pension” figure.

It is undisputed between the parties that the estimated benefit figure arrived at by the Plan using the above methodology will result, in most if not all circumstances, in a figure higher than the actual Social Security benefits received by the claimant. That situation reflects the fact that most Sinai employees covered by the Pension Plan have not “always been a covered employee under the Social Security Act.” The Sinai Pension Plan, § 2.1(w), assumes by definition that an employee has had continuous employee coverage under the Act.

3) Plaintiffs’ Arguments Regarding the Defendant’s Calculation of the Estimated Benefit

The plaintiffs do not contest the defendants’ right to effect an offset for Social Security benefits. They assert, however, that the offset used by these defendants is based on an arbitrary figure which has no relevance to the actual Social Security benefits received by the claimant and, in fact, no relationship to the way the Social Security Administration calculates, what it terms, “estimated benefits.”

When the Social Security Administration computes “average monthly compensation” to arrive at its estimated benefits figure, it adds together all the claimant’s earnings since 1951, except for the lowest five years, and divides by the number of months in those years (Paper No. 25 at 13-14).

As the plaintiffs explain, “The consequence of using a broad range of annual incomes is that the average monthly compensation will be considerably less than the [average] monthly income received at the close of a worker’s career.” (Paper No. 20 at 15). Usually, at the end of a career, a worker’s salary is higher than at the beginning of his career, due not only to raises, but also to inflation. Consequently, when the Social Security Administration calculates the average monthly compensation figure which then is inserted into its table to ascertain estimated benefits, it uses a system which averages out the lower and higher wages of the employee over the course of his career.

The defendants, on the other hand, use a system which focuses on the highest monthly income received by the employee in the 5 years before his retirement. In addition, the defendants’ calculations assume that the employee has always worked under the coverage of the Social Security Act, an assumption which maximizes estimated Social Security benefits. It follows then that the average monthly wage figure used by the defendants to calculate the employee’s estimated Social Security benefits always will be higher than the average monthly wage figure which the Social Security Administration uses to compute estimated Social Security benefits. A higher estimated average monthly wage figure results in higher estimated Social Security benefits.

For the usual Sinai employee, the inevitable outcome of the interplay between the defendants’ system and the Social Security Administration’s system of calculating estimated benefits is that the stream of Social Security income estimated and/or actually received by the employee will always be lower than the Plan estimates it will be.

4. Does the Plan Violate the ERISA Non-Forfeiture Provision?

Pursuant to 29 U.S.C. § 1053, “[e]ach pension plan shall provide that an employee’s right to his normal retirement benefit is nonforfeitable upon the attainment of

normal retirement age____” 29 U.S.C.

§ 1053(a) (Cumm.Supp.1976-83). To assure that “ ‘if a worker has been promised a defined pension benefit upon retirement — and if he has fulfilled whatever conditions are required to obtain a vested benefit’ — ... the concepts] of ... nonforfeitable rights [is] critical to the ERISA scheme.” Alessi, 451 U.S. at 510, 101 S.Ct. at 1899 citing Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359,100 S.Ct. 1723, 64 L.Ed.2d 354 (1980).

The Supreme Court in Alessi asked “what defines the content of the benefit that, once vested, cannot be forfeited?” 451 U.S. at 511, 101 S.Ct. at 1900. The Court answered that question by stating:

“ERISA leaves this question largely to the private parties creating the plan. That the private parties, not the Government, control the level of benefits is clear from the statutory language defining non-forfeitable rights as well as from other portions of ERISA. ERISA defines a ‘nonforfeitable’ pension benefit or right as ‘a claim obtained by a participant or his beneficiary to that part of an immediate or deferred benefit under a pension plan which arises from the participant’s service, which is unconditional, and which is legally enforceable against the plan.’ 29 U.S.C. § 1002(19). In construing this definition last Term, we observed:
‘[T]he term “forfeiture” normally connotes a total loss in consequence of some event rather than a limit on the value of a person’s rights. Each of the examples of a plan provision that is expressly described as not causing a forfeiture listed in [§ 1053(a)(3)] describes an event — such as death or temporary re-employment — that might otherwise be construed as causing a forfeiture of the entire benefit. It is therefore surely consistent with the statutory definition of “nonforfeitable” to view it as describing the quality of the participant’s right to a pension rather than a limit on the amount he may collect.’ Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S., at 372-373 [100 S.Ct. at 1731].
Similarly, the statutory definition of ‘nonforfeitable’ assures that an employee’s claim to the protected benefit is legally enforceable, but it does not guarantee a particular amount or a method for calculating the benefit. As we explained last Term, ‘it is the claim to the benefit, rather than the benefit itself, that must be ‘unconditional’ and ‘legally enforceable against the plan.’ Id., at 371 [100 S.Ct. at 1731].”

Id. at 511-12, 101 S.Ct. at 1900 (Emphasis supplied).

The defendants argue that because an employer is not required by law to provide any particular pension benefit, an employee cannot complain when he receives the benefit promised under an employer’s plan. In effect, the defendants contend you cannot forfeit what you never had.

The plaintiffs retort that the logical endpoint of that rationale is that a pension plan could build into its method of computation a formula which could guarantee that no participant would ever receive a pension. Under such a rationale, they argue, every participant’s right to claim a benefit, although it would be nonforfeitable, would also be ephemeral. To state the logical end result of such a rationale, they claim, shows that it truly violates the nonforfeitability rule.

To reiterate, what is nonforfeitable under ERISA is a claim to that part of a benefit under a pension plan which arises from the employee’s service, and which is unconditional and legally enforceable against the plan. In short, what is nonforfeitable is a claim to vested benefits. See, e.g., Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 376, 100 S.Ct. 1723, 1733, 64 L.Ed.2d 354 (1980) (terms “vested” and “nonforfeitable” are used synonymously in ERISA); Stewart v. National Shopman Pension Fund, 730 F.2d 1552, 1561-62 (D.C.Cir.), cert. denied, — U.S.-, 105 S.Ct. 127, 83 L.Ed.2d 68 (1984) (“An employee is ‘vested’ in a portion of his benefit when he has a nonforfeitable right to a given percentage of his accrued benefit.”) (emphasis in original); Hummel v. S.E. Rykoff Co., 634 F.2d 446, 449 (9th Cir.1980) (“vested employee rights cannot be forfeited for any reason”) (emphasis in original).

Therefore, what must be established herein by the plaintiffs is that the Sinai Pension Plan, by its method of calculating estimated Social Security benefits and offsetting those against the amount of pension benefits payable by the Plan, is somehow depriving the class members of vested pension benefits.

ERISA sets forth two basic vesting requirements: 1) that an employee’s rights in his accrued benefit derived from his own contributions are immediately vested and nonforfeitable, 29 U.S.C. § 1053(a)(1); 2) that an employee’s rights to his accrued benefits derived from his employer’s contributions are nonforfeitable when, at some time defined in the Plan, they vest. 29 U.S.C. § 1053(a)(2). Each Plan must incorporate one of three vesting schedules set out in § 1053 of ERISA.

There is no contention herein that, on its face, the Plan fails to incorporate a minimum vesting schedule. The argument of the plaintiffs is that the offset used by the Plan, when it purports to integrate Social Security income with pension plan income, is so skewed that it causes at least a partial forfeiture of a participant’s right to his vested benefits.

ERISA’s purpose, among others, was to assure that the promise of a pension was fulfilled. S.Rep. No. 93-127, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad.News, 4838. As stated in the Senate report accompanying S. 4, the Senate bill which eventually became part of ERISA, the legislation was intended to be:

“... addressed to the issue of whether American working men and women shall receive private pension plan benefits which they have been led to believe would be theirs upon retirement from working lives. It responds by mandating protective measures, and prescribing minimum standards for promised benefits....”

Id. Therefore, to the extent the pension plan is deceptive or seems to promise more than it delivers, it violates the intent of ERISA, if not its letter.

Integration was permitted under ERISA, not as a means to undermine the promise of a pension, but as a concession to the reality of the cost of such a “promise” to employers.

“[ERISA] does not affect the ability of plans to use the integration procedures to reduce the benefits that they pay to individuals who are currently covered when social security benefits are liberalized. Your committee, however, believes that such practices raise important issues. On the other hand, the objective of the Congress in increasing social security benefits might be considered to be frustrated to the extent that individuals with low and moderate incomes have their private retirement benefits reduced as a result of the integration procedures. On the other hand, your committee is very much aware that many present plans are fully or partly integrated and that elimination of the integration procedures could substantially increase the cost of financing private plans. Employees, as a whole, might be injured rather than aided if such cost increases resulted in slowing down the growth or perhaps even eliminating] private retirement plans.”

H.R.Rep. No. 93-807 at 69 (1974) reprinted in 1974 U.S. Code Cong. & Ad.News, 4696.

. As noted previously, integration as described by the Supreme Court in the Alessi decision is a process by which actual “income streams available to the retired employees” (emphasis supplied) are combined to create a benefit formula. 415 U.S. at 514, 101 S.Ct. at 1901. Thus, the total payment would be the same as promised, but the payment would not all come from pension funds. Or, as further explained by the Alessi Court, “[t]he individual employee remains entitled to the established pension level, but the payments received from the pension fund are reduced by the amount received____” Id. at 516, 101 S.Ct. at 1903. Here, however, the artificial nature of the offset reduces the total payment.

The Internal Revenue Service, in a recent revenue ruling, addressed just such a problem. See Rev.R. 84-45 (Paper No. 25, Ex. 5). The question presented was “[wjhether a defined benefit offset plan that uses estimated wages for an employee in determining that employee’s old-age insurance benefit provided under the Social Security Act fails to satisfy ... the minimum vesting requirements of section 411.” Rev.R. 84-45.

Section 411 “replicates for IRS purposes ERISA’s nonforfeiture provision, 29 U.S.C. § 1053(a).” Alessi, 451 U.S. at 517, 101 S.Ct. at 1903. Therefore, Revenue Ruling 84-45, interpreting the effect of the use of an estimated wage history on the nonforfeitability requirement, is instructive in the case at bar.

In Rev.R. 84-45, the IRS first reiterated that no forfeiture occurs when pension benefits are offset by Social Security benefits actually received. When a pension plan calculates offsets based on estimated compensation, the IRS explained that the plan may or may not have violated the nonforfeitability requirements depending on the effect of the offset on previously accrued benefits. The IRS stated:

“In the case of an offset plan where offsets are calculated based on estimated compensation, the mere offset of social security benefits based on estimated previous compensation will not constitute an impermissible forfeiture to the extent that the offset limits the accrued benefit without causing a reduction in the accrued benefit previously nonforfeitable. If a plan calculates offsets on the basis of estimated compensation, it is possible for a participant to suffer an impermissible forfeiture under section 411 of the Code. For example, it is possible, from one year to the next, for the estimated offset to increase more rapidly than the actual offset and more rapidly than the positive portion of the benefit formula. In such a case, a participant for whom the estimated offset is greater than the actual offset will suffer an impermissible forfeiture because the dollar reduction in the accrued benefit under the plan is not matched by actual.benefits under social security or any other Federal or State law. Similarly, it also is possible for social security benefits to increase by a percentage (such as by a cost-of-living adjustment) that causes the estimated offset with respect to a participant to increase more rapidly than the actual offset. In this case, a participant for whom the estimated offset is greater than the actual offset will suffer an impermissible forfeiture because such participant’s accrued benefit under the plan is decreased as a result of such increase in social security.”

Rev.Ruling 84-45.

Therefore, what appears to be impermissible is a decrease in benefits already accrued and vested.

The defendants explain that Rev.R. 84-45 merely “provides that a plan participant must accrue a benefit every year while under a plan, which benefit must be determinable as if that year were the employee’s year,of retirement, if in any year an employee’s total benefit is less than the total the prior year, it may be an improper forfeiture of a benefit.” (Paper No. 25 at 17). Therefore, they conclude that the Sinai Pension Plan conforms to Rev.R. 84-45 because the benefits a claimant receives “under the plan benefit formula calculation performed after her last year of employment is greater than the benefit which would have resulted from performing such a calculation in any prior year.” (Id., at 18 citing to Ex. 3, IT 11 of Duffy Affidavit).

That conclusion is stated by Kenneth Duffy, “a principal with Yaffe & Offutt Associates; Inc.[,] Compensation and Benefits Consultants in Baltimore, Maryland” (Paper No. 25, Ex. 3, ¶ 1 & IT 11), but he does not explain why or how he arrived at that conclusion.

It appears to this court that the pension plan described in Rev.R. 84-45 calculates its offset in much the same way as the Sinai Pension Plan. Both plans create an estimated earning history upon which they base their calculations of the amount of Social Security benefit the participant theoretically will receive. Compare Rev.R. 84-45, with Paper No. 25, Ex. 3, Duffy Affidavit 11 6. The pension plan in Rev.R. 84-45 was determined to have violated the nonforfeitability provision of 26 U.S.C. § 411 which, as stated previously, replicates ERI-SA’s nonforfeiture provision.

Rev.R. 84-45 raises other questions directly related to the nonforfeitability issue. Specifically, that ruling sets out general rules applicable to plans which use estimated earnings histories. Although a plan “will not fail to satisfy the requirements of section ... 411 of the Code merely because the maximum offset under the plan is determined using an estimated wage history for some or all years before retirement ... (and therefore estimated old-age benefits),” it is required, as of December 31, 1983, to comply with all following rules:

“(1) The pre-separation or pre-retirement salary history (or pre-hire salary history) is estimated by applying a salary scale, projected backwards, to the employee’s compensation (as defined in section 3.03 of Rev.Rul. 71-446) at separation or retirement (or compensation at hire) and the salary scale is either
(A) the actual change in the average wages from year to year as determined by the Social Security Administration, or
(B) a level percentage per year that is not less than six percent per annum.
(2) A plan gives clear written notice to each employee of the employee’s right to supply actual salary history and of the financial consequences of failing to supply such history. The notice must be given each time the summary plan description is provided to the employee and must also be given upon separation from service. The notice must also state that the employee can obtain the actual salary history from the Social Security Administration.
(3) The plan provides that the benefit for a participant will be adjusted to the offset based on an actual salary history for years previously estimated before separation from service (and an assumed post-separation or post-retirement compensation in accordance with section 11.-01 of Rev.Rul. 71-446 when applicable) if the participant supplies documentation of that history. A plan may provide that such documentation must be provided no later than a reasonable period of time following the later of the date of separation from service (by retirement or otherwise) and the time when the participant is notified of the benefit to which he or she is entitled.
The estimated wages may be used either only for years before employment with the employer or for all years before retirement or separation from employment.”

Rev.R. 84-45, 1984 (emphasis supplied).

Under Rev.R. 84-45, “[ojffset plans using estimated wages in determining old-age insurance benefits must be amended to comply with the requirements of [84— 45]____ The amendment must be adopted by the end of the first plan year beginning after December 31, 1983, and made effective as of the beginning of such plan year.” Rev.R. 84-45, 1984.

There is no evidence in this record that the plan amendments contemplated by Rev.R. 84-45 have been adopted by Sinai. To the contrary, it appears that the Sinai Plan consciously and deliberately, through the definition of “Primary Social Security Benefit” in the Plan, prohibits the use of actual salary history in any instance in which an employee was not covered at all times under the Social Security Act, since by definition the Plan assumes that the employee has always been so covered.

While the desire of the plan sponsors to equalize pensions for people who work the same period of time for Sinai Hospital is a proper consideration in formulating benefit levels and while such a factor could be an express part of the formula or method for calculating benefits, it cannot be part of the offset in an integration. An integration deals with the source of funds used to pay an independently calculated level of benefit and is not intended under ERISA to be used to reduce artificially the level of benefits. In other words, the offset must bear a reasonable relationship to an actual payment from the source of funds to which the offset refers.

The place where the plan is deceptive is the definition of “Primary Social Security Benefit,” {See Footnote 3) where it sets out a definition which bears no resemblance to the actual primary social security benefits. It is like defining an “orchid” as a “dandelion.”

The conclusion this court has reached that the Sinai Plan violates the non-forfeiture provisions of ERISA is not undermined by Edwards v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d 52 (3rd Cir.) cert. denied — U.S.-, 106 S.Ct. 130, 88 L.Ed.2d 107 (1985). In that case, the court expressly declined to determine whether “calculations leading to pensions of a de minimis amount might be the equivalent of a forfeiture and prohibited by ERISA.” Id. at 58, n. 7. Here, it appears that the reductions in the ostensible pension to the actual pension amount by the offset of illusory Social Security benefits brings at least some of the pensions close to the de minimis border. In any event, the Edwards case was not one which centered upon the operations of an integration system. Instead, Edwards involved the question of when, under the terms of the plan there involved, an .employee was to be deemed “terminated from employment” for the purpose of determining the amount of actual average annual compensations used to compute pension benefits. The court in Edwards concluded that the plan trustees acted reasonably in interpreting the terms of the plan there to mean an employee was not terminated from employment during the uncompensated time he was out on strike. The use.of such an interpretation of the provisions of the plan resulted in a calculation of actual average annual compensation, albeit a much lower actual average annual compensation then if the uncompensated strike time had not been included in the average.

In the present case, I repeat, the purpose of integration to combine actual income streams to arrive at a total retirement income has been frustrated by the use of an illusory Social Security benefit as an offset from the promised total retirement income. This constitutes, under the facts here, a violation of the non-forfeiture provisions of ERISA.

In view of this conclusion, the court deems it unnecessary to consider the remaining contentions of the plaintiffs.

An order will be separately entered reflecting the decisions explained herein.

ORDER

The Court having considered the written and oral arguments of the parties, and having reviewed the exhibits and pleadings filed in this action,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT:

1. The class certified and defined by Order of October 4, 1984 is redefined as a class of current retirees and future retirees (current employees) of Sinai Hospital, Inc. who are or will be beneficiaries of the Sinai Pension Plan and who have had, are having, or will have their pensions reduced by an amount derived by using an estimated Social Security benefit which they actually received of will receive upon leaving the service of Sinai Hospital to retire.

2. The named plaintiffs representing the class are Florence McLean and Pinkie Ricks.

3. Defendants’ application and use of estimated Social Security benefits in excess of actual Social Security benefits received at retirement violates the non-forfeitability provisions of ERISA, 29 U.S.C. § 1053(a).

4. Defendants, their successors, agents, employees, and all persons acting in concert with them are permanently enjoined from calculating and paying pension benefits by employing an estimated Social Security benefit which is higher than the actual Social Security benefit received by the participant at the time of retirement.

5. Defendants shall immediately recalculate the pension payments to which the plaintiffs and class members are entitled, consistent with the above paragraphs, using the actual Social Security benefit received at the time of retirement rather than an estimated Social Security benefit which is higher than that actually received.

6. Defendants shall immediately recalculate, for each plaintiff and class member, the correct pension payment, by replacing the estimated Social Security benefit which appears as line 4 on Schedule III of the Plan’s calculation sheets with the actual Social Security benefit received at retirement, and shall pay the properly calculated amounts in the pension payments sent to plaintiffs and class members beginning with the second calendar month after the month in which this order is signed.

7. Defendants shall immediately calculate and pay in lump sums (the checks to be mailed no later than March 1, 1986) the pension amounts to which the plaintiffs and class members are entitled for all months prior to the month in which corrected payments are made in accordance with paragraph 6, based on the declaratory and injunctive relief which requires defendants to recalculate pension amounts by replacing defendants’ estimated Social Security benefit with the actual Social Security benefit paid at retirement, including full legal interest as detailed in the next paragraph.

8. Defendants shall include, in the lump sum payments described in paragraph 7, the full legal interest computed daily from the dates of each prior payment which was less than it should have been because of defendants’ use of their estimated Social Security benefit rather than the actual Social Security benefit received, the interest to be compounded annually and the rate to be “equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of the fifty-two week United States Treasury bills settled immediately prior to the date of the judgment.” (28 U.S.C. § 1961(a)).

9. Pursuant to 29 U.S.C. § 1132(g), plaintiffs may seek an order awarding attorneys’ fees by filing a motion within thirty (30) days of the entry of this Order.

      . The estimated benefit was calculated to be $491.00 per month (Paper No. 32 at 5).

      . The estimated benefits were calculated to be $460.75 per month (Paper No. 32 at 5).

      . The Plan defines "Primary Social Security Benefit" as the "estimated Primary Social Security Benefit to which an eligible employee (assuming he has always been a covered Employee under the Social Security Act) was or would be entitled upon reaching the age of sixty-five (65)____” (Emphasis supplied). (See Paper No. 2, Ex. A, The Sinai Pension Plan § 2.1(w)).

      . A date later than 1951 may be used in this calculation if the employee reached 62 years of age after 1978. 1 CCH Unemployment Insurance Reporter at 1015.

      . After the Social Security Administration plugs the annual monthly wage figure into its table to ascertain the estimated benefit figure, it may reduce that figure by 20% for early retirement. 1 CCH Unemployment Insurance Reporter at 1022. If no early retirement occurred, the "estimated benefit” will be approximately the same as the actual benefit received. Id. at 1020.

      . Sinai employees do not contribute to the Pension Plan (Paper No. 2, Ex. A, Pension Plan § 8.1).

      . ERISA establishes three alternative vesting schedules for employer contributions. Under the first, an employee with 10 years of service must have a "nonforfeitable right to 100% of his accrued benefits derived from employer contributions." 29 U.S.C. § 1053(a)(2)(A). Under the second, an employee with at least five years of service has graduated vesting rights whereby an increasing percentage of his accrued benefits become nonforfeitable each year. 29 U.S.C. § 1053(a)(2)(B). Under the third, a vesting formula based on the sum of an employee’s age and service is used. 29 U.S.C. § 1053(a)(2)(C).

      . During Senate debate on the ERISA conference report, the "promise” of a pension was also discussed. "I am happy to report that after long and numerous meetings of the conferees ... we are able to bring before the Senate a conference agreement which ... for the first time, will safeguard the pension expectations of American workers." Statement by Sen. Harrison A. Williams, Jr., Chairman, Senate Committee on Labor and Public Welfare (Aug. 22, 1974), 93d Cong., 2d Sess., 120 Cong.Rec. S 15737, reprinted in 1974 U.S.Code Cong. & Ad.News, 5177.

      . ERISA does not address the operation of the offset method of integration. The Treasury Department, however, has established through regulation, see 26 C.F.R. § 1.401-3, and Internal Revenue Rulings, see, e.g., Rev.R. 71-446 and Rev.R. 84-45, certain rules and regulations regarding the offset method. Neither party herein has challenged the regulations or the rulings as contrary to ERISA.
      Treasury regulations are to be accorded considerable weight by the court, see, e.g., Brewster v. Gage, 280 U.S. 327, 50 S.Ct. 115, 74 L.Ed. 457 (1930); Stride Corp. v. United States, 714 F.2d 1194, 1197 (3d Cir.1983), cert. denied, 466 U.S. 971, 104 S.Ct. 2345, 80 L.Ed.2d 819 (1984). Although Revenue Rulings do not command quite the same deference, they “should be given weight as a statement of the meaning of the Regulations.” United States v. Northumberland Ins. Co., Ltd., 521 F.Supp. 70, 77 (D.NJ.1981).
      Because in the area of offset method integration neither the statute nor case law describes the correct calculation procedures, this court will rely on relevant Treasury Regulations and the Revenue Rulings which govern the offset method as additional evidence of the intent of the statute.


author: JOSEPH H. YOUNG, District Judge.

text:
    TEMPORARIES, INC. v. MARYLAND NATIONAL BANK.
    Civ. No. Y-84-4519.
    United States District Court, D. Maryland.
    Jan. 16, 1986.

      Frederick C. Williams, Washington, D.C., for plaintiff.
    Virginia W. Barnhart, K. Donald Proctor, Towson, Md., and Duncan W. Keir, Baltimore, Md., for defendant.
   MEMORANDUM

JOSEPH H. YOUNG, District Judge.

Several motions for summary judgment are pending in this action for fraudulent misrepresentation, a dispute resulting from a series of negotiations between Temporaries, Inc. (“TI”), Maryland National Bank (“MNB”), and a corporation which has since declared bankruptcy — Business Furniture Interiors, Inc. (“BFI”).

FACTS

Maryland National Bank extended a line of credit to BFI in August, 1983. In December, 1983, it was apparent that BFI was having financial difficulties and could not reduce the percentage of its borrowings to meet the bank’s requirements. At that point, MNB instructed BFI to refinance its loans by February 15, 1984, or be liquidated. In an effort to resolve its difficulties, BFI sought financing from TI, which was in the business of providing temporary employment services to the general business community, and which began considering the possibility of acquiring BFI as a way of expanding into the office furniture business. Temporaries also had a banking relationship with MNB, and the two conferred during the first several months of 1984, with BFI’s permission, about Temporaries’ contemplated acquisition of BFI. It is the content of those conversations which are the essence of the fraud claim. Plaintiff charges that the bank undertook to speak about BFI but in doing so, withheld information about the bank’s inability to evaluate BFI’s financial status due to the severe unreliability of BFI’s bookkeeping, and furthermore the bank made representations that BFI had sufficient collateral and that it had the potential to be profitable when there was no basis for such representations, and, in fact, they were untrue. Temporaries argues that it interpreted these comments as a confirmation of BFI’s representations and, in reliance on these representations and because of a time pressure imposed by the bank, TI advanced money to BFI in February, 1984, prior to a thorough accounting of BFI’s financial status. Maryland National Bank denies that any representations were made. In March, a formal accounting of BFI revealed that the company had material operating losses and a negative net worth. Upon receiving this information, Temporaries rescinded its conditional merger agreement. Shortly thereafter, the bank called BFI’s notes and BFI went into Chapter 11 proceedings. Temporaries now seeks to recover the advances, totaling $233,000, which it made to BFI and from which it claims the bank benefitted.

CHOICE OF LAW

The parties’ interaction occurred across two jurisdictions — Maryland and the District of Columbia — thus raising a choice of law question and a preliminary question of which choice of law rule to apply. This case was originally brought in the District of Columbia, and later transferred to Maryland under 28 U.S.C. § 1404. Normally the choice of law rule of the forum state applies to determine which state’s substantive rules of decision apply, Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), but where there is a change of venue the guideline is different. In those cases, the choice of law doctrine of the original forum should apply, in an effort to maintain a consistent substantive law despite the transfer of venue. Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964); Barnes Group, Inc. v. C & C Products, Inc., 716 F.2d 1023 (4th Cir. 1983). Thus, the District of Columbia’s choice of law rules should apply.

The District of Columbia applies the law of the state with the most significant relationship to the matters at issue. Felch v. Air Florida, Inc., 562 F.Supp. 383, 385 (D.D.C.1983). Accord Hitchcock v. United States, 665 F.2d 354, 360-61 (D.C.Cir.1981). Both Maryland and the District of Columbia have significant relationships with the matters in this case. Maryland’s interest is primarily tied to regulating the defendant — a national bank based in Maryland and maintaining its principal operations in Baltimore City. In this particular case, the technical handling of plaintiffs account was completed in Maryland, some of the communications originated in Maryland, and the personnel who examined BFI’s accounts were located in Maryland. Surely, Maryland has an interest in regulating and applying its laws to a bank with such substantial operations within the state.

The contacts with the District of Columbia in this case, however, are greater than the contacts with Maryland. Temporaries is a District of Columbia corporation which created a relationship with MNB as a national bank that has branch offices within the District, and the center of this relationship remained there. While some of the representations and paperwork originated in Maryland, communications were intentionally directed to a District of Columbia customer, which would rely upon the information in its own District of Columbia office. By undertaking to have substantial operations in other jurisdictions — even though it may be a small percentage of the corporation’s cumulative business — MNB should be subject to the policies and governmental interests of these jurisdictions for activity undertaken within them. Therefore, the District of Columbia courts would most certainly apply their own substantive law to this case.

COUNTS I AND II

Defendant moved for summary judgment on Counts I and II which allege misrepresentation and fraudulent inducement, and plaintiff in response also moved for summary judgment. Both motions must be denied because there are several controverted material facts which should be presented to the jury. The parties agree that the elements of fraud are:

1) a false representation
2) in reference to a material fact
3) made with knowledge of its falsity
4) and with the intent to deceive
5) with action taken with reliance on the representation.

Blake Construction Co. v. C.J. Coakley Co., 431 A.2d 569, 577 (D.C.App.1981); Nader v. Allegheny Airlines, Inc., 512 F.2d 527, 541 n. 32 (D.C.Cir.1975), rev’d on other grounds, 426 U.S. 290, 96 S.Ct. 1978, 48 L.Ed.2d 643 (1976). Cf. Appel v. Hupfield, 198 Md. 374, 378, 84 A.2d 94 (1951). The facts in suppprt pf almost all of these elements are disputed in this case.

COUNTS III AND IV

A. Validity of the Purchase Money Security Interest

Plaintiff moved for summary judgment as to Counts III and IV, which charges that Temporaries had a purchase money security ^ interest in certain inventory collateral which secured a $75,568.09 loan to BFI, yet MNB received the proceeds from sale of the collateral. The security interest was originally created and perfected in Virginia, which requires that the financing statement be filed both locally, in the Office of the Clerk of the Circuit Court for Fairfax County, Virginia, and centrally, and in the Office of the Virginia State Corporation Commission. Upon completion of these two filings, the purchase money security interest is perfected and has priority over a conflicting security interest.

Defendant argues that Temporaries’ security interest was not perfected upon receipt of the inventory as required by Section 8.9-312(3) of the Virginia Code, and thus the security interest is invalid. Furthermore, MNB contends that Temporaries inadequately described its collateral, which defeats the purchase money security interest claim.

Although plaintiff completed the local filing of the financing statement in Fairfax County on February 14, 1984, the central filing in the Office of the Virginia State Corporation Commission was not completed until April 20, 1984 — well after the receipt of the collateral. Thus, Temporaries did not properly perfect the security interest under the formal requisites of the Code. There is a good faith exception for improper filings, however, which is applicable in this case. Under Section 8.9-401(2) of the Virginia Code:

A filing which is made in good faith in an improper place or not in all of the places required by this section is nevertheless effective with regard to any collateral as to which the filing complied with the requirements of this title and is also effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of such financing statement.

It is clear from the evidence that Temporaries did notify MNB of the contents of the financing statement and that its failure to properly file was careless rather than an attempt to withhold notice. In light of MNB’s actual knowledge the security interest should be viewed as perfected. See American Employers Insurance Co. v. American Security Bank, 747 F.2d 1493, 1498 (D.C.Cir.1984); In re Mistura, Inc., 705 F.2d 1496, 1498-1499 (9th Cir.1983).

Defendant’s second contention is also insufficient to invalidate Temporaries’ security interest. In its letter to MNB, Temporaries described the collateral as “approximately 150 pieces of office furnishings comprised of all metal desks, file cabinets and desk chairs.” The same number was included in the financing statement, but the supplier actually provided 290 pieces of inventory to which Temporaries claims an interest. In the context of the events surrounding the purchase money security interest, this error was insignificant and should not invalidate Temporaries’ priority for the reasons which follow.

According to the defendant’s portrayal of the facts, at the time of the $75,568.09 loan BFI had fully extended its credit with several suppliers and was required to deal on cash only terms. It was also clear that the bank would not make any additional loans to allow BFI to make new purchases. Thus, when Temporaries issued its check it was to cover the entire shipment of inventory ordered by two companies known as CIT and GTE. According to the deposition of a bank officer, Michael Williams, the purpose and the scope of the security interest was known to the bank through written notice and telephone conversations. It is undisputed that plaintiffs loan facilitated the purchase of the 290 (rather than 150) pieces of furniture, and not realistically disputed that the bank knew of the scope of the lien.

Financing statements are not normally required to contain precise quantity descriptions. Instead, the financing statement must be sufficiently descriptive so as reasonably to generate further inquiry about the nature and the scope of the collateral. In re Varney Wood Products, Inc., 458 F.2d 435 (4th Cir.1972). A financing statement is sufficient if it contains a statement indicating the type, or describing the items of collateral. Va.Code § 8.9-402(1). Here, Temporaries’ description defines the type of collateral and additionally indicates a large number of items where no quantity description was required. This description is sufficient under the policies of Article 9 of the Uniform Commercial Code: to protect the interests of third party secured creditors, such as defendant, by providing notice of intervening interests in collateral. The fact that upon receipt of this information the bank did make further inquiries and learned more precisely of the scope of the encumbrance only lends further equitable support for the conclusion that the notice was adequate.

B. Amount of the Security Interest

Defendant seeks to reduce the amount of Temporaries’ security interest claim by arguing that Temporaries is not entitled to the portions of cash deposits of GTE and CIT made in payment for the collateral which were credited against BFI’s outstanding loans in December, 1983. This issue boils down to the question of who legitimately had an interest in these December, 1983 cash deposits. From the facts as described by the parties, it is clear that the deposits were advance payments for future shipments of goods, rather than payments for goods already received in which the bank would have had an interest and a right of set-off against the indebtedness. See 6 Michie, Banks & Banking § 52 at 127 n. 64 (1975). Business Furniture Interiors had rights in the collateral and could assign them to Temporaries. Va. Code 8.9-203.

Defendant’s final argument — that the security interest should be reduced by the amount of sales tax must also fail. On the face of the Virginia Code, Section 8.9-306(1), “proceeds” is defined as “whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.” Short of a demonstration that there is some existing, overriding lien on the taxes, they are considered part of the proceeds and should not be subtracted.

In conclusion, Temporaries had a perfected purchase money security interest in the described collateral and MNB is liable to plaintiff for the proceeds of such collateral plus interest accumulated from the date of the sale of the collateral.

ORDER

In accordance with the statements in the attached Memorandum, it is this 16th day of January, 1986, by the United States District Court for the District of Maryland, ORDERED:

1. That defendant’s and plaintiff’s motions for summary judgment on Count I and II BE, and the same IS, hereby DENIED;

2. That plaintiff’s, motion for summary judgment on Counts III and IV BE, and the same IS, hereby GRANTED; and

3. That a copy of this Memorandum and Order be mailed to the parties.

       Because Virginia law governed the original filing of the purchase money security interest, the same law must be applied in determining whether that interest was perfected.


author: McLÁUGHLIN, District Judge.

text:
    F & G SUPERETTE, INC., Petitioner, v. UNITED STATES DEPARTMENT OF AGRICULTURE, Respondent.
    No. 84 CV 2595.
    United States District Court, E.D. New York.
    Jan. 16, 1986.
    Tomas Greenberger, Brooklyn, N.Y., for petitioner.
    Raymond J. Dearie, U.S. Atty. for the E.D. of N.Y. by Jeffrey Alan Coryell, Asst. U.S. Atty., for respondent.
   MEMORANDUM AND ORDER

McLÁUGHLIN, District Judge.

The plaintiff, F & G Superette, Inc. (“F & G”), is a retail food store participating in the Food Stamp Program established pursuant to the Food Stamp Act, 7 U.S.C. § 2011 et seq. Plaintiff brought this action under 7 U.S.C. § 2023 seeking judicial review of its disqualification from the program for a period of five years. For the reasons developed below, the disqualification is upheld and the complaint is dismissed.

Findings of Fact

On or about October 7,1982, a representative from the United States Department of Agriculture Food and Nutrition Service (“FNS”) visited F & G. The FNS representative discussed with Abraham Grunspan, the store’s president, the fact that an unusually high number of food stamps had been redeemed at F & G, as compared with other stores in the area (Transcript of Proceedings (“Tr.”) at 5). In a letter dated October 21, 1982, FNS expressed its suspicions that F & G might be generating its high volume in food stamps by accepting the stamps for products, like beer, that may not be purchased with food stamps. It warned F & G that violations of the Food Stamp Act could result in the store’s disqualification from the program (Administrative Record (“AR”) at 4).

On or about March 25, 1983, FNS investigator Edward Agostini made the first of four “undercover” visits to the store. On that occasion, a clerk later identified as Mr. Grunspan accepted food stamp coupons from Agostini in exchange for several ineligible items (AR at 24-25).

During his later visits to the store, Agostini exchanged food stamps for ineligible items from Philip Davidowitz (April 21, 1983 and June 2,1983) (AR at 14-15, 21-22) and Grunspan’s mother-in-law, Miriam Fischer (May 24, 1983) (AR at 18-19).

As a result of these transactions, plaintiff was informed by letter dated August 17, 1983 that the store was being considered for disqualification from the program (AR at 32-33; Tr. at 11). By letter dated August 24, 1983 plaintiff ■ formally denied any knowing violations of the food stamp regulations (AR at 38).

On September 28, 1983, Angela Mackey, the FNS Officer in Charge, recommended a five-year disqualification from the program (AR at 39-40). She noted that disqualification would have no harmful effect on local food stamp customers since at least two other stores are located within four blocks of plaintiff’s store (Id.)

Plaintiff requested and received an administrative review of the FNS decision (AR 51-59). By letter dated May 22, 1984, plaintiff was informed that the five-year disqualification had been sustained (AR 59).

This action was commenced in August, 1984. The parties agreed that imposition of the sanction would be stayed pending resolution of this action.

Discussion

Pursuant to 7 U.S.C. § 2023, plaintiff is entitled to a trial de novo by the district court, in which the court shall determine the validity of the administrative action. See J.C.B. Supermarkets, Inc. v. United States, 57 F.R.D. 500, 502-03 (W.D.N.Y. 1972), affd 530 F.2d 1119 (2d Cir.1976).

Upon consideration of the record in its entirety, including the evidence adduced at a hearing before this Court, I find that the four sales of ineligible items occurred on the dates previously discussed. Hence, the agency’s finding of a violation of the Act must be upheld. Having so found, I turn to a review of the sanction imposed.

The standard of review for the imposition of a sanction is a determination whether the Secretary’s action was arbitrary or capricious, i.e., whether it was “unwarranted in law or without justification in fact.” Willy’s Grocery v. United States, 656 F.2d 24, 26 (2d Cir.1981).

7 U.S.C. § 2021 provides that, upon a finding of a violation of the statute, a retail food store shall be disqualified “for a reasonable period of time, of no less than six months nor more than five years, upon the first occasion of disqualification.” Id. at (b)(1). Pursuant to this section of the Act, the implementing regulation requires FNS to:

Disqualify the firm for 5 years if it is to be the firm’s first sanction, the firm had been previously advised of the possibility that violations were occurring and of the possible consequences of violating the regulations, and the evidence shows that:
(i) It is the firm’s practice to sell expensive or conspicuous nonfood items, cartons of cigarettes, or alcoholic beverages in exchange for food coupons.

7 C.F.R. § 278.6(e)(2)(3).

In this case, four clearly violative sales of beer and other ineligible items were made on four separate occasions by three different clerks, after plaintiff had been warned of the possibility of violations at the store and the consequences of future violations. Hence, a practice or policy, as defined by the regulations, was established. See Lawrence v. United States, 693 F.2d 274, 276-77 (2d Cir.1982); FNS Instruction 744-9 III B.

In light of this finding, the imposition of a five-year disqualification was consistent with the established policy and regulations of the Department of Agriculture.

Plaintiff argues, however, that a fine in lieu of disqualification is appropriate given the hardship disqualification would impose upon the food stamp customers in the area. However, the agency’s determination that several other firms in the vicinity could adequately serve the food stamp customers in the neighborhood is fairly supported by the record before this Court. See Lawrence v. United States, supra, 693 F.2d at 277.

Accordingly, I find that the Secretary’s imposition of a five-year disqualification was not arbitrary and capricious.

Finally, plaintiff argues that he was denied due process of law by the lack of an opportunity to cross-examine government investigators at the administrative level. However, since plaintiff was afforded the right to cross-examine the investigators at the de novo hearing held before this Court prior to the actual imposition of the sanction, due process requirements have been satisfied. Cf. Broad Street Food Market v. United States, 720 F.2d 217, 221 (1st Cir.1983).

Accordingly, the petition is dismissed.

SO ORDERED.

      . Ineligible goods are non-food items such as beer, soap, household cleaning supplies, toothpicks, bathroom tissue and toothpaste. See 7 U.S.C. § 2012(g) and 7 C.F.R. § 270.2(s).


author: McLAUGHLIN, District Judge.

text:
    INDEPENDENT UNION OF FLIGHT ATTENDANTS, Plaintiff, v. PAN AMERICAN WORLD AIRWAYS, INC., Defendant.
    No. 85 CV 0031.
    United States District Court, E.D. New York.
    Jan. 16, 1986.

      Henning, Walsh & Ritchie, San Francisco, Cal. (James R. Ritchie, of counsel), for plaintiff.
    Ernest L. Garb, Richard Schoolman, Pan American World Airways, Inc., New York City (Morgan, Lewis & Bockius, Washington, D.C., Harry A. Rissetto, Thomas E. Reinert, Robert D. Manfred, Jr., of counsel), for defendant.
   MEMORANDUM AND ORDER

McLAUGHLIN, District Judge.

This is another in a series of disputes between the Independent Union of Flight Attendants (“IUFA”) and Pan Am arising from the parties’ efforts to negotiate a successor collective bargaining agreement following the expiration of the previous agreement on December 31, 1984.

On October 4, 1985, the IUFA filed a motion for supplementary relief requesting that this Court enter a final order declaring the rights and obligations of the parties regarding the payment of wages pursuant to the Court’s February 6, 1985 Judgment. In turn, Pan Am has filed a motion for relief from that judgment. Fed.R.Civ.P. 60(b). For the reasons developed below, Pan Am’s motion is granted and the action is dismissed.

Facts

The chronology of events in this case is summarized as follows:

On February 6, 1985, this Court entered a Judgment which required that Pan Am maintain the wage rates set forth in the March 31, 1982 collective bargaining agreement (the “snapback rates”) as the status quo pursuant to Section 6 of the Railway Labor Act, 45 U.S.C. § 156. The judgment was made retroactive to January 1, 1985, and was operative through April 1, 1985, at which point the parties reached a new collective bargaining agreement.

Beginning February 15, 1985, the IUFA flight attendants who reported to work were paid pursuant to this Court’s Order. However, as of late March 1985, Pan Am had not made the retroactive payments for the period of January 1, 1985 to February 15,1985. Accordingly, the IUFA sought to hold Pan Am in contempt of court. Based upon Pan Am’s representation that the retroactive snapback compensation would be paid as soon as the clerical employees returned from strike, however, the Court declined to sign the IUFA’s Order to Show Cause regarding contempt.

On or around April 1, 1985, the parties executed a “Memorandum of Understanding” regarding a new collective bargaining agreement. Almost immediately thereafter, and prior to ratification of the agreement, a dispute arose between the parties as to whether the new agreement included a promise by the union to drop certain specified lawsuits and grievances (“Item 7”). This action was listed in Item 7 as one of the cases to be withdrawn. See Plaintiff’s Exhibit A.

The issue of the inclusion of Item 7 in the new agreement was litigated extensively before the National Mediation Board, 12 NMB No. 47 (1985), and before this Court, Independent Union of Flight Attendants v. Pan American World Airways, Inc., 624 F.Supp. 64 (E.D.N.Y.1985). After the Court denied the union’s request for injunctive relief and after the NMB declined to interpret the agreement, the IUFA agreed to submit the April Memorandum to its membership for ratification.

Accordingly, on July 31, 1985, the IUFA Executive Board sent the union members a packet that contained a ratification ballot and a letter explaining the ratification process.

On or about August 30, 1985, the IUFA membership ratified the April agreement, including Item 7.

Discussion

Relying upon the Second Circuit’s decision in Nestle Company, Inc. v. Chester’s Market, Inc., et al, 756 F.2d 280 (2d Cir.1985), Pan Am argues that the Court’s February 6, 1985 Judgment should be vacated in order to effectuate the parties’ agreement, as set forth in Item 7. In Nestle, the Court held that the district court had abused its discretion in denying the parties’ joint motion to vacate a partial judgment where the parties had reached a settlement while an appeal was pending. Id. at 284. The IUFA argues that Nestle is inapplicable, however, since the union does not concede that a “settlement” has been reached on the issue of the union’s waiver of its rights to retroactive benefits. Accordingly, as a threshhold matter, this Court must decide the scope of Item 7.

Item 7 states in pertinent part that “the parties agreed that [certain specified] cases would be resolved by IUFA withdrawing either its grievance and/or court action and/or arbitration award____” This action was among the cases specified. Item 7 goes on to state that “upon ratification of the Agreement, IUFA and Pan Am will take whatever action necessary and permitted by law to withdraw the specified disputes.”

Despite the express reference to this action in Item 7, the IUFA argues that it agreed only to withdraw its claims to “prospective” benefits, and not its “vested” right to retroactive benefits. Viewed in light of the circumstances in which it was drafted, however, Item 7 could only be interpreted to mean that the union agreed to give up that which it had won before this Court.

It must be remembered that the agreement as to Item 7 was reached on or about April 1, 1985. This Court’s “snapback” Judgment set the rates of pay during the status quo period, i.e., from January 1, 1985 to April 1, 1985. It did not — and could not — grant relief for the period commencing April 1, 1985. Thus, an agreement on or about April 1, 1985 to withdraw the snapback action could only be construed as an agreement by the union to relinquish the relief it had already won. Any other construction would lead to the conclusion that Pan Am bargained for an “empty bag.”

Moreover, the IUFA’s interpretation of Item 7 is belied by statements contained in certain union documents. First, the letter that the IUFA sent its members as part of the ratification packet explained the agreement as follows:

If we vote to ratify Pan Am’s offer, we will be agreeing to withdraw the following grievances and/or court actions and/or arbitration awards, which are specified in the offer as “Item 7”:
(1) “Snapback”
Court action won and grievance pending to force Pan Am to return to book rates of pay and working conditions as of January, 1985, following the expiration of the Productivity Agreement;

See Defendant’s Exhibit 1. .

Moreover, an IUFA newsletter published shortly after ratification contains the following notice:

As a result of ratification, our claims to snapback pay have been given up (to the extent the law will allow).

See IUFA Newsletter dated September/October 1985 at 4.

Accordingly, I find that, during the give and take of collective bargaining, the parties agreed to withdraw this litigation and to vacate the Court’s prior judgment.

Notwithstanding this agreement, however, the IUFA argues that Pan Am is equitably estopped from denying retroactive compensation based upon its representations to the union and to this Court that the payments would be forthcoming as soon as the clerical employees returned to work. This argument might be persuasive if Pan Am’s representations were made after the April agreement. In fact, however, the representations were made in March 1985, prior to the parties’ agreement. Thus, this Court is left with but one conclusion — that the union’s rights as to those payments were bargained away.

It is by now well-established that the purpose of the Railway Labor Act is to encourage the voluntary settlement of disputes. See Airline Pilots Association v. Pan American World Airways, Inc., 765 F.2d 377, 381-2 (2d Cir.1985). Thus, in light of the parties’ agreement, Pan Am’s motion pursuant to Rule 60(b) is granted. The Court’s Judgment dated February 6, 1985 is hereby vacated and the complaint is dismissed.

SO ORDERED.


author: TOM S. LEE, District Judge.

text:
    Jack WATSON and Carolyn Boyd, Plaintiffs, v. LIFE INSURANCE CO. OF GEORGIA, Defendant.
    Civ. A. No. J84-0748(L).
    United States District Court, S.D. Mississippi, Jackson Division.
    Jan. 16, 1986.
    Kellis L. Madison, Pearl, Miss., and Christopher A. Tabb, Brandon, Miss., for plaintiffs.
    George F. Woodliff, III and Jeffrey P. Reynolds, Heidelberg, Woodliff & Franks, Jackson, Miss., for defendant.
   MEMORANDUM OPINION

TOM S. LEE, District Judge.

This cause is before the court on motion of defendant Life Insurance Company of Georgia for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiffs Jack Watson and Carolyn Boyd have not responded to defendant’s motion, although their response is some six weeks overdue. The court has reviewed the plaintiffs’ complaint and the discovery appearing in the record, together with defendant’s memorandum with attachments, in considering the instant motion.

This is an action to collect benefits allegedly due under two life insurance policies issued by defendant to Jo Ella Watson Collier. Plaintiffs are the beneficiaries under the two policies. Collier died on August 8, 1983, as a result of gunshot wounds she received the day before. Her assailant was Dorothy Lewis, who later pled guilty to manslaughter in connection with her death. It is undisputed that Lewis was sane at the time of the crime, that she was not under the influence of drugs or alcohol and that she was not suffering from any mental disease which robbed her of the ability to perform an intentional act. It appears from the record that the source of the terrible strife between Collier and Lewis was Lewis’ belief that Collier was engaging in an extra-marital affair with Mr. Lewis. Lewis fired upon Collier in public and not in self defense.

Lewis was indicted for the offense of murder on October 20, 1983 and on February 7, 1984, pled guilty to a reduced charge of manslaughter. A judgment of conviction was entered in the Circuit Court of Rankin County, Mississippi on February 7, 1984, and Lewis was sentenced on February 17,1984 to serve 20 years in the Mississippi State Penitentiary.

Defendant’s instant motion seeks summary judgment on the basis of an exclusionary provision in each of the two subject policies. Policy No. 77564270, issued to Collier in 1966, states in pertinent part:

(4) Exceptions — This policy does not cover any loss resulting from ... (c) injuries intentionally inflicted upon the insured either by himself or by any person other than burglars or robbers.

(emphasis added). Policy No. 79692159, issued to Collier in 1969, states in pertinent part:

(4) Exceptions — No benefits shall be payable for death or other loss resulting from ... (c) injuries intentionally inflicted upon the insured either by himself or by any person other than burglars or robbers.

(emphasis added).

For purposes of the instant motion, the ultimate inquiry is not whether the exclusion covers the circumstances of Collier’s death, as it obviously does, but whether such exclusion is legally valid under Mississippi law. It seems clear that, in the absence of such exclusionary clauses, the circumstances surrounding Collier’s death would be deemed “accidental” and that the insurer would be liable for payment of benefits under Mississippi law. As the Mississippi Supreme Court stated in Occidental Life Insurance Co. of California v. Barnes, 226 Miss. 396, 84 So.2d 423, 424 (1956):

Where an insurance policy insures against accidental injury or death, and the policy does not exclude death intentionally inflicted by another, and the insured is injured or killed in a fight he did not provoke, and wherein he was not the aggressor, the injury or death of the insured is accidental within the meaning of the policy.

See also Benefit Ass’n of Railway Employees v. Harrison, 233 Miss. 834, 103 So.2d 925, 927 (1958); Fidelity & Casualty Co. v. Johnson, 72 Miss. 333, 17 So. 2 (1895).

The rationale underlying this presumption of accidental death was well stated by Judge William C. Ready in Davis v. Continental Casualty Co., 560 F.Supp. 723, 728 (N.D.Miss.1983):

Thus, it is well settled that there is a distinction between death through accidental means and a true accidental death. Death by accidental means, the relevant standard under defendant’s insurance policy, is determined from the position of the insured whereas a true accidental death is determined from an objective viewpoint. Consequently, although a third party may have intended to cause the death of the insured, the insured’s death may still have been sustained through accidental means within the definition of accident under the policy.

However, even the court in Occidental Life recognized that the rule allowing recovery of death benefits under such circumstances is subject to exclusionary language in a policy. That is, where the policy expressly excepts from its coverage any death resulting from the intentional act of another, the language of the contract will control. 84 So.2d at 424. The validity of such exclusionary language was upheld in an earlier decision of the Mississippi Supreme Court, Holmes v. American National Ins. Co., 142 Miss. 636, 107 So. 867 (1926):

[T]he policy expressly provides that there shall be no liability for any injury intentionally inflicted for personal reasons; this clause limits the liability of the insurance company to those accidental injuries not intentionally inflicted by another person. The intentional infliction of an injury to the insured may, in a legal sense, be accidental so far as he is concerned, but the policy clearly provides there shall be no liability for such accidental injuries intentionally inflicted. To try to make it somewhat plainer: An intentional injury by another may be accidental as to the insured, but the insurance company may provide against payment where such accidental injury is intentionally inflicted upon the insured; and that is exactly what the policy provides in the case before us.

It is, therefore, clear that exclusionary clauses of the type contained in both of the life insurance policies issued to Collier are valid under Mississippi substantive law. In this diversity case, this court is Erie -bound to apply Mississippi substantive law in the absence of any evidence from the plaintiffs that the exclusionary clause was the product of any misrepresentations or other forms of overreaching by the insurance company.

Accordingly, this court is of the opinion that defendant’s motion for summary judgment should be granted. A separate judgment shall be entered according to the local rules.