In Re: IT Grp Inc

Opinions of the United

2006 Decisions States Court of Appeals

for the Third Circuit

5-25-2006

In Re: IT Grp Inc

Precedential or Non-Precedential: Precedential

Docket No. 05-2191

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________

No. 05-2191

_________

IN RE: IT GROUP, INC.,

Debtor

JOHN ACCARDI; DAVID L. BACKUS;

ROCHELLE BOOKSPAN; MELISSA L.DUBINSKY;

DENNIS G. FENN; JOHN P. FRANZ;

WILLIAM A. GAUNTT; THOMAS W. GRIMSHAW;

DAVID W. HICKMAN; WARREN C. HOUSEMAN;

STEPHEN C. KENNEY; JAMES R. MAHONEY;

THOMAS R. MARTI; DAVIDW. MAYFIELD;

WILLIAM H. MCINTOSH; ROY MCKINNEY;

DAVID C.MCMURTRY; DANIEL C. MELCHIOR, III;

GEORGEANN N. MOREKAS; WILLIAM C. PARIS;

MATTHEW G. RADEK; KEVIN R. SMITH;

LOUIS STOUT; LEONARD YAMAMOTO;

JOHN E. FOLEY; JAMES M. REDWINE;

STEWART BORNHOFT; ENZO ZORATTO;

POLLY QUICK,

Appellants

v.

IT LITIGATION TRUST; IT GROUP, INC.,

and their Affiliates, as employers and fiduciaries,

administrators and sponsors of the Plan;

CARLYLE PARTNERS II, LP, as fiduciary of the Plan

and/or tortfeasor; ANTHONY DELUCA;

FRANCIS J. HARVEY; HARRY J. SOOSE, as fiduciaries of

the Plan and as officers; IT CORPORATION DEFERRED

COMPENSATION PLAN EFFECTIVE JANUARY 1, 1996

MARK S. KENNEY,

Trustee

_________

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civil No. 04-cv-00146)

District Judge: Honorable Joseph J. Farnan, Jr.

__________

Argued April 3, 2006

Before: RENDELL, SMITH, and BECKER*, Circuit Judges

(Filed: May 25, 2006)

____________________

* The Honorable Edward R. Becker approved this

opinion but died before it was released.

2

John M. Stull

1300 North Market Street

P. O. Box 1947

Wilmington, DE 19899

Thomas A. Johnson [ARGUED]

Suite 201

33 West Mission Street

Santa Barbara, CA 93101

Counsel for Appellants

John Accardi; David L. Backus; Rochelle Bookspan;

Melissa L. Dubinsky; Dennis G. Fenn; John P. Franz;

William A. Gauntt; Thomas W. Grimshaw;

David W. Hickman; Warren C. Houseman;

Stephen C. Kenney; James R. Mahoney;

Thomas R. Marti; David W. Mayfield;

William H. McIntosh; Roy McKinney;

David C. McMurtry; Daniel C. Melchior, III;

Georgeann N. Morekas; William C. Paris;

Matthew G. Radek; Kevin R. Smith; Louis Stout;

Leonard Yamamoto; John E. Foley;

James M. Redwine; Stewart Bornhoft;

Enzo Zoratto; Polly Quick

Jeffrey M. Schlerf

The Bayard Firm

222 Delaware Avenue

P. O. Box 25130, 9th Floor

Wilmington, DE 19899

3

John K. Cunningham

Ileana A. Cruz

White & Case

200 South Biscayne Boulevard

Suite 4900

Miami, FL 33131

Counsel for Appellees

IT Litigation Trust; IT Group, Inc.,

and Their Affiliates, As Employers and

Fiduciaries, Administrators and Sponsors

of the Plan

Mark D. Collins

Jason M. Madron

Richards, Layton & Finger

One Rodney Square

P. O. Box 551

Wilmington, DE 19899

Timothy L. Patten

Latham & Watkins

555 11th Street, N.W.

Suite 1000

Washington, DC 20004

Counsel for Appellees

Carlyle Partners II, LP, as Fiduciary of the

Plan And/or Tortfeasor

4

Ronald S. Gellert

Eckert, Seamans, Cherin & Mellott

1515 Market Street, Suite 900

Philadelphia, PA 19102

Mark A. Willard

Delia B. Bianchin

Sandra R. Mihok

Eckert, Seamans, Cherin & Mellott

600 Grant Street, 44th Floor

Pittsburgh, PA 15219

Counsel for Appellee

Anthony DeLuca

Michael J. Prame [ARGUED]

Groom Law Group Chartered

1701 Pennsylvania Avenue, N.W.

Suite 1200

Washington, DC 20006

Counsel for Appellee

Francis J. Harvey

5

Charles A. DeMonaco

Dickie, McCamey & Chilcote

Two PPG Place

Suite 400

Pittsburgh, PA 15222-5402

Counsel for Appellee

Harry J. Soose, as Fiduciaries of the Plan

and as Officers

__________

OPINION OF THE COURT

__________

RENDELL, Circuit Judge.

Plaintiffs (or “Participants”), participants in IT

Corporation’s Deferred Compensation Plan (the “Plan”), filed

an adversary complaint in the Bankruptcy Court for the

District of Delaware against IT Corporation (or the

“Corporation”), its parent company, IT Group, Inc., and their

subsidiaries, seeking secured, priority status for their claims

for benefits owed to them under the Plan. The Bankruptcy

Court concluded that the Plan was an unfunded “top hat” plan

under ERISA, and dismissed Participants’ complaint. The

District Court for the District of Delaware affirmed.

6

On appeal, Participants contend that certain novel

features of the Plan obligated the Corporation to fund a

secular trust, outside the reach of creditors, for their exclusive

benefit when the committee learned that the Corporation was

facing insolvency. We disagree, and will affirm.

I.

A. Deferred Compensation Plans Generally

A deferred compensation plan “is an agreement by the

employer to pay compensation to employees at a future date.

The main purpose of the plan is to defer the payment of

taxes.” David J. Cartano, Taxation of Compensation &

Benefits § 20.01, at 709 (2004). The idea is to defer the

receipt of compensation until retirement or termination of

employment, when the employee is in a lower tax bracket,

thus reducing the overall amount of taxes paid. Id. at

§ 20.02[A], at 710.

Certain deferred compensation plans, known as “top

hat” plans, are subject to ERISA’s administrative and

enforcement provisions, but exempt from the substantive

provisions that regulate plan funding and impose fiduciary

7

duties.1 Because the Participants’ claims arise under ERISA’s

substantive provisions, see Pls.’ 2d Am. Compl. at 29-37, they

depend on a finding that the IT Group Deferred Compensa-

tion Plan is subject to ERISA’s substantive protections, i.e.,

that it is not a “top hat” plan.

ERISA defines a top hat plan as:

a plan which is unfunded and is maintained by an

employer primarily for the purpose of providing

deferred compensation for a select group of

management or highly compensated employees.

29 U.S.C. § 1051(2). See also 29 U.S.C. §§ 1081(a)(3),

1101(a)(1).

1

The Department of Labor has explained that Congress

exempted “top hat” plans from ERISA’s substantive protections

because it believed that, unlike other employees, management

and highly compensated employees have sufficient bargaining

power to negotiate favorable deferred compensation plans and

are capable of taking the risks attendant to such plans into

account. Dep’t of Labor, Pension & Welfare Benefit Programs,

Op. Ltr. 90-14A, 1990 ERISA LEXIS 12, at *3-4 (May 8,

1990).

8

When a plan is “unfunded,”

[t]he employer promises to pay the employee the

deferred compensation at a specified time, but

does not set aside the funds in an escrow, trust

fund, or otherwise. The assets used to pay the

deferred compensation are the general assets of

the employer and are subject to the claims of the

employer’s creditors.

Cartano, at § 20.02[A], at 721. The employee is not subject

to tax on the compensation until he or she actually receives

the deferred amount because “the employee may never

receive the money if the company becomes insolvent.” Id.

An employer may set aside deferred compensation

amounts in a segregated fund or trust without jeopardizing a

plan’s “unfunded” status if the fund or trust remains “subject

to the claims of the employer’s creditors in the event of

insolvency or bankruptcy.” Id. at § 20.05[D], at 731.

One commonly-used mechanism is the “rabbi trust,”

which is

an irrevocable trust for deferred compensation.

Funds held by the trust are out of reach of the

employer, but are subject to the claims of the

9

employer’s creditors in the event of bankruptcy

or insolvency.

The rabbi trust gives employees some

measure of security, while at the same time

deferring taxes. The assets set aside in the trust

are segregated from the employer’s other assets

and can be used only to pay the deferred

compensation. If there is a change in control of

the company, the new owners cannot take back

the assets of the trust.

The employee is not taxed until receipt of

benefits as long as the trust funds are subject to

the claims of the employer’s creditors. The

employer is treated as the owner of the funds and

taxed on all fund earnings until the date of

distribution.

Id. at § 20.05[D][3], at 735. The Department of Labor has

opined that “a plan will not fail to be ‘unfunded’ . . . solely

because there is maintained in connection with such plan a

‘rabbi trust.’” Dep’t of Labor, Pension & Welfare Benefit

Programs, Op. Ltr. 91-16A, 1991 ERISA LEXIS 16, at *6-7

(Apr. 5, 1991).

10

B. IT Corporation’s Deferred Compensation Plan

IT Corporation adopted the Plan in January of 1996.

Participation in the Plan was limited to “non-employee

directors and to employees . . . who are part of a select group

of management or highly compensated employees.” Plan

¶ 2.1. The Plan document specifies that it “constitutes an

unfunded plan,” that participants in the Plan have “no legal or

equitable right, interest or claim in any property or assets of”

the Corporation or its affiliates and that the Corporation’s

obligation under the Plan is “merely that of an unfunded and

unsecured promise to pay money in the future.” Plan ¶ 13.1.

The Plan is administered by a committee established by the

Corporation’s President and Chief Executive Officer. Plan

¶ 10.1.

IT Corporation agreed to establish a trust in connection

with the Plan, Plan ¶ 1.28, and to “transfer over to the Trust

such assets, if any, as the Committee determines, from time to

time and in its sole discretion, are appropriate,” Plan ¶ 12.1.

At the same time that it adopted the Plan, the Corporation

adopted a “Master Trust Agreement for Deferred

Compensation Plans.” The Trust Agreement provided that

assets contributed to the Trust were to be held “subject to the

claims of the Company’s and the Subsidiaries’ creditors in the

event of their Insolvency,” and that the Trust would not

“affect the status of the Plans as unfunded plans maintained

for the purpose of providing supplemental compensation for a

11

select group of management, highly compensated employees

and/or Directors for purposes of Title I of ERISA.” Trust

¶ 1.2.

C. Procedural History

IT Group, IT Corporation and other affiliated

subsidiaries filed for bankruptcy protection under Chapter 11

on January 16, 2002 in the Bankruptcy Court for the District

of Delaware. On September 4, 2002, Participants filed the

adversary complaint that began this proceeding. They named

IT Group, all of its subsidiaries in bankruptcy, various former

executive officers of IT Group and Carlyle Partners II, LP, a

major shareholder of IT Group, as defendants. Participants

claimed that the Plan did not qualify for “unfunded,” “top

hat” status under ERISA, and was thus subject to ERISA’s

funding and fiduciary duty requirements. Under this theory,

Participants contend that IT Corporation had a duty to set

aside, in a trust for Participants’ exclusive benefit, i.e., beyond

the reach of the Corporation’s creditors, assets sufficient to

satisfy the Corporation’s obligations under the Plan. The

executive and shareholder defendants, correspondingly, owed

Participants fiduciary duties under ERISA to ensure that the

trust was funded before the bankruptcy petition date.2

2

Participants also set forth state law causes of action in their

complaint, see 2d Am. Compl. at 37-47, App. at 257-267, but do

not appeal the dismissal of those claims.

12

Participants’ complaint relied principally on the Plan

and Trust documents, but also alleged that a former President

and CEO of IT Corporation orally promised a senior officer

and other potential Plan participants that the Corporation

would fund the Trust for the exclusive benefit of plan

participants and ensure that benefits would be paid in full if

the Corporation ever faced the prospect of insolvency or

bankruptcy. 2d Am. Compl. at 8.

The defendants filed, and the Bankruptcy Court

granted, a consolidated motion to dismiss Participants’ claims.

The Court found that the Plan was “unfunded” and offered

only to a “select group of management or highly compensated

employees,” and was, thus, a top hat plan exempt from

ERISA’s substantive protections. Participants appealed to the

District Court for the District of Delaware; the District Court

affirmed.

II.

The District Court had jurisdiction to hear Participants’

appeal from the Bankruptcy Court’s final order dismissing

their adversary complaint pursuant to 28 U.S.C. § 158(a); our

jurisdiction over the appeal from the District Court’s order

arises under 28 U.S.C. § 158(d).

On appeal, “we stand in the shoes of the district court,

applying a clearly erroneous standard to the bankruptcy

13

court’s findings of fact and a plenary standard to that court’s

legal conclusions.” Am. Flint Glass Workers Union v. Anchor

Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). Because

the District and Bankruptcy Courts dismissed Participants’

complaint for failure to state a claim upon which relief could

be granted, a purely legal question, we review their decisions

de novo. Id.

In reviewing a motion to dismiss, we accept all factual

allegations in the complaint as true and view them in the light

most favorable to the plaintiffs. We may not dismiss a

complaint for failure to state a claim upon which relief can be

granted unless we find that the plaintiff can prove no set of

facts that would entitle him to relief. Pryor v. Nat’l

Collegiate Athletic Ass’n, 288 F.3d 548, 559 (3d Cir. 2002).

We may consider documents that are attached to or submitted

with the complaint and any legal arguments presented in the

briefs and arguments of counsel. Id. at 360.

III.

The primary issue before us, as in the Bankruptcy and

District Court proceedings, is whether the Plan qualifies for

the top hat exemption from ERISA’s substantive provisions.

Because Participants do not challenge those courts’

determinations that the Plan was offered only to management

and highly compensated employees, the only remaining

question is whether the Plan was, in fact, “unfunded.”

14

A.

ERISA does not specify, and we have not previously

considered, what requirements a plan must meet in order to be

considered “unfunded” for purposes of exemption from

ERISA’s substantive provisions.3 However, the decisions of

other courts of appeals provide useful guidance in this regard.

Other courts of appeals that have examined this issue

have focused primarily on what are essentially two sides of

the same coin: whether the corporation has set aside funds,

separate from its general assets, for payment of plan benefits

and whether the beneficiaries have a legal right greater than

3

In previous cases involving deferred compensation plans

offered to management and highly compensated employees, we

have always assumed, without further examination, that

ERISA’s “top hat” exemption applies. See, e.g., Goldstein v.

Johnson & Johnson, 251 F.3d 433, 435 (3d Cir. 2001)

(considering the proper scope of judicial review of an

administrator’s decision to deny benefits owed under a top hat

plan); Senior Executive Benefit Plan Participants v. New Valley

Corp. (In re New Valley Corp.), 89 F.3d 143, 148 (3d Cir. 1996)

(“Both plans at issue are top hat plans . . . .”); Kemmerer v. ICI

Americas Inc., 70 F.3d 281, 284 (3d Cir. 1995) (“The dispute on

appeal centers around [an] executive deferred compensation

plan, which like all such plans is commonly referred to as a ‘top

hat’ plan.”).

15

that of a general, unsecured creditor to the corporation’s

assets.

The Eighth Circuit Court of Appeals has examined this

issue from both sides. In considering whether a death benefit

plan supported by a life insurance policy was subject to

ERISA’s substantive requirements, it stated that “[f]unding

implies the existence of a res separate from the ordinary assets

of the corporation.” Dependahl v. Falstaff Brewing Corp.,

653 F.2d 1208, 1214 (8th Cir. 1981). The plan was “funded”

because the insurance policy provided “a res separate from

the corporation” to which beneficiaries could look for

payment of benefits under the plan. Id. On the other hand, an

excess benefit plan that specified that the rights of the

beneficiary under the plan would “be solely those of an

unsecured creditor” was unfunded, even though the employer

had purchased an insurance policy to help it finance the plan,

because the policy in that case “simply became a general,

unpledged, unrestricted asset of the [employer] and those . . .

assets in turn would be used to fund [the] plan.” Belsky v.

First Nat’l Life Ins. Co., 818 F.2d 661, 663-64 (8th Cir.

1987).

Similarly, the Second Circuit Court of Appeals has

observed that a plan under which benefits were to be paid

“‘solely from the general assets of the employer’” is

unfunded. Demery v. Extebank Deferred Compensation Plan,

216 F.3d 283, 287 (2d Cir. 2000) (quoting Gallione v.

16

Flaherty, 70 F.3d 724, 725 (2d Cir. 1995)). More recently, it

adopted a standard first articulated in Miller v. Heller, 915 F.

Supp. 651 (S.D.N.Y. 1996):

the question a court must ask in determining

whether a plan is unfunded is: “can the

beneficiary establish, through the plan documents,

a legal right any greater than that of an unsecured

creditor to a specific set of funds from which the

employer is, under the terms of the plan, obligated

to pay the deferred compensation?”

Demery, 216 F.3d at 287 (quoting Miller, 915 F. Supp. at

660). Applying this test, the court found that a deferred

compensation plan that was financed using life insurance

contracts, the proceeds of which were kept in a separate

account, was unfunded. According to the court, the plan’s

terms did not “give plaintiffs a greater legal right to the funds

in the Deferred Compensation Liability Account than that

possessed by an unsecured creditor.” Id. Although the

account was separate, it was part of the “general assets” of the

corporation, and the plan was therefore “unfunded as a matter

of law.” Id.

The Fifth Circuit Court of Appeals employed a similar

analysis, but also considered the tax treatment of the plan. In

Reliable Home Health Care, Inc. v. Union Central Insurance

Co., 295 F.3d 505 (5th Cir. 2002), it surveyed the decisions of

17

the other courts of appeals, and noted that the Department of

Labor had provided the following guidance: “‘[A]ny

determination of the ‘unfunded’ status of an ‘excess benefit’

or ‘top hat’ plan of deferred compensation requires an

examination of the facts and circumstances, including the

status of the plan under non-ERISA law.’” Id. at 513 (quoting

Dep’t of Labor, Pension & Welfare Benefit Programs, Op.

Ltr. 92-13A, 1992 ERISA LEXIS 14, at *7 (May 19, 1992)).

More specifically, the court emphasized DOL’s advice that

the tax consequences of the plan should be considered in the

analysis, id. (citing DOL Op. Ltr. 92-13A, 1992 ERISA

LEXIS 14, at *7), and noted a district court’s holding that “a

‘plan is more likely than not to be regarded as unfunded if the

beneficiaries under the plan do not incur tax liability during

the year that the contributions to the plan are made,’” id. at

514 (quoting Miller, 915 F. Supp. at 659). Combining all of

this information, the court devised the following test:

in determining whether a plan is “funded” or

“unfunded” under ERISA, a court must first look

to the surrounding facts and circumstances,

including the status of the plan under non-ERISA

law. Second, a court should identify whether a

[plan] is funded by a res separate from the general

assets of the company.

Id.

18

The Reliable court concluded, under this test, that a

death benefit plan was unfunded. Like the plans at issue in

Demery and Belsky, the plan was financed through the

purchase of life insurance contracts on behalf of participating

employees. However, those contracts belonged to the

company, not the participating employees. Plan participants

were prohibited from contributing to the plan, and did not

treat the company’s contributions to the plan on their behalf

as taxable income. Thus, the plan was unfunded and exempt

from ERISA’s substantive provisions. Id. at 514-15.

We agree with our fellow courts of appeals that the

keys to the determination of whether a plan is “funded” or

“unfunded” under ERISA are (1) whether beneficiaries of the

plan can look to a res separate from the general assets of the

corporation to satisfy their claims; (2) whether beneficiaries

of the plan have a legal right greater than that of general,

unsecured creditors to the assets of the corporation or to some

specific subset of corporate assets. We may also consider the

plan’s intended and actual tax treatment.4 We will analyze the

4

As noted above, a plan under which the beneficiaries do not

incur tax liability during the year that the contributions to the

plan are made is “more likely than not” an “unfunded” plan.

Miller v. Heller, 915 F. Supp. 651, 659 (S.D.N.Y. 1996). This

is so because the tests for taxation of deferred compensation and

for funding status overlap–deferred compensation is not taxable

as current income only where the future payment of the

compensation is somehow uncertain, i.e., where the assets used

19

IT Corporation Plan accordingly.

B.

The IT Corporation Plan is an unfunded top hat plan

under ERISA. At the outset, we note that the Plan and Trust

documents express, in no uncertain terms, IT Corporation’s

intent to create an unfunded plan. The “Purpose” section of

the Plan document provides that the “Plan constitutes an

unfunded plan.” And the Trust document explicitly states that

the Trust “shall not affect the status of the Plans as unfunded

plans . . . for purposes of Title I of ERISA.” Trust ¶ 1.2.

Beyond the Corporation’s stated intent, an examination

of the factors set forth above fully supports our conclusion.

First, there is no res separate from IT Corporation’s general

assets to which Participants can look to satisfy their claims.

Although the Plan document provides for, and the Trust

document establishes, a “Trust” for participants’ benefit, no

funds were ever deposited into the Trust. And Participants’

to pay participants’ claims are also subject to other creditors’

claims. Thus, the fact that a plan qualifies for deferred tax

treatment strongly supports the conclusion that it was unfunded.

See Dep’t of Labor, Pension & Welfare Benefit Programs, Op.

Ltr. 92-13A, 1992 ERISA LEXIS 14, at *7 (May 19, 1992)

(noting that “the tax consequences to trust beneficiaries should

be accorded significant weight” in determining whether a plan

is “funded” or “unfunded”).

20

“account balances,” listed on their annual benefit statements,

do not reflect actual deposits held in a particular location; the

Plan specifically states that each balance is a “bookkeeping

entry only,” designed to “be utilized solely as a device for the

measurement and determination of amounts to be paid to or in

respect of a Participant pursuant to the Plan.” Plan ¶ 1.2.

Second, even if the Trust were funded, Participants’

legal rights to its assets, and to the assets of the Corporation

as a whole, are no greater than those of the Corporation’s

general, unsecured creditors. The Deferred Compensation

Plan Questions & Answers, which was circulated to potential

participants along with the Plan document, explains that the

Trust is a “‘Rabbi Trust’” that “does not provide security in

the event that IT Corporation or its subsidiaries become

insolvent or file for bankruptcy.”5 Moreover, the Trust

document unequivocally establishes that Trust assets are

subject to creditors’ claims in the event of insolvency, and

that such claims are on par with those of Plan participants.

See, e.g., Trust ¶ 1.3 (“The Participants and their

5

As noted above, the DOL has opined that a “rabbi trust”

maintained in connection with a deferred compensation plan

will not undermine the plan’s “unfunded” status. See Dep’t of

Labor, Pension & Welfare Benefit Programs, Op. Ltr.

91-16A , 1991 ERISA LEXIS 16, at *6-7 (Apr. 5, 1991).

21

Beneficiaries shall have no preferred claim on, or any

beneficial ownership interest in, any assets of the Trust. . . .

Any assets held by the Trust will be subject to the claims of

the Company’s and the Subsidiaries’ general creditors under

federal and state law in the event of Insolvency . . . .”);

Trust ¶ 3.6(a) (“To the extent that any Participant or

Beneficiary acquires the right to receive payments under any

of the Plans, such right shall be no greater than that of an

unsecured general creditor of the Company and the

Subsidiaries and such Participant or Beneficiary shall have

only the unsecured promise of the Company and the

Subsidiaries that such payments shall be made.”).

The Plan document similarly limits Participants’ legal

rights to IT Corporation’s general corporate assets. E.g., Plan

¶ 13.1 (“Participants . . . shall have no legal or equitable right,

interest or claim in any property or assets of an Employer. . . .

An Employer’s obligation under the Plan shall be merely that

of an unfunded and unsecured promise to pay money in the

future.”).

Finally, we note that Participants did not pay taxes on

22

the compensation that they deferred under the Plan.6

Participants do not mount much of a challenge to any

of the foregoing (aside from our consideration of the tax

treatment of the Plan, see supra note 6). Instead, they argue

that this analysis fails to take into account other facts and

circumstances that render the Plan “funded.” Participants

advance two arguments in this regard. We address each

theory in turn.

C.

The “centerpiece” of Participants’ claim, see

Appellants’ Br. at 22, is that the Plan document obligated the

Plan’s administrative committee to create and fund a secular

trust for their exclusive benefit in the event of impending

insolvency. More specifically, they argue: (1) that paragraph

6

Participants argue that the tax treatment of the Plan is

“irrelevant.” Although they acknowledge that they did not

report deferred compensation as income for tax purposes, they

contend that the Plan as drafted “was never entitled to favorable

tax treatment” because of the administrative committee’s alleged

obligation to fund an exclusive benefit trust on their behalf in

the event of insolvency. Appellants’ Br. at 38. Given that

Participants benefitted from this tax treatment when the

Corporation was solvent, their argument seems more than a little

disingenuous. Moreover, as we discuss in Section III.C below,

we reject Participants’ characterization of the Plan.

23

12.1 of the Plan document,7 which gives the Plan’s

administrative committee “sole discretion” over the funding

decisions related to the Plan, implies a duty to actually fund

the Trust in “good faith”; (2) that the duty of good faith

carries an obligation to avoid forfeitures, which, in this case,

could only have been accomplished by funding an exclusive

benefit trust before the Corporation became insolvent; and

(3) that the Corporation “pre-approved,” in the Trust

document, an amendment to the Trust that would convert it

from a “rabbi trust,” susceptible to general creditors’ claims,

into a secular trust for the exclusive benefit of Plan

participants. Thus, Participants conclude, they have a legal

right to payment of Plan benefits greater than that of the

Corporation’s general, unsecured creditors.

We need not dwell on this argument for long, because

we reject its fundamental premise. Although we have

recognized that terms of top hat plans that confer discretion to

plan administrators are subject to the implied duty of good

faith, Goldstein v. Johnson & Johnson, 251 F.3d 433, 448 (3d

Cir. 2001), that duty does not extend as far as Participants

7

The full text of paragraph 12.1 is as follows:

The Employers shall establish the Trust and shall

transfer over to the Trust such assets, if any, as

the Committee determines, from time to time and

in its sole discretion, are appropriate.

24

contend. The implied duty of good faith is merely an

“interpretive tool to determine the parties’ justifiable

expectations,” Northview Motors, Inc. v. Chrysler Motors

Corp., 227 F.3d 78, 91 (3d Cir. 2000); it may not be used to

add new terms to an agreement, Lorenz v. CSX Corp., 1 F.3d

1406, 1415 (3d Cir. 1993), or to override express contractual

terms, Northview, 227 F.3d at 91. For Participants to succeed,

we would have to do just that–to hold that the duty requires

the Plan’s administrative committee to fund a trust for their

exclusive benefit. This runs directly afoul of the Plan’s stated

purpose to remain “unfunded” for ERISA purposes and its

express provision that Participants are not entitled to any

“legal or equitable right, interest or claim in any property or

assets of” the Company, and that the Company’s obligation

under the Plan “shall be merely that of an unfunded and

unsecured promise to pay money in the future.” Plan ¶ 13.1.

Participants urge that at least one court has used the

doctrine of “necessary implication” to imply an obligation to

fund an employee benefit plan that was not expressly

provided in the terms of the plan. See Killian v. McCulloch,

850 F. Supp. 1239, 1250-51 (E.D. Pa. 1994). However, that

doctrine is only employed to

imply an agreement by the parties to a contract to

do and perform those things that according to

reason and justice they should do in order to

carry out the purpose for which the contract was

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made and to refrain from doing anything that

would destroy or injure the other party’s right to

receive the fruits of the contract.

Id. (quoting Somers v. Somers, 419 Pa. Super. 131, 613 A.2d

1211, 1212 (1992)) (emphasis added). It does not apply

where, as here, the implied agreement would not accomplish

either of those goals, but would destroy, rather than carry out,

the express purpose of the Plan. Here, the Committee, in

failing to fund the trust, did nothing to destroy or injure

Participants’ rights under the Plan–the Plan granted them only

a limited, unsecured right to future payment.

Participants would have us employ the implied duty of

good faith and the doctrine of necessary implication to expand

their rights under the Plan, not to “carry out the purpose” for

which it was created. To accept Participants’ argument would

require us to depart significantly from our previous decisions

regarding the scope of the implied duty of good faith, to

broaden the doctrine of “necessary implication” and to

disregard the plain and unambiguous language of the Plan and

Trust documents. We cannot, and will not, do so.

D.

Participants’ second claim relies on parol evidence, in

the form of an alleged oral representation made by the former

President and CEO of IT Corporation to various Plan

26

participants, to establish that the plan was “funded.” In their

complaint, Participants alleged that the former President and

CEO assured prospective participants that, in the event of

insolvency, the Trust would be funded and they would be paid

in full.

Participants argue, first, that terms of the Plan and

Trust documents that give the Plan’s administrative

committee discretion to fund the Trust create ambiguity as to

the Plan’s intended funding status, and, second, that the

alleged representation should be used to resolve that

ambiguity. See Senior Executive Benefit Plan Participants v.

New Valley Corp. (In re New Valley Corp.), 89 F.3d 143, 150

(3d Cir. 1996) (“[O]nce a contract provision is found to be

ambiguous, extrinsic evidence must be considered to clarify

its meaning.”).

We disagree. As discussed above, the terms of the

Plan and Trust documents clearly and unambiguously evince

the Corporation’s intent to create an unfunded top hat plan.

Moreover, as the Bankruptcy Court observed, the oral

representation alleged by Participants “would add an

additional term to the contract regarding funding; it would not

shed light on the written terms of the Plan.” IT Group, Inc. v.

Bookspan (In re IT Group, Inc.), 305 B.R. 402, 411 (Bankr.

D. Del. 2004). Thus, the oral representation does not

27

undermine our initial conclusion that the Plan is unfunded,

and has no place in our analysis.

IV.

For the foregoing reasons, we agree with the

Bankruptcy and District Courts that Participants’ claims

should be dismissed. We will accordingly AFFIRM the

District Court’s order.

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