Opposition Brief — Harris Trust & Savings Bank v. John Hancock Mutual Life Insurance

No. 92-1259 hegre Qed, us. |

IN THE

Supreme Court of the United state |

OcToBER TERM, 1992 | Wide Ue

a

HARRIS TRUST AND SAVINGS BANK,

as Trustee of the Sperry Master Retirement Trust No. 2,

Cross-Petitioner,

v.

JOHN HANCOCK MU TUAL LIFE

INSURANCE COMPANY,

Cross-Respondent.

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

FTiy. ED

BRIEF IN OPPOSITION TO CROSS-PETITION

FOR A WRIT OF CERTIORARI

Howarp G. KRISTOL

Counsel of Record

Rosert M. PEAK

Jerrrey N. LEIBELL

Reboul, MacMurray, Hewitt,

Maynard & Kristol

45 Rockefeller Plaza

Rosauig A. HAILey New York, New York 10111

John Hancock Mutual (212) 841-5700

Life Insurance

se Attorneys for Cross-Respondent

Company orneys f ? p

RICHARD J.J. SCAROLA

Of Counsel

February 22, 1993

393 |

sm

Parties

The parties to the action below were Cross-Respondent John

Hancock Mutual Life Insurance Company (“Hancock”); Cross-

Petitioner Harris Trust and Savings Bank (“Harris Trust”);

counterclaim defendant Chase Manhattan Bank, N.A. (“Chase”),

which was succeeded as trustee of the Sperry Master Retirement

Trust No. 2 on October 1, 1987, by Harris Trust; and third-party

defendants Sperry Corporation (“Sperry”) and The Retirement

Committee of Sperry Corporation (“Sperry Retirement

Committee”).

Hancock is a mutual insurance company; it does not have any

parent companies or subsidiaries to list pursuant to Rule 29.1.

In 1986, Sperry merged with Burroughs Corporation and

became Unisys Corporation (“Unisys”). The Sperry Retirement

Committee was succeeded by the Unisys Pension Investment

Review Committee. Hancock is informed and believes that shares

of Unisys and shares of Chase are publicly traded. Additional-

ly, petitioner is informed and believes that Harris Trust is acting

as a party only in its capacity as trustee of the Sperry Master

Retirement Trust No. 2 and is not otherwise affected by the out-

come of this litigation, and that the Bank of Montreal is a parent

of Harris Trust.

Hancock is not aware of any other parent companies or sub-

sidiaries to list pursuant to Rule 29.1.

iia lilac

TABLE OF CONTENTS

Reasons for Denying the Cross-Petition.......... 2

I. THE CONTENTION THAT HANCOCK

SHOULD BE DEEMED A FIDUCIARY

UNDER ERISA WITH RESPECT TO

GAC 50 ITSELF DOES NOT MERIT

eS Se 3

A. There Is No Conflict between the

Second Circuit’s Decision and the

Decisions of Other Circuit Courts ..... 4

B. Harris Trust’s Contention Is in Conflict

with Numerous Decisions in Other

Se ee

~]

Il. THE CONTENTION THAT HANCOCK

IS SUBJECT TO ERISA FIDUCIARY

DUTIES WITH RESPECT TO ALL THE

ASSETS HELD UNDER GAC 50 DOES

NOT MERIT REVIEW................. 9

A. The Second Circuit’s Decision Does

Not Conflict with the Decision of Any

Other Circuit Court................. )

B. Harris Trust’s Contention Is Wholly at

Variance with the “Guaranteed Benefit

wamey Meeeption................... 13

A Se 15

TABLE OF AUTHORITIES

Cases Page

Amato v. Western Union Int'l, Inc., 596 F. Supp.

963 (S.D.N.Y. 1984), aff'd in part, revd in

part, 773 F.2d 1402 (2d Cir. 1985), cert.

dismissed, 474 U.S. 1113 (1986) .............. 8

Associates in Adolescent Psychiatry, S.C. v. Home

Life Ins. Co., 941 F.2d 561 (7th Cir. 1991),

cert. denied, 112 S. Ct. 1182 (1992) .......... 6

Chicago Bd. Options Exch., Inc. v. Connecticut

Gen Life Ins. Co., 713 F.2d 254 (7th Cir.

rrr errs res rrr rr 4,5

Ed Miniat, Inc. v. Globe Life Ins. Group, Inc.,

805 F.2d 732 (7th Cir. 1986), cert. denied, 482

if 7. ; Beer rrr Sree ere 4,5,6

F.H. Krear ¢> Co. v. Nineteen Named Trustees,

810 F.9d.1900 (24 Cir. 1067) .........2.05... 6-7

Hagan v. Kaiser Aluminum & Chem. Corp., 668

F. Supp. 1298 (E.D. Mo. 1987) .............. 8

Harris Trust ¢> Sav. Bank v. John Hancock Mut.

Life Ins. Co., 722 F. Supp. 998 (S.D.N.Y.

Peer eer eer rere re ctr errr 13, 14

Harris Trust ¢ Sav. Bank v. John Hancock Mut.

Life Ins. Co., 767 F. Supp. 1269 (S.D.N.Y.

| err rrr ewer: fon ore 3-4, 5

Harris Trust ¢¢ Sav. Bank v. John Hancock Mut.

Life Ins. Co., 970 F.2d 1138 (2d Cir. 1992)... passim

Jacobson v. John Hancock Mut. Life Ins. Co.,

662 F. Supp. 1103, withdrawn, set aside and

vacated, 662 F. Supp. 1112 (D. Conn. 1987) ..__ 10, 12

Levy v. Lewis, 635 F.2d 960 (2d Cir. 1980) ..... 8

Mack Boring and Parts Corp. v. Meeker Sharkey

Moffitt, 930 F.2d 267 (3d Cir. 1991) ......... 10

vi

Cases (cont'd) Page

Peoria Union Stock Yards Co. Ret. Plan v. Penn

Mut. Life Ins. Co., 698 F.2d 320 (7th Cir.

ea SC ee 9-10, 1]

Schulist v. Blue Cross of lowa, 717 F.2d 1127

Tk EERE eee ere ot Ae 6

Sutton v. Weirton Steel Div. of Nat7 Steel Corp.,

567 F. Supp. 1184 (N.D. W. Va.), aff'd, 724

F.2d 406 (4th Cir. 1983), cert. denied, 467

ee ean 8

United Indep. Flight Officers, Inc. v. United Air

Lines, Inc., 756 F.2d 1262 (7th Cir. 1985) .... 8

Useden v. Acker, 947 F.2d 1563 (11th Cir. 1991),

petition for cert. filed sub nom. Useden v.

Greenberg Traurig Hoffman Lipoff Rosen ¢-

Quentel, 60 U.S.L.W. 3843 (U.S. June 1, 1992)

8 ee yr PPro he eae A 8

Statutes

Employee Retirement Income Security Act of

1974, 29 U.S.C. § 1001 et seg................ passim

29 U.S.C. § 1101(b)(2)(B) ................... 13, 14

Legislative Material

H.R. Rep. No. 1280, 93d Cong., 2d Sess.,

reprinted in 1974 U.S. Code Cong. & Admin.

SR ee iy ote SMa ete - A ot, 4

Rules and Regulations

Department of Labor cial Opinion 78-8A

SS, WUE 2h Sa ua w coe ee hake’ 14

Department of Labor Advisory Opinion 83-51A

Me MR WRI 6 bs 5a <Veves ctv cueeeecrees 14

ieee

No. 92-1259

IN THE

Supreme Court of the United States

OcroBER TERM, 1992

HARRIS TRUST AND SAVINGS BANK,

as Trustee of the Sperry Master Retirement Trust No. 2,

Cross-Petitioner,

v.

JOHN HANCOCK MUTUAL LIFE

INSURANCE COMPANY,

Cross-Respondent.

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION TO CROSS-PETITION

FOR A WRIT OF CERTIORARI

Cross-Respondent John Hancock Mutual Life Insurance

Company (“Hancock”)' submits this brief in opposition to the

Cross-Petition for a Writ of Certiorari of Harris Trust and Savings

Bank (“Harris Trust”). For the reasons stated herein, the Cross-

Petition should be denied.

' The opinions of the courts below are reproduced in the Appendix to the

Petition for a Writ of Certiorari in Docket No. 92-1074. References to pages

of that Appendix are cited herein as “A- ", followed by the page number.

|

sa liiilhiiateeniiiiainaiainiaiaie deen

j )

2

Reasons for Denying the Cross-Petition

Neither question presented by Harris Trust ini its Cross-Petition

warrants review by this Court. Apart from the question presented

by Hancock in its Petition for a Writ of Certiorari in Docket

No. 92-1074, the decision of the Second Circuit:

(1) does not conflict with any decision of another

court of appeals;

(2) is not inconsistent with ERISA? or its legislative

histery;

(3) is not inconsistent with any interpretation of

ERISA published by the Department of Labor (the

“DOL’); and

(4) does not involve a novel or innovative interpreta-

tion of the statute or existing law.

In addition, it is not necessary for the Court to grant the Cross-

Petition in order to consider fully the issues raised by Hancock

in its Petition. The question there presented, viz., whether

ERISA’s fiduciary responsibility provisions apply to any of the

assets held by insurance companies in their General Accounts

under group annuity contracts that provide for guaranteed

benefits, is of fundamental significance to the insurance industry

and state insurance regulators.* The questions presented by the

Cross-Petition, however, raise separate and distinct issues.

Though couched in deceptively ambiguous language, the

Cross-Petition in essence seeks review of the following questions:

* Employee Retirement income Security Act of 1974, 29 U.S.C. § 1001 et seq.

(“ERISA”).

* That question merits review, because the Second Circuit decision, in the one

respect in which it reversed the district court, (i) misconstrues ERISA’s

“guaranteed benefit policy” exception, (ii) directly conflicts with decisions of

other courts of appeals, (iii) contradicts 18 years of consistent regulatory in-

terpretation of the statute by the DOL, (iv) has created substantial confusion

and uncertainty in the insurance industry, (v) threatens disruption of long-

standing insurance company business practices, (vi) ignores Congress’ alloca-

tion of responsibility for regulating the business of insurance to the States and

(vii) unless reversed, will institute a regime of federal regulation of insurance

company assets that conflicts with the existing framework of state regulation

of insurance.

a

i

3

(1) whether an insurance company should be deemed

a fiduciary under ERISA by reason of its exercise

of its contract rights under a group annuity con-

tract with a pension plan; and

(2) whether all the assets held by an insurance com-

pany in its General Account under a typical group

annuity contract like GAC 50 — not just those

assets that are “not referable to guaranteed

benefits” — are subject to ERISA’s fiduciary rules.

Each of these extraordinary propositions was rejected by the

court below, is inconsistent with ERISA and its legislative history,

and has thus far found no support in any judicial decision. The

questions in the Cross-Petition, therefore, do not merit this

Court’s review.

I.

THE CONTENTION THAT HANCOCK SHOULD BE

DEEMED A FIDUCIARY UNDER ERISA WITH RESPECT

TO GAC 50 ITSELF DOES NOT MERIT REVIEW

Harris Trust argues that Hancock must comply with ERISA's

fiduciary standards even when exercising its own contract rights

under GAC 50, on the theory that the contract is a “plan asset”

and that Hancock has “broad and unfettered discretion to alter

Harris Trust’s rights” under GAC 50. Cross-Petition at 8. It con-

tends, therefore, that Hancock, even in exercising its own rights

under the contract, must act exclusively for the benefit of the

Plan.

Affirming the district court, the Second Circuit held that,

while the contract itself is a “plan asset,” Hancock is not a

fiduciary in relation to the contract qua contract:

The policy itself, with its bundle of contractual rights

and responsibilities, therefore is similar to any other

financial instrument owned by an employee benefit

plan. Hancock is not a fiduciary in regard to the policy

here, however, because it does not ‘exercise[ ] any

discretionary authority or discretionary control .. .

respecting management or disposition of the policy

itself. 29 U.S.C. § 1002(21)(A). Only Harris Trust as

contractholder has discretionary authority over the

guaranteed benefit policy qua policy.

(A-13)* The court concluded that Hancock “has no fiduciary

responsibility in regard to the undivided policy” (A-14).

Contrary to Harris Trust’s assertion in its Cross-Petition, the

Second Circuit's decision on this issue is not in conflict with the

decisions of the Seventh Circuit or of any other circuit court.

Rather, its decision on this point has broad judicial support and

does not change existing law.

A. There Is No Conflict Between the Second Circuit's

Decision and the Decisions of Other Circuit Courts.

The Cross-Petition is predicated upon a supposed conflict be-

tween the decision below and two decisions of the Seventh Cir-

cuit, Ed Miniat, Inc. v. Globe Life Ins. Group, inc., 805 F.2d

732 (7th Cir. 1986), cert. denied, 482 U.S. 915 (1987), and Chi-

cago Bd. Options Exchange, Inc. v. Connecticut Gen'l Life Ins.

Co., 713 F.2d 254 (7th Cir. 1983) (“CBOE”). The Second Cir-

cuit properly found, however, that Miniat and CBOE are inap-

posite (A-14). Moreover, even cursory analysis of Miniat and

CBOE shows that neither supports the broad proposition ad-

vanced by Harris Trust, viz., that ERISA’s fiduciary rules apply to

an insurance company’s exercise of its rights under the contract.

In both Miniat and CBOE, the insurance company defendant

allegedly had exercised a unilateral right to alter a critical

* The Second Circuit found clear support for its conclusion in ERISA’s legislative

history. The Joint Explanatory Statement of the Committee on Conference

had noted:

A trust is not to be required in the case of plan assets which

consist of insurance (including annuity) contracts or policies issued

by an insurance company qualified to do business in a State (or

the District of Columbia)... . Although these contracts need not

be held in trust, nevertheless, the person who holds the contract

is to be a fiduciary and is to act in accordance with the fiduciary

rules ... with respect to these contracts.

H.R. Rep. No. 1280, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong

& Admin. News 5038. 5079 (emphasis added).

contract term that resulted in severe prejudice to the contract-

holder.’ Neither decision is on point, because, as the Second

Circuit found, under GAC 50, Hancock “can act only under the

terms of the policy, and any change in the policy requires the

consent of the contractholder” (A-14). Both the Second Circuit

and the district court concluded that Hancock did not alter any

terms of the contract but merely “exercised its express rights

under the contract” (A-14).* Whether or not Miniat and CBOE

are correct applications of ERISA to the facts of those cases,

they are not germane to the facts in this case.

In any event, Miniat and CBOE do not support the broad

proposition advanced by Harris Trust that an insurer should be

deemed a fiduciary when it performs in accordance with the

specific terms of a contract. Indeed, the Seventh Circuit has itself

‘In CBOE. the insurer allegedly amended provisions of the contract unilateral-

ly with the effect of deferring for a ten-year period the right the contract-

holder theretofore had to withdraw or transfer funds under the contract,

thereby altering the contract in a way that “lock{ed] CBOE into the [con-

tract] for the next 10 years ... [and] determined what type of investment

the Plan must make.” 713 F.2d at 260. Similarly, in Miniat, in reversing a

dismissal on the pleadings on the strength of an allegation that the defendant

“‘unilaterally ... announced a withdrawal from the [Retirement Life Reserve]

insurance business and an abandonment of existing policy holders, by reduc-

ing the rate of return paid on account from 10% to 7% to 4% per annum

by November 1, 1983, and increasing premium rates to the maximum allowed

by the policy, ” 805 F.2d at 734, the Seventh Circuit held that “plaintiff may

be able to prove that [defendant] is a fiduciary,” id. at 738 (emphasis added).

* With regard to the specific conduct challenged by Harris Trust (Cross-Petition

at 8), the district court found in Harris I/, on the undisputed facts before it,

that Hancock's conduct was consistent with both the terms of the contract

and state law and granted summary judgment dismissing all such claims. The

district court held that Hancock had no contract obligation whatsoever to con-

tinue to make available the so-called “rollover” arrangement (A-67 to A-71);

Harris Trust did not appeal from the dismissal of that claim. Next, the district

court held that Hancock had the express right under the contract to terminate

so-called “non-guaranteed benefit” payments (A-71 to A-77); on appeal, the

Second Circuit affirmed (A-16 to A-18). Finally, the district court found that

Hancock performed the allocation of investment income and expenses in ac-

cordance with the contract's terms, viz., on a company-wide basis pursuant

to procedures approved by the New York State Insurance Department (A-83

to A-85); Harris Trust did not appeal from the dismissal of that claim.

ruled that in those circumstances an insurer does not have an

ERISA fiduciary duty. See Schulist v. Blue Cross of lowa, 717 F.2d

1127 (7th Cir. 1983). As the Seventh Circuit explained in Miniat:

Schulist stands for the proposition that if a specific term

(not a grant of power to change terms) is bargained for

at arm’s length, adherence to that term is not a breach

of fiduciary duty. No discretion is exercised when an in-

surer merely adheres to a specific contract term.

805 F.2d at 737. See also Associates in Adolescent Psychiatry, S.C.

v. Home Life Ins. Co., 941 F.2d 561, 569 (7th Cir. 1991) (CBOE

“held that an insurer’s authority to amend the terms of an an-

nuity contract purchased to fund a retirement plan makes it a

fiduciary under 29 U.S.C. § 1002(21)(A)”), cert. denied, 112 S.

Ct. 1182 (1992). Harris Trust has been unable to cite any authority

in the Seventh Circuit or any other circuit that holds to the

contrary.

To obscure its patent lack of any supporting authority, Harris

Trust suggests that this case involves an insurer’s exercise of discre-

tion that “alters the pension plan’s rights under the contract or

the value of the contract to the plan.” Cross-Petition at 3. The

conduct challenged by Harris Trust, however, does not involve

an alteration of the terms of GAC 50 but rather actions consis-

tent with the terms of the contract.’ As the court below held,

none of these actions could be construed as altering or amend-

ing any of Harris Trust’s rights under the contract or involved

“a grant of power to change terms.” These actions merely reflected

an exercise by Hancock of its “express rights under the contract”

(A-14), and there is no authority in any circuit that holds that

the exercise of such rights implicates ERISA fiduciary duties."

* See supra note 5.

* Harris Trust also argues that Hancock's exercise of its contract rights constitutes

an increase in Hancock's “compensation.” Cross-Petition at Ll. Hancock disputes

that characterization as a factual matter, and there is no support for such a

conclusion in the record. In any event, as the Seventh Circuit noted in Schulist,

adherence to the contract, even in matters of compensation, does not render

an insurer a fiduciary. 717 F.2d at 1132. Harris Trust cites FH. Krear ¢- Co.

v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987), to support

(Footnote continued)

B. Harris Trust’s Contention Is in Conflict

with Numerous Decisions in Other Circuits.

Harris Trust also seeks review on the ground that the deci-

sion below changes existing law and “has opened an enormous

gap in the protections afforded by ERISA’s fiduciary rules.”

Cross-Petition at 7. On the contrary, the Second Circuit's deci-

sion is consistent with a substantial body of judicial authority

that holds that ERISA was not intended to place a person deal-

ing with a pension plan in the position of having conflicting

obligations.

Harris Trust’s theory, if adopted, would have profound implica-

tions for insurance company operations. A General Account con-

tract like GAC 50 typically affords the insurer a variety of con-

tract rights to which the contractholder has expressly agreed.

Those rights are specifically set forth in the contract and are

designed to benefit not just the insurer but all its other General

Account contractholders. For example, GAC 50, as well as Han-

cock’s other participating group annuity contracts, requires that

Hancock employ company-wide procedures, such as income and

expense allocations and dividend formulae, that simultaneously

affect thousands of contracts backed by the General Account.

Hancock is obligated, of course, both under contract terms and

by an extensive body of state laws and regulations, to establish

those procedures and apply them in a manner that is non-

discriminatory as to pension plan and non-pension plan customers

alike. If, as Harris Trust contends, an insurer’s conduct is to be

governed by ERISA’s “solely in the interest of” standard when

it executes such procedures, it would be subjected to irreconcilably

conflicting duties.

its argument. Krear is of no help to Harris Trust, however, because that case

held that the defendants were not ERISA fiduciaries, inasmuch as they had

no fiduciary responsibilities in fixing the terms of an agreement with the pen-

sion plan involved, including the terms relating to their compensation. /d. Krear

noted, in dictum, that a party to a contract may have such control over factors

that affect its compensation, like the percentage of claims paid, so as to become

a fiduciary with respect to compensation. Jd. Krear did not suggest, however.

that a party to a contract would become a fiduciary under ERISA whenever

it had discretion in connection with the exercise of its contract rights.

The courts in a number of circuits have held that Congress

did not intend to impose ERISA’s fiduciary duties in a manner

that would create conflicting obligations.* In Useden v. Acker,

tor example, the Eleventh Circuit, rejecting a claim that a com-

mercial lender to a plan acts as a fiduciary in exercising its rights

under the loan agreement, recognized that such conduct, while

affecting the interests of the plan, also affects the interests of

the lender’s shareholders and depositors:

We cannot agree with appellant's claim that the bank’s

mere exercise of its contractual rights made the bank

an alter ego of the named Plan fiduciaries. . . .

To accept appellant's theory would subject any com-

mercial lender acting within ordinary commercial

custom to inconsistent obligations. On the one hand,

a bank’s duty to its shareholders and depositors would

demand that it enter into only those agreements which

accord it sufficiently exacting security rights. On the

other hand, a bank’s resulting fiduciary duty to the

plan-borrower would irreconcilably preclude its ex-

ercise of those crucial rights.

947 F.2d 1563, 1575 (lth Cir. 1991), petition for cert. filed sub

nom. Useden v. Greenberg Traurig Hoffman Lipoff Rosen ¢>

Quentel, 60 U.S.L.W. 3843 (U.S. June 1, 1992) (No. 91-1944).”

The reasoning of Useden and of these other cases applies with

equal force here.

* See, e.g., Levy v. Lewis, 635 F.2d 960 (2d Cir. 1980); United Indep. Flight

Officers, Inc. v. United Air Lines, Inc.. 756 F.2d 1262, 1268 (7th Cir. 1985):

see also Hagan v. Kaiser Aluminum ¢ Chem. Corp., 668 F. Supp. 1298, 1301

(E.D. Mo. 1987); Amato v. Western Union Int1, Inc., 596 F. Supp. 963, 968

(S.D.N.Y. 1984), affd in part, rev'd in part, 773 F.2d 1402 (2d Cir. 1985), cert.

dismissed, 474 U.S. 1113 (1986); Sutton v. Weirton Steel Div. of Nat Steel

Corp., 567 F. Supp. 1184, 1201 (N.D. W. Va.), affd, 724 F.2d 406 (4th Cir.

1983), cert. denied, 467 U.S. 1205 (1984).

” The questions presented in the pending Petition for Writ of Certiorari in

Useden do not affect the proposition for which that case is cited here. Those

questions concern whether ERISA authorizes a monetary remedy against a

non-fiduciary who knowingly participates in a fiduciary’s breach of duty. See

61 U.S.L.W. 3093 (U.S. Aug. 11, 1992).

An insurer does not act in a fiduciary capacity when it exer-

cises its rights under a General Account group annuity contract,

because it cannot act “solely in the interest of” any one contrac-

tholder without simultaneously breaching its obligations to its

other contractholders. The Second Circuit’s holding merely con-

firmed the conclusion reached by all the other courts that have

considered this issue.

I.

THE CONTENTION THAT HANCOCK IS SUBJECT

TO ERISA FIDUCIARY DUTIES WITH RESPECT

TO ALL THE ASSETS HELD UNDER GAC 50

DOES NOT MERIT REVIEW

Having persuaded the court below that Hancock should be

subject to ERISA fiduciary duties with regard to the “free funds”

under GAC 50, Harris Trust now claims that the Second Cir-

cuit “did not go far enough.” Cross-Petition at 12. It contends

that the Second Circuit should have held that Hancock is a

fiduciary with regard to all the assets under GAC 50. Cross-

Petition at 3. Despite Harris Trust’s assertions to the contrary,

no circuit court has gone that far. There is no conflict, therefore,

and no other reason why this Court should grant review.

A. The Second Circuit’s Decision Does Not Conflict

with the Decision of Any Other Circuit Court.

The Second Circuit rejected Harris Trust’s contention that

Hancock should be considered a fiduciary with respect to all

the assets held under GAC 50. Rather, it found that “Hancock

provides guarantees with respect to one portion of the benefits

derived from the contract” (A-8 to A-9) and that,

at least to the extent it provides for benefits guaranteed

by Hancock, GAC 50 is a guaranteed benefit policy

and Hancock does not act as a fiduciary in administer-

ing it.

(A-8) (emphasis added). Contrary to Harris Trust’s contention,

that determination is not inconsistent with the opinions in Peoria

Union Stock Yards Co. Ret. Plan v. Penn Mut. Life Ins. Co.,

10

698 F.2d 320 (7th Cir. 1983), and Jacobson v. John Hancock

Mut. Life Ins. Co., 662 F. Supp. 1103, withdrawn, set aside ¢>

vacated, 662 F. Supp. 1112 (D. Conn. 1987), the two decisions

ostensibly in conflict with the decision below! In any event, the

opinions in Peoria Union and Jacobson are of limited preceden-

tial value, as even the courts that issued them recognized.

Peoria Union involved a contract which the Seventh Circuit

described, on the basis of the pleadings before it, as one that

(unlike GAC 50) did not provide guarantees with respect to any

of the benefits derived from the contract.” Instead, the contract

was said to involve a so-called “accumulation phase” during

which the insurer did not guarantee any benefits. 698 F.2d at

327. As described by the Seventh Circuit, the employer could

use funds accumulated in that phase to purchase annuities from

the defendant insurance company or withdraw them to pur-

chase the annuities from another insurer. Id. at 322. The

employer had in fact withdrawn funds to purchase annuities

on behalf of retired employees. Id. at 323.

The sole issue considered in Peoria Union was whether the

“guaranteed benefit policy” exception applied to the funds held

by the insurer during the “accumulation phase.” It did not ad-

dress whether the exception applied in any respect to benefits

guaranteed under the contract or to the annuities purchased with

funds withdrawn from the contract.

While the Second Circuit found that GAC 50 has at all times

had “free funds,” i.€., assets that the court characterized as “not

referable to guaranteed benefits,” it is undisputed that GAC 50

" Peoria Union and Jacobson, to the extent that they hold that an insurance

company has any fiduciary duty with respect to a General Account contract

that provides for guaranteed benefits, are substantively incorrect for the reasons

stated in Mack Boring and Parts Corp. v. Meeker Sharkey Moffitt, 930 F.2d

267 (3d Cir. 1991), and urged by Hancock in its Petition in Docket No. 92-1074.

° Peoria Union involved an appeal from the district court's dismissal of the

complaint on the ground that it did not state a claim for relief under ERISA.

698 F.2d at 328. The Seventh Circuit reversed, holding that a claim for ERISA

had been stated. Jd. at 327.

11

also contained substantial assets supporting guaranteed benefits

(A-8)" Peoria Union does not conflict with the decision below,

therefore, because it does not address ERISA’s applicability to

that portion of a group annuity contract that supports guaranteed

benefits.”

Harris Trust’s argument, to the extent that it relies upon Peoria

Union, fails for other reasons as well. Upon motion for rehear-

ing, the Seventh Circuit expressly acknowledged the limited

nature of its opinion, which “merely reverse[d] the dismissal of

the complaint,” and it reserved judgment on a “number of

arguments” concerning ERISA’s applicability that the court had

not considered. 698 F.2d at 328. The Seventh Circuit’s candid

statement that its opinion should not be regarded as dispositive

of ERISA’s applicability to the contract at issue diminishes

whatever precedential value it might otherwise have.

For similar reasons, Jacobson, a district court decision within

the Second Circuit, does not support Harris Trust’s contention.

Like Peoria Union, Jacobson involved the question whether the

insurance company defendant — Hancock — was an ERISA

fiduciary with respect to assets held under a group annuity con-

tract that were not associated with guaranteed benefits.

Jacobson did not, as Harris Trust asserts, hold that “Hancock

was an ERISA fiduciary as to all of the funds held under the

® In its Brief in Opposition to Petition for a Writ of Certiorari (“Opposition

Brief”) in Docket No. 92-1074, Harris Trust acknowledged that “Hancock pro-

vides guarantees with respect to one portion of the benefits derived from the

contract.” Opposition Brief at 3.

“ Harris Trust conceded as much in its Opposition Brief in Docket No. 92-1074.

There, it stated:

In Peoria Union Stock Yards Co. Retirement Plan v. Penn Mut.

Life Ins. Co., 698 F.2d 320, 327 (7th Cir. 1983), the Seventh Cir-

cuit recognized that group annuity contracts such as GAC 50 can

be divided into guaranteed and non-guaranteed aspects for pur-

poses of an ERISA analysis. In Peoria, the Seventh Circuit con-

cluded that the non-guaranteed portion of the contract was

governed by ERISA.

Opposition Brief at 5.

12

contract.” Cross-Petition at 17. Quite the opposite: Jacobson held

that the “guaranteed benefit policy” exception covers “that phase

of a contract in which the obligation of the insurer to guarantee

the benefits payable to plan participants is fixed.” 662 F. Supp.

at 1108. Thus, Jacobson is flatly contrary to Harris Trust’s

argument.

Jacobson lacks significance for other reasons as well. To begin

with, Jacobson is only a decision of a district court within the

Second Circuit. The law of the Second Circuit is expressed in

the decision below, not in Jacobson. Jacobson cannot properly

be used, therefore, to support Harris Trust’s claim that there is

a “conflict” between the circuits. F inally, the Jacobson decision

lacks any precedential value, because it was subsequently

withdrawn and vacated by the district court."

* Harris Trust correctly characterized Jacobson in its Opposition Brief in Docket

No. 92-1074:

The principles articulated in Peoria have also been applied in the

context of a contract nearly identical to GAC 50. Jacobson v. John

Hancock Mut. Life Ins. Co., 655 F. Supp. 1290, withdrawn pur-

suant to settlement, 662 F. Supp. 1103, 1112-13 (D. Conn. 1987). In

Jacobson, the pension plan trustees alleged and the Court held that

Hancock was an ERISA fiduciary with respect to funds held under

a contract which were not associated with guaranteed benefits.

Opposition Brief at 6 (emphasis added).

“ In entering its order vacating its prior decision, the district court noted that

“there are genuine issues with respect to whether, in enacting ERISA, Con-

gress intended that insurance companies be deemed to be fiduciaries, as defined

by ERISA, with respect to assets contributed pursuant to group annuity con-

tracts and held in their general investment accounts .. . .” 662 F Supp. at 1113.

The district court directed that its previous decision,

together with the findings and conclusions therein, [be] withdrawn,

set aside and vacated, and shall be of no force or effect for use against

defendant, its successors and assigns, by plaintiffs, by the Pension

Fund or by third parties, for collateral estoppel or other preclusive

Purposes... .

Id.

13

B. Harris Trust's Contention Is Wholly at Variance

with the “Guaranteed Benefit Policy” Exception.

Harris Trust argues that the Second Circuit’s decision

misconstrues ERISA’s “guaranteed benefit policy” exception. The

Second Circuit expressly found that “Hancock provides

guarantees with respect to one portion of the benefits derived

from the contract” (A-8 to A-9) and that, “at least to the extent

it provides for benefits guaranteed by Hancock, GAC 50 is a

guaranteed benefit policy” (A-8). Harris Trust contends, however,

that the “crucial question” governing the applicability of the

exception “is whether the availability of funds for benefits is

dependent upon Hancock’s success or failure as an investor.”

Cross-Petition at 14. That contention, of course, is totally di-

vorced from the language of the exception, which states that

a “guaranteed benefit policy” is “an insurance policy or con-

tract to the extent that such policy or contract provides for

benefits the amount of which is guaranteed by the insurer.” 29

U.S.C. § 1101(b)(2)(B).”

The proposition urged by Harris Trust in its Cross-Petition,

if adopted by this Court, would eviscerate the “guaranteed

benefit policy” exception.” Vittually all General Account group

" Harris Trust also argues that Hancock is a fiduciary with respect to all the

funds held under GAC 50 since “Hancock has chosen to commingle assets back-

ing its guarantees with those representing free funds.” Cross-Petition at 15.

That argument lacks any factual basis: Hancock has not “chosen to commingle”

any assets. Quite the contrary, as is clear in the record, GAC 50 expressly re-

quires that the premiums received by Hancock be placed in Hancock's General

Account (A-4).

“ Harris Trust also urges that GAC 50 does not come within the “guar-

anteed benefit policy” exception, because, in its view, GAC 50 is not an

“insurance policy or contract” within the meaning of 29 U.S.C. § 1101(b)(2)(B),

under tests that Harris Trust would import from cases construing the fed-

eral securities laws. Cross-Petition at 20. That issue was put to rest by

the district court on the basis of the undisputed facts discussed at length

in Harris I (A-53 to A-56), and the Second Circuit did not disturb those

findings. Moreover, the tests urged by Harris Trust have no application to an

analysis of the “guaranteed benefit policy” exception. In effect, Harris Trust

(Footnote continued)

a

14

annuity contracts provide for some form of participation in the

General Account’s investment experience, through, for exam-

ple, the payment of a dividend. Every such participating con-

tract will at times have associated with it what Harris Trust calls

“free funds.” Under the construction urged by Harris Trust, no

such participating contract would ever qualify under ERISA as

a “guaranteed benefit policy,” even to the extent of guaranteed

benefits. There is no support for such a result under the statute,

its legislative or administrative history.” or any judicial precedent.

Harris Trust’s contention that Hancock should be subject to

ERISA fiduciary duties with respect to all the assets held under

GAC 50 — despite the fact that the contract has at all times pro-

vided substantial guaranteed benefits to plan participants — is

contrary to the language of the statute and without any judicial

support. The Cross-Petition fails, therefore, to present any col-

orable basis for review.

would have this Court engraft onto ERISA a prerequisite test for what con-

stitutes “insurance” that is not required by the terms of § 1101(b)(2)(B).

” Harris Trust purports to rely upon two DOL advisory opinions, Advisory

Opinions 78-8A (Mar. 13, 1978) and 83-51A (Sept. 21, 1983), to suggest that

thee DOL would consider the extent to which “investments” are guaranteed

in determining whether a General Account contract is a guaranteed benefit

policy. Cross-Petition at 19-20. As Hancock's Petition in Docket No. 92-1074

points out, however, these opinions address separate account, not General Ac-

count, contracts. Petition at 15. Moreover, as the district court noted in

Harris I, they are merely advisory opinions that, under ERISA, may be relied

upon only by the party submitting the request for an opinion and only to the

extent the actual situation conforms to that described in the request (A-60).

15

Conclusion

For all the foregoing reasons, the Court should deny Harris

Trust’s Cross-Petition for a Writ of Certiorari.

February 22, 1993

Respectfully submitted, .

Howarp G. KrIsTou

Counsel of Record

Rosert M. Peak

Jerrrey N. LerBeLy

Reboul, MacMurray, Hewitt,

Maynard & Kristol

45 Rockefeller Plaza

New York, New York 10111

(212) 841-5700

Attorneys for Cross-Respondent

RosauieE A. HaAILey

John Hancock Mutual

Life Insurance

Company

RICHARD J.J. SCAROLA

Of Counsel