Appealed from: United States Court of Appeals, Ninth Circuit
Oral argument: April 24, 2007
Employee Retirement Income Security Act (ERISA), Fiduciary Duty, Bankruptcy, Pension Plans, Annuity
The Employee Retirement Income Security Act of 1974 (ERISA) requires private sector pension plan managers to discharge their management duties solely in the interest of plan participants and beneficiaries. When Crown Vantage, Inc. entered into bankruptcy proceedings, it terminated its existing pension plan by purchasing an annuity, rather than merging the plan into a group of plans administered by PACE International Union (PACE), which represented a number of Crown’s employees. On behalf of those employees, PACE then sued Crown for failure to discharge its ERISA duties by adequately investigating the proposed merger. The Court of Appeals for the Ninth Circuit upheld the lower court's decision that Crown’s failure to adequately consider the merger was a violation of its fiduciary duty under ERISA. The Supreme Court’s decision in this case will determine whether an employer’s adoption, modification, or termination of a pension plan can be based on its own business needs or the best interests of its employees.
Whether a pension plan sponsor’s decision to terminate a plan by purchasing an annuity, rather than to merge the pension plan with another, is a plan sponsor decision not subject to ERISA’s fiduciary obligations.
When an employer decides to terminate a pension plan by purchasing an annuity, is that decision governed by the obligations set out by ERISA?
Crown Vantage, Inc. was the parent company of Crown Paper Co. (collectively, “Crown”), which employed 2,600 members of PACE International Union (“PACE”). Beck v. Pace Int'l Union, 427 F.3d 668, 671 (9th Cir. 2005) (Beck II). In March 2000, amid financial turmoil, Crown filed for Chapter 11 bankruptcy and began liquidating its assets, including its pension plans. Id. at 672. The Pension Benefit Guarantee Corporation (PBGC), an independent agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect the pensions of nearly 44 million American workers and retirees, filed proofs of claims totaling several millions of dollars for liability the agency would have assumed if it were forced to assume the liabilities of the Crown pension plans. Id. The United States Bankruptcy Court for the Northern District of California, viewing the proofs of claims as a “stumbling block,” was hesitant to grant Crown Chapter 11. Id. Consequently, Crown’s board of directors began seeking out alternative ways to terminate the pension plans. Id.
In July 2001, the Crown board began obtaining quotes “for the purchase of an annuity as a means of effecting a ‘standard termination’ of the plans under Section 4041(b) of ERISA, 29 U.S.C. § 1341(b).” Id. PACE, however, “proposed a merger of the seventeen pension plans that covered Crown’s hourly employees into the PACE Industrial Union Management Pension Fund (PIUMPF),” a multiemployer pension fund founded in 1963 for PACE union members. Id. The union favored this option because PIUMPF in recent years had paid an additional monthly check per year and thus offered the possibility that retired employees might receive more than their minimum benefits. Id. Ultimately, despite looking into the possibility of a merger with PIUMPF, the board decided to purchase an annuity as a means of terminating the twelve merged plans. Id. at 673.
PACE, on behalf of members and former members who were plan participants, along with Edward Miller and Jeffrey Macek, on behalf of themselves and other non-union plan participants, filed suit in the United States Bankruptcy Court for the Northern District of California. Id. PACE and the plan participants “alleged that Crown breached its fiduciary duties under ERISA by failing to ‘perform a diligent investigation into the PIUMPF [merger] proposal,’ and by failing to discharge its duties ‘solely in the interest of the participants and beneficiaries.’” Id. The court granted a preliminary injunction “ordering all assets remaining in the pension plan to be placed in an interest-bearing account, and that no reversion of assets to Crown could occur” pending a final decision on the allocation of the assets. Id.
Crown appealed to the District Court for the Northern District of California, arguing that it did not breach fiduciary obligations in terminating the plan since “ERISA does not envision termination by merger.” Beck v. Pace Intern. Union, 2003 WL 745114, *6 (N.D. Cal., Jan. 10, 2003) (Beck I). The district court affirmed the bankruptcy court’s determination that Crown breached its fiduciary duties, concluding that ERISA required Crown to investigate the PIUMPF merger before deciding to purchase annuities. Id. at *7–8.
Crown then appealed the case to the Court of Appeals for the Ninth Circuit. See generally, Beck II, 427 F.3d 668. Crown argued “that both ERISA and the terms of the pension plan prohibit[ed] merger into a multiemployer plan as a means of termination; thus its decision to terminate, rather than to merge, was discretionary and not subject to fiduciary obligations.” Id. at 674. While the bankruptcy court did not explicitly determine whether ERISA permits merger into a multiemployer plan as a means of terminating a single employer plan, Id., the Ninth Circuit held that “under ERISA and its regulations, merger into a multiemployer plan is not a prohibited means of terminating a pension plan.” Id. at 671. The Ninth Circuit concluded that the district court was correct in finding that Crown had breached its duties under ERISA by failing to consider the merger. Id. at 679–80.
The United States Supreme Court granted certiorari on January 19, 2007.
The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law that sets minimum standards for private sector pension plans and regulates the tax effects of employee benefit plan dealings. 29 U.S.C. § 1001 et seq. ERISA also establishes standards of conduct, responsibility, and obligation for “plan fiduciaries” who exercise any discretionary authority over the management of the plan. 29 U.S.C. § 1002 (21)(A)(i). Among other obligations, ERISA requires plan fiduciaries to discharge their duties solely in the interest of plan participants and beneficiaries. See Beck II, 427 F.3d at 673.
In this case, PACE argues that Crown violated its fiduciary obligations under ERISA by not adequately considering the proposed merger. See Id. at 671. Merging the plans into PACE’s pension fund, PIUMPF, would have been in the best interest of the plan beneficiaries, according to PACE, because in recent years PIUMPF paid an extra check per year, offering the possibility that retirees would receive more than their minimum benefits.” Id. at 672. However, Beck (on behalf of Crown) argues that Crown did not violate its obligations, because “merger into a multiemployer plan is an impermissible means of terminating a pension plan under ERISA, its implementing regulations, and the terms of the pension plan.” Id. at 671. In other words, Beck argued that since the merger would not have been allowed under ERISA regulations in the first place, Crown’s decision to terminate the plan by purchasing an annuity did not violate their fiduciary duties under ERISA.
If the Supreme Court reverses the Court of Appeals for the Ninth Circuit and decides for Beck, employers can continue dealing with their pension plans based on their own needs. Under current law, “an employer is generally free under ERISA to adopt, modify or terminate an employee benefit plan based upon its own business interests.” See Secretary of Labor's Amicus Curiae Brief in Support of Petition for Rehearing at 4, Beck v. Pace Int'l Union, 427 F.3d 668 (9th Cir. 2005) (Nos. 03-15303, 03-15331). An employer’s pension-related decisions, such as whether to have a plan at all, the terms of the plan, and issues of plan design “generally are left to the employer acting in its capacity as an employer, not as a fiduciary.” Id. Currently, defined benefit plans are less popular than they once were; employers have been “freezing or replacing them with 401(k) plans for the past 20 years.” Emily Whipp, On the Docket: Beck, Jeffrey & Crown Paper Co. v. PACE International Union, et al., Medill School of Journalism (Jan. 21, 2007) (quoting Mark Johnson, pension and bankruptcy law expert). Therefore, a decision for Beck might benefit employers by allowing them to terminate defined benefit plans freely, but a termination might not be in the best interests of the plan’s beneficiaries.
If the Supreme Court upholds the Ninth Circuit and decides for PACE, employers who manage pensions subject to ERISA will face more stringent regulation, and the decision to terminate a plan may itself become subject to ERISA. As a consequence, employers would be required to make pension decisions based on the best interests of the beneficiaries, not their own business interests. Employees might be better off, but at the expense of their employers, who may “have to choose merger over termination even if the termination would save their company money.” Whipp, On the Docket: Beck v. PACE.
Crown argues that the Ninth Circuit misconstrued ERISA when it held that Crown had a fiduciary duty to consider PACE’s merger proposal. Crown contends that it had no such fiduciary duty for two reasons—the decision to merge a pension plan is never a fiduciary function, and ERISA’s text and structure strongly suggest that merger is not a method of terminating a pension plan. Brief for Petitioner at 9.
The Decision to Merge a Pension Plan Is a “Plan Sponsor” Function Not Subject to ERISA Fiduciary Duties
Crown seeks to distinguish between an employer’s role as “plan sponsor,” in which the employer may pursue business interests contrary to the interests of plan members, Id. at 13, and an employer’s role as “plan administrator,” in which the employer is obligated to act in the best interests of the plan members. Id. at 13–14. Crown contends that “‘the threshold question is not whether [Crown’s actions] adversely affected a plan beneficiary’s interest, but whether [Crown] was acting as a fiduciary (that is, performing a fiduciary function) when [it terminated the pension plans].’” Id. (quoting Pegram v. Herdrich, 530 U.S. 211, 226 (2000)).
Crown argues that the Supreme Court has distinguished between “a plan sponsor’s non-fiduciary functions and a plan administrator’s fiduciary functions.” Id. at *14. As the Court explained in Lockheed Corp. v. Spink, 517 U.S. 882 (1996), employers that decide to adopt, modify, or terminate pension plans are not acting as fiduciaries, but are instead comparable to settlers of a trust. 517 U.S. at 890. In Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999), the Court reaffirmed Spink and held that the act of amending a plan “does not constitute the action of a fiduciary.” 525 U.S. at 444. Crown suggests that the Court should apply the same “functional analysis” in this case—an analysis supported by ERISA’s definition of fiduciary. Brief for Petitioner at 15.
The Ninth Circuit recognized that Crown’s decision to terminate its pension plans was a plan sponsor (as opposed to plan administrator) decision not subject to ERISA’s fiduciary duties. Brief for Petitioner at 16. Nonetheless, the Ninth Circuit concluded that the implementation of a decision to terminate is a decision subject to fiduciary duties. Id. Rather than evaluating a party’s fiduciary obligations through ERISA’s functional analysis, which focuses on the nature of the decision, Crown argues that the Ninth Circuit’s decision creates a new “temporal” test that wrongly focuses on when a merger-related decision has been made. Id. at 18. Under the Ninth Circuit’s test, “a decision concerning merger made before a decision to terminate would be a plan sponsor function without fiduciary obligation as it involves plan structure and does not involve ‘implementation’ of termination.” Id. On the other hand, “a decision concerning merger made after a decision to terminate is a fiduciary decision, according to the Ninth Circuit, because it concerns the ‘implementation’ of a termination decision.” Id.
Crown argues that the Ninth Circuit’s temporal test is wrong because ERISA’s definition of “fiduciary” does not suggest that the same function can be non-fiduciary at one moment and fiduciary at a later moment. Id.; see also 29 U.S.C. § 1002(21)(A). Crown contends that “whether an employer wears its fiduciary or non-fiduciary hat depends on whether the employer is ‘performing a fiduciary function,’ not when the function is performed.” Id. at 19 (quoting Pegram, 530 U.S. at 226); see also Spink, 517 U.S. at 890. Under the Ninth Circuit’s test, an employer—such as Crown—acting in its non-fiduciary capacity could reject a union’s merger proposal before making a decision to terminate. Id. On the other hand, an employer acting as a fiduciary would be required to reconsider the same merger proposal after a decision to terminate. Id. Therefore, “whenever a plan sponsor opts to terminate, the Ninth Circuit’s decision would require the employer (now wearing its hat as plan administrator, ‘implementing’ the termination) to reconsider the same merger decision that it made as plan sponsor before termination.” Id. Crown argues that ERISA’s functional definition of fiduciary obligation does not compel such a strange result. Id.
PACE, on the other hand, argues that the Ninth Circuit’s decision rests on well-established ERISA principles and is consistent with the law of the Supreme Court and other federal courts. Brief in Opposition at 11. Although the decision to terminate a plan is generally a sponsor function, PACE contends that “ERISA places implementation expressly and exclusively in the hands of the administrator.” Id. at 9 (quoting 29 U.S.C. § 1341). Implementation, argues PACE, is a “defined function” of the administrator. Id. Under Section 1341(b)(3)(A), “the administrator has a choice of options in providing full benefits and, of course, a concomitant duty to investigate those options.” Id. PACE argues that the cases cited by petitioner “do not deal with termination procedures, or with the employer as administrator, or with an actual conflict between the employer as sponsor and employer as administrator.” Id.
When an employer chooses to take on the functions of an administrator, PACE argues that the employer also takes on the fiduciary obligations of an administrator. Id. (citing Varity Corp. v. Howe, 516 U.S. 489, 498-505 (1996)). In District 65, UAW v. Harper & Row, Publishers, Inc., 670 F.Supp. 550 (S.D.N.Y. 1987), the employer made an allegedly unreasonable interest rate assumption when calculating the amount of lump-sum distributions of plan assets. Id. at 10. The district court in that case held that the employer could be liable as a fiduciary because it exercised “actual control over the disposition of plan assets” and because “its acts with respect to implementing the termination required discretionary decisions on its part.” Id. PACE argues that the same two factors are present in this case. Id. Furthermore, PACE argues that even when an employer is acting in its capacity as a plan sponsor, it is obligated to investigate options so that it can make informed choices. Id.
ERISA’s Text and Structure Establish that Merger Is an Alternative to—Not a Means of—Standard Termination of a Pension Plan
The Ninth Circuit reasoned that whether Crown breached any fiduciary duty turned on “whether merger into a multiemployer plan is a permissible means of implementing a decision to terminate.” Brief for Petitioner at 20 (internal quotations omitted). The court concluded that, under ERISA, a merger can serve as a means of effecting plan termination. Id. Crown argues that the Ninth Circuit “misconstrued the text of ERISA’s standard termination provision, and disregarded ERISA’s structure.” Id.
Crown contends that the language of 29 U.S.C. § 1341 precludes the possibility that merger can serve as means of terminating a pension plan. Id. Section 1341 provides that in a standard termination, a plan administrator “shall distribute the [plan] assets” by either “(i) purchas[ing] irrevocable commitments from an insurer to provide all benefit liabilities under the plan, or (ii) in accordance with the provisions of the plan and any applicable regulations, otherwise fully provid[ing] all benefit liabilities under the plan.” 29 U.S.C. § 1341. According to Crown, merger into a multiemployer plan cannot fulfill either of the statutory requirements for standard termination because merger does not “distribute” plan assets, nor does it “fully provide all benefits liabilities.” Brief for Petitioner at 22. Crown argues that the merger of a single-employer plan with a multiemployer plan fails to satisfy either of Section 1341(b)(3)(A)(ii)’s two requirements—actual payment to plan participants and full satisfaction of ERISA liabilities. Id. at 24 (citing 29 C.F.R. § 4041.28(c)(2)). Merger of a single-employer plan with a multiemployer plan—such as the proposed PIUMPF merger—fails to satisfy either of these requirements. Id. Instead, assets and liabilities are transferred to the multiemployer plan, where they are not allocated solely to the benefit of the original plan’s participants. Id. Crown argues that, in this case, the mere transfer of plan assets does not satisfy § 1341(b)(3)(A)’s requirement that plan assets be distributed to the plan participants. Id. at 25. Consequently, the Ninth Circuit erred in holding that merger could serve as a means of implementing a standard termination under § 1341(b)(3)(A)(ii).
PACE concedes that 29 CFR § 4041.23(c) refers only to spin-off/terminations—not to mergers—but contends that the only difference between a spin-off/termination and the present case is that the plan in this case was not newly created, but was a preexisting multiemployer plan. Brief in Opposition at 13. PACE contends that the failure to include mergers in this regulation should not be read as an implicit prohibition, but simply means that PBGC regulations do not expressly cover all possible means of terminating a plan. Id. at 13–14. Therefore, PACE contends that merger can be a permissible means of implementing a standard termination under § 1341(b)(3)(A)(ii).
The Supreme Court’s decision in this case will determine whether employers must base their decision to adopt, modify, or terminate a pension plan on their own business interests or the interests of their employees and plan beneficiaries. If the Court upholds the Ninth Circuit and decides for PACE, employers will be required by ERISA to make their plan management decisions based on the beneficiaries’ best interests, but they may be forced to make decisions that are not the best for the company’s own financial position. If the Court reverses the Ninth Circuit and decides for Beck, employers can continue making plan management decisions based on their own business interests, but employees may be adversely affected.