By Pension and Benefits Editorial Staff
The distress termination provisions of ERISA Sec. 4042(c) do not require a judicial adjudication prior to termination of a distressed pension plan, the U.S. Court of Appeals in Cincinnati (CA-6) has ruled. Rejecting the arguments made by retirees representing the 20,000 participants in an employer’s Salaried Plan, the court also concluded that the participants’ due process rights were not violated by the termination, and the PBGC did not act in an arbitrary and capricious manner.
During the 2008 financial crisis, Delphi Corporation—an automotive parts supplier and former subsidiary of General Motors Corporation (GM)—and GM, each facing their own financial troubles, discussed the fate of Delphi’s troubled Hourly and Salaried defined benefit plans. The PBGC and the Treasury Department played key roles in the discussions. While initially it seemed possible that GM would assume liabilities for both the Hourly and Salaried Plans, ultimately the parties agreed to save the Hourly Plan but to terminate the Salaried Plan. Under the agreement, GM would assume the Hourly Plan’s pension liabilities and the PBGC would terminate the Salaried Plan, releasing any remain liens and claims on Delphi’s assets.
In July 2009, the PBGC issued a Notice of Determination to Delphi, notifying it that the agency had determined that the Salaried Plan must be terminated and that the PBGC should be appointed as statutory trustee of the plan. In August 2009, the PBGC and Delphi executed a termination and trusteeship agreement that terminated the Salaried Plan effective July 31, 2009.
The Salaried Plan participants filed suit, arguing that ERISA Sec. 4042(c) requires a judicial adjudication before a plan may be terminated, that termination of the plan violated their due process rights, and that the PBGC’s decision to terminate the Salaried Plan was arbitrary and capricious. A district court granted summary judgment to the PBGC. The Sixth Circuit affirmed the lower court’s judgment.
Distress termination. The Sixth Circuit rejected the retirees’ assertion that ERISA Sec. 4042(c) requires a judicial adjudication prior to termination of a distressed pension plan. The court concluded that ERISA Sec. 4042(c)(1) provides two alternative mechanisms for terminating a distressed pension plan: (1) by application to a United States district court for a decree that the plan must be terminated, or (2) by agreement between the PBGC and the plan administrator. This is the best interpretation of the statutory language, the court explained, noting for example that the subsection uses permissive language when discussing an in-court adjudication before terminating a pension plan. Also, the only other circuit court to directly interpret the statutory language at issue reached the same conclusion (see Jones & Laughlin Hourly Pension Plan v. LTV Corporation, 834, F.2d 197 (2d Cir. 1987)).
Due process. The appellate court also rejected the retirees’ contention that their due process rights were violated because they were not afforded a hearing prior to plan termination. The retirees do not have a property interest in the full amount of their vested pension benefits because the Salaried Plan document—the source of the retirees’ proposed property interest—provides that only funded benefits at the time of plan termination are nonforfeitable.
The court also rejected the retirees’ contention that the PBGC’s interpretation of the Salaried Plan document would violate the anti-cutback rule in ERISA Sec. 204(g)(1). The anti-cutback rule governs plan amendments, not a termination.
Decision to initiate termination proceedings. The Sixth Circuit also determined that the PBGC did not act in an arbitrary or capricious manner when it initiated termination proceedings under ERISA Sec. 4042(c). The PBGC’s decision to terminate the Salaried Plan was supported by sufficient evidence, even if a different conclusion might have been reached. For example, despite the retirees’ contention that GM’s assumption of the Salaried Plan was a viable option “until PBGC folded under pressure by the Treasury Department,” ample countervailing evidence demonstrated that GM was unwilling to assume the Salaried Plan’s liabilities.
Source: Black v. PBGC (CA-6).
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