Pension & Benefits News Employer not bound by pension contribution delinquency policy in trust agreement
Monday, November 4, 2019

Employer not bound by pension contribution delinquency policy in trust agreement

By Pension and Benefits Editorial Staff

Until it executed an amendment to a collective bargaining agreement in 2014, an employer had not agreed to be bound to a trust agreement and its delinquency policy with respect to pension contributions. Thus, the U.S. Court of Appeals in New York City (CA-2) vacated the judgment of a district court which had awarded a pension fund damages for delinquent pension contributions under ERISA Sec. 515 that included an interest rate set forth in the delinquency policy. On remand, the district court was to redetermine the correct amount of interest owed by the employer.

Trust agreement. An employer provides food services to nursing homes. The employees at one of its nursing home clients are members of a union. On September 1, 1998, the employer entered into a CBA with a predecessor union and agreed to make pension fund contributions for bargaining unit employees. An article in the CBA stated that the fund would be managed under the terms of an agreement and declaration of trust. Under the trust agreement, an employer that failed to pay contributions would be obligated to pay, in addition to any penalties under the CBA, interest on the unpaid contribution as set forth in the agreement.

In 2008, the trustees of the pension fund established the first version of the delinquency policy, which included a 10% annual interest rate. The trustees revised that rate effective July 1, 2013, which lowered the interest rate to 9%.

On April 20, 2014, the employer executed a memorandum of agreement (MOA) with the union, which continued in full force the terms of the CBA for the period from August 1, 2013, through July 31, 2014, and also added a new article by which the employer adopted the trust agreement.

Between 2008 and 2015, the employer failed to make the required contributions to the pension fund. The fund conducted two audits of the employer’s records that discovered some of these unpaid contributions, after which the fund filed this suit. A third audit increased the amount that the fund sought to recover. The district court granted summary judgment to the fund as to the unpaid contributions discovered in the second audit. Thereafter, the district court held a bench trial regarding issues surrounding the remaining unpaid contributions discovered by the first and third audits.

The district court held that the fund was entitled to recover the remaining unpaid contributions. The employer did not challenge that holding regarding the amount of principal owed. However, the district court also held that the employer was required to pay the interest rate stated in the delinquency policy on all the unpaid contributions. It rejected the employer’s argument that it was not bound to the delinquency policy’s interest rate until it executed the 2014 MOA.

Delinquency policy. On appeal, the employer argued that the district court erred by applying the delinquency policy’s interest rate to its unpaid contributions beginning in 2008, rather than from August 1, 2013 (the effective date of the 2014 MOA). For its part, the fund contended that because the 1998 CBA “referenced” the trust agreement, the employer was already bound to the agreement and to any delinquency policy established thereunder as of 1998. Moreover, the fund also argued that even if the employer did not agree to be bound to the trust agreement before the 2014 MOA, the fund’s trustees were entitled to unilaterally impose that rate on the employer.

Interest rate. Under ERISA Sec. 502(g)(2), “interest on unpaid contributions shall be determined by using the rate provided in the plan, or, if none, the rate prescribed under” Code Sec. 6621. “The plan” in this context may refer, the court explained, to the trust agreement or to the contract under which the plan was formed. To impose a plan-provided interest rate on a delinquent employer, there is an additional requirement: The employer must be a signatory—or otherwise have agreed to bind itself—to the plan document. The Second Circuit’s ruling in Jaspan v. Glover Bottled Gas Corp. (80 F.3d 38 (2d Cir. 1996)) plainly requires that an employer must objectively manifest an intent to be bound to an ERISA plan document, not merely note the document’s existence, or acknowledge that a future trust agreement will manage operation of the fund, as was the case in this instance.

Moreover, the Supreme Court held in CNH Industrial, N.V. v. Reese (138 S. Ct. 761 (2018)) that CBAs and ERISA plan documents “must be interpreted according to ordinary principles of contract law.” As with all contracts, “where the words of a contract in writing are clear and unambiguous, its meaning is to be ascertained in accordance with its plainly expressed intent.”

Applying these ordinary contract-interpretation principles, the Second Circuit found that the employer did not bind itself to the trust agreement—and the interest rate established under its delinquency policy—until after it agreed to the MOA modifying the CBA in 2014. The 1998 CBA stated, “the parties understand that the pension fund will be held and managed under the terms and provisions of an agreement and declaration of trust to be executed in connection with the fund.” The appeals court agreed with the employer’s interpretation that the 1998 CBA language memorialized the parties’ understanding that the fund—not the employer—would be governed by the terms of a future trust agreement.

The appeals court also rejected the fund’s alternative argument that applying ERISA-plan-based interest provisions is so fundamental to the functioning of a fund that its trustees may unilaterally impose such provisions on a delinquent employer. The court observed that allowing a fund’s trustees to unilaterally impose on an employer an interest rate the trustees selected presents a considerable concern of fairness to the employer. In this case, a substantial portion of the damages the fund was awarded in the district court derived from interest rates to which the employer did not agree. Thus, the appeals court concluded that the fund’s trustees were not entitled to unilaterally impose on the employer a plan-based interest rate for unpaid contributions.

SOURCE: The 32BJ North Pension Fund and Its Board of Trustees v. Nutrition Management Services Company (CA-2).

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