by Jackson Lewis

The United States Supreme Court unanimously decided, in an opinion issued on June 11, that merging one defined benefit pension plan into another is not a permissible method of plan termination under the statutory scheme of Title IV of the Employee Retirement Income Security Act of 1974.

Thus, a bankrupt employer did not breach its fiduciary obligation under ERISA, when it did not give due consideration to whether the termination of its defined benefit plans should be implemented as a merger of the plans into a multiemployer plan, as proposed by a union representing its employees. Beck, Liquidating Trustee of Estates of Crown Vantage, Inc., et al. v. PACE International Union, et al., No. 05-1448.

Title IV of ERISA both regulates the methods of terminating a defined benefit plan and also guarantees under its insurance program certain benefits under plans that terminate while underfunded.

If the Court had decided in favor of the union and the participants, the plan mergers would have caused the employer to lose a large reversion from the plans that could be distributed to creditors in the bankruptcy.

Section 4041 of ERISA, contained in Title IV, sets out the exclusive methods of terminating a covered defined benefit plan. It states "a single-employer plan may be terminated only in a standard termination [where its assets are capable of providing for benefit liabilities] … or a distress termination [where the plan sponsor and all its affiliates are in bankruptcy proceedings or show the federal regulatory agency that financial necessity requires termination]…." [Emphasis added.]

In a standard termination, the plan or the plan sponsor must provide for satisfying all benefit liabilities under the plan before it can be wound up. If any assets are left over after providing for such liabilities, those residual assets can revert to the employer if the plan so provides, in accordance with ERISA.

Often, disputes arise between the plan sponsor and participants or, in the case of a plan maintained under a collective bargaining agreement, the employer, on one hand, and the participants and union on the other, over the party or parties entitled to those residual assets.

Further, in the case of a distress termination, the Pension Benefit Guaranty Corporation (PBGC), the federal agency that administers the plan termination program under Title IV, may come into a bankruptcy proceeding as a large creditor, adversely affecting the rights of other business creditors and making the wind up of the debtor's affairs or its rehabilitation more difficult. Not surprisingly, bankruptcy trustees or debtors in possession have argued that a plan could be terminated in a bankruptcy outside of the normal rules of Title IV, in order to avoid the adverse consequences of a Title IV termination on business creditors.

In Beck, PACE International Union represented employees that participated in 17 single-employer defined-benefit pension plans subject to Title IV. The liquidating bankrupt, Crown, sponsored and administered these plans.

Crown considered terminating the plans in a standard termination by having the plan purchase annuities and having any assets in the plan in excess of those required to purchase annuities revert to it. The excess assets amounted to about $5 million.

The union proposed that Crown merge all assets and liabilities of its plans into the PACE multiemployer plan. Under that proposal, Crown would not receive any reversion of assets.

PACE and the plan participants sued in bankruptcy court, claiming that Crown had breached its fiduciary duties under ERISA by failing to give appropriate consideration to the merger proposal. The court ruled for PACE and the participants. Crown (through its liquidating bankruptcy trustee) appealed to the U.S. District Court, but both that court and the Ninth Circuit affirmed the bankruptcy court's decision.

Even though the Ninth Circuit recognized that the decision to terminate a pension plan is a business (or "settlor") decision that is not subject to ERISA's fiduciary obligations, it held that implementing a termination decision is fiduciary in nature. The Ninth Circuit then held that the merger was a permissible way of terminating a single-employer defined benefit plan and that Crown had failed in its fiduciary duty to consider PACE's merger proposal seriously, to the detriment of the plan participants. The Supreme Court granted Crown's petition for review.

The Supreme Court stated its decision hinged on whether plan merger was a permissible means of plan termination under Title IV. The PBGC, in a friend of the court brief, argued that PACE's reading of the statute was incorrect because merger was not a means of terminating a plan, but only an alternative to plan termination.

The Court deferred to PBGC's view, agreeing that in a plan merger, the merged plan's assets continue to be subject to ERISA's requirements, albeit as part of another benefit plan. Thus, the rules applicable to a merged plan are those applicable to ongoing plans in general; different rules apply to a plan once it is terminated.

The significance of the case may depend on context. Based on this case, the lower federal courts will likely follow how the Supreme Court acted, and give deference to the PBGC's views concerning the methods of terminating a defined benefit plan. The PBGC has consistently said that a plan may only be terminated under the specific procedures set out in Title IV.

Thus, for example, despite the sponsor-favorable result here, the case could turn out to favor participants by limiting bankrupt employers' attempts to argue that certain bankruptcy court procedures may be invoked to terminate a plan to avoid Title IV's statutory participant protections.

For more information on the Trade Secrets, Non-Comptes and Workplace Technology Practice Group, please visit www.jacksonlewis.com/pa . The Group assists employers in establishing policies, hold procedures and complex e-discovery matters.