The following opinion recap is by Todd Rouse, a summer associate at Akin Gump and a student at The Catholic University Columbus School of Law.
Today, in a unanimous decision authored by Justice Scalia, the Supreme Court held that merger is not a permissible method for an employer to terminate a single-employer defined-benefit pension plan.
In March 2000, struggling company Crown Paper (along with its parent company, Crown Vantage, Inc.) filed for Chapter 11 bankruptcy. Among the parties in interest in the bankruptcy proceedings were some 2,600 members of PACE International Union, who were participants in Crown pension plans worth over $80 million. During the bankruptcy proceedings, the Pension Benefit Guarantee Corporation (“PBGCâ€) – an independent government agency specifically created to protect employee pensions in cases of employer insolvency and plan terminations – filed documents warning that, if Crown were reorganized under Chapter 11, it would be forced to assume millions of dollars in pension liability. In light of this potentially huge liability for the PBGC, the bankruptcy court was hesitant to allow Crown to reorganize.
In mid-2001, Crown, still in financial turmoil, began to consider options that would remove the “stumbling block†of its huge pension liability and thereby allow its Chapter 11 reorganization to proceed. One possibility the Crown board of directors considered – and ultimately adopted for twelve of its eighteen pension plans – was the purchase of annuities, which would pay participants a fixed yearly amount equaling their benefits. In so doing, the board rejected PACE’s suggestion that Crown merge its plans with the PACE Industrial Union Management Pension Fund (“PIUMPFâ€), a multiemployer pension plan for PACE union members.
PACE, along with two individual plan participants, challenged the board’s decision, arguing that Crown had violated its fiduciary duties under ERISA by not adequately considering the merger proposal before electing to purchase the annuities. The bankruptcy court agreed, and the U.S. District Court for the Northern District of California affirmed. Crown then appealed to the Ninth Circuit, which also affirmed. It distinguished between “the decision to terminate a pension plan†– which it described as “a business decision not subject to ERISA’s fiduciary obligations†– and the “implementation of a decision to terminate,†which is subject to ERISA’s fiduciary obligations. If the decision to purchase annuities rather than merge with PIUMPF was a form of implementation, Crown was required to fully investigate and consider PACE’s offer; if it were merely a business decision, however, it did not need to investigate the merger. Because it found merger was a means of implementing the plan termination, the court of appeals held the board breached its fiduciary duty to act solely in the interest of plan participants by not adequately considering this option.
The issue before the Court was whether the decision to terminate a pension plan by purchasing an annuity, rather than merge the plan with another, was a decision subject to ERISA’s fiduciary obligations. This issue, however, was ultimately not decided by the Court, which found that merger is not a permissible method of termination and therefore did not reach the question of what constitutes an “implementation of a business decision to terminate.†Because merger was not a viable option under the statute, Crown did not need to fully investigate the merger as an option in implementing the termination. In so finding, the Court deferred to the PBGC and the Department of Labor’s view that merger is not a method of termination but rather an alternative to termination, explaining that “to attempt to answer these questions without the views of the agencies responsible for enforcing ERISA[] would be to embar[k] upon a voyage without a compass.â€
In resolving the case, the Court relied on what it regarded as simple methods of statutory construction. It found nothing in the text of ERISA or its legislative history indicating that Congress ever intended merger to be a permissible means of termination; to the contrary, it explained, “the structure of ERISA amply (if not conclusively) supports the conclusion†that mergers cannot be a form of standard termination. It rejected PACE’s contention (and the Ninth Circuit’s holding) that clauses relating to both termination and merger fall under the same title and thus should be read as related concepts, as well as its assertion that the “otherwise fully provide all benefit liabilities†mentioned in the section regarding terminations may be read to include mergers. Instead, the Court reasoned, ERISA’s “distinct treatment of merger and termination provides clear evidence that one is not an example of the other.â€
Indeed, the Court continued, termination and merger are “fundamentally different†concepts because of the resulting effect of each. Terminating a plan takes the assets, as well as the participants and beneficiaries, outside the umbrella of ERISA. All future issues or claims relating to the benefits involved are no longer subject to ERISA and are boiled down almost exclusively to state-based contract law. If the plan were merged, it would continue to be governed by ERISA, the PBGC would still be responsible for the assets as guarantor, and – if Crown continued to employ any participants – it would remain subject to ERISA.
The Court’s holding leaves open the question of the breadth of an employer’s fiduciary duties to plan participants when making decisions relating to implementing a plan termination, including how diligently they must pursue all options available when wearing their plan administrator hat. If the Court had found merger to be a viable termination option, was the fact that Crown took PACE’s offer under advisement enough to fulfill its duty to investigate alternatives? The scope of an employer’s fiduciary duty under ERISA – to make decisions based solely on the beneficiaries best interests – is a question that will wait to be answered in another term.
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