Crown Paper Company operated seven different paper mills and employed approximately 2,600 persons. PACE International Union ("PACE") represented employees covered by seventeen of Crown's defined benefit pension plans. Crown administered these plans, none of which were part of a multi-employer pension plan.

Crown filed for bankruptcy in March of 2000 and proceeded to liquidate assets. Crown informed PACE that it was considering a standard termination of the plans, which would mean that the terminated plans would have sufficient assets to cover potential benefit liabilities.

PACE proposed that Crown merge its plans into an existing multi-employer plan operated under the Taft-Hartley Act, pursuant to which PACE representatives and paper industry representatives served as trustees in equal numbers. The PACE proposal was simple: Crown would be required to convey all plan assets to the multi-employer plan, and that plan would be responsible for all plan liabilities.

Though Crown took the matter under advisement, it discovered that -- since the plans were over-funded -- it could proceed with the standard plan termination, purchase annuities to cover its plan liabilities, and retain a $5 million reversion for its other creditors. Not wanting to lose the $5 million reversion, Crown rejected the PACE proposal to merge the plan.

In Beck v. PACE International Union, 551 U.S._______ , 05-1448 (Sup. Ct. 2007), the Court ruled that Crown did not breach its fiduciary duties by refusing to consider the plan merger. Its decision reversed that of the Ninth Circuit Court of Appeals, which had been based upon two conclusions: (1) that merger was a permissible termination method, and (2) that the implementation of the termination decision was "fiduciary" in nature. The Supreme Court specifically rejected only the first conclusion. It held that ERISA Section 1341(b)(3)(A) provides only two methods of terminating a single employer plan: (1) the employer must purchase irrevocable commitments from an insurer (annuities) to provide all benefit liabilities, or (2) the employer must, "in accordance with the provisions of the plan and any applicable regulations, otherwise fully provide all benefit liabilities under the plan" - which is typically accomplished by payment of lump sums. The Supreme Court held that the merger PACE had proposed did not fall into either of these categories.

PACE argued that the statutory language, "...otherwise fully provide all benefit liabilities under the plan," could be construed to encompass plan merger. Rejecting this argument, the Court relied heavily on the PBGC's regulations, which essentially conclude that a merger is an alternative to, rather than an example of, a plan termination.

Among the points the Supreme Court made in supporting its conclusion were the following: First, terminating a plan through the purchase of annuities formally severs the applicability of ERISA to any plan assets and employer obligations (while merging a plan does not do so). Second, in a standard termination the employer can recoup surplus assets (as Crown was seeking to do), but it cannot do so in a merger. Third, the structure of ERISA (as well as its legislative history) strongly suggests that terminations and mergers are to be treated as totally different events covered by different rules. Fourth, the PBGC - the agency charged with responsibility for administering the statutory provisions in question -- urged the Court to reject PACE's position, and the Court found that a certain amount of deference to this agency was appropriate.

The Court concluded:

For all the foregoing reasons, we believe that the PBGC's construction of the statute is a permissible one, and indeed the more plausible. Crown did not breach its fiduciary obligations in failing to consider PACE's merger proposal because merger is not a permissible form of termination. Even from a policy standpoint, the PBGC's choice is an eminently reasonable one, since termination by merger could have detrimental consequences for plan beneficiaries and plan sponsors alike.

IMPACT

Employer Attorney's Point of View: The Court's decision is a logical one, and is consistent with its past decisions calling for a strict interpretation of ERISA statutory provisions. The decision may likely have an impact on future NLRB claims as well, clarifying any duty to bargain over these issues. It is also difficult to fault under bankruptcy court standards, since the decision netted an additional $5 million to be distributed to creditors.

The ruling is a benefit to employers that also serve as their own plan administrators, since it limits the scope of fiduciary duty. The Court's deferral to PBGC regulations and its position is not surprising, given the fact that a merger would involve less PBGC oversight in the process. Since ERISA matters are to be construed in the best interest of plan beneficiaries, and no one disputed that the annuities purchased by Crown were sufficient to satisfy its commitment to plan participants and beneficiaries, the Court's decision is both logical and consistent, and should not be a cause of alarm for any future similarly-situated plan beneficiaries.

Plan Participants Attorney's Point of View: Throughout the proceedings, the employer (through the bankruptcy trustee) argued strenuously that its refusal to consider PACE's proposal for winding up the plan did not implicate any "fiduciary" duties. The underpinning of the argument was case law holding that employer decisions to terminate pension plans constitute "settlor" functions and not "fiduciary" functions. The Supreme Court refused to accept the employer's argument on this question, and plan participant attorneys should be happy with this result. If anything, the Supreme Court's discussion on this point is consistent with lower court precedent holding that choosing a particular insurance company to provide annuities in connection with plan termination is in fact a fiduciary decision. Thus, the Supreme Court observed:

The purchase of an annuity is akin to a transfer of assets and liabilities (to an insurance company), and if Crown was subject to fiduciary duties in selecting an annuity provider, why could it automatically disregard [the merger PACE proposed] simply because [the target plan PACE proposed] happened to be a multiemployer plan rather than an insurer?

With the Supreme Court rejecting the employer's argument for an expansion of what kind of conduct should be considered a "settlor" act and not a "fiduciary" act, the impact of the decision should be quite limited. This is because the PACE proposal presented a unique situation: it appears that plan mergers have rarely been attempted as a method for terminating a plan. Moreover, the Supreme Court suggests in footnote 5 that plans can still transfer assets and liabilities to other plans as part of a multi-step process for termination, even though the transfer itself does not qualify as a termination.

Link to decision: http://www.supremecourtus.gov/opinions/06pdf/05-1448.pdf

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William T. Payne will be merging his practice into the Pittsburgh law firm of Stember Feinstein Doyle & Payne as a partner this August, and he will serve as a partner in that firm. He specializes in litigating class action lawsuits that seek to protect retirement benefits of employees and retirees. Mr. Payne is a member of the Section's Employee Benefits Committee and Co-Chair of the Benefit Claims and Individual Rights Subcommittee.

James C. Zalewski is a partner in the law firm of DeMars, Gordon, Olson & Zalewski in Lincoln, Nebraska. He has practiced labor and employment law since 1980, primarily on behalf of employers. Mr. Zalewski has worked in all aspects of labor law, from arbitrations and NLRB processing, all forms of litigation, as well as contract negotiation and ERISA litigation. He is a member of the Section's Employment Rights and Responsibilities Committee and Co-Chair of the ERISA Subcommittee.