Beck v. PACE International Union - Opinion Announcement

Argument of Speaker

Mr. Speaker: Justice Scalia has the opinion of the court in two cases this morning.

Argument of Justice Scalia

Mr. Scalia: The first of these is Beck v. PACE International Union, number 05-1448.

This case comes to us on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.

It’s a case about pension benefits and it involves the federal statute known as ERISA which is the acronym for the Employee Retirement Income Security Act of 1974.

The respondent PACE International Union represented employees covered by pension plans sponsored and administrated by Crown, a Paper Company which had filed for bankruptcy.

Crown had over-funded these pension plans to the tune of $5 million.

As Crown was winding down its affairs, PACE proposed that Crown merge its pension plans into PACE’s own multiemployer plan.

Crown rejected this proposal, opting instead for a standard plan termination through the purchase of annuities which allowed it retain the $5 million surplus for its creditors rather than hand the $5 million over to PACE’s multiemployer plan.

PACE and two plan participants filed an adversary action in the Bankruptcy Court alleging that Crown’s directors had breached their fiduciary duties under ERISA by neglecting to give diligent consideration to PACE’s merger proposal.

The Bankruptcy Court ruled for PACE issuing a preliminary injunction that prevented Crown from obtaining the $5 million reversion.

Petitioner, the trusty of the Crown bankruptcy estate then appealed to the District Court which affirmed in relevant part as did the Ninth Circuit.

The Ninth Circuit reasoned that the implementation of a decision to terminate is fiduciary in nature and that merger was a permissible means of plan termination.

Crown does had a fiduciary obligation to consider PACE’s merger proposal seriously which it had failed to do.

We granted certiorari and now reverse.

We hold that Crown did not breach his fiduciary obligations in failing to consider PACE’s merger proposal because merger is not a permissible form plan termination under ERISA.

Section §1341(b) (3)(A) provides, “In any final distribution of assets pursuant to standard termination the plan administrator shall, Clause One, Purchase irrevocable commitments from an insurer to provide all benefit liabilities under the plan or Clause Two, Otherwise fully provide all benefit liabilities under the plan.

The parties agreed that clause one referrers to the purchase of annuities which is the course that Crown pursued and the clause two allows for lump sum distributions.

Well, these are by far the most common distribution methods.

PACE maintains that merger should be included under clause two because it argues, “Merger is the legal equivalent of purchasing annuities.”

PACE faces an upfield battle however because accepting its argument would require us to disagree with the Pension Benefit Guarantee Corporation, the entity administering the federal insurance program that protects plan benefits.

The PBGC takes the position that ERISA does not permit merger as a method of termination because in its view merger is an alternative to rather than an example of plan termination.

This court has traditionally deferred to the PBGC when interpreting ERISA and here we conclude that PBGC’s policy is based upon a contraction of the statute that is not only permissible but indeed the more plausible.

Three points strike us as especially persuasive.

First, terminating a plan through purchase of annuities formally severs ERISA’s applicability to plan assets and employer obligations.

Whereas, merging the Crown’s plans into PACE’s multiemployer plan would result in the former plans asset remaining within ERISA where they could be used to satisfy the benefit liabilities of the multiemployer plans other participants and beneficiaries.

Second, merger would preclude the employer from obtaining a reversion of surplus funds which ERISA specifically authorizes upon termination and third the structure of ERISA, amply if not conclusively, supports the conclusion that merger is not a permissible formal plan termination.

Merger is dealt within an entirely different set of statutory sections setting forth entirely different rules and procedures.

PACE’S argument that the procedural differences could be reconciled by requiring an employer intending to use merger as a termination method to follow the rules for both merger and termination is condemned by the confusion it would engender and by the fact that it has no apparent basis in the statute.

Even from a policy standpoint the PBGC’s construction is eminently reasonable because termination via merger could have detrimental consequences for the plan participants and beneficiaries of a single employer plan as well as for plan sponsors.

Therefore, the judgment of the Court of Appeals is reversed and the cases remanded for proceedings consistent with this opinion.

The opinion of the court is unanimous.