In upholding a lower court ruling, the 3 rd US Circuit Court of Appeals ruled that the plan amendment was legally a fraudulent transfer and that it would be declared void.
The three-judge appellate panel noted that the amendment was not conducted at arm’s length and was not a “good faith” transaction.
“That the benefits inured substantially to corporate insiders, and the Amendment was reviewed by those who stood to gain between 200% and 500% increases in their pension benefits if it were approved, suggest that the transaction was not conducted at arm’s length,” Circuit Judge Thomas Ambro said in writing for the appeals court.
According to the ruling, Fruehauf Trailer Corp., aDelaware corporation, operated facilities throughout the United States that designed, manufactured, sold, distributed, and serviced truck trailers. Fruehauf expanded its business rapidly in the 1980s, leading to an overextension of capital, and by 1996 had a negative net worth of approximately $120 million, according to the court.
At an emergency board of directors meeting in September 1996, an amendment to Fruehauf’s pension plan for nonsalaried and nonunion workers – referred to as the “Third Amendment”- was passed. The amended plan granted two separate benefit increases. The first increase called for each of the 400 employees covered by the plan who stayed with Fruehauf until March 31, 1997 to receive a contribution to his or her pension account equal to 5% of his or her annual salary as of January 1, 1996 plus 8% annual interest on such amount until retirement. According to the appeals court, all salaried plan participants were eligible for this increased benefit, even if they were not vested in the plan.
The second increase, referred to by Fruehauf as a “pension thaw,” modified the salary year that was used to calculate pension benefits. Before the amendment was made, Fruehauf’s plan stated that benefits would be calculated using participants’ 1991 salaries. The amendment changed the salary year to 1996.
According to the court, Fruehauf calculated that the cost of the Third Amendment was $2.4 million. The source of funding for the Third Amendment was a surplus on the “union side” of Fruehauf’s pension plan, the court noted.
Several days after the amendment was approved by the board of directors, Fruehauf filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
In January 2005, the US District Court for the District of Delaware found that the Third Amendment met the definition of a fraudulent transfer under Section 548 and ruled that the amendment was void. The plan participants appealed.
In addition, the appeals court said that funding the Third Amendment from the union side pension surplus, coupled with the fact that the Third Amendment was presented to Fruehauf’s board of directors inaccurately as an “administrative formality,” strongly suggested that the amendment was not a “good faith” transaction.
The 3rd Circuit ruling in Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corporation Retirement Plan No. 003 (In re Fruehauf Trailer Corp.), 3d Cir., No. 05-1374, 4/12/06 is here .