Appellate Court Shuts Down Shutdown Benefits Claim

October 4, 2004 ( - A US appeals court ruled Friday that the federal government is not required to pay employees of a failed manufacturer "shutdown pensions" that union officials said were promised in a labor contract.

>That ruling, from the 6th US Circuit Court of Appeals, denies payments of $1,000 to $2,000 per month to about 2,500 former employees of Republic Technologies International LLC, a northeast manufacturer of steel bars that closed in 2002.

>The United Steelworkers of America union had argued that the Pension Benefit Guaranty Corporation (PBGC) was obligated to pay “shutdown pensions” to workers because they were part of the labor contract signed with RTI (see  PBGC Picks Up Another Steel Casualty ).   To help facilitate several mergers that occurred during the late 1990s, RTI and the steelworkers union negotiated a labor agreement providing that, in the event of a plant closure, workers who met certain age and years of service requirements would be entitled to shutdown benefits. Those shutdown benefits would allow such workers to receive unreduced early retirement benefits – and workers eligible for shutdown benefits would receive an additional $400 per month in pension benefits.

>According to the court, the PBGC recognized that these enhanced shutdown benefits increased the risk on the agency’s insurance fund, and subsequently negotiated an agreement with RTI whereby the firm pledged to make payments in excess of the statutory minimum in return for PBGC’s promise to refrain from initiating termination proceedings.   However, according to the court, RTI experienced financial difficulties and on April 2, 2001, filed for Chapter 11 bankruptcy protection.   During bankruptcy proceedings, RTI and the union entered a modified labor agreement that was designed to help RTI restructure its assets, but RTI failed to meet the restructuring conditions and instead entered negotiations to sell the company.  

>The three-judge appeals panel found that a lower court erred last year when it ruled in favor of the workers, and instead said that that court should have deferred to the PBGC’s argument that the shutdown benefits imposed an unreasonable burden (see  Republic Lines Up with Steelworkers, Opposes PBGC Action ).

>The PBGC, the federal agency that insures the nation’s private pension system, had said the shutdown payments would cost taxpayers about $96 million (see  Steelworkers Plan “Shutdown Benefits” Showdown ). The agency had argued it was not responsible for the benefits because the company never paid premiums to ensure the shutdown pensions would be paid.

Case History

>PBGC filed a motion in the district court for summary judgment, asking the district court to determine that the plans must be terminated, to appoint PBGC as the trustee of the terminated plans, and to establish June 14, 2002, as the date of plan termination. The union asked the court to establish Aug. 17, 2002, the day after the closing of the asset sale to Newco, as the date of plan termination.  

>The district court sided with the PBGC that the four RTI pension plans should be terminated and agreed to appoint PBGC as statutory trustee of the terminated plans. However, the court concluded that despite PBGC’s issuance of notices of their intent to terminate the plan on June 14, 2002, plan participants continued to have strong reliance interests in the receipt of shutdown benefits, and said the PBGC failed to demonstrate that the June 14, 2002, date adequately protected its insurance fund from an unreasonable increase in liability.

However, in Friday’s ruling the appeals court reversed, finding that PBGC’s notice of plan termination was sufficient to terminate the plan as ofJune 14, 2002 , at which time the participants ceased to accrue benefits.