In an Employee Retirement Income Security Act (ERISA) lawsuit alleging the trustees of the Central States, Southeast and Southwest Areas Pension Plan neglected their duties of prudence and loyalty by rejecting proposals by The Kroger Co. to withdraw from the multiemployer plan, U.S. District Judge Edmond E. Chang of the U.S. District Court for the Northern District of Illinois sided with Central States.
According to Chang’s opinion and order, Kroger and the International Brotherhood of Teamsters (IBT), which represents Kroger employees in collective bargaining, proposed setting up a separate, fully funded pension plan for the Kroger participants, taking away the Central States’ responsibility to pay participants’ benefits. However, in exchange, Kroger and the IBT would not have to pay ERISA withdrawal liability to the Central States plan.
Two proposals were considered by the trustees, with the second one rejected for various reasons, including that the fund’s net asset balance would be negatively affected by the proposal; the proposal would undermine the Multiemployer Pension Plan Amendments Act requirement that each employer bear a proportional share of the underfunding of the fund, because a large portion of the underfunding is attributable to “orphan” participants (participants whose employers withdrew and failed to pay their withdrawal liability); and the proposal would reduce the fund’s revenues and exacerbate the decline of active participants in comparison to retirees, which could cause “more deep and painful benefit suspensions.”
The Kroger participants filed a lawsuit, and shortly after, the trustees submitted a counterproposal. In addition to letting Kroger withdraw from the fund early, the counterproposal contemplated a transfer of liabilities for all Kroger participants and a lump-sum settlement payment of $581,410,707. Two days later, Kroger responded with a letter rejecting the counterproposal.
After another failed proposal and counterproposal, in February 2017, Kroger and the IBT entered into an agreement permitting Kroger to withdraw from the fund after September 2017. The fund sent Kroger a notice and demand for payment of $1.029 billion in withdrawal liability, “under which Kroger would be required to pay monthly installments of $2,841,001.39 for 20 years.” After some negotiation, the fund settled with Kroger for a lump-sum payment of $467 million.
Chang agreed with Central States’ argument that the trustees did not abuse their discretion in rejecting Kroger’s proposals because they had to balance the interests of both Kroger and non-Kroger participants, and because, in doing so, they considered the advice of their financial consultants, lawyers, and staff. “The trustees did not abuse their discretion in weighing the sometimes-competing interests of the plan’s myriad participants and in making tough choices rife with predictions about the future,” Chang wrote in his opinion.
It was the documented process of considering the proposals that helped the Central States trustees win the case. For example, for the first proposal, the court opinion says, the record shows that the plan’s Fund Office asked Segal Consulting to prepare an actuarial analysis of the proposal, which the trustees discussed at their July 15, 2014, meeting. The court document notes that the trustees also considered input from one particular trustee and from fund staff. The trustees fully discussed the Segal report, which concluded that the proposal would cause the plan to “lose employment base, thus become more leveraged and adding risk.” The report also said this could then “be exacerbated by other food industry employers … as well as non-food industry employers ceasing participation in the plan.” Chang noted that in addition to discussing the Segal report, the trustees received input from a fund staff member who pointed out that although Kroger’s proposal might postpone the fund’s insolvency by one month (if other food-industry employers remained in the fund), it could also prompt “many strong, viable employers” to exit, demand no-cash payment deals, and deprive the fund of “significant revenue” from withdrawal-liability payments, which would likely “have a highly negative impact.”
The plaintiffs countered that these risks are “directly contradicted by the numerical data in the report”—referring to Segal Consulting’s conclusion that the exit of other food-industry employers would actually delay insolvency of the Central States fund by 20 additional months and increase the present value of net cash flows by nearly $1.5 billion. The plaintiffs say this means that the defendants abused their discretion and violated their fiduciary duties by engaging in an inadequate process and ignoring relevant information.
However, Chang said, the plaintiffs neglected to mention that this hypothetical, 20-month figure applied only in the case of liability-transfer withdrawals by all food-industry employers; it did not reflect the leverage or risk of such a withdrawal, nor the impact of additional withdrawals by non-food industry employers. “In fact, had the trustees accepted the 2014 proposal and ignored the risks outlined by Segal, then the trustees just as likely would have faced a similar lawsuit from the non-Kroger beneficiaries,” Chang wrote in his opinion.
He concluded that the record shows that the trustees did consider how best to balance the interests of the various participants. “The record, even when viewed in the light most favorable to the plaintiffs, conclusively shows that the defendants did not act arbitrarily and capriciously. Instead, they prudently exercised their discretion and prudently carried out their fiduciary duties in considering Kroger’s various withdrawal proposals,” Chang wrote.
He granted summary judgment for the Central States defendants.
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