The High Court reversed the 9th U.S. Circuit Court of Appeals holding, which said that the termination of a pension plan is a business decision not subject to the Employee Retirement Income Security Act’s (ERISA) fiduciary obligations, but reasoned the implementation of a termination decision is fiduciary in nature. The 9 th Circuit went on to argue that the merger proposed by the union was a permissible termination method and that the company therefore had a fiduciary obligation to seriously consider it.
Crown Paper Co., also known as Crown Vantage Inc., filed for bankruptcy protection in March 2000, at which point it administered 18 employee pension plans.
The PACE International Union, which represented many of the plan participants, offered to take over the plans. However, Crown rejected the offer to terminate the plans by merging them with the union’s own multiemployer plan. It opted instead for a standard termination through the purchase of annuities.
The labor union then sued the company in the U.S. Bankruptcy Court for the Northern District of California , saying it breached its fiduciary duties under ERISA when it snubbed the proposal to merge the plans.
The Supreme Court, however, rejected PACE’s claims that a plan merger was a permissible form of plan termination under ERISA, and that not considering the option was then a breach of fiduciary duty.
The court also found that terminating a pension plan through the purchase of annuities, like terminating a plan through distribution of lump-sum payments, formally severs the applicability of ERISA to plan assets and employer obligations. Writing for the court, Justice Antonin Scalia said that a merger “represents a continuation rather than a cessation of the ERISA regime.”
He further wrote that a merger was simply an alternative method of termination rather than an example of plan termination, and further that plan mergers are “fundamentally different” from plan terminations.
Also, merging the plan would not have given Crown Vantage the same ability to recoup surplus funds as is afforded by terminating the plan. If Crown had extracted the $5 million surplus from its plans before merging them with PACE’s multiemployer pension fund, Crown would have violated ERISA’s anti-inurement provision, the court noted.
For the full opinion, visit Beck v. PACE International Union, U.S., No. 05-1448, 6/11/07) .