High Court Helps Bankrupt Cos. Terminate Pensions

The Supreme Court justices rule unanimously that a bankrupt employer can liquidate an over-funded plan, buy annuities, and retain the surplus—witho...
Stephen TaubJune 11, 2007

Meting out a blow to labor groups, the Supreme Court on Monday provided troubled companies with the ability to terminate their pensions without having to consider merging their failing retirement plans with union plans.

The High Court’s unanimous ruling held that companies don’t breach their fiduciary duties when they fail to consider proposals to merge their pensions with other defined-benefit plans. In the case, Beck v. Pace International Union, Pace represented employees covered by single-employer defined-benefit pension plans sponsored and administered by Crown Vantage Inc., which had filed for bankruptcy.

Crown rejected the union’s proposal to terminate the plans by merging them with the union’s own multiemployer plan in favor of terminating Crown’s over-funded plan and purchasing annuities with some of the resulting cash. That enabled the company to retain $5 million.

The union and the plan participants filed an action in U.S. Bankruptcy Court, alleging that Crown’s directors had breached their fiduciary duties under the Employee Retirement Income Security Act by neglecting to give “diligent consideration” to the union’s merger proposal.

The Bankruptcy Court and U.S. District Court ruled against the union. The 9th U.S. Circuit Court of Appeals, however, ruled in favor of the union, reasoning that the implementation of a termination decision is fiduciary in nature. It then determined that merger was a permissible termination method and that Crown therefore had a fiduciary obligation to consider Pace’s merger proposal seriously, which it had failed to do.

But the Supreme Court held that Crown did not breach its fiduciary obligations in failing to consider Pace’s merger proposal and deciding to purchase annuities. Rather, the justices deferred to the Pension Benefit Guaranty Corporation, ruling that the entity administering the federal pension insurance program doesn’t agree that a merger of the plan is a method of termination. PBGC holds that the merger is an alternative to (rather than an example of) plan termination, according to the High Court. “The Court has traditionally deferred to the PBGC when interpreting ERISA,” it wrote in its opinion.

”Here, the Court believes that the PBGC’s policy is based upon a construction of the statute that is permissible, and indeed the more plausible,” it added.