Costantino v. TRW, Inc.

• Decision Date: 29 March 1994
• Docket Number: Nos. 91-3768,91-3769,s. 91-3768
• Citation: 13 F.3d 969
• Parties: 94-1 USTC P 50,170 Michael A. COSTANTINO, et al., on behalf of the class of plaintiffs, Plaintiffs-Appellees, Cross-Appellants, v. TRW, INC.; Jake Schoepler, Secretary, Board of Administrators TRW Salaried Pension Plan, Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 969

13 F.3d 969

94-1 USTC P 50,170

Michael A. COSTANTINO, et al., on behalf of the class of plaintiffs, Plaintiffs-Appellees, Cross-Appellants, v. TRW, INC.; Jake Schoepler, Secretary, Board of

Administrators TRW Salaried Pension Plan,

Defendants-Appellants, Cross-Appellees.

Nos. 91-3768, 91-3769.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 21, 1992.

Decided Jan. 10, 1994.

Rehearing and Suggestion for

Rehearing En Banc Denied

March 29, 1994.

Robert D. Gary (briefed), Lorain, OH, Leonard F. Carr, Carr, Feneli & Carbone, Mayfield Heights, OH, Judith A. Lehnowsky (briefed), Rocky River, OH, Eric H. Zagrans (argued), Leslie Yvonne Spencer, Garfield & Zagrans, Cleveland, OH, for Michael A. Costantino.

Kim F. Bixenstine, Jones, Day, Reavis & Pogue, Cleveland, OH, Joseph M. David, Jones, Day, Reavis & Pogue, Washington, DC, William H. Powderly, III, Jones, Day, Reavis & Pogue, Pittsburgh, PA, William L. Sollee (argued and briefed), Ivins, Phillips & Barker, Washington, DC, for TRW, Inc. and Jake Schoepler.

Before JONES and SILER, Circuit Judges, and PECK, Senior Circuit Judge. ^*

AMENDED OPINION

NATHANIEL R. JONES, Circuit Judge.

This class action challenges Defendants' calculation of Plaintiffs' early retirement benefits under Defendants' pension plan. Plaintiffs claim that the retroactive application of interest rates established in section 1139 of the Tax Reform Act of 1986 was unconstitutional, denying them the proper amount of their vested early retirement benefit. Alternatively, Plaintiffs argue that even if the retroactive application of these rates was constitutional, Defendants improperly calculated Plaintiffs' benefits in violation of Section 204(g) of the Employment Retirement Income Security Act (ERISA) (29 U.S.C. Sec. 1054(g)), and I.R.C. Sec. 411(d)(6), both of which prohibit employers from amending pension plans to eliminate or decrease early retirement benefits or subsidies. ¹ Defendants respond that Plaintiffs' claims should be dismissed due to Plaintiffs' failure to exhaust administrative remedies, and that the benefits in question were properly calculated.

The federal district court granted in part and denied in part both parties' motions for summary judgment, rejecting Plaintiffs' claim that the retroactive application of section 1139 was unconstitutional, but ruling in favor of Plaintiffs on their claims that their benefits were miscalculated, and ordering Defendants to recalculate Plaintiffs' lump sum benefits. Both parties appealed. We direct the district court to modify its order to reflect the proper rule for calculating the applicable interest rate, and otherwise affirm.

Facts

The plaintiff class consists of approximately 1,000 participants in TRW, Inc.'s salaried pension plan (the Plan) who retired between January 1, 1985, and October 22, 1986, ² and who elected to receive their early retirement distributions in the form of a lump sum. The Plan, which was a defined benefit plan governed by ERISA, provided that participants who left TRW's employment at or after age 65 were entitled to normal retirement benefits in the form of a life annuity (monthly payments of a fixed amount for life). In addition, those who left TRW's employment after age 55 with ten or more years of service were entitled to "subsidized" early retirement benefits; their monthly payments for life beginning before age 65 were more valuable than monthly payments of the same amount that began at age 65 simply because their benefits lasted over a longer time.

As an alternative to receiving early retirement benefits in the form of a life annuity, eligible Plan participants could elect to receive their early retirement benefits in a lump sum consisting of the present value of the life annuity, calculated by discounting the annuity payments at an interest rate provided by the Plan. Until the Plan was amended on December 18, 1986, the subsidy was available to early retirees regardless of whether they elected the lump sum or the life annuity options. Also, until December 18, 1986, the Plan provided that the interest rate was to be equal to an average of yields for Moody's "Aaa" Corporate Bonds for the first month of the calendar quarter (the Moody's rate). The Moody's rates for 1985 and 1986 were 12.08% and 10.05% respectively.

In 1984, Congress revised ERISA and the Internal Revenue Code through the Retirement Equity Act (REA). ³ The REA and subsequent Treasury Department temporary regulations required, inter alia, that the immediate interest rate set by the Pension Benefit Guaranty Corporation (PBGC) be the maximum rate used to calculate the present value of a lump sum distribution. ⁴ The PBGC rate was 9.75% in 1985 and 8.75% in 1986. Because the PBGC rates were lower than the Moody's rates, the use of the PBGC rates would have resulted in larger lump sum payments than those resulting from use of the Moody's rates. Although TRW amended its Plan in 1985 to comply with the REA, its amendment did not comply with the PBGC rate requirement. Thus, the members of the Plaintiff class, all of whom retired after enactment of the REA, received lump sum early retirement distributions determined at the Moody's rates. These distributions were smaller than what Plaintiffs would have received had Defendants complied with the PBGC rates.

Congress superseded the maximum rate it had established in the REA in section 1139 of the Tax Reform Act of 1986 (TRA), which capped the allowable interest rate at 120% of the PBGC rate for distributions in excess of $25,000, and at the PBGC rate for distributions less than $25,000. ⁵ In addition, Congress made the Section 1139 interest rate retroactive for distributions in plan years beginning on or after January 1, 1985, except for distributions made in accordance with the interest rate requirements of the regulations under the REA. TRW actively lobbied for this amendment and its retroactive application.

TRW amended its Plan on December 18, 1986, retroactive to January 1, 1985, to conform with the interest rate changes made by section 1139 of the TRA. ⁶ It recalculated the retirees' lump sum distributions, and, when applicable, sent them supplemental benefits. However, even though the new rates were lower than the Moody's rates TRW had previously used, only 25% of the retirees received any supplemental benefits, because, in addition to changing the interest rate in the Plan, TRW eliminated the subsidy it formerly had provided to early retirees electing to receive lump sum distributions. Thus, the new interest rates were applied only to unsubsidized lump sum benefits. Under this system, many of the early retirees were actually entitled to a lower lump sum distribution than the one they already received under the old plan. To avoid any decrease in benefits, TRW amended its Plan again in 1988 to provide employees who retired during the class period with either the amount received under the old Plan or the amount received under the amended Plan, whichever was greater. The 1988 Plan amendments also allowed the PBGC rate to be applied to the subsidized early retirement benefit if the lump sum amount was no more than $25,000.

Plaintiffs filed their Complaint on August 5, 1986 and their motion for summary judgment on May, 26, 1989. Defendants filed their cross-motion for summary judgment on July 12, 1989. Granting in part and denying in part both parties' motions, the district court affirmed the constitutionality of section 1139, rejected Defendants argument that Plaintiffs' claims should be dismissed for Plaintiffs' failure to exhaust administrative remedies, and agreed with Plaintiffs' contention that Defendants violated ERISA Sec. 204(g) and I.R.C. Sec. 411(d)(6), by improperly calculating the present value of the early retirees' lump sum distributions. The court found two problems with Defendants' calculations: 1) Defendants improperly eliminated the subsidy for early retirees who were eligible for $25,000 or more in benefits and who elected to receive lump sum distributions; and 2) Defendants improperly applied the PBGC rate set at the beginning of the year rather than the rate that existed at the time of the distribution of benefits. ⁷

Issues

There are four issues before us on appeal:

I. Whether the district court correctly ruled that Plaintiffs were not required to exhaust their administrative remedies prior to filing an action against TRW in federal district court;

II. Whether the district court properly held that, in applying an interest rate cap retroactively to Plaintiffs' lump sum distributions, the Tax Reform Act of 1986 did not unconstitutionally deprive plaintiffs of vested property rights without due process, or deny them equal protection;

III. Whether the district court correctly ruled that, for Plaintiffs who have earned lump sum distributions of $25,000 or more (calculated at the PBGC rate), TRW must amend its Plan to provide a lump sum benefit equal to the present value of the Plan's subsidized early retirement annuity, calculated at 120% of the PBGC rate;

IV. Whether the District Court correctly ruled that the rate to be used in calculating the lump sum distributions shall be the section 1139 rate in effect on the date that the distribution occurred.

Discussion

I. Exhaustion of Administrative Remedies

Even though we review a district court's grant of summary judgment de novo, Rector v. General Motors Corp., 963 F.2d 144, 146 (1992), and this non-deferential standard of review applies to all of the other issues presently before us, on the issue of exhaustion of administrative remedies, the district court is to be afforded a more deferential standard of review. Curry v. Contract Fabricators Inc. Profit Sharing Plan, 891 F.2d 842, 846 (11th Cir.1990) ("[T]he decision whether to apply the exhaustion requirement is committed to the district court's sound discretion and can be overturned on appeal only if the district court has clearly abused its...