Mathews v. Sears Pension Plan

• Decision Date: 26 June 1998
• Docket Number: No. 97-2938,97-2938
• Citation: 144 F.3d 461
• Parties: 22 Employee Benefits Cas. 1193 Edward H. MATHEWS, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. SEARS PENSION PLAN and Sears, Roebuck & Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 461

144 F.3d 461

22 Employee Benefits Cas. 1193

Edward H. MATHEWS, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. SEARS PENSION PLAN and Sears, Roebuck & Company, Defendants-Appellees.

No. 97-2938.

United States Court of Appeals Seventh Circuit.

Argued Feb. 25, 1998.

Decided May 13, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied June 26, 1998. ^*

Paul E. Slater (argued), Sperling, Slater & Spitz, Chicago, IL, for Plaintiff-Appellant.

William A. Gordon (argued), Mayer, Brown & Platt, Chicago, IL, for Defendants-Appellees.

Before POSNER, Chief Judge, and WOOD, Jr., and DIANE P. WOOD, Circuit Judges.

POSNER, Chief Judge.

This is a class action under ERISA against Sears Roebuck's pension plan. It is brought on behalf of those employees of Sears who upon retiring received (between 1987 and 1994) a lump sum payout in lieu of an annuity. The determination of the lump sum required discounting to present value the future payments that the retiree would have received had he elected the annuity form of pension. Discounting requires the selection of a discount rate. The Pension Benefit Guaranty Corporation recomputes the applicable rate every month. Sears' unvarying practice during the period covered by the suit was to use the rate fixed by the PBGC for January 1 of the year of retirement, even though the plan itself provides that the applicable rate is the PBGC rate that would be used "as of the date of distribution," which the plan defines as the first day of the month following retirement.

The named plaintiff retired on May 15, 1991, so his date of distribution was June 1, 1991. The PBGC discount rate for June was 6.75 percent. Sears, however, as usual used the January 1 rate, which was 7.25 percent, and as a result gave the plaintiff a smaller lump sum (by $17,324) than if it had used the rate applicable to the date of distribution. It was smaller because the higher the rate used to discount future payments to present value, the lower that present value will be. A discount rate is the interest rate at which a present lump sum would grow to equal specified future payments. That growth will be more rapid, and hence the starting point (the lump sum) smaller, the higher the rate. For example, the present value of an annuity of $10,000 a year for 20 years is $124,622 at 5 percent, but at 10 percent it is only $85,136.

The district court certified a class consisting of all the Sears retirees who in the period embraced by the complaint would have gotten larger lump sums had the PBGC discount rate applicable to their date of distribution been used instead of the January 1 rate. But the court then granted summary judgment for Sears on the ground that use of the January rate did not violate the plan.

There is no suggestion that by its choice of the January 1 PBGC rate rather than the rate on the date of distribution Sears was trying to rip off anyone. On the contrary, over the period covered by the complaint interest rates generally were rising and as a result tended to be lower at the beginning of a year than at the end. So the use of the January 1 rate gave most retirees who elected a lump sum a larger amount than if Sears had followed the literal language of the plan--for remember that the lower the interest rate, the higher the present value of a stream of future entitlements.

The origin of the plan's language that is in issue ("as of the date of distribution"), and of the practice discrepant with that language, are remote from anything to do with the plan sponsor's wanting to reduce the retirement benefits paid out under the plan. In 1984 Congress required pension plans covered by ERISA to use interest rates published by the PBGC in calculating lump sum payouts. (The law has since been changed--the statute now requires the use of the interest rate on 30-year Treasury bonds, 26 U.S.C. § 417(e)(3)(A)(ii)(II)--but the change does not affect this suit.) Specifically it required the plans to use the PBGC rate "as of the date of the distribution [i.e., payout]." 26 U.S.C. § 417(e)(3)(B). The following year, however, the Treasury Department issued a temporary regulation which stated that a plan could use either the date of distribution or the first day of the plan year in which the employee retired. Treas. Reg. § 1.417(e)-1T(e)(i). (In its final form, the regulation added that "the plan must provide which date is applicable." We consider the significance of this addition at the end of our opinion.) Although this may seem a bold, or even an outrageous, interpretation of the phrase "as of the date of the distribution," the validity of the regulation is not questioned.

At the time the temporary regulation was promulgated, Sears' pension plan provided that the January 1 rate would be used to calculate lump sum payouts. But because Sears (its people testified) wasn't certain that it wanted to continue using that date, it amended the plan, effective January 1, 1987, by replacing the January 1 rate with the language of section 417(e)(3)(B), thus creating the foundation for this lawsuit. Sears continued, however, without interruption or exception, to use the January 1 PBGC rate in calculating the lump sum payouts. And this method was clearly described in the summary plan documents furnished to all employees throughout the period. As far as appears, moreover, no one who retired during this period complained about the use of the January 1 rate.

At the end of 1994, Sears unilaterally amended the plan to reinsert January 1 in the place of the quotation from the statute. This action was possible because the plan allows Sears to amend the plan unilaterally, without consulting or getting the consent of any of the potential beneficiaries. And that is why the period covered by the suit ends on the last day of 1994. After that date, as until January 1, 1987--the beginning of the complaint period--there was no possible argument that the plan required the use of a date different from January 1 of the year of retirement.

The parties agree that the ordinary principles of contract interpretation govern the interpretation of pension plans covered by ERISA. Cases can easily be cited for this proposition. See, e.g., Lynn v. CSX Transportation, Inc., 84 F.3d 970, 973 (7th Cir.1996); Krawczyk v. Harnischfeger Corp., 41 F.3d 276, 279 (7th Cir.1994); Burnham v. Guardian Life Ins. Co., 873 F.2d 486, 489 (1st Cir.1989). But like so many legal generalizations, this one requires qualification to be completely accurate. First, when the fiduciary aspects of a plan are in issue, the relevant principles are those of the law of trusts rather than the law of contracts. See, e.g., Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). Second, the relevant principles of contract interpretation are not those of any particular state's contract law, but rather are a body of federal common law tailored to the policies of ERISA. Santaella v. Metropolitan Life Ins. Co., 123 F.3d 456, 461 (7th Cir.1997); Swaback v. American Information Technologies Corp., 103 F.3d 535, 540 (7th Cir.1996); Wegner v. Standard Ins. Co., 129 F.3d 814, 818 (5th Cir.1997); Denzler v. Questech, Inc., 80 F.3d 97, 101 (4th Cir.1996). And third, when a case involves ERISA pension plans rather than ERISA welfare plans, the interpretive principles are also to be tailored to the distinctive characteristics of pension plans. See Miller v. Taylor Insulation Co., 39 F.3d 755, 759 (7th Cir.1994); Black v. TIC Investment Corp., 900 F.2d 112, 115 (7th Cir.1990); Armistead v. Vernitron Corp., 944 F.2d 1287, 1299-1300 (6th Cir.1991).

The third qualification is particularly important here. It is illustrated by the rule forbidding oral modifications of ERISA pension plans, Cefalu v. B.F. Goodrich Co., 871 F.2d 1290, 1295-97 (5th Cir.1989), and cases cited there; see 29 U.S.C. § 1102(a)(1); cf. Doe v. Blue Cross & Blue Shield United of Wisconsin, 112 F.3d 869, 875-76 (7th Cir.1997); Miller v. Taylor Insulation Co., supra, 39 F.3d at 759, a rule that is designed to protect the plan's solvency and that is not a part of the common law of contracts. E.g., Mohr v. Metro East Mfg. Co., 711 F.2d 69, 72 (7th Cir.1983); Xerox Financial Services Life Ins. Co. v. High Plains Limited Partnership, 44 F.3d 1033, 1041 (1st Cir.1995); 2 E. Allan Farnsworth, Farnsworth on Contracts § 7.6, p. 228 (1990).

A further illustration comes from the fact that pension plans are usually not negotiated. Although this is true of many other contracts as well (printed form contracts, sometimes called "contracts of adhesion," are as numerous as the grains of sand on a beach), the reservation in Sears' plan, a common reservation in such plans, of the right unilaterally to amend the plan underscores the degree to which this particular kind of contract goes beyond even "take it or leave it." The potential beneficiary, though not consulted or consenting, ordinarily is bound nevertheless by the amendment unless it violates a provision of ERISA, as by cutting down on his accrued rights under the plan (basically the value of his own monetary contributions). See 29 U.S.C. § 1054(g); see generally 1 Ronald J Cooke, ERISA Practice and Procedure § 4:43, pp. 4-168 to 4-169 (2d ed. 1996).

Our third illustration of the need to tailor the federal common law of contracts to the special characteristics of ERISA plans is the principle that the plan summary generally controls in the case of a conflict with the plan itself because the summary is what the plan beneficiaries actually read. See, e.g., Fuller v. CBT Corp., 905 F.2d 1055, 1060 (7th Cir.1990); Chiles v. Ceridian Corp., 95 F.3d 1505, 1518-19 (10th Cir.1996); Jensen v. SIPCO, Inc., 38 F.3d 945, 952 (8th Cir. 1994); Hansen v. Continental Ins. Co., 940 F.2d 971, 981-83 (5th Cir.1991); Edwards v. State Farm Mutual Automobile Ins. Co., 851 F.2d 134, 136 (6th Cir.1988). In the case of an ordinary...