Johnson v. Georgia-Pacific Corp., GEORGIA-PACIFIC

• Citation: 19 F.3d 1184
• Decision Date: 23 March 1994
• Docket Number: No. 93-2357,GEORGIA-PACIFIC,93-2357
• Parties: , 18 Employee Benefits Cas. 1218 John H. JOHNSON, et al., Plaintiffs-Appellants, v.CORPORATION, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1184

19 F.3d 1184

62 USLW 2605, 18 Employee Benefits Cas. 1218

John H. JOHNSON, et al., Plaintiffs-Appellants, v. GEORGIA-PACIFIC CORPORATION, et al., Defendants-Appellees.

No. 93-2357.

United States Court of Appeals Seventh Circuit.

Argued Dec. 10, 1993.

Decided March 23, 1994.

John F. Maloney, McNALLY, MALONEY & PETERSON, Milwaukee, WI, Susan Martin (argued), WARD, KEENAN & BARRETT, Phoenix, AZ, for plaintiffs-appellants.

Michael H. Auen (argued), FOLEY & LARDNER, Madison, WI, Karl A. Dahlen, Paul D. Braun, FOLEY & LARDNER, Milwaukee, WI, for defendants-appellees.

Before EASTERBROOK and ROVNER, Circuit Judges, and REINHARD, District Judge. ^*

EASTERBROOK, Circuit Judge.

Great Northern Nekoosa Corporation (GNN) decided to resist a takeover bid by Georgia-Pacific Corporation. Among the steps GNN took to make itself less attractive was an alteration in its pension plan. At the end of 1989 the plan's assets exceeded the value of all promised benefits (including those that had not vested) by some $80 million. Because employees had made contributions toward their pensions until 1988, the Employee Retirement Income Security Act (ERISA) prevented GNN from withdrawing the full surplus by terminating the plan and purchasing annuities to pay vested benefits. 29 U.S.C. Secs. 1103(c), (d), 1344(d)(3)(A). Cf. Mead Corp. v. Tilley, 490 U.S. 714, 109 S.Ct. 2156, 104 L.Ed.2d 796 (1989). Nonetheless, the surplus was of substantial benefit to the firm and its current employees. After 1987 all employee contributions ceased, increasing the workers' take-home pay. ^d GNN itself had not chipped into the fund for many years, exercising a privilege to suspend contributions that it had reserved in Sec. 11.1 of the plan's governing document. If the surplus were exhausted, the firm or its employees, or both, would have to start contributing again.

GNN took advantage of this fact by amending the plan. An amendment adopted by GNN's board in November 1989 (and approved by the employees' union) provided that a change of control would cause an increase in benefits to current employees sufficient to exhaust the surplus; moreover, all pension benefits would vest whether or not the employees met the applicable time-of-service requirements. The upshots: (a) if Georgia-Pacific won control, it would have to make contributions to the pension plan, while if control did not change GNN would not need to make contributions for the foreseeable future; (b) GNN's employees would feel more free to quit if Georgia-Pacific won (for leaving would not diminish their newly vested benefits) than if GNN retained control, and an exodus of skilled employees might make the firm less productive in Georgia-Pacific's hands.

Defensive tactics such as this often injure shareholders, depriving them of the premium the bidder offers for their stock. See Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 500-02 (7th Cir.1989) (collecting data). As things turned out, Georgia-Pacific obtained control in March 1990. Current workers' benefits were increased by a factor of 1.789766 and immediately vested in full; the plan is no longer overfunded. Although the alteration of the pension plan may have reduced the price Georgia-Pacific paid for GNN's stock, GNN's former shareholders were sufficiently satisfied that they did not file suit against its managers. This suit was commenced by GNN's pensioners. The retirees contend that they are entitled to the same benefits increase as the current workers; after all, they submit, it was their contributions that produced the surplus. By increasing current employees' promised pension benefits without increasing the retirees' pensions, plaintiffs say, GNN and its successor Georgia-Pacific violated not only the terms of the pension trust but also the fiduciary standards established by ERISA. The district court dismissed the case on the pleadings, see Fed.R.Civ.P. 12(b)(6), ruling that both ERISA and the plan's governing documents permit an employer to increase the pension benefits promised to current workers without increasing payments to retirees. Because retirees receive no more than their contract promises, see Bidlack v. Wheelabrator Corp., 993 F.2d 603 (7th Cir.1993) (en banc), and the promised pensions have not been reduced, see 29 U.S.C. Sec. 1054(g), the district court concluded that there was no point in developing the facts in detail.

Because the district court dismissed the case on the pleadings, we assume that GNN's managers were up to no good--that they amended the pension plan to serve their own interests rather than those of investors or employees, past, present, or future. Managerial self-protection is not the only way to understand what happened. Changes of control bring uncertainty. The new owner may close plants or change the composition of the labor force. An increase in pensions (a form of deferred compensation)--and particularly immediate vesting, which protects against the loss of anticipated benefits--is a form of compensation for the uncertainty that attends a change of control. Pensioners could not complain if GNN or Georgia-Pacific promised current workers a deferred bonus or increased their salaries to make them indifferent between secure employment with GNN and risky employment with Georgia-Pacific. Uncertainty in the wake of a takeover affects only the current employees. What this suit depends on is a cry of: "Not with our money, you don't!" Yet the retirees do not own the assets of a defined-benefit pension plan. Their contributions purchased not a pool of assets (as would be the case with a defined-contribution plan) but a promise of benefits. 29 U.S.C. Sec. 1002(34). Employees who contribute to a defined-benefit plan are in this respect like persons who purchase annuity contracts from insurance companies. They obtain a guaranteed stream of payments; the insurer (or, with pension plans, the employer) bears the investment risk. See Stephen R. Bruce, Pension Claims: Rights and Obligations 14-15 (2d ed. 1993); Daniel R. Fischel & John H. Langbein, ERISA's Fundamental Contradiction: The Exclusive Benefit Rule, 55 U.Chi.L.Rev. 1105, 1112-13, 1138-43 (1988). From this perspective an increase in the pension benefits promised to current employees is not fundamentally different from a bonus paid directly to the workers (although it has different tax consequences and affects savings differently): the employer bears the full cost over the long run, whether by paying in cash today or by undertaking to make future contributions to keep the plan solvent. For the purpose of this litigation, however, we assume that GNN lacked a sound reason to increase current workers' benefits while leaving retirees' benefits alone. We ask only whether GNN had the power to make such a decision.

According to the retirees, providing more for active workers without adding benefits for retirees offends Sec. 9.5 of the pension plan, which provides Any discretionary acts to be taken under the provisions of the Plan by the Board of Directors, the Board of Directors Committee, or by the Committee, with respect to classification of Employees, contributions, or benefits shall be uniform in their nature and applicable to all those persons similarly situated, and no discretionary act shall be taken which shall be discriminatory under the provisions of the Internal Revenue Code as it now exists or may from time to time be amended.

It is a nice question whether active and retired workers are "similarly situated" for this purpose. An increase in average wages would lead to higher pensions for current workers without any alterations in the plan's formulas for computing benefits, yet it is hard to believe that this common effect is forbidden. But determining which employees are situated "similarly" to which others would be a bootless exercise in view of this excerpt from Sec. 11.1 of the plan:

The Company ... reserves the right at any time and from time to time by action of its Board of Directors to modify or amend in whole or in part any or all of the provisions of this Plan, but no such action shall reduce or deprive any person of benefits credited to the date of modification or amendment....

No part of the assets of the Plan shall, by reason of any modification or amendment, be used for, or diverted to, purposes other than for the exclusive benefit of Members or their beneficiaries under the Plan and for administrative expenses of the Plan prior to the satisfaction of all liabilities to Members and their beneficiaries for retirement benefits based upon Creditable Service theretofore rendered.

So the trust instrument contains a broad amending power, subject to two limitations: GNN may not reduce benefits already credited to any employee, and it may not withdraw assets without first satisfying all liabilities for benefits. This language, drafted in 1948, anticipated the no-reduction, exclusive-benefit, and asset-withdrawal limitations that were to be codified when Congress enacted ERISA in 1974. See 29 U.S.C. Secs. 1054(g), 1103(c), (d), 1344(d)(3)(A).

When amending the plan in November 1989, GNN made it clear that it was using the power under Sec. 11.1 to alter every provision that it was necessary to change. The amendment begins:

The Plan is hereby amended by adding new sections 9.7 and 9.8 as follows:

9.7 Effect of Change of Control. Anything in the Plan to the contrary notwithstanding ...

Thus if, as the retirees contend, Sec. 9.5 entitled them to benefit increases in lockstep with improvements for active workers, this profits them nothing--for then Sec. 9.5 is just something "to the contrary" of the new clauses and has been overridden. When the amendment took effect, the uniformity clause of Sec. 9.5 passed out of existence to the extent it was "contrary" to the two added sections. And the amendment did not transgress the limitations in Sec. 11.1 itself: it did not reduce anyone's pension, and it did not...