Rybarczyk et al v. TRW Inc.

• Decision Date: 09 December 1998
• Docket Number: No. 97-4167,97-4167
• Parties: (6th Cir. 2000) Richard J. Rybarczyk, Minoru Mizuba, and William Rittenhouse, Plaintiffs-Appellees, v. TRW, Inc. and TRW Salaried Pension Plan, Defendants-Appellants. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 975

235 F.3d 975 (6th Cir. 2000)

Richard J. Rybarczyk, Minoru Mizuba, and William Rittenhouse, Plaintiffs-Appellees, v. TRW, Inc. and TRW Salaried Pension Plan, Defendants-Appellants.

No. 97-4167

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: December 9, 1998

Decided and Filed: December 21, 2000

Appeal from the United States District Court for the Northern District of Ohio at Cleveland. Nos. 95-02800; 96-02493, Ann Aldrich, District Judge. [Copyrighted Material Omitted] John Winship Read, Amanda Martinsek, VORYS, SATER, SEYMOUR & PEASE, Cleveland, Ohio, for Appellants.

David S. Cupps, Robert N. Webner, VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, John Winship Read, Amanda Marinsek, VORYS, SATER, SEYMOUR & PEASE, Cleveland, Ohio, for Defendant-Appellant.

Robert D. Gary, Gary, Naegele & Theado, Lorain, Ohio, Paul E. Slater, SPERLING, SLATER & SPITZ, Chicago, Illinois, Eric H. Zagrans, ZAGRANS LAW FIRM, Elyria, Ohio, for Appellees.

Before: WELLFORD, NELSON, and DAUGHTREY, Circuit Judges.

NELSON, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. WELLFORD, J. (p. 987), delivered a separate opinion concurring in part and dissenting in part.

OPINION

DAVID A. NELSON, Circuit Judge.

Here we have an appeal by a manufacturing company and its pension plan from a summary judgment in favor of a class of employees who took early retirement from the company. The plaintiff class-members claimed that the lump sum pension benefits distributed to them at retirement were too low in amount.

The district court concluded that the employer (TRW, Inc.) was collaterally estopped to make its lump sum benefit calculations under a methodology less favorable to the retirees than that mandated by this court in an earlier class action,Costantino v. TRW, Inc., 13 F.3d 969 (6th Cir. 1994). The district court further held that the members of the class were entitled to prejudgment interest at the greater of the interest rate on 52-week U.S. Treasury bills or the rate of return actually realized by TRW on the money found to have been wrongfully withheld.

Upon de novo review of the benefit calculation issue, we conclude that the plaintiff class is not entitled to avail itself of the collateral estoppel doctrine. We further conclude, however, that the portion of the lump sum payments attributable to service rendered prior to a certain plan amendment adopted on December 18, 1986, reflects a violation of the "anti-cutback rule" contained in the Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code (the "I.R.C." or "Code"). There was no violation, in our view, with respect to the portion attributable to service rendered subsequent to the amendment.

As to the district court's resolution of the prejudgment interest question, we find no abuse of the court's discretion.

The challenged judgment will be affirmed in part and reversed in part.

I

As of 1984 - prior to the enactment by Congress of the first of a series of ERISA and I.R.C. amendments that we shall describe presently - TRW's Salaried Pension Plan (a defined benefit plan, as opposed to a defined contribution plan) offered employees a "normal retirement" option and an "early retirement" option. Employees electing to retire at age 65 were entitled to receive a normal retirement annuity consisting of specified monthly payments starting at age 65 and continuing until the retiree's death. The second option was designed to provide an incentive for early retirement by offering salaried employees who retired between ages 60 and 65 the same annuity, with the same monthly payments, starting immediately on retirement. (In addition, a slightly reduced monthly payment was offered to employees who retired between ages 55 and 60.) Because the level of benefits for early retirees was not lowered (or was not sufficiently lowered) to make up for the increase in the length of time over which payments would be made to them, the total lifetime pension benefit available to early retirees was greater than the total lifetime benefit available to age-65 retirees. The benefit received by early retirees was called, in the jargon of the cognoscenti, a "subsidized" benefit.

The plan also provided that retirees could elect to take their pension benefits in a lump sum, payable up-front, rather than as a series of monthly payments. The amount of the lump sum was calculated under a prescribed formula that discounted the monthly payment stream to its present value. Prior to 1986, the plan provided that the interest rate used in making the present value calculation would be the Moody's Aaa bond rate.

In the Retirement Equity Act of 1984,¹ Congress set a ceiling on the interest rates that could be used in calculating the present value of future pension payments. (It will be helpful to keep the following relationship in mind: the higher the interest rate utilized in the present value calculation, the lower the lump sum produced by that calculation.) Under the statute, the interest rate was capped at a level set by the Pension Benefit Guaranty Corporation. This rate - the technical derivation of which need not concern us here - is commonly called the "PBGC rate." The statutory cap meant that TRW employees electing to take their early retirement benefits in a lump sum would receive payments substantially greater in amount than the payments to which they would have been entitled under the plan as originally written².

The Retirement Equity Act also provided that early retirement subsidies such as those offered in the TRW plan were subject to an "anti-cutback" rule embodied in ERISA and the Internal Revenue Code. The anti-cutback rule prohibits the amendment of pension plans in such a way as to reduce benefit rights that have already accrued. See ERISA § 204(g), 29 U.S.C. § 1054(g), and I.R.C. (26 U.S.C.) §411(d)(6) (1984)³.

As of October 22, 1986, the Tax Reform Act of 1986 ⁴ retroactively raised the interest rate ceiling where the vested accrued benefit (calculated in a manner specified by statute) exceeded $25,000. The new ceiling for such distributions was 120 percent of the PBGC rate. (The amended ceiling - i.e., the PBGC rate for distributions of $25,000 or less and 120 percent of the PBGC rate for distributions exceeding $25,000 - is commonly called the "§ 1139 rate," after the relevant section of the Tax Reform Act.) The Code and ERISA also provided that a plan could not distribute a benefit in a lump sum without the participant's consent if the benefit was over $3,500⁵.

Because of the ballooning effect of the Retirement Equity Act on early retirement lump sum distributions (or so we surmise), TRW eventually decided to eliminate any early retirement subsidy where the lump sum form of payment was chosen. This decision was implemented in plan amendments adopted on December 18, 1986 - a date critically important, as we shall see, to the resolution of the case now before us.

With the December 18 amendments, which were made retroactive to January 1, 1985, TRW's retirement plan provided in relevant part as follows:

"The lump sum benefit shall be the present value of the monthly single life annuity (excluding any early retirement subsidy) to which the Participant would have been entitled except for the election of the lump sum form of payment. The lump sum shall include the present value of the anticipated Post-Retirement Adjustments which would have been made had the Participant elected monthly payments." TRW Salaried Pension Plan, Section 5.9(b)(i), as amended December 18, 1986 (emphasis supplied)⁶.

The elimination of the early retirement lump sum subsidy gave rise to the class action in which we issued the decision reported as Costantino v. TRW, Inc., 13 F.3d 969 (6th Cir. 1994). The Costantino class was made up of TRW employees who had taken early retirement between January 1, 1985, and October 22, 1986, and who had elected to receive lump sum distributions. It was claimed on behalf of this class that the retroactive amendments adopted on December 18, 1986, violated the anti-cutback rule quoted in note 2, supra.

TRW argued in Costantino that the amendments had not reduced the benefit in terms of real dollars. This court held, however, that regardless of the dollar amount of the lump sum distribution, the anti-cutback rule prohibited elimination of the early retirement subsidy for a retiree who had already qualified for the subsidy. Costantino, 13 F.3d at 977-78.

TRW also argued in Costantino that the rate cap was applicable only to "accrued benefits," a term that according to TRW meant only unsubsidized benefits. Id. at 978. This court rejected TRW's arguments in a two-part analysis. First, we noted, a Treasury Department regulation codified at 26 C.F.R. § 1.411(a)-11(a)(2) required that the amount of any accrued benefit be calculated in accordance with prescribed valuation rules that contemplated use of the § 1139 rate. Costantino, 13 F.3d 979. Second, the regulation required that the subsidized early retirement benefit be treated as an accrued benefit for purposes of the anti-cutback rule. Id. The regulation, Costantino declared, "expressly requires that, where a plan provides that a lump sum distribution of a subsidized early retirement benefit is available as an option, the section 1139 interest rate must be applied to calculate the value of the distribution." Id. And the regulation, said Costantino, "treats subsidized benefits as if they were accrued benefits" for the purpose of "limiting an employer's ability to distribute benefits without appropriately calculating the value of any subsidies." Id.

Turning to the case at bar, we note that plaintiff Richard Rybarczyk represents a class of TRW retirees who retired between October 23, 1986, and July 1, 1996. Plaintiffs Minoru Mizuba and William Rittenhouse represent a class of retirees who retired between January 1, 1989, and July 1, 1996. The two classes have been merged for...