Artistic Carton Co. v. Paper Industry Union-Management Pension Fund, UNION-MANAGEMENT

• Decision Date: 10 August 1992
• Docket Number: UNION-MANAGEMENT,No. 91-1801,91-1801
• Citation: 971 F.2d 1346
• Parties: 15 Employee Benefits Cas. 2434 ARTISTIC CARTON COMPANY, et al., Plaintiffs-Appellants, v. PAPER INDUSTRYPENSION FUND, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1346

971 F.2d 1346

15 Employee Benefits Cas. 2434

ARTISTIC CARTON COMPANY, et al., Plaintiffs-Appellants, v. PAPER INDUSTRY UNION-MANAGEMENT PENSION FUND, et al Defendants-Appellees.

No. 91-1801.

United States Court of Appeals Seventh Circuit.

Argued Nov. 7, 1991.

Decided Aug. 10, 1992.

James D. Holzhauer (argued), Cynthia H. Hutchins, Susan M. Burner, Joan E. Brophy Mayer, Brown & Platt, Chicago, Ill., for plaintiffs-appellants.

Russell Woody, Cotton, Watt, Jones & King, Chicago, Ill., Barry S. Slevin (argued), Fredrick M. Marx, Slevin & Hart, Washington, D.C., for defendants-appellees.

Before COFFEY and EASTERBROOK, Circuit Judges, and CRABB, District Judge. ^*

EASTERBROOK, Circuit Judge.

With the Employee Retirement Income Security Act of 1974 came a form of pension insurance. On the termination of a pension plan whose assets are insufficient to pay all vested benefits, the Pension Benefit Guaranty Corporation covers some or all of the unfunded remainder. This gives pension funds an opportunity, and hence an incentive, to "put" unfunded promises to the PBGC. Because the PBGC can recover from the plans' sponsors, the opportunity to back out is not attractive to solvent corporations managing their own pension plans. In some industries, however, many employers participate in industry-wide plans. Withdrawal from underfunded multi-employer plans does not precipitate assessments by the PBGC, which need not assume the fund's liabilities so long as it continues to meet its obligations. But a series of withdrawals, much like a bank run, can leave the fund unable to pay off vested obligations.

Congress amended ERISA in 1980 to provide for piecemeal assessments of unfunded liability. Instead of waiting until the last period, when the PBGC may be unable to find or collect from the employers responsible, the fund itself assesses any withdrawing employer a portion of the shortfall. The Multiemployer Pension Plan Amendments Act (familiarly if tongue-trippingly called the MPPAA) requires a withdrawing firm to pay on the fund's demand, with arbitration in the event of disagreement. See Connolly v. PBGC, 475 U.S. 211, 106 S.Ct. 1018, 89 L.Ed.2d 166 (1986); PBGC v. R.A. Gray & Co., 467 U.S. 717, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984); Chicago Truck Drivers Pension Fund v. Central Transport, Inc., 935 F.2d 114 (7th Cir.1991). Anyone dissatisfied with the arbitrator's decision is entitled to judicial review--de novo on questions of law, deferential on conclusions of fact. Trustees of Iron Workers Local 473 Pension Trust v. Allied Products Corp., 872 F.2d 208, 211 (7th Cir.1989).

If the original version of ERISA prompted employers to desert multi-employer funds, the MPPAA may induce them to stay too long. For it permits the trust to determine the degree of funding shortfall "on the basis of any reasonable actuarial method of valuation". 29 U.S.C. § 1082(c)(2)(A). Valuation of benefits due in the future depends on assumptions about future rates of interest and growth in wages. When reducing future cash flows to present value, a change of even a few percent in the interest rate can double or halve the resulting valuation. See Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 533-47, 103 S.Ct. 2541, 2548-55, 76 L.Ed.2d 768 (1983); Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 834-38 (7th Cir.1985); O'Shea v. Riverway Towing Co., 677 F.2d 1194, 1199-1201 (7th Cir.1982); Lucian Arye Bebchuk & Marcel Kahan, Fairness Opinions: How Fair Are They and What Can Be Done About It?, 1989 Duke L.J. 27, 35. Because precognition is so rare (and not a good source of evidence in court), there will be legitimate debate about tomorrow's interest rates and a correspondingly wide range of "reasonableness." Funds seeking to improve their solvency will make generous assumptions about these rates--generous, that is, from the standpoint of a creditor seeking to collect as much as possible. Employers grouse about "staggering" and "unanticipated" assessments, but those who wrote and supported the MPPAA over the violent opposition of the employers in these industries understood trusts' incentives and the likely effects of combining discretion in the trustees with arbitration (and the correspondingly confined judicial role).

I

Muskegon Paper Box Company closed its doors in August 1986, thus withdrawing from the Paper Industry Union-Management Pension Fund to which it had contributed. At the end of 1985 (the relevant date for these purposes) the Fund had assets with a market value of $355,272,400. The Fund sent Artistic Carton Company, Muskegon's parent corporation, a notice stating that the value of the Fund's vested obligations was $336,458,900, a substantial surplus. Nonetheless the Fund sought to recover more than $450,000 as Artistic Carton's share of the plan's "underfunding." Baffled, Artistic Carton asked for an explanation. Eventually it received two. (More, actually, but only two matter. We disregard the others, and disregard as well the fact that Artistic Carton as a corporate group did not withdraw fully from the Fund. None of these complications matters.)

First, the Fund asserted that its positive net worth is irrelevant because it determines funding employee-by-employee, and the contribution history of Muskegon's work force was insufficient to pay their vested benefits. Second, the Fund maintained that, despite what its notice said, it was indeed underfunded. In coming to a present value of $336 million for benefits that had vested, the Fund used an interest rate assumption derived from a blend of short- and long-term rates. It used this same rate in determining the present value of the vested benefits attributable to Muskegon's workers. For other purposes, however, the Fund uses an interest rate based on long-term rates. Applying this rate generated a present value of $388,675,500, and a funding shortfall of $33,403,100. The Fund sent Artistic Carton the form it had prepared for the Internal Revenue Service showing its financial condition on January 1, 1986. Schedule B of this Form 5500 recites a valuation of $389 million for vested benefits.

Artistic Carton demanded arbitration. Arbitrator Dreyer sided with the Fund, concluding that the $389 million reflected a "reasonable actuarial method of valuation" and that the Fund had computed Artistic Carton's liability properly under the Fund's organic documents. The Fund uses the statutory "attributable method", 29 U.S.C. § 1391(c)(4), matching contributions on account of each employee against the costs of that employee's vested benefits. In calculating both contributions and benefits, the Fund included each employee's entire working history, including time with other employers. Artistic Carton, which bought the assets of Muskegon Paper Box from Cosco Industries in 1980, contended that the Fund could not count any of the time its workers had been employed by Cosco. The arbitrator rejected this contention and ordered Artistic Carton to pay the full sum the Fund specified, approximately $485,000. The district court enforced this decision on Artistic Carton's petition for review under 29 U.S.C. § 1401(b)(2). 1990 U.S. Dist. LEXIS 16744, 1991 U.S. Dist. LEXIS 2195.

II

Section 4201 of the MPPAA makes a withdrawing employer responsible for "the allocable amount of unfunded vested benefits". 29 U.S.C. § 1381(b)(1). Artistic Carton insists that the Paper Industry Fund had no unfunded vested benefits--the Fund's own notice said so--and that it therefore owes nothing.

In 1983 the PBGC issued an opinion letter (No. 83-19) concluding that a pension fund need not have net unfunded benefits for a particular employer to have an "allocable amount of" unfunded benefits. Section 4211, 29 U.S.C. § 1391, gives funds several ways to define each employer's responsibility. One way to understand § 4211 is to say that "allocable ... unfunded vested benefits" means the amounts produced by application of the statutory formulae. One of these is direct allocation. If some employers have chipped in more than the amount necessary to pay for their employees' vested benefits, while others have paid less, the latter group may have "allocable" unfunded benefits even though the pension trust as a whole is solvent. Pension funds that allow firm-by-firm negotiation of benefits may find that this is a common situation. The Paper Industry Fund allows the employer and union to negotiate over both contribution and benefit levels. So although the Fund spans many employers and protects workers against transitory or insolvent businesses, there is not a common contribution rate or benefit level for the entire industry. Some employers may be contributing too little to pay for benefits they agreed to provide, while others are over-funding their promises.

Allowing withdrawals without collecting employer-specific shortfalls acts as a tax on the payments by other employers. It also creates a discontinuity. Suppose a method prescribed by § 4211 requires a given employer to pay $500,000. If the pension fund's net worth is a penny less than the present value of vested benefits, it may collect the whole half million; if its net worth is two cents greater, it collects nothing. Such considerations led one court of appeals to agree with the PBGC's opinion. Ben Hur Construction Co. v. Goodwin, 784 F.2d 876 (8th Cir.1986).

Although the PBGC persuaded the eighth circuit, the eighth circuit did not persuade the PBGC. After reading Ben Hur, the agency did an about-face and concluded that an amount is "allocable" only if the plan as a whole has "unfunded vested benefits." Notice of Interpretation, 51 Fed.Reg. 47342 (Dec. 31, 1986). If the plan is solvent, there is less risk of "runs" by employers seeking to avoid future obligations and no need to regulate private activity in order to reduce risk to the insurance pool. Plans get their choice of actuarial assumptions; if they cannot find even one set of assumptions that...