Fleck v. Spannaus, 3-75 Civ. 178.

CourtUnited States District Courts. 8th Circuit. United States District Court of Minnesota
Citation449 F. Supp. 644
Docket NumberNo. 3-75 Civ. 178.,3-75 Civ. 178.
PartiesWalter J. FLECK, Edyth A. Hamler, E. A. Richert, as Fiduciary of the Allied Structural Steel Company Salaried Employees' Pension Plan, and Allied Structural Steel Company, a Delaware Corporation, Plaintiffs, v. Warren SPANNAUS, E. I. Malone, Phyllis Speilman and Allied Structural Steel Company Salaried Employees' Pension Plan, Defendants.
Decision Date22 September 1977

Dennis J. Carlin, Maurice J. McCarthy, Chicago, Ill., John R. Kenefick, Briggs & Morgan, St. Paul, Minn., for plaintiffs.

Warren Spannaus, Atty. Gen., by Kent G. Harbison, Sp. Asst. Atty. Gen., Richard A. Lockridge, St. Paul, Minn. for Warren Spannaus, E. I. Malone and Phyllis Speilman.

Frank C. Heath, Jones, Day, Reavis & Pogue, Cleveland, Ohio, Curtis L. Ray, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, Minn., amici curiae, for White Motor Corp. and White Farm Equipment Co.

Before HEANEY, Circuit Judge, and DEVITT and ALSOP, District Judges.


HEANEY, Circuit Judge.

The plaintiffs brought this action to contest the enforceability and constitutionality of the Minnesota Private Pension Benefits Protection Act, Minn.Stat. § 181B.01 et seq. (1974) (hereinafter the Pension Act). The relevant facts are set forth in Fleck v. Spannaus, 412 F.Supp. 366 (D.Minn.1976). In that decision, Judge Alsop held that the Pension Act was not preempted by the Employee Retirement Security Act of 1974, 29 U.S.C. § 1001 et seq. (hereinafter ERISA) until January 1, 1975, and that a three-judge court was necessary to decide the various constitutional issues raised. On August 5, 1976, the three-judge court certified several questions to the Minnesota Supreme Court concerning the Pension Act's "self-destruct" provisions and held that the individual plaintiffs, two employees of Allied Structural Steel Company (hereinafter Allied) and the pension fund trustee, lacked standing to sue. In addition, the court ordered the appointment of a special master to take evidence and make findings on certain factual matters.

Pursuant to Judge Alsop's certification order, the Minnesota Supreme Court held that the Pension Act continued in effect until January 1, 1975, when the provisions of ERISA preempted the state act and that this preemption preserved the pending causes of action. In other words, the terms of the Pension Act were in force and applicable to the eleven employees terminated by Allied on July 31, 1974.

On April 7, 1977, the special master issued his findings to which the parties subsequently stipulated. In particular, he found that:

1) it was impossible to determine which contributions by Allied to the plan were allocable to the terminated employees;
2) there were insufficient assets in the pension fund to pay the terminated employees after paying all employees who had vested rights under the plan;
3) the possibility of a plant closure was not considered in calculating Allied's annual contributions to the pension plan; and
4) the cost of prepaid deferred annuities which Allied would have to purchase for the terminated employees ranged from $114,171.93 to $185,751.00.

Before this three-judge court, Allied claims the Pension Act suffers the following constitutional infirmities:

1) it impairs the obligation of contract; and
2) it violates the due process, equal protection and commerce clauses of the United States Constitution.

Although Allied raises each of these issues in its initial complaint, they seem to rely almost entirely on the contract clause argument. Accordingly, our decision will focus primarily on this issue.

I. The Impact of United States Trust Co. of New York v. New Jersey.

Over the last century, the contract clause of the United States Constitution has played a limited role in constitutional adjudications concerning limitations on state power. A recent decision of the United States Supreme Court, United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977), provides the most definitive statement on the current status of the contract clause. This case involved a statutory covenant between New York and New Jersey which limited the ability of the Port Authority to subsidize rail passenger transportation from revenues and reserves pledged as security for bonds issued by the Authority. In 1974, the legislatures of both states repealed the security promise in the 1962 covenant. The legislation was sought when it became apparent that, in providing a greater share of its revenues for rail mass transit, Port Authority reserves would drop below levels promised as security in the original covenant. United States Trust Co. of New York v. New Jersey, supra at 431 U.S. 10-13, 97 S.Ct. 1511-1513, 52 L.Ed.2d 102-104.

In assessing the bondholders' contract clause challenge, the Supreme Court began by drawing an important distinction between general regulatory legislation impairing a range of private contracts and legislation abrogating a particular contract to which the state was a party. As to the former, the Court acknowledged that a more relaxed standard of review must apply; but when the state itself was a party, it conceded that complete deference to the legislature's judgment was inappropriate.

The States must possess broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result. * * * As is customary in reviewing economic and social regulation, however, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.
* * * * * *
In applying this standard to the instant case, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised.

United States Trust Co. of New York v. New Jersey, supra at 431 U.S. 22, 97 S.Ct. 1517, 52 L.Ed.2d 109-110, 112.

Thus, an important first step in analyzing the constitutionality of a particular impairment is to determine the nature of the contractual relation with which the law conflicts.

A second issue addressed by the Court in determining the constitutionality of a particular impairment is the extent of that impairment. Id. at 27, 97 S.Ct. at 1520, 52 L.Ed.2d at 113. Without drawing a clear distinction between substantial and insubstantial impairments, the Court, at several points in the opinion,1 suggested that a factor to be considered in determining the extent of impairment is the legitimate expectations of the contracting parties. Apparently, to the extent the obligation imposed or abrogated by the challenged legislation was, in fact, or could have been anticipated by the contracting parties, the impairment of those bargained for expectations is diminished.

Ultimately, the Court held that an impairment can be sustained only if reasonable and necessary to serve important purposes of the state. Id. at 28, 97 S.Ct. at 1521, 52 L.Ed.2d at 114. Total repeal of the 1962 covenant was not necessary, in the Court's judgment, because less drastic modifications of the security terms would have accomplished the state's objectives. The legislation was not reasonable because the state was well aware of pending mass transit problems when the covenant was enacted. Id. at 28, 30, 97 S.Ct. at 1521, 1522, 52 L.Ed.2d at 114-115.

With this review of the Supreme Court's most current statement on the contract clause, we now turn to the instant case.

II. The Extent of Impairment.

Allied argues and the State of Minnesota seems to concede that there has been an impairment of contract. Our attention is directed then to the extent of that impairment. In this regard, Allied contends that the impairment is substantial because the Pension Act burdens employers with pension obligations that were not actuarially anticipated.2 First, Allied argues that their contributions to the pension plan were actuarially determined on the basis of certain assumptions and that by providing benefits to those who would have forfeited their benefits under those assumptions, unanticipated liability is imposed. This argument is belied by Allied's own admission that the possibility of plant closure was not relied upon by their actuaries in calculating plan contributions.3

Closely paralleling the preceding argument, Allied claims that the ten-year vesting provision of the Pension Act imposes liability which was not anticipated by Allied or its actuaries. We do not quarrel with their claim that an acceleration of vesting was not anticipated and that the Pension Act impaired Allied's employment agreements in this regard. Nevertheless, we do not believe the obligations imposed by the Pension Act unconstitutionally expand upon the contracting parties initial expectations or the actuaries' original assumptions.

Generally, employer contributions to pension plans are determined in the following fashion. Actuaries first calculate the amount an employer is likely to pay out in benefits over the course of the plan; this calculation, of course, is based on certain assumptions regarding mortality, job changes, and other causes of employee turnover.4 To meet this anticipated liability, the actuaries next project the amount an employer must contribute to adequately fund these future payments. For example, an actuary may determine that annual contributions of two or three percent of payroll are necessary to meet the first series of anticipated payments and to accumulate an interest-earning reserve to cover the remainder of the plan.

Certainly, Allied did not and could not be expected to anticipate the possibility of vesting at an earlier date for the terminated Minnesota employees. But, the claim that payment to these employees was not anticipated distorts the...

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  • Allied Structural Steel Company v. Spannaus, 77-747
    • United States
    • United States Supreme Court
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