Nachman Corp. v. Pension Ben. Guar. Corp.

• Decision Date: 23 January 1979
• Docket Number: Nos. 77-2146,77-2147,s. 77-2146
• Citation: 592 F.2d 947
• Parties: 1 Employee Benefits Ca 1450 NACHMAN CORPORATION, Plaintiff-Appellee, v. PENSION BENEFIT GUARANTY CORPORATION and International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 947

592 F.2d 947

1 Employee Benefits Ca 1450

NACHMAN CORPORATION, Plaintiff-Appellee, v. PENSION BENEFIT GUARANTY CORPORATION and International Union, United Automobile, Aerospace & Agricultural Implement Workers of America Defendants-Appellants.

Nos. 77-2146, 77-2147.

United States Court of Appeals Seventh Circuit.

Argued Sept. 26, 1978.

Decided Jan. 23, 1979.

M. Jay Whitman, International Union, UAW, Detroit, Mich., Mitchell L. Strickler, Deputy Gen. Counsel, Pension Benefit Guaranty Corp., Washington, D. C., for defendants-appellants.

Joel D. Rubin, Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, Circuit Judge, WISDOM, Senior Circuit Judge, ^* and SPRECHER, Circuit Judge.

SPRECHER, Circuit Judge.

The Pension Benefit Guaranty Corporation and the United Auto Workers appeal from the district court order granting summary judgment in favor of the plaintiff, Nachman Corporation. The lower court granted declaratory relief, limiting Nachman's pension liability to the amounts accumulated in a pension plan trust fund.

The collectively bargained pension plan contains a clause excluding employer liability by limiting the employees' recourse to the assets of the pension fund. The issue raised on appeal is whether the Employee Retirement Security Income Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1381 (1975), supersedes the employer liability disclaimer and thereby imposes liability for the payment of vested benefits on an employer who, after September 2, 1974, terminates a covered pension plan with insufficient assets. Additionally, Nachman challenges the constitutionality of ERISA if construed to impose liability on employers for vested unfunded benefits. We hold that ERISA does subject the plaintiff to liability for the payment of unconditionally vested benefits effective September 2, 1974 and that this construction does not contravene the Due Process Clause of the Constitution. Accordingly, we reverse the judgment of the district court.

I

Pursuant to collective bargaining with the UAW, in 1960 Nachman established a pension plan for certain employees at its Armitage Avenue facility in Chicago. The plan terms provided for vesting of benefits after employees fulfilled specified age and length-of-service requirements. This pension plan is characteristic of "defined-benefit" plans, promising a fixed monthly benefit level for each year of service. As is typical of a defined-benefit plan, Nachman was required to make annual contributions to a trust fund on an actuarial basis. Those contributions were calculated by reference to administrative costs of the fund, benefit liabilities accruing during the current plan year ("normal costs"), and the amounts necessary to amortize the past service liability over thirty years. ¹ The parties do not dispute that Nachman complied fully with the funding obligations imposed by the plan.

On October 1, 1975, Nachman gave timely notice to the UAW that it was terminating the pension plan effective December 31, 1975. The termination accompanied the closing of the Armitage Avenue facility, which had become unprofitable. The propriety of the termination is not challenged.

It is also undisputed that the assets in the trust fund are insufficient to pay all the vested benefits which accrued before December 31, 1975. Apparently the fund assets can provide only thirty-five percent of the accrued vested benefits. Under the terms of the plan, the employees' benefits would be reduced ratably. Nachman would not be obligated to assume liability for the unfunded benefits. Article V, section 3 of the plan provides:

Benefits provided for herein shall be only such benefits as can be provided by the assets of the Fund. In the event of termination of th(e) Plan, there shall be no liability or obligation on the part of the company to make any further contribution to the Trustee except such contributions, if any, as on the effective date of such termination, may then be accrued but unpaid.

Nachman brought an action for declaratory relief to determine whether ERISA would impose any liability on it for the vested, but unfunded, benefits. The district court granted summary judgment in Nachman's favor, holding that Congress did not intend until January 1, 1976, to subject employers to liability for unfunded benefits which they had disclaimed. Since Nachman terminated the pension plan prior to that date it was not found subject to statutory liability.

II

In 1974 Congress passed the Employee Retirement Income Security Act (ERISA) in order to establish "minimum standards . . . assuring the equitable character of . . . (private pension) plans and their financial soundness." 29 U.S.C. § 1001(a). ERISA consists of four titles, each designed to correct different abuses perceived in the private pension system. Title I attacks the lack of adequate "vesting" provisions in many plans. Before ERISA, for example, if a plan did not provide for vesting until retirement, an employee with 30 years of service could lose all rights in his pension benefits in the event that his employment was terminated prior to retirement. Title I establishes minimum vesting standards to ensure that after a certain length of service an employee's benefit rights would not be conditioned upon remaining in the service of his employer. Employers were required to amend the terms of their plans to reflect these minimum standards effective January 1, 1976. Id. at § 1053(a). A second area of difficulty was the inadequacy of the funding cycle used by many plans. To improve the fiscal soundness of these pension funds, Title II amends the Internal Revenue Code to require minimum funding. Title III imposes fiduciary responsibilities on the trustees of the pension funds and provides for greater information and disclosure to employee-participants. The final area of concern addressed by ERISA was the loss of employee benefits which resulted from plan terminations. In order to protect an employee's interest in his accrued benefit rights when a plan failed or terminated with insufficient funds, Title IV establishes a system of termination insurance, effective September 2, 1974.

The mechanics of the insurance system established in Title IV control the resolution of this case. Congress created the Pension Benefit Guaranty Corporation (PBGC) within the Department of Labor to administer the termination insurance program. The PBGC guarantees the payment of "nonforfeitable benefits (other than benefits becoming nonforfeitable solely on account of the termination of a plan) under the terms of a plan which terminates at a time when . . . this title applies to it." Id. at § 1322(a). Prior to the termination by an employer-sponsor of a covered pension plan, a notice of intent to terminate must be filed with the PBGC. Id. at § 1341(a). The PBGC then examines the plan and determines whether the assets of the fund are sufficient to pay all benefits guaranteed by the Act. If the assets are sufficient, termination proceeds. If, on the other hand, the PBGC is unable to determine that the assets are sufficient, a trustee is appointed and the guaranteed benefits are then paid out from the trust assets and, if those are insufficient, from PBGC funds. ² Id. at §§ 1341(c) & 1342(b).

When the PBGC guarantees benefits in excess of the fund assets, the act provides for recovery from the employer-sponsor. Id. at § 1362. The amount of the employer's liability is determined by the value of the "plan's benefits guaranteed under this subchapter on the date of termination" offset by the allocable assets of the trust fund. Id. at § 1362(b)(1). Liability, however, is limited to a maximum of thirty percent of the net worth of the employer. Id.

Nachman's potential liability to the PBGC depends upon whether the employees' vested benefits, unfunded at the date of termination, are " guaranteed" under Section 1322, that is, whether these benefits are " nonforfeitable . . . under the terms of a plan" and the plan termination occurred after the effective date of Title IV, September 2, 1974. If they are so guaranteed, the PBGC must provide them and assess liability against the employer. ³

It is conceded that the benefits in issue were vested under the terms of the plan. Thus, the precise question before us is only whether the plan term limiting benefit rights to the assets of the fund rendered the rights forfeitable and thus not guaranteed.

Title IV does not provide a definition of "nonforfeitable." However, the word nonforfeitable is used in Title I, the "minimum vesting" sections, as well. Title I requires that after January 1, 1976, every plan must provide that benefits become "nonforfeitable" upon the satisfaction of the minimum eligibility requirements. Id. at § 1053(a). The term "nonforfeitable right" is defined for purposes of Title I in Section 1002(19) as

a claim obtained by a participant or his beneficiary to that part of an immediate or deferred benefit under a pension plan which arises from the participant's service, which is unconditional, and which is legally enforceable against the plan.

Another definition of nonforfeitable for the purposes of Title IV was promulgated by the PBGC as the administering agency. Benefits are nonforfeitable, and guaranteed, if

on the date of termination of the plan The participant has satisfied all of the conditions required of him under the provisions of the plan to establish entitlement to the benefit, except the submission of a formal application, retirement, or the completion of a required waiting period.

29 C.F.R. § 2605.6(a) (1977) (emphasis added). Nachman's employees have satisfied all conditions required of them. The benefits in issue are therefore clearly "nonforfeitable" if the PBGC definition is employed. ⁴

The district court concluded that Nachman employees did not have nonforfeitable rights under the plan. Relying on the definition provided in Title I, the judge concluded that the employer liability exclusion...