Pension Plan for Employees of Broadway Maintenance Corp., In re, 922

• Decision Date: 02 May 1983
• Docket Number: D,No. 922,922
• Citation: 707 F.2d 647
• Parties: 4 Employee Benefits Ca 1673 In re PENSION PLAN FOR EMPLOYEES OF BROADWAY MAINTENANCE CORPORATION. PENSION BENEFIT GUARANTY CORPORATION, Plaintiff-Appellant, v. BROADWAY MAINTENANCE CORPORATION, Defendant-Appellee. ocket 82-6274.
• Court: U.S. Court of Appeals — Second Circuit

Page 647

707 F.2d 647

4 Employee Benefits Ca 1673

In re PENSION PLAN FOR EMPLOYEES OF BROADWAY MAINTENANCE CORPORATION PENSION BENEFIT GUARANTY CORPORATION, Plaintiff-Appellant, v. BROADWAY MAINTENANCE CORPORATION, Defendant-Appellee.

No. 922, Docket 82-6274.

United States Court of Appeals Second Circuit.

Argued Feb. 14, 1983.

Decided May 2, 1983.

Mitchell L. Strickler, Washington, D.C. (Henry Rose, General Counsel, James N. Duncan, Asst. General Counsel, Lawrence F. Landgraff, Trial Atty., Angela J. Arnett, Atty., Pension Benefit Guar. Corp., Washington, D.C., on brief), for plaintiff-appellant.

Remy J. Ferrario, New York City (Shea & Gould, New York City, on brief), for defendant-appellee.

Before LUMBARD, OAKES and NEWMAN, Circuit Judges.

NEWMAN, Circuit Judge:

The Pension Benefit Guarantee Corporation (PBGC) appeals from the September 30, 1982, judgment of the District Court for the Southern District of New York (Kevin H. Duffy, Judge) setting a termination date for the Pension Plan for Employees of Broadway Maintenance Corporation (Plan). 547 F.Supp. 629 (S.D.N.Y.1982). The appeal presents issues requiring interpretation of the pension plan termination procedures established by Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1301-1461 (1976 & Supp. V 1981).

I.

Congress created PBGC to encourage the development of private pension plans and to ensure that plan participants receive the benefits promised by their employers. One of PBGC's statutory duties is to operate a mandatory insurance program that guarantees plan participants a certain minimum level of benefits if their employers terminate pension plans with inadequate funds.

Because plan termination can cause significant hardships for participants and substantial liabilities for PBGC, ERISA outlines permissible plan termination procedures in considerable detail. A plan administrator (often, as in this case, the employer) wishing to terminate a pension plan must follow the voluntary termination proceedings described in section 4041 of ERISA, 29 U.S.C. Sec. 1341. First the plan administrator files a Notice of Intent to Terminate with PBGC. Then the administrator waits ninety days while the PBGC reviews the plan's financial records to make sure it has sufficient funds to cover the participants' accrued benefits. Once PBGC has determined the assets to be sufficient, the administrator is free to terminate the plan.

ERISA also permits PBGC to institute termination proceedings. Under section 4042 of ERISA, 29 U.S.C. Sec. 1342, PBGC must initiate what are known as involuntary termination proceedings whenever it determines, according to specified criteria, that a plan's financial position has become untenable, see id. Sec. 4042(a), 29 U.S.C. Sec. 1342(a). Once PBGC finds a plan untenable, it applies to the appropriate federal district court to have the plan terminated and a trustee appointed to administer the plan's assets. See id. Sec. 4042(b), (c), 29 U.S.C. Sec. 1342(b), (c). Occasionally, a company initiates voluntary termination proceedings, and PBGC discovers in the course of its ninety-day review period that the plan's assets are insufficient. ¹ In such cases, PBGC is obliged to begin involuntary termination proceedings under section 4042 of ERISA, 29 U.S.C. Sec. 1342, in order to protect itself and the plan participants from suffering losses caused by the company's unfunded pension liability. Id. Sec. 4041(c), 29 U.S.C. Sec. 1341(c).

A plan's termination date is significant in both voluntary and involuntary termination proceedings. In both, termination marks the date on which the benefits of plan participants cease to accrue. For involuntary terminations, the date of termination serves an additional purpose. When an employer underfunds its pension plan and is unable to finance a minimum level of benefits, PBGC, pursuant to its statutory guarantee, must pay those benefits. See id. Sec. 4022, 29 U.S.C. Sec. 1322. If forced to honor its guarantee, PBGC has the right to recover from the employer the lesser of the amount that the employer underfunded its plan or thirty percent of the employer's net worth on a date chosen by PBGC within 120 days prior to the plan's termination date. See id. Sec. 4062(b), 29 U.S.C. Sec. 1362(b). Because involuntary termination proceedings often involve bankrupt corporations with deteriorating financial resources, see, e.g., In re Braniff Airways, Inc., 21 B.R. 181 (Bkrtcy.N.D.Tex.1981) (Braniff I ), the date of termination can significantly affect the extent of PBGC's recovery from the employer. A late termination date may prevent PBGC from having any claim against an employer with little or no net worth during the 120 days before the termination date. On the other hand, an early termination date could give PBGC the right to recover substantial assets from the employer, based on its higher net worth at an earlier time.

In devising a mechanism for setting a termination date, Congress expressed a clear preference that a termination date be set in advance to give plan participants warning when their benefits will stop accruing. Accordingly, in voluntary termination proceedings, a plan administrator must propose a termination date at least ten days after the date on which the Notice of Intent to Terminate is filed. See ERISA, Sec. 4041(a), 29 U.S.C. Sec. 1341(a). Although it favored prospective termination dates, Congress did not require PBGC to give formal advance notice to plan participants in all involuntary termination proceedings. Congress apparently recognized that, when faced with bankrupt employers and substantial unfunded pension liabilities, PBGC might occasionally wish to establish a retroactive date of termination to limit its own liability. See id. Sec. 4048(a)(2), 29 U.S.C. Sec. 1348(a)(2). But Congress did not give PBGC unilateral authority to set a termination date, even in involuntary proceedings. Under ERISA, if the plan administrator does not agree to the date proposed by PBGC in an involuntary termination proceeding, a federal district court will set the date. Id. Sec. 4048(a)(3), 29 U.S.C. Sec. 1348(a)(3). Similarly, PBGC can request the Court to set a termination date if it does not approve of the date proposed by the employer in a voluntary termination proceeding. Id.

II.

In September 1973, the Broadway Maintenance Corporation, engaged in the business of street light maintenance in Manhattan and the Bronx, established a pension plan for its employees. Over the next five years, Broadway made several contributions to the Plan, but not the number nor the total amount of dollars that the Plan required. On July 19, 1978, the company filed a petition in bankruptcy under Chapter XI of the old Bankruptcy Act. Broadway officials mistakenly believed that their bankruptcy filing terminated the company's pension plan, and did not realize that they had to file a Notice of Intent to Terminate with PBGC before terminating the Plan. PBGC first learned in August 1980 that Broadway wished to terminate its Plan when a Broadway employee contacted the agency about the Plan's coverage. Through subsequent investigation, PBGC discovered that Broadway's Plan was seriously underfunded and that the company was in bankruptcy proceedings. Recognizing that it might soon have to assume responsibility for Broadway's pension liabilities, PBGC filed two Proofs of Claim in bankruptcy court: one on behalf of the Plan for the contributions that Broadway should have made over the past seven years under the terms of the Plan and under section 4042(d)(1)(B)(ii) of ERISA, 29 U.S.C. Sec. 1342(d)(1)(B)(ii), and the other on its own behalf for the expected liability of the company to PBGC under section 4062(b) of ERISA, 29 U.S.C. Sec. 1362(b), as a result of the Plan's imminent termination. In statements submitted to the bankruptcy court, PBGC revealed that it planned to initiate involuntary termination proceedings against Broadway. PBGC's Proofs of Claim and its accompanying statements were filed on December 5, 1980.

In early 1981, officials from Broadway and PBGC met to discuss the termination of the Plan. On March 20, 1981, Broadway filed with the PBGC a Notice of Intent to Terminate, proposing a retroactive termination date prior to December 31, 1979. Ordinarily, this Notice would have proposed a date of termination no earlier than ten days after the date the Notice was filed. See ERISA Sec. 4041(a), 29 U.S.C. Sec. 1341(a). PBGC, however, has indicated that it will "in unusual cases" accept retroactive termination dates. See 45 Fed.Reg. 80,941, 80,942 (Dec. 8, 1980). In a cover letter attached to Broadway's Notice of Intent, counsel for the company expressed his understanding that PBGC had already agreed that Broadway's application was sufficiently unusual to warrant a retroactive date of termination.

PBGC officials did not share the understanding of Broadway's counsel and refused to accept the retroactive termination date, as would have been necessary for the proposed date to take effect. See ERISA Sec. 4048(a)(1), 29 U.S.C. Sec. 1348(a)(1). The earliest termination that PBGC would accept was March 30, 1981, which was ten days after March 20, 1981, the day that Broadway filed its Notice with PBGC. PBGC subsequently initiated this action requesting that Broadway's pension plan be terminated, that PBGC be appointed trustee of the Plan, and that March 30, 1981, be set as the date of termination. Broadway acquiesced to PBGC's first two requests, but maintained that the company's proposed retroactive termination date was appropriate. The date of termination was thus the sole issue before the District Court.

In resolving the parties' dispute over a termination date, the District Court first reasoned that the termination of Broadway's Plan was involuntary because PBGC rather than Broadway had instituted the termination proceedings. The District Court then looked to a recent Third Circuit...