Tuesday, April 24, 2007

Preliminary Analysis of Oral Argument in Beck ERISA Fiduciary Case

4united_states_supreme_court_1129_2 The Supreme Court this morning heard oral arguments in the ERISA fiduciary case of Beck v. Pace International Union. The transcript can be found here.

As you may recall from our previous post on this case, at issue is whether a company, Crown Vantage, violated its ERISA fiduciary duties to its pension plan participants to act in their best interests when it decided to terminate a number of its pension plans and purchase annuities for the participants of the plans.  As an alternative, the employees' union, Pace, offered to merge the plans into its multi-employer plan. Without investigating this alternative, the company refused.  Although most seem to agree that the company did not engage in a fiduciary action when it decided to terminate the plan, the real issue is whether the company had a fiduciary duty to act in the plan participants' best interests before deciding to go the annuity, rather than, the merger route.

Justices Ginsburg and Souter's questions appear to clearly indicate that they believe that the choice between the annuity and merger options was a fiduciary decision concerning plan administration.  In this regard, Justice Souter commented and asked:

If the, if the plan sponsor decides to purchase an annuity, it's accepted I think by you and by everybody that there are two decisions being made. Decision one is terminate the plan. Decision two, distribute the assets by purchasing an annuity that gives the beneficiaries what they should get. And so on.

But when we come to the question of merger, you're saying there's only one decision, and I think that's where I'm having trouble with your argument. When we come to the question of merger, it seems to me there are two decisions again. The first decision is we're going to terminate the plan that we've got. What do we do with our assets. We have decided to merge -one possible decision as an alternative to annuities is to merge the plan with, with another one. Why aren't there two decisions in the merger case just as there are two decisions in the annuity case?

Justice Scalia, coming to the aid of the company's attorney, puts forward the counter-argument to this view that instead a merger should be viewed as a separate type of non-fiduciary decision akin to plan termination:

Mr. Baker, I thought your position in your briefs, and I don't know why you do not make this reply to this exchange, is that the merger with another plan is not a termination, isn't that your basic position? . . . .Because if it were a termination, in a termination, you must distribute the assets to the participants. And here when you merge with somebody else, the assets are not distributed to the participants, but they are thrown into a pot with other people.

Justice Breyer's sympathies appear to be with Souter and Ginsburg, but he asks an additional question which may cut against the union's position and which Chief Justice Roberts appears sympathetic to.  It is not clear, however, whether the company waived this argument by not raising it below:

And now there is a third question. Does what happened in terminating mean that although you have a fiduciary duty, you couldn't consider a merger, because that's just not consistent with the basic plan of terminating.

Justices Kennedy and Alito both seem open to the view that it is not necessarily in the best interests of the plan participants to have their pension funds go to a large pension pool where in the end they may receive less benefit than in an annuity form.  Of course, this assumes that the company engaged in a fiduciary action, but did not breach their fiduciary duty.

Justice Thomas, as is his practice, makes no comment, but would appear, based on his previous ERISA decisions, to be more likely to favor the employer.  And Justice Stevens may have summed up everyone's feeling when he started a question with: "I'm puzzled. Can I just get myself straightened out a little bit?"  His puzzlement aside, Justice Stevens' few comments seem to favor the union.

After reading this transcript, I think the Court is likely to favor the company, with perhaps Justice Kennedy and Justice Alito holding the deciding votes.  No guts, no glory: I predict a 5-4 decision for the employer that its decision not to consider the merger proposal was not a fiduciary one.



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» Beck v Pace International Union from Boston ERISA Law Blog
Well, my trials still ongoing, and I find myself short of time to really comment in any detail on the latest details in the always percolating and never quiet world of ERISA and insurance law. However, I do still find... [Read More]

Tracked on Apr 25, 2007 11:13:41 AM

» Round-Up from SCOTUSblog
The AP's Frederic J. Frommer reports here on this morning's oral argument in the campaign finance cases; Kristin Jensen and Greg Stohr have this article at Bloomberg; in the Washington Post, Robert Barnes reports here that a majority of the... [Read More]

Tracked on Apr 25, 2007 2:13:42 PM


Thanks for providing this insight into the preliminaries of the Supreme Court decision. It is fascinating to see how the justices proceed with their deliberations on this very important question of a sponsor's fiduciary duties.

On p. 16, a new element, for me, was introduced. Justice Alito asked, "Is what's really involved in this, who is going to get the $5 milliom reversion that you would get if you purchased an annuity?"
Mr. Baker replied, "That's what's really in dispute."

It seems like the real argument is who gets the $5million: the employer or the union?

If the employer must look at the reversion from a fiduciary's viewpoint, Chief Justice Roberts said it well on p. 39, "If you're saying it's a fiduciary, how can they make a decision ever to do anything other than just give the $5 million to the beneficiaries?"

In my opinion, if this money can revert back to the employer, its decision to terminate is a settlor one, not a fiduciary one.
The union counsel seems to be suggesting that reversion is not even an option.

Chief Justice Roberts summed it up well on p. 40-41, "If the employer cannot get that back even after fully insuring the benefits, employers in the future will be very careful not to put in one penny more than what's required to fund the plan."

With defined benefit plans dwindling, employers will need the incentive to overfund those plans that remain, and may form in the future.
Don Levit,CLU,ChFC

Posted by: Don Levit | Apr 30, 2007 12:55:51 PM

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