Petition — Nachman Corp. v. Pension Benefit Guaranty Corporation

In the MICHABL RODAK, JR., CLERK

Supreme Court of the Gnited States

OCTOBER TERM, 1978

No. 28-1557 |

NACHMAN CORPORATION,

Petitioner,

Vv.

PENSION BENEFIT GUARANTY

CORPORATION and INTERNATIONAL

UNION, UNITED AUTOMOBILE

AEROSPACE AND AGRICULTURAL

IMPLEMENT WORKERS OF AMERICA.

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIROUIT

LAWRENCE R. LEVIN

ROBERT W. GETTLEMAN

JOEL D. RUBIN

H. DEBRA LEVIN

30 North LaSalle Street

Chicago, Illinois 60602

(312) 236-9200

Attorneys for Petitioner

e

Of Counsel

D’ANCONA, PFLAUM, WYATT & RISKIND

30 North LaSalle Street

Chicago, Illinois 60602

a

INDEX

PAGE

EIEIO WT choc rruhinasdeoacinecasecDeccsdninagus.seekacecshenndevcithenaanaie 1

"SEE era SNORE aU sO 2

EET ORE Oe 2

Statutory Provisions Involved .............ccsccssessesseceseseeseees 3

UN SE UNI INI So lincen cede coerccs sas ccsccececoceveicnzesvensvene 5

Reasons for Granting the Wit ..............ccccssssseeeees sae

NINE shia tls sock ccutvclninncctneccnssoecnensepsseocsessnsee 10

I. The Ruling Below Conflicts With Applicable De-

cisions of This Court Holding That Retroactive

Imposition of Liability is Unconstitutional ........ 11

If. The Ruling Below is Erroneous and Creates a

Conflict of Rationale Among the Circuits ............ 16

Ill. This Case Presents a Critical Issue of Federal

Law Which Should Be Settled By This Court .... 19

COMCIOSION .......ccssssvssssesssssernesersessnscessssessecsnessnnsgneestacsnnesesnensnes 20

Appendix (Opinion and Judgment of Court of

B. Gae a CORRS Fn trinclstlne App. 1

AUTHORITIES CITED

Cases:

Allied Structural Steel Co. v. Spannaus, 438 U.S. 234

RU AIL E. als hate na Detter pas dccenceanchtaasansbenicoseeeeaqeetytesocsens 7, 11-16

A-T-O v. PBGC, 456 F.Supp. 545 (N.D. Ohio, 1978) .... 18-19

Fisher & Porter de P.R., Inc. v. ITT Hammell-Dahl/-

Conoflow, 369 F.Supp. 638 (D.P.R. 1974) .........sssesee 13

Fornaris v. Ridge Tool Co., 423 F. 2d 563 (1st Cir. 1970),

Rev’d. on other grounds, 400 U.S. 41 (1970) ........0000 13

Mandeville Island Farms, Inc. v. American Crystal

Sugar Co., 334 U.S. 219 (1948) .......cccesseseeesees oS Rea ‘11

ii

PAGE

Martin v. Hunter’s Lessee, One Wheat (14 U.S.) 304

GUE siasssecteepichiithscdeninsctddscevenielil eatrasisitils Sislinapisaidins vcdeapabebeodnnestis 19

Nachman Corp. v. PBGC, 436 —— 1334 _ Tl.

MER widadseeipenusbinitngeessitictirenttlashaiitensitiabinlassiaatioscbeanapenianicdbates 1, 16

Railroad Retirement Board v. Alton Railroad Co., 295

U.S. 330 (19385) ......... shadnoals Brie Beet

Riley v. MEBA Pension — 570 F.2d 406 (2nd Cir.

pg ee ihe sebittltinsnléiiiaidiomeniteiatenctntl tan 17, 19

Standard Oil Co. of Louisiana v. Poterie, 12 F.Supp.

100 (E.D. La. 1935) siidahalidedsiteddonedbeniipniecabiiccaibecateais 13

US. v. Public Utilities Commission of Cal., 345 U.S. 295

(1953) sialadebeislsiadisioucriacbaigdlivhasiadyieaensinieiileietahanilasanpildeceshes 19

Usery v. Turner Elkhorn Mining Oo., 428 U.S. 1 (1976) 11, 13-14

Other Authorities:

U.S. Constitution, Amendment V_ ..............:sssscsseresssssesoeseees 3

AO TEs ECR D ShehcnicssoctnsvckonsinatasacansicGjenotehdoneibcoscncaacvns 8,17 '

SRS As APE TED selacscitinssosiincescsttecsonntediccerussdiitisonmaciesiioon 3, 8, 10,

17-19

29 U.S.C. $1053 (a) ...cccccccoccccsccsesssseseseses idilibemadisdasaash onset 3,7

29 U.S.C. §1061(b) (2) ............. siahijtncenaareiiaactsoasintvinsusihioks 4, 7, 14

29 U.S.C. §1082(b) (3) ..........0.. laphaniinalibiclatacaldoc tacos sic 4,7

Be Py ONIN ac issinitoctiaceorsscknn risdbthavsctlatbibébdabniencusesisses 5, 7, 14

MP NP: QUID Soka. ccs Salis mpnshiscsnschinsssononsecbasibonsi 5, 10, 18

Se AM is IID soo idses sn sceeicebiaicks wcabedSsits acai Sua 18

Oxford English Dictionary ............c.cccssssssssssecsscssssesscsseesessees 19

Webster’s New Collegiate PIMOS casciisinssicesidabivsrincesesie ‘19

Funk & Wagnall Standard Desk Dictionary ............... aw 0

In the

Supreme Court of the Anited States

OcTOBER TERM, 1978

No.

NACHMAN CORPORATION,

Petitioner,

v.

PENSION BENEFIT GUARANTY

CORPORATION and INTERNATIONAL

UNION, UNITED AUTOMOBILE

AEROSPACE AND AGRICULTURAL

IMPLEMENT WORKERS OF AMERICA,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH OIROUIT

Petitioner, Nachman Corporation, respectfully prays that

a writ of certiorari issue to review the judgment and opinion

of the United States Court of Appeals for the Seventh Circuit

entered in this proceeding on January 23, 1979.

OPINION BELOW

The opinion of the Court of Appeals, not yet reported,

appears in the appendix hereto. The opinion of the United

States District Court for the Northern District of Illinois,

which was reversed by the Court of Appeals, appears at 436

F.Supp 1334.

JURISDICTION

The judgment of the United States Court of Appeals

for the Seventh Circuit was entered on January 23, 1979.

Jurisdiction of the courts below was based upon 28 U.S.C.

§§1331 and 1339, and 29 U.S.C. §1302(b). This Court’s

jurisdiction is invoked under 28 U.S.C. §1254(1).

QUESTIONS PRESENTED

1. Whether the retroactive application of ERISA (as

hereinafter defined) to compel employer liability under a

lawfully terminated pension plan which did not provide

for continued funding in excess of the plan’s assets on

termination violates the due process clause of the fifth

amendment to the United States Constitution.

2. Whether an employer, which lawfully terminated a

pension plan prior to the effective date of the minimum

vesting and fanding standards imposed by ERISA, is

compelled to continue to fund the pension plan to provide

payments to participants for which the employer was not

contractually liable.

3

STATUTORY PROVISIONS INVOLVED

United States Constitution, Amendment V:

‘*No person shall . . . be deprived of life, liberty, or prop-

erty, without due process of law....”

United States Code, Title 26

§401(a)(7) [prior to amendment by ERISA]

‘¢(7) A trust shall not constitute a qualified trust under

this section unless the plan of which such trust is a part

provides that, upon its termination or upon complete dis-

continuance of contributions under the plan, the rights of

all employees to benefits accrued to the date of such termi-

nation or discontinuance, to the extent then funded, or the

amounts credited to the employees’ accounts are nonforfeit-

able.’’

United States Code, Title 29

§1002(19)

‘*For purposes of this subchapter :

(19) The term ‘‘nonforfeitable’’ when used with re-

spect to a pension benefit or right means a claim obtained

by a participant or his beneficiary to that part of an im-

mediate or deferred benefit under a pension plan which

arises from the participant’s service, which is uncondi-

tional, and which is legally enforceable against the plan.

For purposes of this paragraph, a right to an accrued

benefit derived from employer contributions shall not be

treated as forfeitable merely because the plan contains

a provision described in section 1053(a) (3) of this title.’’

§1053 (a)

‘*(a) Each pension plan shall provide that an employee’s

right to his normal retirement benefit is nonforfeitable upon

the attainment of normal retirement age and in addition

shall satisfy the requirements of paragraphs (1) and (2)

of this subsection.

4

(1) A plan satisfies the requirements of this para-

graph if an employee’s rights in his accrued benefit de-

rived from his own contributions are nonforfeitable.

(2) A plan satisfies the requirements of this para-

graph if it satisfies the requirements of subparagraph

(A), (B), or (C).

(A) A plan satisfies the requirements of this sub-

paragraph if an employee who has at least 10 years of

service has a nonforfeitable right to 100 percent of

his accrued benefit derived from employer contribu-

tions... .’’

§1061 (b) (2)

‘*(2) Except as otherwise provided in subsections (c)

and (d) of this section in the case of a plan in existence

on January 1, 1974, this part shall apply in the case of

plan years beginning after December 31, 1975.’’

§1082(b) (3)

‘*(3) For a plan year, the funding standard account

shall be credited with the sum of—

(A) the amount considered contributed by the em-

ployer to or under the plan for the plan year,

(B) the amount necessary to amortize in equal an-

nual installments (until fully amortized)—

(i) separately, with respect to each plan year, the

net decrease (if any) in unfunded past service lia-

bility under the plan arising from plan amendments

adopted in such year, over a period of 30 plan years

(40 plan years in the case of a multiemployer plan),

(ii) separately, with respect to each plan year, the

net experience gain (if any) under the plan, over a

period of 15 plan years (20 plan years in the case of

a multiemployer plan), and

(iii) separately, with respect to each plan year,

the net gain (if any) resulting from changes in

5

actuarial assumptions used under the plan, over a

period of 30 plan years.’’

§1086(b)

‘*(b) Except as otherwise provided in subsections (c)

and (d) of this section, in the case of a plan i in existence

on January 1, 1974, this part shall apply in the case of

plan years beginning after December 31, 1975.’’

§1322(a)

‘*(a) Subject to the limitations contained in subsection

(b) of this section, the corporation shall guarantee the

payment of all nonforfeitable benefits (other than bene-

fits becoming nonforfeitable solely on account of the

termination of a plan) under the terms of a plan which

terminates at a time when section 1321 of this title ap-

plies to it.’’

STATEMENT OF THE CASE

This declaratory judgment action’ arises from the deter-

mination by respondent Pension Benefit Guaranty Corpo-

ration (‘‘PBGC’’) that the Employee Retirement Income

Security Act of 1974, 29 U.S.C. $1001, et seq. (‘‘ERISA’’)

compels petitioner Nachman Corporation (‘‘Nachman’’) to

continue to fund a lawfully terminated collectively bargained

pension plan despite an express limitation of vequaga ~

liability to the Plan.

The Plan at issue (the ‘‘ Nachman Plan’’) was established

in 1960 pursuant to a collective bargaining agreement be-

tween Nachman and the International Union, United Auto-

mobile Aerospace & Agricultural Implement Workers of

America (the ‘‘UAW’’), which provided that Nachman

1 Nachman filed a declaratory judgment action against the PBGC

alone. The UAW subsequently intervened as a defendant. The case

was decided on cross motions for summary judgment.

6

would contribute to a pension plan a certain number of

cents per hour worked for each employee. Under the Plan,

Nachman’s obligation to make annual contributions to a

trust fund was translated into an actuarial formula calcu-

lated so that the benefits under the Plan would be fully

funded after 30 years if the Plan had not terminated.’

As acknowledged by the Seventh Circuit, ‘‘The parties do

not dispute that Nachman complied fully with the funding

obligations imposed by the Plan.’”

The Nachman Plan expressly provided that benefits were

payable to participants only if the funds contributed by

Nachman and the accumulated earnings thereon were ade-

quate to pay all such benefits:

‘*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 ac-

crued but unpaid.’”

Under its terms, the Plan could be terminated at any

time after the collective bargaining agreement expired. The

Plan also provided that upon termination, the contributions

previously made by Nachman constituted a ‘‘complete dis-

charge of the Company’s financial obligation.’”

Prior to ERISA, the applicable provisions of the Internal

Revenue Code and Illinois law permitted an employer such

as Nachman to terminate a plan and cease contributing.

Benefits would then be paid to participants from the funds

2Joint Appendix, pp. 15-21.

5Slip Opinion, Appendix p. 2.

*Article V, §3 of the Plan, Joint Appendix, p. 39.

5Article V, §5 of the Plan, Joint Appendix, p. 37.

7

| already contributed and for which the employer received

a deduction on its income tax return. ERISA established

a number of requirements for plans to provide truly ‘‘non-

forfeitable’’ benefits, i.e., certain benefits could not be for-

feited due to early termination of employment, or plan

termination, and minimum funding obligations must be

undertaken by the employer. ERISA did not, however,

require a plan to provide these nonforfeitable benefits upon

its enactmert in 1974. Instead, the requirement to provide

nonforfeitable benefits was phased in to allow employers

time to plan appropriate courses of action to deal with the

requirements of the new Act. See Allied Structural Steel

Co. v. Spannaus, 438 U.S. 234, 249 (1978) discussed at pp.

11-16, mfra).

Thus, under Title I of ERISA, every plan such as the

Nachman Plan was required to be amended by January 1,

1976 to provide that a participant’s benefits become non-

forfeitable after he completes a certain length of employment.

29 U.S.C. §§1053(a), 1061(b)(2). The first contribution to

meet the new minimum funding requirements imposed by

ERISA would have been for the year beginning January 1,

1976. 29 U.S.C. $41082(b) (3), 1086(b).

Relying on this timetable, on October 1, 1975 Nachman,

which was closing its plant, gave timely notice to the VAW

that it was terminating the Plan effective December 31, 1975.

Nachman could not have given such notice sooner because,

under the provisions of the Nachman Plan, termination was

not permitted during the term of the collective bargaining

agreement which expired on October 31, 1975. As the court

below acknowledged, ‘‘The propriety of the termination is:

not challenged.’

®Article IX, §2 of the Plan, as amended by Amendment No. 3 to

the Plan, Joint Appendix pp. 50, 76.

TSlip Opinion, Appendix p. 3.

_ The effect of such termination on Nachman, however, is in-

deed challenged. Although the parties and the court below

conceded that Nachman could not have terminated the plan

prior to October 31, 1975, and although Congress allowed a

grace period to January 1, 1976 to amend such plans to pro-

vide that benefits become ‘‘nonforfeitable,’’ the Seventh Cir-

cuit (reversing the District Court) found (1) that the benefits

provided under the Plan, which were expressly conditioned

upon sufficiency of Plan assets, were nonforfeitable under

ERISA prior to 1976, and (2) that the express terms of the

plan had been retroactively amended by ERISA to impose

liability for continued funding where no such liability had .

previously existed, even though the Plan was properly termi-

nated before 1976. The court further held that such an inter-

pretation did not violate the due process clause of the fifth

amendment.

The court held, first, that the definition of ‘‘nonforfeitable’’

contained in section 1002(19) of Title I of ERISA applies to

the use of that term in Title IV, which governs the PBGC.

This is important since Nachman’s liability to the PBGC is

limited only to the extent the Plan provides nonforfeitable

benefits. A claim to benefits is ‘‘nonforfeitable’’ under sec-

tion 1002(19) only if it ‘‘is unconditional, and. . . is legally

enforceable against the plan.’’ Although the finding that the

section 1002(19) definition applies to Title TV was in accord

with the position taken by the District: Court and Nachman,

the Court of Appeals held that the benefits at issue were

‘*‘nonforfeitable’’ under that definition, despite the fact that

those benefits were limited by express contract to the assets of

the Nachman Plan at termination.

Moreover, the Court of Appeals held that such an inter-

pretation did not offend due process despite the fact that it,

(a) created new and expensive obligations on the employer

(which admittedly had complied with all its obligations), (b)

ignored the express contractual limitation of liability which

was the product of collective bargaining, and (c) imposed this

new liability without any chance for the employer to have

avoided it under the grace period provisions of ERISA.

10

’ REASONS FOR GRANTING THE WRIT

Introduction

The instant case meets three of the five requirements for

review by this Court set forth in Supreme Court Rule 19(b).

First, the ruling below squarely conflicts with applicable

decisions of this Court which hold unconstitutional the retro-

active imposition of liability to pay additional compensation

for services already rendered and fully compensated. Fur-

ther, the Seventh Circuit’s rationale conflicts with that of

the Second Circuit in interpreting the definitional section of

ERISA at issue (section 1002(19)). Finally, the statutory

issue presented—the definition of ‘‘nonforfeitable benefit’’—

constitutes a critical issue of federal law which should be .

settled by this Court since, (a) the PBGC insures, and

employers are obligated to fund, only such ‘‘nonforfeitable

benefits,’ (b) the issue directly affects at least 12,000 em-

ployees and their employers throughout the United States

(including the 135 former employees of the plant closed by

Nachman),*® and (c) a uniform approach to this legislation

generally is required to guide both the public and private

sectors in administering retirement benefit funds which af-

fect practically every working person in this country.

Petitioner contends that the Seventh Circuit’s interpreta-

tion of ERISA was erroneous and constitutes a violation of

the due process right of Nachman and other employers who

lawfully terminated pension plans prior to the effective date

of the minimum vesting and funding requirements.

§ 29 U.S.C. §1322 (a).

*Joint Appendix at 138.

11

I.

THE RULING BELOW CONFLICTS WITH APPLI-

CABLE DECISIONS OF THIS COURT HOLDING THAT

RETROACTIVE IMPOSITION OF LIABILITY IS UN-

CONSTITUTIONAL.

The Seventh Circuit, in holding that the benefits at issue

were ‘‘nonforfeitable,’’ concluded that the statute as so inter-

preted, although admittedly retroactive, did not violate due

process. Thus, the court found that Nachman could constitu-

tionally be held liable for continued funding although (a)

Nachman had complied with all its obligations under the

Plan, (b) Nachman could not have terminated the Plan be-

fore it did so, and take advantage of certain grace periods

set forth in ERISA, (c) the Plan expressly limited benefits

to its assets and limited Nachman’s liability to accrued

contributions at termination, and (d) the Plan was lawfully

terminated prior to the date on which such plans had to

be amended to provide for truly nonforfeitable benefits.

This holding directly conflicts with the decisions of this

Court in Railroad Retirement Board v. Alton Railroad Co.,

295 U.S. 330 (1935), and Allied Structural Steel Co. v.

Spannaus, 438 U.S. 234 (1978)." In Alton, this Court held

10 Although the portion of the Alton opinion dealing with the com-

merce clause was overruled in Mandeville Island Farms, Inc. v.

American Crystal Sugar Co., 334 U.S. 219, 230 n.9 (1948), the

coordinate holding of Alton on the due process limitations imposed

on Congress by the Constitution remains in effect and unaltered,

as recognized by this Court in Usery v. Turner Elkhorn Mining

Co., 428 U.S. 1, 19, n.18 (1976).

11 Although the latter case was decided under the Contract Clause, the

court below properly noted that “the analysis employed in Contract

Clause cases is also relevant to judicial scrutiny of Congressional

enactments under the Due Process Clause.” Slip opinion, Appendix

p. 21.

12

that Congressionally imposed liability (under the Railroad

Retirement Act) requiring the payment of pension benefits

based in part on employment prior to enactment of that

Act violated due process. The Court rejected the govern-

ment’s argument that Congress, by imposing liability to

fund pension benefits based in part on past services, was

acting in the best interests of the nation and the railroad

industry. The Alton Court, in language directly applicable

to Nachman’s situation, held that by requiring payment ‘‘for

services long since rendered and fully compensated,’’ Con-

gress had deprived the employers—who had no opportunity

to terminate their obligations or increase retroactively their

charges to their customers—of property without due process.

295 U.S. at 354.

Similarly, in Allied Structural Steel, this Court struck

down a Minnesota statute which imposed liability on em-

ployers who terminated pension plans for the payment of

unfunded benefits to all employees who had worked at least

ten years. That statute, the Court ruled, unconstitutionally

created a “severe disruption of contractual expectations... .”

438 U.S. at 247. Liability for benefits based on services

already rendered was imposed on employers who terminated

plans immediately after enactment of the Minnesota statute.

This Court compared such an impermissible retroactive im-

position of liability without an opportunity to avoid such

liability to the ‘‘gradual applicability of grace periods’’ which

it found were provided by ERISA. 438 U.S. at 247. The

ruling of the court below in the instant case, however, ef-

fectively rejects the existence of such grace periods and

denies Nachman the opportunity to take advantage of them.

13

The Alton and Allied cases, along with the numerous

lower court decisions following them,’* stand for the

proposition that the Constitution forbids legislation which

imposes a new liability on employers to pay additional

compensation to its employees for work which has been

fully performed and compensated. Further, the cases

emphasize the suspect nature of retroactively applied

obligations, and reject arguments seeking to justify such

legislation on the ground that the legislatures were acting

in the public interest.

In rejecting the applicability of the precedent established

by this Court in the above cited cases, the Seventh Circuit,

although acknowledging the retroactive effect of its inter-

pretation, relied entirely on Usery v. Turner Elkhorn

Mining Co., 428 U. 8. 1, (1976), where this Court upheld

Congressional imposition of liability on coal industry em-

ployers to compensate employees suffering from black lung

disease. That reliance is misplaced. The opinion in Turner

Elkhorn carefully distinguished Alton, and held that retro-

active benefits for black lung victims constituted compen-

sation for essentially tortious injury, ‘‘to satisfy a specific

need created by the dangerous conditions under which the

former employee labored.’’ Alton, on the other hand, in-

volved an unconstitutional attempt to require increased

pension compensation in the nature of additional salary. 428

U.S. at 19. In the instant case, the pension payments imposed

12Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir. 1970), Rev'd.

on other grounds, 400 U.S. 41 (1970) ; Fisher & Porter de P.R.,

Inc. v. ITT Hammell-Dahl/Conoflow, 369 F.Supp. 638 (D.P.R.

1974) ; Standard Oil Co. of Louisiana v. Poterie, 12 F.Supp. 100

‘ (E.D. La. 1935). ;

14 |

by the Seventh Circuit are, without question, in the nature

of additional salary, and bear no relation to compensation

for tortious injury or similar conduct. Clearly, this case

should be governed by the principles of Alton, and not by

those of Turner Elkhorn.

Even if this Court were to conclude that the imposition

of new liability for past service were permissible, due

process requires that Nachman be given the opportunity

to avoid that liability. The Court in Allied, in striking

down the Minnesota statute, criticized its ‘‘sudden, totally

unanticipated, and substantial retroactive obligation’’ im-

posed by the Minnesota statute, and compared it with the

gradual applicability of the ‘‘[fJunding and vesting re-

quirements [of ERISA which] were delayed for an addi-

tional year [to January 1, 1976]. 29 U.S.C. §§1086(b),

1016(b)(2).” 438 U.S. at 249, n.23.

The statutory interpretation of the Seventh Circuit un-

necessarily nullifies the grace period emphasized by this

Court in Allied, by imposing liability for benefits prior to the

effective date of the mandatory vesting and funding pro-

visions—a result which, like Alton and Allied, established

a constitutionally impermissible retroactive alteration of

employer obligations for additional pension benefits. In

reaching its conclusion, the Seventh Circuit mentioned

several tests which it believed might apply to the judicial

- scrutiny of ERISA, as interpreted by that court.” The

court below concluded that the retroactive imposition of

liability on Nachman did not violate due process, mainly

18 Thus, the court helow mentioned a “means-end rationality test”

(at p. 21), as well as a comparative test requiring an examination

of both the problem to be remedied and the “nature and scope of

the burden imposed to remedy that problem.” (Slip opinion at

p. 23.)

15

because it found ‘‘ample evidence that Congress perceived

a widespread problem of national importance.’’ (Slip opin-

ion p. 24.) That conclusion is fallacious, because the Sev-

enth Circuit’s analysis erroneously presumed that the

entire effect of ERISA was being subjected to constitu-

tional scrutiny. In fact, this litigation involves only those

plans which terminated prior to the end of the grace period

—the first date on which Congress mandated plan amend-

ments to provide for truly nonforfeitable benefits.

Although Congress undoubtedly perceived a ‘‘ widespread

problem of national importance,’’ Congress also, as noted

by this Court in Allied, allowed phase-in grace periods

during which employers could terminate plans without further

liability. To hold, as did the court below, that ERISA allowed

Nachman no opportunity to terminate its obligations during

this grace period, squarely contradicts this Court’s holding

in Allied. Since Nachman terminated its Plan at the first op-

portunity, and admittedly complied with all of its obligations

under the Plan, the entire constitutional rationale of the

Seventh Circuit is invalid.

One further important point should be mentioned with

respect to the holding of the court below on the constitu-

tional question. The opinion dealt at some length with the

issue of respective reliance by Nachman and its employees,

concluding that the ‘‘employees’ reliance interests in vested

benefits outweigh the employer’s reliance on prior fund-

ing.’’ (Slip Opinion at 25.) That startling finding is con-

trary to the record that the benefits at issue were not

promised under the terms of the Plan, but only as the Plan

was later affected by ERISA. Moreover, this finding totally

ignores the fact that the Nachman Plan was the product

of collective bargaining by the employer and the employees,

the latter acting through the UAW. Nachman agreed to

16

contribute a certain sum to the Plan each year during

which the collective bargaining agreement was in effect

and the UAW agreed that benefits would be limited to the

amount of those contributions.

Thus, as this Court recognized in Allied (438 U.S. at

246, n.18), the employees clearly had no expectation of

benefits which were not provided in the agreement, and

thus no ‘‘reliance’’ on the receipt of such benefits. As the

District Court held in this case, based on the record, ‘‘the

advent of ERISA does nothing to disturb the contractual

expectations of Nachman or its employees.’’ 436 F.Supp.

at 1339. Indeed, any discussion of reliance must be settled

in favor of Nachman in light of its lack of any liability

to continue funding under pre-ERISA law. Further, to

hold that reliance by the employer on the provisions of a

duly executed collective bargaining agreement are any less

than those of the employees who entered into that agree-

ment violates constitutional doctrine, the National Labor

Relations Act, and common sense.

The decision below is constitutionally offensive, contra-

dicts established precedent, and should be reviewed and

reversed by this Court.

II...

THE RULING BELOW IS ERRONEOUS AND CREATES

A CONFLICT OF RATIONALE AMONG THE OIR-

CUITS.

In the instant case, although the benefits at issue were

expressly conditioned upon sufficiency of assets, the Seventh

Circuit held that the benefits were ‘‘nonforfeitable”’’ since the

benefits were ‘‘vested,’’ i.e., the participants had met the re-

quired length of service requirements. The Seventh Circuit

concluded that since the terms ‘‘nonforfeitable’’ and

17

‘*vested’’ are used interchangeably in much of the legislative

history regarding ERISA, the vested benefits under the Plan

are nonforfeitable."* The Seventh Circuit failed to realize,

however, that the terms ‘‘nonforfeitable’’ and ‘‘vested’’ be-

came interchangeable only after all the provisions of ERISA

—including the minimum funding and vesting requirements

—became effective. Prior to such time, and under pre-ERISA

law, vested benefits were nonforfeitable only to the extent

funded. 26 U.S.C. §401(a)(7) [prior to amendment by

ERISA].

Moreover, the Seventh Circuit decision directly conflicts

with the rationale of the Second Circuit in Riley v. MEBA

Pension Trust, 570 F.2d 406 (2nd Cir. 1977). In Riley, the

Second Circuit found that a benefit that had vested by the

time the employee terminated his employment was in fact

forfeitable because it was subject to a condition subsequent—

the benefit would be forfeited if the employee competed with

his former employer.

Thus, in Riley, a ‘‘vested’’ benefit was ‘‘forfeitable.’’ Al-

though these two cases arise under different factual settings,

the application of the Seventh Circuit’s holding in the instant

case to the facts of Riley would have, without question, re-

sulted in a contrary ruling to that of the Second Circuit on

the issue of interpretation of the same statutory provision,

section 1002(19)."* If the Riley plan had terminated before

January 1, 1976, the Second Circuit would have held that the

employee’s vested benefit was not insured because it was for-

feitable. The vesting of benefits in the Plan merely established

that a participant who terminated his employment before

14 Slip Opinion, p. 9, quoting D. McGill, Preservation of Pension

Benefit Rights, 6 (1972).

18 The court in Riley went on to hold that although the benefit was

forfeitable, the employee had not in fact breached the condition

subsequent.

18

retirement age, but after his benefit vested, would still be

entitled to receive benefits upon reaching retirement age,

provided that assets in the fund were sufficient.

The Seventh Circuit’s ruling also conflicts directly with

the decision in A-7-O v. PBGC, 456 F.Supp. 545 (N.D. Ohio,

1978). In that case, as in the instant case, the employer had

terminated a plan, which limited liability to the assets of the

fund, prior to the January 1, 1976 effective date of the

minimum vesting and funding requirements. The court held

that, as it interpreted section 1002(19), the benefits so limited

were not nonforfeitable until after that date and, after an

extensive review of the legislative history, found that Con-

gress specifically intended to impose the new vesting require-

ments prospectively, not retrospectively. 456 F.Supp. at 522.

Counsel is informed that the A-7-O case has been appealed

to the Fourth Circuit, but as of this date no opinion has been

issued by the reviewing court.

The interpretive issue addressed by the various district

courts and courts of appeals is critical to the administration

of ERISA since the PBGC insures only nonforfeitable ben-

efits. 29 U.S.C. §1322. Although the PBGC has contended

that its own definition of nonforfeitable (29 CFR §2605.6(a))

should take precedence over section 1002(19) for purposes

of Title IV, every reported decision dealing with the issue

has rejected that position. Only the Seventh Circuit, however,

has held that a benefit is nonforfeitable under section 1002

(19) prior to 1976, where liability to pay the benefit was

expressly and lawfully limited to the assets of the fund at

termination.

In A-T-O and the instant case, the lower courts drew

extensively on legislative history to bolster their conclusions.

Significantly, the Seventh Circuit reached a result diametri-

cally opposite to that reached by the A-7-O court, relying on

the same legislative history. (See Slip Opinion, pp. 11-13.)

These published opinions not only cause confusion in the

19

manner of approaching the interpretation of ERISA, but

cloud the ordinary meaning of the central term ‘‘nonforfeit-

able’’ which, of course, should govern absent a finding of am-

biguity.!*

The dictionary definition of nonforfeitable is clear: ‘‘not

subject to forfeiture; cannot lose right to.’’'’ Since the

benefits at issue are strictly limited to the Plan’s assets

at termination, those benefits clearly were—at least prior

to 1976—not nonforfeitable under the common meaning of

the term as used in section 1002(19). In short, the benefits

were not ‘‘unconditional’’ or ‘‘legally enforceable against the

Plan’’ prior to January 1, 1976, on which date plans then

in existence were required to be amended to provide non-

forfeitable benefits.

The different approaches and conclusions drawn with

respect to the definition of nonforfeitable under ERISA re-

quire review by this Court.

Il.

THIS CASE PRESENTS A CRITICAL ISSUE OF FED-

ERAL LAW WHIOH SHOULD BE SETTLED BY THIS

COURT.

Based upon the foregoing, the need for a uniform approach

to the concept of nonforfeitability under ERISA becomes

clear. The issue has been sharpened and reduced by the

opinions of the lower courts in the instant case, by the

Second Circuit in Riley and by the District Court (and soon

by the Fourth Circuit) in A-T-O. '

16 U.S. y. Public Utilities Commission of Cal., 345 U.S. 295 (1953),

Martin v. Hunter's Lessee, One Wheat (14 U.S.) 304 (1816).

17Oxford English Distionary; See also, Webster’s New Collegiate

Dictionary, Funk & Wagnall Standard Desk Dictionary.

20

To hold, as did the Seventh Circuit, that Congress allowed

no grace period in retroactively imposing the new vesting and

funding requirements of ERISA constitutes a violation of

due process and a disregard for the legislation’s phase-in

provisions. Too many employees and employers are affected

by the sweeping changes mandated by ERISA to allow such

a decision to stand.

CONCLUSION

For the foregoing reasons, petitioner Nachman Corpora-

tion prays that this court issue a writ of certiorari to the

United States Court of Appeals for the Seventh Circuit for

purposes of reviewing and reversing the decision of that

court.

Respectfully submitted,

LAWRENCE R. Levin

Rosert W. GetrLEMAN

JozL D. Rusm

H. Desra Levin

30 North LaSalle Street

Chicago, Illinois 60602

(312) 236-9200

Attorneys for Petitioner

Of Counsel

D’Anoona, Priraum, Wratt & Riskinp

30 North LaSalle Street

Chicago, Illinois 60602

3n the

Gnited States Court of Appeals

For the Seventh Circuit

Nos. 77-2146 and 77-2147

NACHMAN CORPORATION,

\ Plaintiff-A ppellee,

Vv.

PENSION BENEFIT GUARANTY CORPORATION and INTER-

NATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE &

AGRICULTURAL IMPLEMENT WORKERS OF AMERICA,

Defendants-A ppellants.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 76-C-2963—Abraham bk. Marovitz, Judge.

ARGUED SEPTEMBER 26, 1978—DECIDED JANUARY 23, 1979

Before CUMMINGS, Circuit Judge, WisDOM, Senior

Circuit Judge,* and SPRECHER, Circuit Judge.

SPRECHER, Circuit Judge. The Pension Benefit Guar-

anty Corporation and the United Auto Workers appeal

from the district court order granting summary judg-

ment in favor of the plaintiff, Nachman Corporation.

The lower court granted declaratory relief, limitin

Nachman’s pension liability to the amounts accumula

in a pension plan trust fund.

* Senior Circuit Judge John Minor Wisdom, of the

United States Court of Appeals for the Fifth Circuit, -is

sitting by designation.

APPENDIX

2 Nos. 77-2146 and 77-2147

The collectively ined 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 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

——_ of vested benefits on an employer who, after

ptember 2, 1974, terminates a cove pension plan

with insufficient assets. Additionally, Nachman chal-

lenges the ign sg | 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 judg-

ment of the district court.

I.

Pursuant to collective bargaining with the UAW, in

1960 Nachman established a pension plan for certain

employees at its Armi 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 yeas 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.! The parties do not dispute

chat Nachman complied fully with the funding obli-

gations imposed by the plan.

' The plan credits an employee for years served prior to

the establishment of the plan. “Past service liability”

refers to the cost of paying monthly benefits for those

years.

Nos. 77-2146 and 77-2147 3

On October 1, 1975, Nachman gave timely notice to

the UAW that it was terminating the pension plan

effective December 31, 1975. The termination accom-

panied the closing of the mg 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 Pe He 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 char-

acter 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

4 Nos. 77-2146 and 77-2147

Tre “vesting” previsions in many plans. Before

ERISA, for example, if a plan did — for

vesting until tong prt Bog 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 stand-

ards 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

aos ag 4 of the funding cycle used by many plans. To

improve the fiscal soundness of these pension funds,

Title II amends the Internal Revenue e to require

minimum funding. Title III imposes fiduciary responsi-

bilities on the trustees of the rome funds and provides

for ter information and disclosure to employee-

Pot cipants. The final area of concern add by

RISA was the loss of employee benefits which resulted

from plan terminations. In order to protect an employ-

ee’s interest in his accrued benefit mens 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 guaran-

tees the ment of “nonforfeitable benefits (other than

benefits ming 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

cmployer-sponsor of a covered pension plan, a notice of

intent to terminate must be filed with the PBGC. Jd. at

Ho The PBGC then examines the plan and

etermines 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

—

Nos. 77-2146 and 77-2147 5

benefits are then paid out from the trust assets and, if

those are insufficient, from PBGC funds.? Jd. 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. /d. 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. Jd. at § 1862(bX1). Liability, however, is

limited to a maximum of thirty percent of the net worth

of the employer. /d.

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

lan termination occurred after the effective date of

Mritle IV, September 2, 1974. If they are so guaranteed,

the PBGC must provide them and assess liability

against the employer.’

It is conceded that the benefits in issue were vested

under the terms of the plan. Thus, the — question

before us is only whether the plan term limiting benefit

2 The PBGC funds are collected through premiums

assessed against employer-sponsors and _ inves in var-

ious accounts. 29 U.S.C. §§ 1305-07.

3 The district court suggested that although Nachman

could not be liable to the PBGC for the payment of the

benefits, the PBGC might nonetheless be required to

provide those lost benefits to the employees. 436 F. Supp.

at 1334. Nothing in the statutory language or history of

the Act suppo this conclusion. The measure of the

PBGC’s obligation to provide benefits and the measure of

employer liability are identical under the Act; that

measure is the amount of benefits “guaranteed.” 29 U.S.C.

1361-62. The effective date of both sections was Septem-

r 2, 1974. Id. at § sssie). Furthermore, the act

provides expressly for PBGC assumption of liability

without recourse to the employer only for those ter-

minations occurring between June 30, 1974 and Septem-

ber 2, 1974. Id. at § 1381(b).

6 Nos, 77-2146 and 77-2147

rights to the assets of the fund rendered the rights

forfeitable and thus not guaranteed.

Title ITV does not provide a definition of “nonfor-

feitable.” However, the word nonforfeitable is used in

Title I, the “minimum vesting” sections, as well. Title I

requires that after January 1, 1976, ery plan must

provide that benefits become “nonforfeitable” upon the

satisfaction of the minimum eligibility requirements. /d.

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 promul by the PBGC as the admini-

—s agency. Benefits are nonforfeitable, and guaran-

.

on the date of termination of the plan the partici-

ant has satisfied all of the conditions required of

tm 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). Nach-

man’s employees have satisfied all conditions required of

them. The benefits in issue are therefore clearly

“nonforfeitable” if the PBGC definition is employed.‘

‘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 clause in

the plan rendered the employee rights both “conditional”

and not “legally enforceable” and therefore forfeitable.

<The PBGC has relied on this definition in guaranteei

sailliens ef dellers in enfended bensllin diclnimes le

employers who terminated plans prior to Jan 1, 1976. ©

More than 12,000 l i

wang MO employees are receiving such benefits

Nos. 77-2146 and 77-2147 7

The court reasoned that since Title I requires that plans

be amended to make benefits nonforfeitable, such

exclusion clauses could not be operative after January 1,

1976, the effective date of that title. Since the Nachman

plan was terminated before Title I took effect, however,

the judge concluded the clause retained validity. The

court found no contrary ap rene intent, relying on the

congressional purpose to delay the effective date of the

minimum vesting requirements until January 1, 1976.

Under the lower court reading of the Act, between

September 2, 1974 (the effective date of Title 1V) and

' January 1, 1976 (the effective date of Title I) the PBGC

would only be authorized to guarantee benefits which

had become vested and had not been disclaimed by the

employer under the terms of the plan.

We conclude that ERISA was designed to insure

benefits which were vested under the plan terms,

without regard to liability exclusion clauses, effective

September 2, 1974. Benefits which would only vest by

mandate of Title I standards rather than prior plan

terms would not be insured until 1976. Since the

Nachman plan was terminated after 1974, and since the

benefits had admittedly vested under the terms of the

plan (without regard to Title I) we hold that Nachman is

subject to liability under ERISA. 29 U.S.C. § 1362.5

III

We agree with the district court that the definition of

“nonforfeitable” provided in Title I should govern the

construction of that term’s use in Title IV. However

5 We te no opinion on the amount of that liability.

As_ noted, § 1362 contains a net worth limitation. In

addition, the PBGC has the authority to defer § 1362

ORE onde make special repayment arrangements. 29

6 The defendants argue it should not since Title I

specifically limits the definitional provisions to that

subchapter. 29 U.S.C. § 1002. But we agree with the

proposition cited by the lower court that: “{aJn earlier

7 sya definition may properly color a su uent use of

the same words without redefinition.” Kent Mfg. Corp. v.

Commissioner, 288 F.2d 812, 815 (4th Cir. 1961).

8 Nos. 77-2146 and 77-2147

unlike the district court, we conclude that the PBGC

definition is consistent with the Titie I definition.

Although the district court’s further construction is

linguistically plausible, we conclude that the benefit

— of Nachman's employees fit within the Title |

definition of “nonforfeitable.” Reference to the legislative

history and the fundamentals of pension plans in effect

before the passage of ERISA illustrates beyond any

doubt that the PBGC definition also reflects the

construction of the Title I definition intended by

Congress.

Under ordinary usage, it may seem illogical to

conclude that the Nachman es provides employees

with nonforfeitable benefits when a clause in the plan

expressly precludes recovery from the employer in the

event the plan terminated with insufficient assets. It

certainly appears to be a forfeiture. This is undoubtedly

the “illogic” which led the district court below, and the

district court in A-7-O, Inc. v. Pension Benefit Guaranty

Corp., ..... F. Supp. ..... —- Ohio 1978), to conclude the

benefits were forfeitable. But see In re Williamsport

Milk Products Co., Inc., ..... F. Supp. ..... (M.D, Pa. 1978).

But as the Second Circuit recently stated in Riley v.

MEBA Pension Trust, 570 F.2d 406, 408-09 (2d Cir.

1977), “the lower court fell victim to the not uncommon

error of reading technical pension language as if it were

ordinary English speech.”

Notwithstanding the plausibility of the lower courts’

construction of “nonforfeitable” another construction is

also possible; and it is that construction which we

believe to be the correct one. This construction, like the

district court’s, also derives from the three elements

reqared for nonforfeitability under the Section 1002(19)

definition: the “claim” to the benefits must “arise from

the participant’s service,” it must be “unconditional” and

it must be “ legally enforceable against the Plan.”

(Emphasis added). The benefit claims in issue can be

seen to satisfy all three elements. The claims arise from

participant service. Second, although the benefit claim

is admittedly not legally enforceable against the em-

ployer under the terms of the plan, the statute requires

Nos. 77-2146 and 77-2147 9

only that the claim be enforceable against the plan.

Nachman’s employees’ claims are enforceable against

the plan, they simply may not be collectable. Nor is

their claim inst the plan conditional. All conditions

placed upon the participant such as age and length of

service have been met. The PBGC definition interprets

“unconditional” only as referring to those conditions

placed on the participant and not to sufficiency of

assets.’ Satisfaction of the claim is dependent upon

sufficient assets, but this should not be viewed as a

condition on the claim, Under the pre-ERISA termin-

ology, one author clarified that although benefit claims

in fact were conditioned on the availability of funds in

— trust, they were not to be considered conditional

rights:

In a basic contradiction to the pure legal concept of

vesting, the Benefit under a pension plan that is

deecrtteel as vested, is, in the usual case ...

contingent ... upon survival .. . [and] upon the

availability of assets in the plan. In principle,

however, this is no different from some other types

of vested Be baondhJ rights such as those embodied in

bonds and promissory notes that may not be honored

at maturity because of the financial condition of the

promisor. In essence, therefore, the vesting of a

pension benefit mene means that the realization of

the benefit is no mg ag contingent upon the

individual’s remaining in the service of the em-

ployer to normal retirement age.

D. MCGILL, PRESERVATION OF PENSION BENEFIT RIGHTS,

6 (1972). See also DEPARTMENTS OF TREASURY AND

7 Some conditions on vested benefits related to require-

ments imposed on the participants might render the

benefits forfeitable, at least until 1976 when Title I would

invalidate such conditions. See, e.g., the benefit rights in

Riley v. Pension Trust, 670 F.2d 406 (2d Cir.

1974). In this case, the vesting was unconditional.

10 Nos. 77-2146 and 77-2147

LABOR, STUDY OF PENSION PLAN TERMINATIONS 1972, 19

(1973).8 |

In sum, the definition instructs that nonforfeitability

must be measured by the quantum of rights against the

lan and without regard to rights against the employer.

he liability exclusion clause is therefore irrelevant to a

determination of nonforfeitability because it relates only

to a claim the employee may have had against an entity

other than the plan itself.

Not only does this construction more closely conform

to the statute itself, but it is also the only construction

substantially supported by the legislative history. Two

facts from the legislative history are significant in this

regard. First, there is ample evidence that Congress

used “vested” and “nonforfeitable” interchangeably and

understood the definition of “vest” to mean that benefits

would “vest” upon the participant’s fulfillment of plan

requirements regardless of employer liability exclusion

® Prior definitions of nonforfeitable clarify the use of the

term “unconditional.” H. R. 2 as reported, defined a

nonforfeitable pension benefit as a:

l claim obtained by a icipant or his beneficiary to

thet part of an adhe EE og deferred pension benefit,

which arises from the participant’s service and is no

longer | a on continued service or any other

obligation to the employer, sponsoring organization, or

other party in interest.

H. R. 2, 98rd Cong., Ist Sess., § 3(19) (1973), reprinted in II

LEGISLATIVE HISTORY OF EMPLOYEE RETIREMENT INCOME

SECURITY ACT of 1974, 2251-52 (herein LEGISLATIVE HISTORY).

See also S. 1557, 93rd Cong., Ist’ Sess., § 3(t) (1973), I

LEGISLATIVE HISTORY at 285. Despite a wide variance in the

definitions employed in various versions of the act, there is

substantial evidence that the object of coverage in this regard

never differed. Thus even though this language was gg

the committee report accompanying H. R. 12906, bill

incorporating definitional language , very similar to that

eventually clarifies that definitions were de-

signed to “requirje] plans to insure unfunded vested . . .

pee + to the amounts insured by the Act)}.” II

ISLATIVE HISTORY at 3346. See also note 10 infra.

Nos. 77-2146 and 77-2147 11

clauses.? Second, the legislative history also shows that

Congress enacted Title IV for the specific purpose of

guaranteeing benefits that were lost because of

employer liability exclusion clauses.

® The district court in A-T-O, Inc. v. PBGC, ..... F. Supp. at

vesbe concluded that Congress “was aware of the distinction

between ‘vested’ and ‘nonforfeitable,’” concluding that “non-

forfeitable” encompasses only those vested benefits not dis-

claimed by the employer, As discussed infra, we are

convinced that Congress did not understand this to be a

difference in the terms.

We find only one statement in the legislative history

potentially supportive of this construction of the statute. The

district court relied on the following passage in the conference

report to conclude that Congress intended to insure only those

unfunded, vested benefits for which the employer had

assumed liability: “Under the conference substitute, vested

retirement benefits guaranteed by the plan ... are to be

covered. .. .” III] LEGISLATIVE HISTORY at 4635. The court

concluded that if the plan did not guarantee the vested

benefits cag gre did not intend to guarantee those benefits

(until Title I became effective).

Although the sheer weight of the contrary history probably

precludes the district court’s conclusion, a closer reading of

the paragraph cited reveals the propriety of a different

inference than that drawn by the A-T-O court. The sentence

reports the conference bill resolution of an issue of what

variety of vested benefits should be insured. The on

explains that the House version of the bill insured only those

benefits “required to be vested under the bills minimum

vesting standards” while the Senate version insured all

benefits which vested by reason of plan terms. We read the

quoted sentence as merely gee | that the Senate version

was adopted and that ves benefits “guaranteed” by the

plan, rather than Title I, would be insured. Thus it is

inappropriate to read the word “guarantee” so strictly in a

Geant. where limitation-of-liability issues were not under

iscussion.

There in fact never was a dispute between the bills on the

desirability of poeeting vested benefits without regard to

employer liability exclusion clauses. Senator Williams

explained that “the conference substitute, as did the House

and Senate bills, establishes an insurance program to protect

employees against the loss of vested benefits . . .” without any

ualification that those vested benefits be recoverable from

the employer under the plan.

(Footnote continued on following page)

12 Nos. 77-2146 and 77-2147

ane the first important opens of the legislative

history—the interchangeability of Congressional use of

the terms “vested” and “nonforfeitable’—it must be

realized that “vested” had a clear meaning which

determined the meaning of its corollary term, “nonfor-

feitable.” It had been commonly understood that benefits

would “vest” even when the plans contained employer

liability exclusion clauses. See McGill, supra at 6. The

Nachman pw itself is illustrative, providing for the

“vesting” of benefits upon satisfaction of age and service

requirements, despite the inclusion of the exculpatory

clause in the plan. Thus the substitution of the word

“vested” for the word “nonforfeitable” in_the statutory

language further clarifies that Title IV guarantees

benefits not contractually guaranteed by the employer.

The definitional substitution is entirely appropriate.

There is overwheiming evidence that the words vested

and nonforfeitable were in fact used synonymously in

this regard by Congress.'® Even though the Act uses the

® continued

The district court in Nachman, on the other hand,

a berenty recognized that the words were used _inter-

c = y agin ge the Act, but nonetheless concluded

that Congress u the word “vested” to describe unfunded

benefit rights enforceable against the employer. We refuse to

presume, without supporting legislative history, that Congress

used this standard pension term to mean something other

than its accepted definition. The legislative history, as

discussed, indicates traditional usage of the term “vested.”

10 In fact, in the reported version of S.4 the word vested was

where the word nonforfeitable now appears. See S.4,

93rd Cong., Ist Sess., § 402(a) (1973), I LEGISLATIVE HisTORY

at 389. The substitution of terms — be explained by

reference to the testimony of members from the rtment

of Labor at the hearings. The Department testified in 1973

that “there is a problem of defining the accrued benefit which

will be insured.... [W]e probably need to get some

consistency between accrued benefits definition for purposes

of Internal Revenue as well as for purposes of termination

insurance.” Hearings ore the Subcommittee on Private

Plans of the Committee on Finance, 93rd

Cong., Ist Sess., Part I at 437. Senator Bentsen responded

(Footnote continued on following page)

Nos. 77-2146 and 77-2147 13

word “nonforfeitable,” various committee ory as well

as remarks of members invariably state that Title IV

insures “vested” benefits."' During the hearings Senator

Bentsen specifically stated that “(t]he risk we are

talking about insuring is the vested interest of the

participants.” Hearings before the Subcommittee on Pri-

vate Pension Plans of the Senate Committee on Finance,

93d Cong., Ist Sess., Part } ai 443 (1973). The words

“nonforfeitable” and “vested” appear interchangeably in

the dialogue of the history throughout all stages of the

legislation."2 For example, in discussing the minimum

10 continued 1 3 :

with some interest in consistent definitions, although em-

Ms err it was vested benefits Congress intended to insure.

d. at 443. The Internal Revenue Code used the word

“nonforfeitable,” rather than “vested,” in its regulation —_

terminations pre ERISA. See Treas. Reg. § 1.401-6 (1963)

Alternatively it is conceivable that “nonforfeitable” was

referred to “vested” to clarify that benefits guaranteed by

itle IV must have vested unconditionally during the period

before Title I’s restrictions on vesting conditions went into

effect. See note 7 supra.

Moreover, the committee reports reveal clearly that al-

though the statutory language was altered, the intent

remained constant. In S. 1179, the first Senate bill to use the

term “nonforfeitable,” the sccompane tae committee report

explained that insured benefits were those “vested . . . under

oe ne S. Rep. No. 93-383, I LEGISLATIVE HisToRY at

'' The conference report on Title IV was explained as

pene the loss of “vested benefits.” III LEGISLATIVE

ISTORY at 4741 Na ae of Senator Williams). See

also H. Rep. No. 93-533, II LEGISLATIVE HISTORY at

2349; S. Rep. No. 93-383, LEGISLATIVE HISTORY at 1094, 1149.

See also the remarks of Representative Drinan, III LEGISLA-

TIVE History at 3590 (“The Bill . . . would prevent anyone

who has a vested pension benefit from losing benefits because

of plan failure for any reason.”).

12 In one Senate Report reference is made to “vested (te.,

nonforfeitable) rights.” S. Rep. No. 93-383, I LEGISLATIVE

History at 1112. Both House and Senate Reports refer to “the

term ‘nonforfeitable right’ or ‘vested right’ ” (Emphasis on the

singular form added). H. Rep. No. 93-533, II LEGISLATIVE

' History at 2357, S. Rep. No. 93-127, I LEGISLATIVE HISTORY

(Footnote continued on following page)

14 Nos. 77-2146 and 77-2147

funding staadards the Senate Committee noted that the

“presently vested [benefits] . . . represent the nonfor-

feitable rights of employees.” S. REP. NO. 93-383, I

LEGISLATIVE HISTORY OF THE EMPLOYEE RETIREMENT

SECURITY INCOME ACT OF 1974 (hereinafter LEGISLATIVE

History), at 1090. In another Senate Report it was

explained that “[ojne of the major private pension plan

considerations centers around the concept of vesting.

Vesting refers to the nonforfeitable right or interest

which an employee acquires in the pension fund.” S.

REP. No. 93-127, I LEGISLATIVE HISTORY at 594.

The second significant aspect of the rye kt history

- supporting our construction of “nonforfeitable” is even

more direct: the parpose of Title IV was to guarantee

benefits that might be lost because of employer liability

disclaimers. We must note initially that construing

ERISA, as did the court below, to cover only instances

in which the employer assumed liability for incomplete-

Beas ag plans would import so narrow a purpose to

ngress as to make the enactment of Title IV almost

meaningless.'* Congress was certainly aware of the fact

that the standard private pension plan prior to ERISA

2 continued

at 602. Senator Williams explained the conference bill as

assuring every employee the attainment of “nonforfeitable or

vested’” rights in a pension. III LEGISLATIVE HISTORY at

4734. See H.R. 462, 93d_Cong., Ist Sess., § 3(26) (1973)

II LecisLaTive History at 75, setting out the definition of

nonforfeitable right’ or ‘vested right.’ ”

7 — the district court found that these benefits would

have me insurable under Title I effective in 1976. Title I,

however, would have no effect on this problem since it was

only directed at ensuring unconditional vesting under the

lan. As discussed supra, it has been traditionally true that

nefits can be unconditionally vested and still unrecoverable

because of asset deficiencies. Throughout the history it is

emphasized that Title I requirements would not ensure the

employee of actual receipt of vested benefits—only Title IV

could do that. See, eg. S. REP. NO. 93-383, I LEGISLATIVE

History 1093-94.

Nos. 77-2146 and 77-2147 15

disclaimed employer liability.“ Additionally, under this

construction the congressional urgency behind Title 1V

would reasonably have to be further narrowed to reach

only the instances where the employer was both liable

for plan deficiencies and insolvent. (Otherwise insurance

would be generally unnecessary). There is no question

that terminations often result because of some financial

difficulty. However, the Treasury-Labor Study of pen-

sion plan terminations, on which Congress relied heavi-

ly, revealed that only three per cent of employees who

suffered benefit losses in 1972 worked for employers

with a net worth less than the employee benefit losses.

DEPARTMENTS OF THE TREASURY AND LABOR, STUDY

OF PENSION PLAN TERMINATIONS 1972, 61 (1973).

Further, seventy-one percent of the employees who suf-

fered losses were employed by a firm with a net worth

of at least 1,000 times greater than the benefits lost. Jd.

Therefore Congress clearly perceived the employer

liability exclusions as the source of the losses and the

4 Both legislative. and non-legislative sources confirm that

the employer rarely assumed liability for underfunding of the

lans pre-ERISA. SEE S. REP. No. 92-634, 92nd Cong., 2nd

ess. at 74 (1971), I1 LEGISLATIVE HISTORY at 3479 (remarks

of Rep. Annunzio); II LEGISLATIVE HISTORY at 3388-89

remarks of Rep. Erlenborn). See also, A STUDY OF THE

ERMINATION OF UAW PENSION PLANS reprinted in Hearings

on H. R. 1269 before the Subcommittee on Labor of the House

Committee on Education and Labor, 92nd Cong., Ist Sess. at

164 (1972); GREENOUGH AND KING, PENSION PLANS AND

PUBLIC PoLicy 194 (1976); D. MCGILL, FULFILLING PENSION

EXPECTATIONS 112, 240 (1962) (stating that “except for

unusual! situations, the onpeer is under no legal reg to

monitize the benefits credited under a pension plan.” (Em-

phasis in original).

Evidence in the record here suggests that 78 of the 136

plans terminated before January 1, 1976 contained limitation

of liability clauses similar to the one in the Nachman plan, a

figure representing a lower percentage than these sources

suggest has been traditionally true. This evidence does not

reveal however whether some of the terminated plans used

various other forms of indirect disclaimers instead of the

standard clause. See MCGILL, FULFILLING PENSION EXPECTA-

TIONS, supra, at 88-89.

16 Nos. 77-2146 and 77-2147

— to be remedied." As early as 1971, the Senate

ubcommittee on Labor had concluded:

The need for or desirability of insurance arises

because of the numerous contingencies which can

result in’. . . termination. . . . Employers ordinari-

ly have no financial responsibility for pension

payments beyond the contributions they are com-

mitted to make.

INTERIM REPORT OF ACTIVITIES OF THE PRIVATE

WELFARE AND PENSION PLAN StTupy, SENATE CoMm-

MITTEE ON LABOR AND PUBLIC WELFARE, SUBCOMMITTEE

ON LABOR, 92nd Cong., 2nd Sess., 74 (1971).

There is, however, no need to infer such a narrow pur-

pose to Congress since in fact Congressional represen-

tatives definitely believed that Title IV of ERISA had

been written to insure the benefits which employers had

declined to guarantee. It was definitivel stated during

the floor debates in both the House and Senate, that the

termination insurance, had it been in force in 1960,

would have insured the vested benefit losses of the

employees of the South Bend Studebaker plant. II

LEGISLATIVE HISTORY at 1639 (Remarks of Senators

Bentsen and. Javits); III LEGISLATIVE HISTORY at 4694

(remarks of Rep. Brademas).'* Those losses resulted

because the plan disallowed recourse to the employer's -

assets.!7

8 This is further evident from the repeated expressions of

intention to insure all the vested benefit Seas reported by the

1972 renmary. Katies Study. As noted, almost all of the losses

reported involved solvent employers. {I LEGISLATIVE HISTORY

at 1635-36 (remarks of Sen. Bentsen).

- 6 The Studebaker losses were of the greatest magnitude and

were frequently cited as representative of the need for

Histone af 1093-94, 1146-47: II LEGISLATIVE H t 1665-

a . TIVE HISTORY

66 (remarks of Sen. Taft); II LEGISLATIVE ISTORY at

3373-74 (remarks of Rep. Brademas).

11 See the remarks of Willard Solenburger, HEARINGS ON

PRIVATE PENSION PLANS BEFORE THE SUBCOMMITTEE ON

FISCAL POLICY OF THE JOINT ECONOMIC COMMITTEE, 89th

Cong., 2nd Sess., 126, 127 (April 27, 1966).

P. No. 93-383, I LEGISLATIVE .

Nos. 77-2146 and 77-2147 3 17

Therefore, it is beyond doubt that the vested benefits

of Nachman’s employees are guaranteed by Title IV.

The lower court suggested that even if the benefits were

guaranieed Nachman would not be liable. As discussed

supra, Section 1362, subjecting employers to liability for

2 guaranteed benefits, prohibits this conclusion.

Moreover, the legislative history confirms that Section

1362 was intended to re liability on employers for

the benefits they had disclaimed contractually. Although

the primary concern of the legislature was to guarantee

benefits to workers, it was determined that imposition of

liability on the employer would be essential to prevent

abuse.’ Title IV was not merely a subrogation scheme

as the district court suggested. It was recognized as im-

position of the very liability employers had previously

refused to assume.'® Nowhere does this appear more

clearly than in the remarks of the — of Title IV.

Five Congressmen supported a bill to delete Title IV

18 See S. Rep. No. 93-383, I LEGISLATIVE History at 1155; II

LEGISLATIVE HisToRY at 1873 (remarks of Sen. Griffin); II

LEGISLATIVE HISTORY at 3382 (remarks of Rep. Gaydos),

stating that employer liability was necessary to “prevent a

solvent employer from wi ket geen, a plan and transferrin

the amount of the unfunded vested liabilities to the [PBGC]}.

Absent this igggcoonct the solvent employer would be able to

is ag

renege on reement to contribute to the plan with

impunity.” ,

i See GREENOUGH, supra at 194:

Until the 1974 act ... the finanvial obligation of a

pension trust was limited to the actual assets of the plan;

there was no recourse beyond the limit for those to whom

benefits had been promised but for whom the liability had

been insufficiently funded. Under the new pension law,

the gap between the employer and the pension plan has

been bridged. If the PGBC has had to pay benefits to

vested participants upon plan termination, employers are

liable for shone aga 5 the insurance corporation for

insurance benefits paid... .

The new termination insurance provisions constitute a

recognition in public policy that an employer who

establishes a pension plan cannot thereafter isolate

himself from the financial consequences of the promises

made. The reform was long overdue.

18 Nos. 77-2146 and 77-2147

(significantly not Title I) from the act because a ob-

jected to its intent to “change the contract of the

employer from a promise to make certain contributions

to a fund to a promise to pay the pension ger by a

pledge of the employer’s assets.” H. REP. No. 93-533, II

ISLATIVE HISTORY at 2387-88 (supplemental views of

Representatives Quie, Ashbrook, Erlenborn, Eshleman

and Hansen).2° Congress provided that Title IV take

effect on September 2, 1974, to ensure “promptsant

effective protection.” III LEGISLATIVE HISTORY at 4742

(remarks of Sen. Williams). Senator Williams explained

the need for the September 2, 1974 effective date:

Probably one of the most difficult problems con-

fronted by the Congress was the selection of effec-

tive dates for the insurance program, and here both

Senate and House conferees worked diligently to

arrange a structure of effective dates that would

bring Oy peeeton ee a into effect

as quickly as possible. This was done in recognition

of the fact that depressed economic conditions in cer-

tain regions created the possibility that a number of

plans were in critical straits and were terminating

or were likely to do so imminently. Lack of im-

mediate protection for beneficiaries in these cases

involved workers who had earned ... pensions

notwithstanding the new provisions of the bill

which have a delayed effective date.

Id. at 4766. To hold that the unconditionally vested

benefit rights of Nachman’s employees are not insured

under the Act would totally subvert the Congressional

intent. Since the benefits are guaranteed under the Act,

Nachman is subject to liability under Section 1362.

20 See Representative Erlenborn’s lengthy explanation of his

opposition to this result during floor debates and the vocal

disagreement of other members of the House. II LEGISLATIVE

HISTORY at 3388-89, 3390, 3393, 3396, 3399-3400. See also

Representative Annunzio’s remarks in support of termination

insurance on the grounds that “it is unconscionable that an

employer is presently under no legal obligation to make

on his pension promise.” II LEGISLATIVE HIsToRY at 3479.

Nos. 77-2146 and 77-2147 19

IV

Nachman argues that Congress cannot constitutionall

impose retroactive liability for the payment of on oe 2 f

vested benefits under the Due Process Clause. U.S.

Const. Amend. V. The Plaintiffs rest their claim of

unconstitutionality principally on the Supreme Court’s

decisions in Katlroad Retirement Board v. Alton

Ratulroad, 295 U.S. 330 (1935) and Allied Structural

Steel Co. v. Spannus, 46 U.S.L.W. 4887 (June 28, 1978).

The defendants argue that the liability imposed should

_be characterized as prospective, but that even if retroac-

tive, this exercise of legislative power is reasonable and

constitutional under the Supreme Court decision in

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976).

The Supreme Court has confirmed that Congress has

broad latitude to readjust the economic burdens of the

rivate sector in furtherance of a public purpose. Only if

ngress legislates to achieve its purpose in an “ar-

bitrary and irrational way” is due process violated.

Usery v. Turner Elkhorn Mining Co., supra, at 15; Duke

Power Co. v. Carolina Environmental Study Group, Inc.,

46 U.S.L.W. 4845, 4851 (June 27, 1978). Turner Elkhorn

rrdscrg also instructs however that it is not necessarily

true that “what Congress can legislate prospectively it

can legislate retrospectively,” 428 U.S. at 16. Judicial

scrutiny of a statute must therefore include an assess-

ment of the rationality of the retroactive effects as a

means to achieving the Congressional purpose.

Title IV of ERISA does affect Nachman retroactively.

The defendants argue that since ERISA only requires

employers to assume liability for pension benefits which

me due upon terminations after the effective date of

the Act, it assesses liability prospectively. This argu-

ment, however, relates only to the degree of retroactive

impact. Although it is true that the statute applies only

to prospective terminations, it also applies retrospective-

ly to invalidate exclusion-of-liability clauses in pension

plans agreed upon prior to ERISA. Thus to the extent

that ERISA invalidates Nachman’s otherwise valid acts

which occurred prior to enactment, it is retroactive. See

20 Nos. 77-2146 and 77-2147

re | Allied Structural Steel Co. v. Spannus, 46

S.L.W. 4887, 4891 (June 28, 1978).

The Congressional purpose in enacting Title IV of

ERISA was to protect employees from the loss of vested

benefits when a pension plan terminates with insuf-

ficient funds. Nachman does not argue that this end

itself exceeds Congressional latory power. Instead,

the specific question presented for review is whether the

imposition of retroactive liability on employers is an ar-

bitrary and irrational means of achieving this end.

The success of Nachman’s position ultimately must

rest on the applicability of several Supreme Court

recedents. Recently, the Supreme Court in Allied

Gructural Steel invalidated a Minnesota statute assess-

ing liability on employers for the payment of unfunded

benefits upon the termination of a private pension plan.

Upon termination, covered employers were required to |

purchase deferred annuities sufficient to provide full

pensions to all employees who had worked at least ten

years. Allied Structural Steel Co. terminated a pension

lan after the effective date of the Act with insufficient

unds. The plan provided benefits for employees retirin

after having served the company for a prescri

period, in no case less than fifteen years, and contained

an exclusion of liability clause. Nine of the eleven

employees discharged did not have any vested pension

rights under the plan since they had not fulfilled the

minimum service requirements. However, these

employees had been in the company’s employ for ten

ears and were therefore entitled to benefits under the

innesota statute.

The Supreme Court found the employer could not be

held to the liability imposed by the statute. The Court

reviewed the statutory scheme and found it con-

stitutionally insufficient, concluding that the legislature

21 To be wholly prospective, Title IV of ERISA would have

to apply only to pension plans established after the effective

date of the act. Hochman, “The Supreme Court and the

Constitutionality of Retroactive Legislation,” 73 HARV. L. REv.

2 As discussed supra, this was the explicit Congressional

purpose.

Nos. 77-2146 and 77-2147 21

had made “no showing . . . that this severe disruption of

contractural expectations was necessary to meet an im-

portant general social problem.” 46 U.S.L.W. at 4891.

Although decided under the Contract Clause, which is

applicable only to state legislation, several authorities

have suggested that the analysis employed in Contract

Clause cases is also relevant to judicial scrutiny of Con-

gressional enactments under the Due Process Clause.

Allied Structural Steel Co. v. Spannus, 46 U.S.L.W. at

4894, 4895 note 9 | peeige pe opinion); Veix v. Sixth

Ward yo ogy & Loan Association, 310 U.S. 32, 41

(1940); Home Building & Loan Association v. Blaisdell,

290 U.S. 398, 448 (1934). See also Hochman, supra note

19, at 695; Hale, The Supreme Court and the Contract

Clause, 57 Harv. L. REv. 852, 890-91 (1944). Both

employ a means-end rationality test. However, since we

are convinced that ERISA withstands the scrutiny

employed under the Contract Clause cases, we need not

decide whether the two clauses in fact impose identical

restraints on legislative impairment of contracts.

A second Contract Clause case, W.B. Worthen Co. v.

Thomas, 292 U.S. 426 (1934), relied upon in Allied

Structural Steel Co., may also be cited as support for

Nachman’s position. In Worthen, the Court invalidated

Arkansas legislation exempting all life insurance from

creditor attachment. The debt was: incurred, judgment

was obtained, and the writ of garnishment was issued,

prior to the enactment of the legislation. The Court held

that this limitation upon the means of emg | a con-

tract impaired the obligation of contracts and therefore

could be justified only if it was enacted “in order to meet

public need because of a pressing public disaster” end

was “limited by reasonable conditions appropriate to the

emergency.” Jd. at 433. Applying these standards, the

Court was unable to ascertain a public need sufficiently

23 In another recent decision, United States Trust Co. v. New

Jersey, 431 U.S. 1 (1977). the Supreme Court invalidated state

legislation under the Contract Clause. The Court applied a

more stringent level of scrutiny to a state’s impairment of its

own contracts than is Se ate for laws impairing private

oe 431 U.S. at 22-23, thus rendering it inapplicable to

is case.

22 Nos. 77-2146 and 77-2147

broad to justify an act containing “no limitations as to

a amount, circumstances, or need.” 292 U.S. at

In Railroad Retirement Board v. Alton Railroad, 295

U.S. 330 (1935), the Supreme Court invalidated under

the Due Process Clause a federally imposed compulsory

retirement and pension system for all carriers subject to

the Interstate Commerce Act. The Act uired

employers to pay the cost of retirement pensions for all

workers presently in their employ as well as for those

workers who had terminated employment in the year

prior to enactment. Whether the pur of the legisla-

tion was viewed as a legislative effort to improve ef-

ficiency, safety or the retirement security of workers,”

the Court found it was arbitrary to achieve these ends

ery the “imposition of liability to pay again for ser-

vices long since rendered and fully compensated,” 295

U.S. at 354, and violated Due Process.

The defendant, on the other hand, relies principally on

the Supreme Court’s decision in Usery v. Turner

Elkhorn Mining, 428 U.S. 1 (1976). There the Court up-

held Congressional imposition of liability on coal in-

dustry employers to Sorngenants employees suffering

from black lung disease. The challenged provision sub-

co employers to liability for injury to employees who

terminated employment prior to the effective date

of the Act. The Court resolved that Due Process was

satisfied because the legislation represented “a rational

measure to spread the costs of the employees’ disabilities

to those who have profited from the fruits of their

labor. .. .” 428 US. at 18.

* It is interesting to note that the beneficiary of the life

insurance in the case, wife of the deceased, had been a

partner in the business for which the credit was obtained,

illustrating the over-inclusive protection afforded.

2 A majority of the court found that this purpose—general

improvement of retirement socarity--anenened the scope of

Congressional power under the Commerce Clause. 295 U.S. at

362. But see id. at 374 (dissenting opinion). We do not

understand the plaintiff here to raise this objection.

Nos. 77-2146 and 77-2147 23

Application of the factors relevant to judicial assess-

ment of rationality, as distilled from these and other

recedents, indicates that Title IV of ERISA satisfies

ue Process. Rationality must be determined by a com-

parison of the problem to be remedied with the nature

and scope of the burden imposed to remedy that

nae In evaluating the nature and scope of the

urden, it is appropriate to consider the reliance in-

terests of the parties affected, Allied Structural Steel

Co., 46 U.S.L.W. at 4890-91; Adams Nursing Home of

Williamstown, Inc. v. Mathews, 548 F.2d 1077, 1080-81

(1st Cir. 1977); whether the impairment of the private

interest is effected in an area previously subjected to

regulatory control, Allied Structural Steel Co., 46

U.S.L.W. at 4891, Federal Housing Administration v.

The Darlington, Inc., 358 U.S. 84, 91 (1958); the equities

of imposing the legislative burdens, Alton Railroad, 295

U.S. at 354; Turner Elkhorn Mining, 428 U.S. at 19, and

the inclusion of statutory a designed to limit

and moderate the impact of the burdens. W.B. Worthen

Co., 292 U.S. at 434; Allied Structural Steel Co., 46

U.S.L.W. at 4891. It must be emphasized that although

these factors might improperly be used to express mere-

ly judicial approval or disapproval of the balance struck

by Congress, they must only be used to determine

whether the legislation represents a rational means to a

yg end. See Turner Elkhorn Mining, 428 U.S.

at 18-19.

Congress determined that each year somewhere in the

vicinity of 20,000 workers lost vested pension benefits

due to causes beyond their control when a pension plan

terminated.?’ Given that workers had “anticipated” that

these vested benefits would provide retirement security,

Congress viewed the termination losses as an abuse of

the private pension system in need of correction. 29

2 Although explicit consideration of these factors might

suggest a risk of judicial usurpation of properly legislative

judgments, failure to consider them might ultimately result in

no meaningful scrutiny of the legislative process—a result

prohibited by the Due Process Clause.

27 See text and notes supra at 14-16 and note 32 infra.

24 Nos. 77-2146 and 77-2147

U.S.C. § 1001(a). Thus, unlike the record before the

Supreme Court in Allied Structural Steel Co., here we

have ample evidence that Congress perceived a wide-

spread problem of national importance.”

An analysis of the retroactive burden im

eo that unlike the legislation in Allied Structural ©

Co., Worthen and Alton Ratlroad, the burdens im-

posed by ERISA a presen ss Pageooe to the Con-

gressional purpose. It is e monetary measure

of Nachman’s potential liability cannot be characterized

as insubstantial.“ Further, Title IV of ERISA does dis-

wey reliance interests of the employer. If the employer

known that he would be liable for funding the insuf-

ficiencies >. termination of the plan, the company |

either would not have established the plan or perhaps

would have utilized a more accelerated funding

28 In Allied Structural Steel Co. the Court objected to the

“extremely narrow focus” of the Minnesota statute. 46

U.S.L.W. at 4891. Moreover, the Court found the “onl

indication of legislative intent in the record” was represented

by the Minne legislature’s concern with one plan termin-

ation a White Motor Corp. Jd. Finally the Court also notes

that the Minnesota legislation had an extremely short

effective life, since it was to become void on the effective dates

of ERISA. /d. at 4891 n.21. This time limitation further belies

the narrowness of the legislative purpose. None of these

defects in the Minnesota scheme are applicable to ERISA.

Although the loss of pension benefits was not considered a

national emergency by Congress, Allied Structural Steel Co.,

confirms the prior precedents holding that re ive liabil-

ity can properly be imposed to re problems which fall

short of an emergency. /d. at 4891 n.24.

22 The Supreme Court in Allied Structural Steel Co., stated

that “[mJinimal alteration of contractual ae may end

the inquiry at its first stage” under a traet Clause

analysis. 46 U.S.L.W. at 4890. The record evidence i

that the average benefit subject to guarantee for Nachman’s

employees is $77 per month. The assets of the fund are only

sufficient to provide an ave monthly benefit of $27, thus

subjecting Nachman to potential gg Oe amortizing the

average benefit of $50 per month for 135 employees.

Nos. 77-2146 and 77-2147 25

schedule.” In Allied Structural Steel Co., the Supreme

Court emphasized the gravity of altering an employer's

obligation “in an area where the element of reliance was

vital—the funding of a pension plan.” 46 U.S.L.W. at

4891. However, the nature of the reliance interests in

this case can be distinguished in several respects. First,

the Minnesota statute imposed liability for payment of

benefits to employees who, since they had not fulfilled

service requirements, had no vested rights under the

plan. Thus the Minnesota employer had a far greater

reliance interest displaced than the only reliance dis-

placed by Title IV—the belief that the company

would not be liable for funding deficiencies in the event

of a plan termination. The Minnesota employer had not

funded the plan to ever accommodate payment of

benefits upon completion of only ten years service, as the

Act now required. This is the only reliance element

emphasized by the Supreme Court in Allied Structural

Steel Co.—an element not present in this case.*!

The second and more important distinction in the

nature of the reliance interests is that in this case Con-

gress found that the employees’ reliance interests in

vested benefits outweighed the wa. a ae reliance on

Had funding. In Allied Structural Steel Co., the

upreme Court specifically stated that, “{iJn some

situations the element of reliance may cut both ways,”

but that “Minnesota did not act to protect any cite yes

reliance interest demonstrated on the record.” 46

30 See D. MCGILL, FULFILLING PENSION EXPECTATIONS 276

ada! concluding that if an engraver were subject to liabilit

or the payment of unfund nefits, “sound financia

management and realistic accounting practice would call for

the funding on a current and actuarially determined basis of

benefit credits not yet vested”—a practice apparently not

typical of plans excluding employer liability upon termination.

31 This aspect of differentiation with Allied Structural Steel

Co., will be eliminated for terminations which occur after

December 31, 1975, since the minimum vesting requirements

of Title I will then be in effect. We need not consider the

2 ie ata of Title I in this case since it is inapplicable

ere.

26 Nos. 77-2146 and 77-2147

U.S.L.W. at 4891 n.18. The Supreme Court was unwill-

ing to speculate that employees without any vested

rights under the plan had any substantial reliance in-

terests. Title IV, however, protects the reliance interests

of employees in benefit rights which had vested under

the pension plan, an interest which, prima facie, is

stronger than interests in unvested rights. Moreover,

Lo: aes meen is - vee gemeneretee on the

egislative record. Congress found that employees’ expec-

tations for retirement security were being defeated by

lant closings and other causes beyond their control.”

he third and final distinction in the reliance interesis

is that the expectation of the employer may also

rationally be given less weight by ey 0 since pen-

sion plan terminations had previously n subject to

federal regulation,” another element notably missing in

Allied Structural Steel Co. 46 U.S.L.W. at 4891.

The basic equities of imposing the liability has also

been relevant to the determination of whether the

burden is irrational. In Allied Structural Steel Co., and

Alton Railroad the Court emphasized that the employer

was being forced to pay added compensation for fully

% The following paragraph represents perhaps the most

succinct explanation contained in the Congressional record:

Concern for loss of benefits by workers after long years

of labor through circumstances beyond their control was

similarly expressed by President Richard M. Nixon on

December 8, 1971, when, in a message to the Congress he

said, “When a pension plan is terminated, an nmmeree

participating in it can lose all or part of the benefits

which he has long been relying on, even if his plan is fully

vested. . . . Even one worker whose retirement security is

destroyed by the termination of a plan is one too

many.

II LEGISLATIVE HISTORY at 3296..

3% The Internal Revenue regulations imposed numerous

requirements on the format of private pension plans necessary

to obtain favorable tax treatment. Included in those regula-

tions was the mandate that all funded benefits be made

nonforfeitable simultaneous with plan termination. Treas.

Reg. § 1.401-6 (1963).

Nos. 77-2146 and 77-2147 27

compensated services. The employers received no benefit

in the bargain. In Alton Railroad the employer had

never agreed to pay any retirement benefits. In Allied

Structural Steel Co. the employer had agreed«to pay

retirement only if the employee served him for the req-

uisite period of time—a time period not satisfied by nine

of the eleven employees terminated. As the Supreme

Court has noted, “the ‘true nature’ of the pension

ayment is a reward for length of service.” Alabama

‘ower Co. v. Davis, 431 U.S. 581, 593 (1977): Here,

however, Nachman received the benefit he bargained

for. The Nachman employees entitled to ERISA benefits

in this case served Nachman for the requisite number of

years required by the tay orf under the terms of the

lan and thus conferred the full benefit on the employer.

n this case, then, the question Congress answered was

not merely who should provide workers with retirement

income, but who should bear the costs of a plan termina-

tion: a solvent employer who has received the full

benefit he bargained for or the employee with vested

benefit rights. As in Turner Elkhorn Mining, it was

reasonable for Congress to conclude that this liability

represented “an actual, measurable cost of ... [the

employer’s}] business.” 428 U.S. at 19.

nrg x the most important facts distinguishin

ERISA from the Minnesota statute in Allied Structura

Steel are those revealing the Congressional attempt to

moderate the impact of the liability imposed. Title IV

provisions represent a rational attempt to impose liabili-

ty only to the extent necessary to achieve the legislative

purpose. Congress concluded that it was necessary to in-

sure unfunded vested benefits and established a federal

corporation for that purpose. However, it was also deter-

mined that it would not be possible to maintain an effec-

tive insurance Paw without imposing some liability

on employers. The abuses employer liability was design-

ed to cure included terminations motivated by a desire

to avoid the continued burden of funding.™ III

LEGISLATIVE HISTORY at 4741 (remarks of Sen. Wil-

liams); II LEGISLATIVE HISTORY at 3382 (remarks of

Rep. Gaydos). Congress was also concerned that without

% ©6See text and notes supra at 14-16.

28 Nos. 77-2146 and 77-2147

the risk of liability, employers might use promises of

higher retirement benefits for bargaining leve .

knowing that the PBGC would be required to fulfill the

promise. S. REP. No. 93-383, I LEGISLATIVE HISTORY at

1155. It was also believed that to impose liability would

cause employers to assume a more responsible fundin

schedule. II LEGISLATIVE HisTorY at 1873 (remarks o

Sen. Griffin). These first two considerations would

not have been relevant in the Minnesota scheme because

no agency was established to assume primary responsi-

bility for the payment of benefits.

Acknowledging that vy, ot age on the verge of

bankruptcy would be unlikely to terminate pension

pene solely to take advan of termination insurance,

ngress provided net worth limitations on the amount

of potential liability. 29 U.S.C. § 1362. Congress also

devised other provisions to temper the burdens imposed.

Employers will not necessarily be liable for the full

amount of benefits promised in the plan, since Congress

set a level on the amount of benefits guaran . 29

U.S.C. 8 1322(bX3). In Section 1323 Congress required

the PBGC to provide optional insurance to an employer

who desires to poe against this contingent liability.*

Finally, Title IV grants the PBGC discretion to arran

reasonable terms for the — of liability. 29 U.S.C.

§ 1367. Thus Title IV of ERIS

validated under Due Process or the Contract Clause does

have “limitations as to time, amount, circumstances,

[and] need.” W.B. Worthen, 292 U.S. at 434.

The record supporting the enactment of ERISA, whol-

Vy unlike that present in Allied Structural Steel,

emonstrates that “the presumption favoring ‘legislative

judgment as to the necessity and reasonableness of a

TR measure’ ” must be allowed to govern here. 46

S.L.W. at 4891. Turner Elkhorn Mining, 428 U.S. at

%* This protection would not have been available to Nachman

since such insurance would have had to be in effect for 60

months. 29 U.S.C. § 1323(d).

A, unlike the statutes in-

Nos. 77-2146 and 77-2147 29

18, 19; Williamson v. Lee Optical Co., 348 U.S. 483, 488

(1955). Title IV of ERISA satisfies Nachman’s rights to

Due Process.

The order of the district court is reversed.

REVERSED.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit