Petition for Writ of Certiorari — McDonald v. Braniff Airways, Inc.

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AUG 6 1924

No.

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CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1983

W. P. McDONALD,

Petitioner,

V.

BRANIFF AIRWAYS, INC., et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

JAMES L. HICks, JR.

Hicks, GILLESPIE, JAMES &

LESSER, P.C.

740E-1341 W. Mockingbird Lane

Dallas, Texas 75247

(214) 630-8621

Attorneys for Petitioner

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON. D.C. 20001

QUESTION PRESENTED

The sole issue before the Court is whether the courts

below erred in selecting the formula for calculation of

retired pilots’ pension benefits under 29 USC section

1344 upon the termination of the Braniff pilot pension

plan.

LIST OF PARTIES

Airline Pilots Association International

Braniff’s Airways, Inc. Retirement Plan for Pilots Part A

Dale States

Jack Boisen

John Skiba

Richard Russell

(i)

TABLE OF CONTENTS

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(iii)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1983

No.

W. P. McDONALD,

Petitioner,

V.

BRANIFF AIRWAYS, INC., et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

W. P. McDonald, class representative below, hereby

petitions for a Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit, enabling this

Court to review the judgment in W. P. McDonald vs

Braniff Airways, Inc., et al. (Fifth Circuit No. 83-1531

as decided on April 3, 1984). The opinions of the United

States Bankruptcy Courts of the Northern District of

Texas and the United States District Court of the

Northern District of Texas are not officially reported and

are reprinted as Appendices A and B to this petition.

The Court of Appeals for the Fifth Circuit affirmed the

opinion of the District Court per curiam without a writ-

ten decision. Accordingly no Fifth Circuit decision is

appended.

2

JURISDICTION

The judgment of the Court of Appeals for the Fifth

Circuit was issued on April 3, 1984. On July 5, 1984,

Justice White signed an order extending the time for

filing a petition for a writ of certiorari to and including

August 6, 1984 (Appendix C). This Court has jurisdic-

tion pursuant to 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

The statutory provisions and regulatory provisions are

reprinted in Appendices D & E.

STATEMENT OF THE CASE

Throughout the proceedings in the Bankruptcy Court,

District Court and Court of Appeals the parties have

concurred that there is no dispute over the material

facts. Those facts are detailed in both the memorandum

opinions of the Bankruptcy and District Courts. (Ap-

pendices A and B, respectively).

This case grows out of the much publicized bank-

ruptey of Braniff Airways, Inc. The pilots of Braniff

Airways were covered by a pension plan referred to as

the “Pilot’s A Plan” (the “Plan”). The amount of bene-

fits under that plan was negotiated between Braniff and

the collective bargaining representative of its pilots, Air-

line Pilot’s International (“ALPA’). In November 1976

ALPA negotiated a collective bargaining agreement with

a retroactive effective date of August 1, 1976, which pro-

vided for prospective increases in the level of be”.efits to

be paid under the plan. At the time of those negotiations

retiring pilot’s benefits under the plan were calculated at

$14,400.00 per year plus $250.00 for each year served in

excess of twenty (20) years (the “$14,400.00 formula’).

During those negotiations ALPA secured an agreement

from Braniff which among other things raised benefits

to $16,400.00 per year plus $250.00 for all years served

3

in excess of twenty (20) which was to be paid beginning

January 1, 1978 ($16,400.00 formula’). ALPA and

Braniff also agreed that on May 1, 1979, benefits would

be increased to forty percent (40%) of average earnings

(the “40% formula’’) .!

The negotiated increases also provided that any pilot

retiring after August 1, 1976 would receive the increased

benefits as they came into effect thereafter in January

1978 (the $16,400 formula) and May 1979 (the 40%

formula).

Under the Employee Retirement Income Security Act

(ERISA) the Pension Benefit Guarantee Corporation

(PBGC) guarantees certain levels of plan benefits to par-

ticipants of terminated pension plans. The guaranty ex-

tends through the first four statutory categories defined

in 29 U.S.C. § 1844 (Appendix D). A plan is “sufficient”

when it has sufficient plan assets allocable under Section

1344 to pay the first four benefit levels.2 All parties

agree that if the $14,400.00 formula is utilized for the

determination of benefits spon plan termination as the

benefit of the third category of benefits, § 1344(a) (3),

the plan assets are sufficient. If on the other hand the

40% formula is employed, the plan is in all probability

insufficient. If the plan is rendered insufficient as a re-

sult of application of the 40% formula, the guaranteed

levels of benefits are paid from plan assets supplemented

by Pension Benefit Guaranty Corporation reserves.

The issue is a single one submitted to the Bankruptcy

Court, the District Court and the Court of Appeals for

the Fifth Circuit. The question to be resolved is which

of the two formulas (40% or the $14,400.00) should

properly be used in allocating plan assets to the third

1 The “40% formula” provides with few exceptions that pilots

were to receive 40% of their nighest monthly earnings in any

12 consecutive months of the pilot’s last 5 years of employment.

2 See 29 U.S.C. §§ 1322 and 1361.

4

category of benefits, 29 U.S.C. § 1344(a) (3). Appellant

believes that each of the courts below erroneously se-

lected the $14,400.00 formula in violation of the plain

language of the statute.

As a result of the application of the $14,000.00 for-

mula by each of the courts below retired pilots lost as

much as two-thirds of the benefits that they had been

receiving prior to termination of the plan.

REASONS FOR GRANTING THE WRIT

Obviously, the issue presented in this case is a narrow

one. The issue is one of first and potentially only im-

pression. Despite these factors mitigating against con-

sideration by this Court two important considerations

warrant granting this petition.

First, despite the fact that ERISA was enacted to

protect pensions throvgh statutory safeguards and PBGC

insurance, the retired Braniff pilots represented by Peti-

tioner have been caused to lose as much as two-thirds

(2/8rds) of their pension benefits. That loss is the re-

sult of a statutory interpretation discussed hereafter

which defies policy, reason and the language of the stat-

ute. An important federal pension policy is at stake as

well as interpretation of this federal statute.

Second, the decisions of the Court below interpreting

29 U.S.C. § 1344(a) (3) are palpably wrong. That is,

that statutory provision requires use of that plan benefit

level which meets three statutory criteria each of which

is met by the “40% formula”: (1) the benefit must have

been in pay status for a three (3) year period on the

termination date of the plan; (2) the plan provisions

providing for the benefit must have been in effect for a

five (5) year preceding the termination of the plan; and

(3) the benefit must be the lowest benefit paid during

the three year preceding termination of the pian. Hav-

ing failed to recognize that the 40% formula meets each

of these criteria, the courts below engaged in plain error.

—

5

There is no dispute as to the existence of requirements

(1) and (3).* That is, any participant retiring after

August 1, 1976 has received a benefit calculated upon the

40% formula since May 1, 1979 (i.e. for more than three

years preceding the date of determination (August 30,

1982)). Likewise, the lowest benefit for any participant

during that same three-year period has obviously re-

mained the same as calculated under the 40% formula.

Hence (1) and (3) are indeed satisfied.

Requirement (2) was the one troublesome to the courts

below and upon which we believe those courts erred. That

is, to qualify for use the plan benefit must have been “in

effect” for five years preceding termination. We believe

the facts demonstrate that the 40% formula complies.

The upgrading to the 40% formula was agreed upon

between the ALPA and Braniff in November 1976 (ef-

fect retroactively for those retiring after August 1,

1976). By the terms of the agreement the increase to

the 40% formula occurred later on May 1, 1979 (again,

retroactively for all retiring after August 1, 1976). Con-

sequently, the plan provision requiring the 40% formula

has been “in effect” since at least November, 1976 and

hence for more than five years.

Obviously, the five year requirement is intended to

guard against plan administrators providing for gigantic

benefit increases knowing that such increases cannot be

actuarily funded and that plan termination is imminent.

If such manipulations were countenanced by ERISA, the

PBGC would be subject to assuming obligations for huge

guaranteed benefits in purposely underfunded plans.

None of these fears exist here. In 1976, Braniff and

ALPA provided for plan increases in good faith and

with an eye to the plan continuing indefinitely. Conse-

quently, there is no policy basis upon which to apply the

3 i.e. By order of the Bankruptcy Court the plan was terminated

effective August 30, 1982 (Appendix F).

6

five year “in effect” rule to defeat application of the

40% formula.

In an apparent effort to render its definition of “in

effect” as concerns automatic benefit increases like the

1978 and 1979 increases involved here, the PBGC issued

29 CFR 2618.13 (Appendix G). Specifically, 2618.13 (b)

(5) permits automatic benefit increases payable in the

fourth and fifth years preceding termination to be in-

cluded in the category three benefit if: (a) the plan pro-

vision requiring the automatic increases was adopted and

effective before the beginning of the five year period pre-

ceding termination; and (b) the increases are applicable

to both active participants (non-retirees) and those in

pay status (retirees receiving benefits), or to retirees

only. Requirement one is met—the increases were adopt-

ed in November 1976.

The facts show that the increases to the $16,400.00 and

40% formulas were applicable to all pilots retiring after

August 1, 1976, but not to those retiring before that

date. Consequently, these increases were applicable to

all non-retirees and some retirees (i.e., those retiring

after August 1, 1976). However, nothing in the regula-

tion requires that increase be for all retirees—only that

it be applicable to those in pay status.

In an effort to assure the sufficiency of the plan and

avoid requiring PBGC to assume the deficiency, the courts

below supplemented the regulation to require that the

increases be applicable to all retirees.

Courts do not write statutes or regulations. Courts

only interpret them when required. Interpretation how-

ever, does not include adding words or phrases to reach

a desired result. Indeed, it is axiomatic that the absence

of limiting words by a drafter implies the absence of

intent to limit. Here, the PBGC did not write “all” in

its regulations and it must be inferred that it intended

7

what it wrote—only that to qualify the benefit must be

payable to retirees. These facts meet that qualification.

The interpretation of the statute and the regulations

below is plainly erroneous. For these reasons a writ of

certiorari is required.

CONCLUSION

For the foregoing reasons the petition for a writ of

certiorari should be granted on the issue presented.

Respectfully submitted,

JAMES L. HICKs, JR.

HICKS, GILLESPIE, JAMES &

LESSER, P.C.

740E-1341 W. Mockingbird Lane

Dallas, Texas 75247

(214) 630-8621

Attorneys for Petitioner

APPENDICES

la

APPENDIX A

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

Case No. 482-00369

Adversary No. 482-0337

IN RE BRANIFF AIRWAYS, INC., et al.,

Debtors

BRANIFF AIRWAYS, INC., AIR LINE PILOTS ASSOCIATION,

INTERNATIONAL; BRANIFF AIRWAYS, INC., RETIREMENT

PLAN FOR PILOTS, PART A, DALE STATES, JACK

BOISEN, JOHN SKIBA AND RICHARD RUSSELL, CONSTI-

TUTING THE RETIREMENT BOARD OF BRANIFF AIRWAYS,

INC. RETIREMENT PLAN FOR PILOTS, PART A,

Plaintiffs,

v.

BANKERS TRUST COMPANY AS TRUSTEES; AND W. P. Mc-

DONALD, DANIEL P. HULSEY, GERALD §. ROSS AND

N. G. ROBSON AND V. A. QUATTLEBAUM ON THEIR OWN

BEHALF AND ON BEHALF OF ALL PLAN BENEFICIARIES,

AND PENSION BENEFIT GUARANTY CORPORATION,

Defendants.

ORDER REGARDING BENEFIT

COMPUTATION UNDER ERISA SECTION 4044

The Court having considered the briefs and arguments

of the parties, and having issued its Memorandum Opin-

ion in this matter on December 10, 1982, it is HEREBY

ORDERED THAT:

i i i i |

2a

For purposes of section 4044(a)(3) of the Em-

ployee Retirement Income Security Act of 1974,

29 U.S.C. § 1344(a) (3), benefits under the Braniff

Airways, Incorporated Retirement Plan for Pilots,

Part A (“Plan”) shall be calculated for Plan Par-

ticipants who would, under the terms of the Plan, be

eligible for benefits under Plan section 8.4(c), under

the “$14,400 formula,” i.e., the formula providing a

Normal Retirement Age annual benefit of $14,400

plus $250 for each year (adjusted for completed

months) of the Participant’s Service in excess of

twenty (20) years.

/s/ John Flowers

JOHN FLOWERS

United States Bankruptcy Judge

Dated: January 28, 1983

3a

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

Case No. 482-0369

Adversary No. 482-0337

IN RE BRANIFF AIRWAYS, INCORPORATED et al.,

Debtors

BRANIFF AIRWAYS, INCORPORATED; AIR LINE PILoTs As-

SOCIATION, INTERNATIONAL; BRANIFF AIRWAYS INCOR-

PORATED, RETIREMENT PLAN FOR PILOTS, ParT A;

DALE STATES, JACK BOISEN, JOHN SKIBA, and RICHARD

RUSSELL, CONSTITUTING THE RETIREMENT BOARD OF

BRANIFF AIRWAYS, INC. RETIREMENT PLAN FOR PILOTS

PART A,

Plaintiffs,

v.

BANKERS TRUST COMPANY, AS TRUSTEE; and W. P.

McDONALD, V. A. CEBELL, III, N. G. ROBINSON, and

V. H. QUATTLEBAUM ON THEIR OWN BEHALF AND ON

BEHALF OF ALL PLAN BENEFICIARIES,

Defendants.

[Filed Dec. 23, 1982]

MEMORANDUM OPINION

This case involves several issues concerning the Braniff

Airways Incorporated Retirement Plan for Pilots, Part

A (“Plan”). The debtor brought this action pursuant to

§ 4048 of the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. § 1848, seeking a court ordered

date for termination of the Plan. The debtor also re

4a

quested instructions as to its fiduciary responsibilities

pursuant to § 502 of ERISA, 29 U.S.C. § 1132. The

case has been certified as a class action and the named

defendants are representatives of their respective classes.

This court has jurisdiction under 28 U.S.C. § 1471.

The issues before the court are: the date of plan ter-

mination; whether certain participants are entitled to

lump sum distributions from the Plan; whether a group

of participants, who became employees of the debtor by

reason of a merger of the debtor with Pan American-

Grace Airways, Inc. (“Panagra”), are entitled to segre-

gation of specific assets which were transferred to the

plan from the Panagra retirement plan; and the effec-

tive date for determining participants’ marital status for

purposes of certain actuarial calculations.

BACKGROUND

For many years the debtor has maintained a pension

plan for its pilots. The plan in question is a defined

benefit plan providing specific benefits to be paid to plan

participants. As such it is subject to the provisions of

ERISA. 29 U.S.C. § 1321. The Plan was originally es-

tablished in 1957. Prior to January 1, 1967 participa-

tion was voluntary and participants’ contributions were

made with their after-tax earnings. In 1967 all pilots

with one year of service automatically became par-

ticipants and contributions to the Plan were no longer

deducted from their earnings. Thereafter all contribu-

tions were made by the debtor for each participant but

a portion, namely the “deemed employee contribution”,

was treated as if each participant had made it. The

“deemed employee” contributions were calculated on the

participant’s earnings, and credited to an account main-

tained for each participant known as his Contribution

Account A (“Employee Contribution Account”). Par-

ticipants did not pay income taxes on these contributions.

A small group of pilots participated in the plan prior

5a

to 1967 and they undisputedly have benefits derived from —

contributions made from their after tax earnings. The

debtor was required to make such additional contribu-

tions as necessary to provide the promised benefits and

satisfy the minimum funding requirements establisued

by the Internal Revenue Code. The only other source of

plan funding has been from earnings on plan invest-

ments.

Participants’ interests in the Plan are expressed in

terms of “Accrued Benefits”. Total Accrued Benefits are

computed by means of a mathematical formula based

upon a hypothetical retirement income for each par-

ticipant. The Employee Accrued Benefit is also cal-

culated by a formula using the respective Employee’s

Contribution Account as its base.’ The Employer Ac-

crued Benefit is calculated by subtracting the Employee

Accrued Benefit from the Total Accrued Benefit. All

participants are fully vested at all times in their Em-

ployee Accrued Benefit. They become 50% vested in

their Employer Accrued Benefit after five years service,

acquiring an additional 10% for each additional year

of service.

A participant’s right to be paid from the fund is de-

pendent upon his length of service. Participants with less

than five years service are only entitled to a lump sum

payment equal to the amount of their Employee Con-

tribution Account upon final termination of employ-

ment. Those participants with five years or more serv-

ice are entitled to receive a retirement income expressed

as a percentage of certain earnings. They also have the

right to elect a lump sum distribution equal to their

Employee Accrued Benefit in the event of termination

1 These are different expressions of the same value. When re-

ferred to as the Employee’s Contribution Account it is expressed

as a lump sum and when referred to as the Employee’s Accrued

Benefit it is expressed as an annuity.

6a

of employment. This election must be made before re-

tirement and it reduces their future retirement income

to the vested portion of their Employer Accrued Benefit.

The plan does not contain any specific provisions re-

garding the plan administrator’s duties in a situation as

is presented here. Section 19.4 of the plan generally

provides that in the event of plan termination all assets

shall be distributed in accordance with § 4044 of ERISA.

The debtor employed 1,966 pilots who were plan par-

ticipants, some of whom were on furlough, when on May

12, 1982 it ceased all operations and notifie all em-

ployees they were terminated. On May 18, 1982, the

debtor filed a petition under Chapter 11 of the Bank-

ruptey Code. Throughout the summer the debtor dis-

cussed the status of the plan with the Pension Benefit

Guaranty Corporation (“PBGC”). During this time sev-

eral participants, some with less than five years service

requested lump sum payments. These requests were

processed but not paid, although all monthly retirement

benefits continued to be paid at promised levels. On

August 20, 1982 the plan administrator notified all par-

ticipants of its intent to terminate the Plan retroactively

as of May 12, 1982. Simultaneously the plan administra-

tor brought this action.

The Plan does not have adequate assets to pay all par-

ticipants at promised levels. Under ERISA a plan is

considered “sufficient” for PBGC purposes if it has assets

adequate to pay the first four priority categories set

forth in the statute even though it may not be able to pay

all promised benefits. The Plan here meets that test of

sufficiency and has assets to meet some but not all fifth

priority liabilities. No sixth priority liabilities will be

paid. After a preliminary hearing on August 26 and 27,

the level of retirement benefits being paid to retirees was

ordered reduced to PBGC minimums and lump sum dis-

tributions enjoined. Because it is short of assets, Jump

sum distributions will have the effect of exacerbating the

Ta

reduction of benefits for all other participants while giv-

ing the lump sum claimants with less than five years

service full payment of their promised benefits. Those

participants with more than five years service would

receive full payment of the employee accrued benefit por-

tion of their promised benefit.

ERISA, which became effective in 1974, was enacted to

provide some measure of security to pension plans. Un-

der its provisions a plan may be terminated at any time.

29 U.S.C. § 1841. The termination procedures of ERISA

have been the subject of analysis in a companion case

involving the pension plan of the debtor’s management

employees. See my memorandum opinion of November 9,

1982, in adversary number 482-0839. In cases as here,

where a plan is sufficient, ERISA provides for the plan

administrator to conduct the dissolution of the Plan. 29

U.S.C. § 1841(a). Plan assets are to be allocated to par-

ticipants depending upon where various parts of their

respective benefits fall within the system of priority levels

established in the statute. Funds contributed by partic-

ipants have the two highest priorities, followed by retire-

ment income to those actually retired or eligible for re-

tirement three years prior to plan termination. The

fourth priority category is composed of all other benefits

guaranteed by the PBGC. The fifth is all other benefits

which are non-forfeitable under the plan. The final cate-

gory is any remaining plan benefits. Plan assets are to

be used to pay all claimants in the highest priority cate-

gory in full before proceeding to the next lower one. If

the assets are insufficient to completely compensate all

participants for the value of their benefits within a par-

ticular category they are allocated on a pro-rata basis.

See 29 U.S.C. § 1344. The customary method for dis-

tributing the assets is to purchase commercial annuities.

A participant may have benefits which fall into more

than one of the priority categories. In summary, a par-

ticipant’s benefits under the plan are categorized into the

8a

statutory priorities, valued, and then distributed by pur-

chasing an annuity of which the participant is the bene-

ficiary. Typically, the annuity has several settlement

options.

TERMINATION DATE

Since ALPA, the bargaining agent for the pilots, and

the debtor agree the plan should be terminated it is not

necessary to address the issue of whether the terms of the

collective bargaining agreement preclude termination.

On the question of plan termination I have previously

ruled, in the companion case involving the debtor’s man-

agement plan, that where, as here, a plan is sufficient

under ERISA it cannot be terminated earlier than ten

days after notice of termination is given to all partic-

ipants. See 29 U.S.C, § 1841. In this case that notice

was given on August 20, 1982, and accordingly I set the

termination date of the Plan to be August 30, 1982.

LUMP SUM CLAIMS

The selection of August 30 as the termination date

makes relevant for discussion the claims of some partic-

ipants for lump sum distributions. Those claimants fall

into two general categories, those participants having less

than five years service and those with more. Those with

less than five years service point out that their employ-

ment was terminated on May 12 and the Plan continued

in effect until August 30. They rely upon section 10.4 of

the Plan which provides for a lump sum distribution in

an amount equal to the Employee Contribution Account

for any participant terminated short of five years serv-

ice. Those with more than five years service rely upon

their right under section 10.5 of the Plan to elect to re-

ceive a lump sum distribution equal to their Employee

Accrued Benefit upon termination of their employment.

As noted earlier, the Plan provides the latter group must

receive a reduced retirement income in the event of a

lump sum distribution.

9a

The debtor, the PBGC and all other parties object to

any lump sum distributions because they would constitute

a distribution in anticipation of plan termination which

violates both the ERISA mandated system of priorities

and regulation 2618.4(b) of the PBGC. The pertinent

portions of the regulation provide:

(b) Distributions in anticipation of termination.

A distribution, transfer, or allocation of assets to a

participant or to an insurance company for the bene-

fit of a participant, made in anticipation of plan

termination, is considered to be an allocation of plan

assets upon termination, and is covered by para-

graph (a) of this section. In determining whether a

transfer, or allocation of assets has been made in

anticipation of plan termination PBGC will consider

all of the facts and circumstances including —

(1) Any change in funding or operation proce-

dures;

(2) Past practice with regard to employee requests

for forms of distribution;

(3) Whether the distribution is consistent with plan

provisions; and

(4) Whether an annuity contract that provides for

a cutback based on the guarantee limits in Part 2621

of this chapter could have been purchased from an

insurance company.

29 C.F.R. § 2618.4 (b) (1981)

The lump sum claimants respond that distributions in

anticipation are prohibited in instances where collusion

exists between the plan administrator and some plan par-

ticipants. They correctly point out there is no evidence of

collusion here. This view of the regulation is too narrow

although certainly that would be prohibited. It is appar-

ent from §§ 4044 and 4045 of ERISA, 29 U.S.C, § 1344,

1345, that Congress established certain priority policies

10a

regarding protection of pension plan benefits. Those

priorities, as described earlier, are found in § 4044. Sec-

tion 4045 provides for recapture of certain distributions

made within three years of plan termination which result

in a distribution contrary to the statutory scheme, re-

gardless of intent. The regulation merely expresses that

which is implied by the statute.

The purpose of the Regulation is to maintain the re-

spective positions of the participants in a plan’s assets

and prevent a run on the bank. This purpose is best

served by interpreting the Regulation to prohibit claims

for distribution which are made at a time the participants

know or should know that plan termination is a likely

prospect. Because of the nature of pension plans, where

each individual has a different interest, it may be impos-

sible to fashion a rule to cover all situations and some

windfalls may be inevitable. The discretionary recoup-

ment provisions of § 4045 of ERISA also provide a means

to address this problem.

An examination of the facts is necessary to ascertain

if the lump sum claims are made in anticipation of ter-

mination. As noted, the test is an objective one based

upon all the facts and not a subjective one based upon

statements of intention of the particular participants

involved.

The facts here reveal that the debtor ceased operations

and gave notice of termination of employment to all of

its employees on May 12, 1982. Uncashed pay checks

were not honored thereby leaving all employees unpaid

for the last payroll period. On May 13, after the debtor

filed its petition for reorganization under the bankruptcy

laws, its chief executive officer publicly stated Braniff

was “dead”, advised former employees to seek other em-

ployment and stated that pensions might be reduced.

These statements were widely circulated by the news

media. On June 10, ALPA notified all of its members of

potential problems with their pension plans.

lla

Referring to the circumstances mentioned in the regu-

lation as being relevant, it appears that of May 12, 1982,

a change in funding had occurred in that Braniff was no

longer operating or funding the Plan and would not likely

be able to do so in the future. The evidence revealed that

historically there had been very few applications for lump

sum distributions even with numerous participants on

furlough in recent years. In the two montis following

the filing of the bankruptcy case 155 lump sum applica-

tions were filed. An additional 32 were filed after Au-

gust 20, 1982. At time of trial 144 remained pending, the

others having been withdrawn. The requested lump sum

distributions, while authorized by plan provisions in ordi-

nary situations, are contrary to the plan administrator’s

duty not to discriminate in favor of any group of partic-

ipants in the extraordinary situation presented here. 29

U.S.C. § 1344. This same responsibility is also found in

§ 13.1 of the Plan. I find the requests for lump sum

payments were made in anticipation of termination of the

Plan.

The lump sum claimants cite PBGC Op. Letter No.

78-24 in which it was held that death benefits due a par-

ticipant who died two years prior to a plan termination

date must be paid in a lump sum before the § 4044 allo-

cation of assets is undertaken. From this the lump sum

claimants reason that their claims are not made in antic-

ipation of termination because before termination occurs

funds must be allocated to satisfy obligations arising

prior to the termination date. They assert that one of

those obligations is their lump sum claims. This argu-

ment is wide of the mark. The issue remains one of dis-

tribution in anticipation of termination. It is difficult to

see how a lump sum claim that arises by reason of the

death of a participant can ever be one in anticipation of

termination.

Finally, these claimants assert that payment of the

lump sums they seek would not be in violation of the

12a

ERISA priority scheme and thus not be subject to the

rule prohibiting distribution in anticipation of termina-

tion. They claim they fall into the second priority cate-

gory, which is the highest priority category applicable to

any participant’s benefits, and there are sufficient assets

to pay this category in full, including all lump sum

claims. Priority category two of ERISA provides:

Blea

(2) Second, to that portion of each individual's

accrued benefit which is derived from the partic-

ipant’s mandatory contributions

29 U.S.C. § 1344 (a) (2)

The lump sum claimants argue that the benefits which

they seek are derived from their mandatory contribu-

tions. They claim these contributions were part of their

wages and it makes no difference that they were not taxed

on them. In support they cite §414(h) of the Internal

Revenue Code which provides that “. . . for purposes of

this title any amount contributed . . . to an employee’s

trust described in § 401(a) shall not be treated as having

been made by the employer if it is designated as an em-

ployee contribution.” (Emphasis added).

Section 414(h), is expressly limited to Title 26, the

Internal Revenue Code. Moreover, it does not provide

such designated contributions shall be treated as employee

contributions but rather that they shall not be treated as

employer contributions. To interpret it to convert em-

ployer contributions into employee contributions for pur-

poses of § 1344 of Title 29, ERISA, would upset the care-

fully considered Congressional policy of priorities and

extend § 414(h) beyond its purpose and context.

Section 6.1(b) of the Plan provides:

Effective January 1, 1967, no regular contribution

under this Sub-Section 6.1, payable to Trust Fund A,

13a

will actually be deducted from the Participant’s

Earnings. For the purposes of Sub-Section 6.2, how-

ever, it shall be assumed after such date that each

Participant has made a monthly contribution to

Trust Fund A of an amount determined under the

foregoing Sub-paragraphs (a) and (b). The affect

of the preceding sentence is to provide for each Par-

ticipant, beginning January 1, 1967, cash vesting for

purposes of refunds at death and termination, in

Company contributions to Trust Fund A of amounts

equal to the contributions described in the foregoing

Sub-paragraphs (a) and (b).

The express purpose of this section is to provide for “cash

vesting” of certain plan contributions even though made

by the employer and not to change the priority scheme of

§ 1344. Section 6.1 does not designate the contributions

as employee contributions. The legislative history of

§ 414(h) states that its purpose is to give “. . . effect to

the source of contributions, as designated in the plan.”

H.R. Rep. No. 97-807, 98rd Cong., 2nd Sess. 145. I hold

that priority category two of § 1344 is limited to after

tax earnings contributed by a participant and only those

benefits in that category are entitled to lump sum dis-

tributions. The effect of holding as urged by the lump

sum claimants would be devastating to the priority

scheme of ERISA because it would elevate benefits of

younger workers who have not yet retired over those of

retirees. A result clearly contrary to Congress’ intent.

The remaining question concerns which priority cate-

gory applies to the benefits of the lump sum claimants

with less than five years service. Under § 19.8 of the

Plan they are non-forfeitable. I have held that they are

not category two benefits and, because they are not pay-

able as an annuity to a participant eligible to retire

within three years of termination, I hold that they are

not category three benefits.

14a

Priority category four of ERISA includes all other

benefits whose payment is guaranteed. 29 U.S.C. § 1344

(1) (4). Section 1322(b) (3) which guarantees benefits,

limits the guaranty to those having an actuarial value

which does not exceed a specified cap. The PBGC argues

that a benefit must be an annuity in order for it to fall

within priority category four. The statute does not con-

tain this requirement and the PBGC’s argument is based

upon §§ 2613.2 and 2613.3 of their Regulations which de-

fine guaranteed benefits to be pension benefits, i.e. an

annuity. Since no party challenges this position, it is not

necessary that I rule on the validity of the Regulation

and I will assume for purposes of this opinion that a ben-

efit must be an annuity to be within priority category

four.

Although the only right of the lump sum claimants

with less than five years service is to receive a single

payment upon termination of service, section 10.1 of the

plan defines their Total Accrued Benefit in terms of an

annuity. Their rights are to receive a lump sum portion

of their Total Accrued Benefit. I hold the lump sum

claimants’ benefits, which are expressed as an annuity in

the Plan (the Employee Accrued Benefit), fall within

priority category four of § 1344.*

In its brief, the PBGC raises a question regarding a

residual value of the lump sum claims and into which

priority category that residue would fall. Their position

apparently is based on the fact the Plan provides a con-

version rate utilizing a 5% interest factor which is sub-

stantially below current market rates and conversion

into current market values will produce higher values.

That is true for all benefits in the Plan. My holding that

lump sums are expressed as an annuity under the Plan is

solely for the purpose of determining into which priority

2 Benefits in any category are offset to the extent they fall within

a higher priority category.

15a.

category the lump sum benefits belong. A lump sum

which is converted into an annuity is equal to the lump

sum so long as the conversion factors (interest rate and

time) remain constant. It therefore has no residual

value. The fact the lump sum may have a higher value

on the commercial market than its value computed with

plan factors is not relevant in determining its priority

category.*

PANAGRA

_ At the time the debtor merged with Panagra in 1967,

Panagra had a pension plan for its pilots. Under the

merger agreement the Panagra plan was merged into the

Braniff plan effective January 1, 1968. Assets from the

Panagra plan were used to purchase a commercial an-

nuity to provide the employee accrued benefits of all

Panagra pilots. All assets of the Panagra plan in excess

of those used to purchase the annuity became part of the

debtor’s plan and the Panagra plan ceased to exist. One

of the merger terms was that all Panagra pilots became

members of the Plan and were given credit for their serv-

ice with Panagra. Since 1968 the Panagra pilots have

accumulated additional benefits under the Plan by reason

of their increased years of service and because of periodic

increases to the benefits in the Plan. All Panagra pilots

will therefore receive benefits in excess of those in the

Panagra plan. The annuity alone is insufficient to pay

these increased benefits to the Panagra pilots. The Pana-

gra pilots seek to have this annuity segregated for their

exclusive benefit and participate in the allocation of the

other plan assets. To grant the Panagra pilots’ request

would effectively give them a proportionally greater share

* Perhaps, under some circumstances it could be argued that

the right to claim a lump sum is a benefit having a value in addi-

tion to the actual lump sum. That argument has no application

here because of my holding that no right to a lump sum payment

exists upon termination.

16a

of plan assets than the other participants. This, of

course, disrupts the allocation priorities of § 1344. The

evidence is undisputed that the Panagra pilots will re-

ceive more in the allocation process by treating the an-

nuity as part of the Plan’s assets than they would receive

under the annuity alone. They have demonstrated no

inequities because of their position. On the other hand,

it would be inequitable to all other participants to give

the Panagra pilots preferential treatment. The fact that

a portion of the Plan’s assets is the annuity purchased

with the Panagra plan’s assets is immaterial. See Treas.

Reg. § 1.414(1)-1(b) (1). Participants’ of defined bene-

fit plans have rights to defined benefits from the entire

unallocated trust fund, not from specific plan assets. The

Panagra pilots claim to specific plan assets will be denied.

MARITAL STATUS

Section 9.4 of the plan provides a retirement income

benefit in the form of an annuity to eligible spouses who

survive participants. This is a “subsidized” benefit as the

plan rather than the individual participant bears the

cost.* The Plan defines an “eligible spouse” as one that

was legally married to the participant at the time of the

participant’s death and for at least the prior twelve

months. Not all participants are married. The marital

status and identity of the spouses of any participant may

change before their death. Therefore, at this time, it is

impossible to ascertain the identity and age of “eligible

spouses”. Because commercial annuities are priced on an

actuarial basis, the plan administrator has been unable to

obtain any bids for such annuities as a result of its in-

ability to furnish prospective bidders with actuarial data

on participants’ “eligible spouses”. As a solution, the

plan administrator has proposed that the court modify

*A “non-subsidized” survivorship benefit is one where the par-

ticipant, usually through a reduction in their annuity, bears the

cosi uf the benefit.

17a

the definition of “eligible spouses” and limit it to spouses

married to narticipants at the date of plan termination,

which I have e tablished as August 30. Such a change

will affect three groups of participants: (1) Those who

are single on August 30 and married at the time of their

death; (2) those who are married on August 30 but are

remarried to a younger spouse at the time of their death;

and, (3) those who are married on August 30 but are

remarried to an older spouse at the time of their death.

Group three suffers no adverse consequences as a result

of the proposed solution. Group two’s adverse conse-

quences.will depend upon the age difference of the respec-

tive spouses. The actuary testified there would be little

impact on the first group, those single on August 30 and

married at the time of their death, because of the man-

ner in which the calculations are made to value a partic-

ipant’s benefits. Benefits of single participants are given

a higher value than married ones because of this sur-

vivorship feature. In the actuary’s opinion this would

approximately offset any inequality of treatment in most

cases. None of the parties objected to this modification,

but no one agreed to it, therefore leaving it for the court

to decide. This problem was not contemplated when the

plan was written. On the basis of the need for such modi-

fication and the general lack of inequities caused by it I

will order the modification proposed by the plan adminis-

trator. This ruling does not preclude any participant

from arranging for a non-subsidized survivorship bene-

fit upon such terms as may be negotiated with the insur-

ance carrier providing the annuity.

During trial a question arose as to the sufficiency of

the notice given all class members and whether they were

given adequate notice of the issues relating to the Pana-

gra pilots and the surviving spouses. In the interest of

due process the debtor will send another notice to all

class members advising them of the existence of these

issues. On those two issues I will enter an order which

_

18a

will be conditioned upon consideration of any interests

that may arise as a result of the notice. On all other

issues I will enter a final order.

Dated in Fort Worth, Texas on the 22nd day of Decem-

ber, 1982.

/s/ John Flowers

JOHN FLOWERS

U.S. Bankruptcy Judge

19a

‘APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

Miscellaneous No. 4-225-E

[Filed Jun. 28, 1983]

W. P. McDONALD

vs.

BRANIFF AIRWAYS, INCORPORATED, et al.

MEMORANDUM OPINION AND ORDER

This is an appeal from an order of the United States

Bankruptcy Court for the Northern District of Texas

entered January 28, 1983. That order involved pension

plans of Braniff Airways, Inc. (“Braniff’) and as a

“related proceeding,” see 29 U.S.C. § 1303(f), must be

reviewed de novo by this Court under § d(3) of the Local

Rule of the Northern District of Texas concerning Bank-

ruptcy Cases and Procedures. Having carefully consid-

ered the supporting briefs, oral arguments, and applicable

law, the Court has concluded that the order of the Bank-

ruptcy Court should be affirmed.

I. Facts

The facts underlying this appeal are not in dispute.

On November 3, 1976, Braniff and the Airline Pilots

20a

Association (“ALPA”) signed a collective bargaining

agreement effective as of December 1, 1976. The collec-

tive bargaining agreement provided that the “A” Fund

minimum for all pilots retiring on or after August 1,

1976 would be increased to $16,400 at 20 years of serv-

ice, plus an additional $250 per year for each additional

year of service over 20, effective January 1, 1978 (“the

$16,400 formula’) and the “A” Fund minimum for all

pilots retiring on or after August 1, 1976 would be recal-

culated to be equal to 40% of the best 12 consecutive

months of the last 60 months of compensation prior to

retirement (with an option to drop certain months), effec-

tive May 1, 1979 (“the 40% formula”).

As of either August 23 or 30, 1977 the terms of the

“plan document” of the Braniff Airways, Incorporated

Retirement Plan for Pilots provided an annual minimum

benefit of $14,400 plus $250 for each year of service over

20 (“the $14,400 formula”). Braniff and ALPA signed

an agreement on June 27, 1978 implemented the Novem-

ber 3, 1976 collective bargaining agreement in a formal

plan amendment which was approved by the Braniff

Board of Directors on August 29, 1978.

II. Proper Method of Calculation

The sole issue in this appeal involves the proper method

of calculating priority category three benefits under Sec-

tion 4044 of the Employee Retirement Income Security

Act of 1974, (“ERISA”) 29 U.S.C. § 1344.

Upon termination of a “defined benefit” plan, ERISA

provides a mandatory statutory scheme of allocation of

benefits into six categories. If the allocation shows that

the assets of the plan are insufficient to satisfy all bene-

gts thorugh category 4A, Pension Benefit Guaranty Cor-

poration steps in to supplement the plan’s assets to pro-

vide guaranteed benefits under 29 U.S.C. § 1322.

2la

29 U.S.C. § 1344(a) (3) provides a third priority in

the allocation of pension plan assets for benefits payable

as an annuity:

(A) in the case of the benefit of a participant or

beneficiary which was in pay status as of the begin-

ning of the 3-year period ending on the termination

date of the plan, to each such benefit, based on the

provisions of the pla: (as in effect during the 5-year

period ending on such date) under which such bene-

fit would be the least,

(B) in the case of a participant’s or beneficiary’s

benefit (other than a benefit described in subpara-

graph (A)) which would have been in pay status as

of the beginning of such 3-year period if the partic-

ipant had retired prior to the beginning of the 3-

year period and if his benefits had commenced (in

the normal form of annuity under the plan) as of

the beginning of such period, to each such benefit

based on the provisions of the plan (as in effect dur-

ing the 5-year period ending on such date) under

which such benefit would be the least.

For purposes of subparagraph (A), the lowest ben-

efit in pay status during a 3-year period shall be

considered the benefit in pay status for such period.

PGBC issued a regulation to clarify these provisions.

29 C.F.R. § 2618.13(b) (1982 provides:

(b) Assigning benefits. The annuity benefit that

is assigned to priority category 3 with respect to a

participant is the lowest annuity that was paid or

payable under the rules in paragraphs (b) (2)

through (b) (6) of this section.

* * *

(2) Plan provisions governing determination

of benefit. In determining the amount of the

priority category 3 annuity with respect to a

participant, the plan administrator shall use

22a

the participant’s age, service, actual or expected

retirement age, and other relevant facts as of

the following dates:

(i) Except as provided in the next sen-

tence, for a participant or beneficiary whose

benefit was in pay status before the he-

ginning of the 3-year period ending on

the date of plan termination, the priority

category 3 benefit shall be determined ac-

cording to plan provisions in effect on the

date the benefit commenced. Benefit in-

creases that became effective before the be-

ginning of the 5-year period ending on the

date of plan termination, including auto-

matic benefit increases after that date to

the extent provided in paragraph (b) (5)

of this section, shall be included in deter-

mining the priority category 3 benefit. The

form of annuity elected by a retiree is con-

sidered the normal form of annuity for that

participant.

* «& - *

(5) Automatic benefit increases. If plan pro-

visions adopted and effective before the begin-

ning of the '-year period ending on the date of

plan termination provided for automatic in-

creases in the benefit formula for both active

participants and those in pay status or for par-

ticipants in pay status only, the lowest annuity

benefit payable during the 5-year period ending

on the date of plan termination determined un-

der paragraph (b) (8) of this section includes

the automatic increases scheduled during the

fourth and fifth years preceding termination,

subject to the following restrictions. Benefit in-

creases for active participants in excess of the

increases for retirees shall not be taken into

account.

234

Appellant McDonald asserts that the 40% formula

should be used for determination of category three bene-

fits because it is an “automatic benefit increase” as de-

fined above. Appellees contend that the regulation regard-

ing “automatic benefit increases” should be interpreted

to mean increases for all retirees in a plan. The in-

creases of the $16,400 formula and the 40% formula

were only applicable to those persons retiring on or after

August 1, 1976, and there were, in fact, persons in pay

status as of August 1, 1976 under the Plan who were not

entitled to those benefit increases.

The Court considers the proper construction of 29

C.F.R. § 2618.13(b) (5) to mean benefit increases for all

retirees of the Plan. This conclusion is supported both

by the common understanding of the words “those in pay

status” to include the entire class of retirees, and by the

interpretation offered by appellee PBGC, which is charged

with the responsibility of interpreting and administering

Title IV of ERISA, under the express Congressional au-

thorization of 29 U.S.C. § 1302(b) (3), 1822(b) (4) (A)

(1976 and Supp. IV 1980). See Red Lion Broadcasting

Co. v. FCC, 395 U.S. 367, 381 (1969) ; Connolly v. PBGC,

581 F.2d 729, 730 (9th Cir. 1978) cert. denied, 440 US.

935 (1979); SEC v. Talley Industries, 399 F.2d 396, 403

(2nd Cir. 1968).

Thus, the $16,400 formula and 40% formula should

not be applied in calculating category three benefits.

Having made this determination, the Court need not de-

termine whether the plan provisions at issue were both

“adopted and effective” before the beginning of the five

year period ending on the date of the plan termination.

The order of the United States Bankruptcy Court for

the Northern District of Texas entered January 28, 1983

requiring calculation of category three benefits by the

$14,400 formula is hereby AFFIRMED.

Signed this 28 day of June, 1983.

/s/ ELDON B. MAHON

United States District Judge

24a

APPENDIX C

SUPREME COURT OF THE UNITED STATES

No. A-1070

W. P. McDONALD,

Petitioner,

v.

BRANIFF AIRWAYS, INC., et al.

ORDER EXTENDING TIME TO FILE PETITION

FOR WRIT OF CERTIORARI

UPON CONSIDERATION of the application of counsel for

petitioner,

It Is ORDERED that the time for filing a petition for

writ of certiorari in the above-entitled cause be, and the

same is hereby, extended to and including August 6, 1984.

/s/ Byron R. White

Associate Justice of the Supreme

Court of the United States

Dated this 5th

day of July, 1984.

25a

APPENDIX D

29 USC § 1344

(a) In the case of termination of a single-employer

defined benefit plan, the plan administrator shall allocate

the assets of the plan (available to provide benefits)

among the participants and beneficiaries of the plan in

the following order:

(1) First, to that portion of each individual’s

accrued benefit which is derived from the partic-

ipant’s contributions to the plan which were not

mandatory contributions.

(2) Second, to that portion of each individual’s

accrued benefit which is derived from the partic-

ipant’s mandatory contributions.

(3) Third, in the case of benefits payable as an

annuity—

(A) in the case of the benefit of a partic-

ipant or beneficiary which was in pay status as

of the beginning of the 3-year period ending on

the termination date of the plan, to each such

benefit, based on the provisions of the plan (as

in effect during the 5-year period ending on such

date) under which such benefit would be the

least,

(B) in the cause of a participant’s or bene-

ficiary’s benefit (other than a benefit described

in subparagraph (A) which would have been in

pay status as of the beginning of such 3-year

period if the participant had retired prior to the

beginning of the 3-year period and if his bene-

fits had commenced (in the normal form of an-

nuity under the plan) as of the beginning of

such period, to each such benefit based on the

provisions of the plan (as in effect during the

26a

5-year period ending on such date) under which

such benefit would be the least.

For purposes of subparagraph (A), the lowest bene-

fit in pay status during a 3-year period shall be con-

sidered the benefit in pay status for such period.

7 27a

APPENDIX E

29 CFR § 2618.13

§ 2618.13 Priority category 3 benefits.

(a) Definition. The benefits in priority category 3 are

those annuity benefits that were in pay status before the

beginning of the 3-year period ending on the date of plan

termination, and those annuity benefits that could have

been in pay status for participants who were eligible to

receive annuity benefits before the beginning of the 3-year

period ending on the date of plan termination. Benefits

are primarily basic-type benefits, although nonbasic-type

benefits will be included if any portion of a participant’s

priority category 3 benefit is not guaranteeable under the

provisions of Part 2613 of this chapter.

(b) Assigning benefits. The annuity benefit that is

assigned to priority category 3 with respect to a partic-

ipant is the lowest annuity that was paid or payable un-

der the rules in paragraphs (b) (2) through (b) (6) of

this section.

(1) Eligibility of participants and beneficiaries. A

participant or beneficiary is eligible for a priority cate-

gory 3 benefit if either of the following applies:

(i) The participant’s (or beneficiary’s) benefit was in

pay status before the beginning of the 3-year period end-

ing on the date of plan termination.

(ii) The participant was eligible for an annuity and

his or her benefit could have been in pay status before

the beginning of the 3-year period ending on the date of

@ plan termination. Whether a participant was eligible to

receive an annuity before the beginning of the 3-year

period shall be determined using the plan provisions in

effect on the day before the beginning of the 3-year

period.

28a

(iii) If a participant described in either of the preced-

ing two paragraphs died during the 3-year period ending

on the date of the plan termination and his or her bene-

ficiary is entitled to an annuity, the beneficiary is eligible

for a priority category 3 benefit.

(2) Plan provisions governing determination of bene-

fit. In determining the amount of the priority category 3

annuity with respect to a participant, the plan adminis-

trator shall use the participant’s age, service, actual or

expected retirement age, and other relevant facts as of

the following dates:

(i) Except as provided in the next sentence, for a par-

ticipant or beneficiary whose benefit was in pay status

before the beginning of the 3-year period ending on the

date of plan termination, the priority category 3 benefit

shall be determined according to plan provisions in effect

on the date the benefit commenced. Benefit increases that

became effective before the beginning of the 5-year period

ending on the date of plan termination, including auto-

matic benefit increases after that date to the extent pro-

vided in paragraph (b) (5) of this section, shall be in-

cluded in determining the priority category 3 benefit. The

form of annuity elected by a retiree is considered the

normal form of annuity for that participant.

(ii) For a participant who was eligible to receive an

annuity before the beginning of the 3-year period ending

on the date of plan termination but whose benefit was not

in pay status, the priority category 3 benefit and the nor-

mal form of annuity shall be determined according to

plan provisions in effect on the day before the beginning

of the 3-year period ending on the date of plan termina-

tion as if the benefit had commenced at that time.

(3) General benefit limitations. The general benefit

limitation is determined as follows:

(i) If a participant’s benefit was in pay status before

the beginning of the 3-year period, the benefit assigned to

29a

priority category 3 with respect to that participant is

limited to the lesser of the lowest annuity benefit in pay

status during the 3-year period ending on the date of

plan terminations and the lowest annuity benefit payable

under the plan provisions at any time during the 5-year

period ending on the date of plan termination.

(ii) Unless a benefit was in pay status before the be-

ginning of the 3-year period ending on the date of plan

termination, the benefit assigned to priority category 3

with respect to a participant is limited to the lowest an-

nuity benefit payable under the plan provisions, including

any reduction for early retirement, at any time during

the 5-year period ending on the date of plan termination.

If the annuity form of benefit under a formula that ap-

pears to produce the lowest benefit differs from the nor-

mal annuity form for the participant under paragraph

(b) (2) (ii) of this section, the benefits shall be compared

after the differing form is converted to the normal an-

nuity form, using plan factors. In the absence of plan

factors, the factors in Part 2621 of this chapter shall be

used.

(iii) For purposes of this paragraph, if a terminating

plan has been in effect less than five years on the date of

plan termination, computed in accordance with paragraph

(b) (6) of this section, the lowest annuity benefit under

the plan during the 5-year period ending on the date of

plan termination is zero. If the plan is a successor to a

previously established defined benefit plan within the

meaning of section 4021(a) of the Act, the time it has

been in effect will include the time the predecessor plan

was in effect.

(4) Determination of beneficiary’s benefit. If a bene-

ficiary is eligible for a priority category 3 benefit because

of the death of a participant during the 3-year period

ending on the date of plan termination, the benefit as-

signed to priority category 3 for the beneficiary shall be

80a

determined as if the participant had died the day before

the 3-year period began.

(5) Automatic benefit increases. If plan provisions

adopted and effective before the beginning of the 5-year

period ending on the date of plan termination provided

for automatic increases in the benefit formula for both

active participants and those in pay status or for par-

ticipants in pay status only, the lowest annuity benefit

payable during the 5-year period ending on the date of

plan termination determined under paragraph (b) (3)

of this section includes the automatic increases scheduled

during the fourth and fifth years preceding termination,

subject to the following restrictions. Benefit increases

for active participants in excess of the increases for re-

tirees shall not be taken into account.

(6) Computation of time periods. For purposes of this

section, a plan or amendment is “in effect” on the later

of the date on which it is adopted or the date it becomes

effective.

[46 FR 9485, Jan. 28, 1981; 46 FR 10720, Feb. 2, 1981.

Redesignated and amended at 46 FR 32575, June 24,

1981]

3la

APPENDIX F

IN THE UNITED STATES BANKRUPTY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

Case. No. 482-00369

Adversary No. 482-0337

IN RE BRANIFF AIRWAYS, INC., et al.,

Debtors

BRANIFF AIRWAYS, INC., AIR LINE PILOTS ASSOCIATION,

INTERNATIONAL; BRANIFF AIRWAYS, INC., RETIREMENT

PLAN FOR PILOTS, Part A; DALE STATES, JACK BOISEN,

JOHN SKIBA and RICHARD RUSSELL, constituting the

RETIREMENT BOARD OF BRANIFF AIRWAYS, INC. RE-

TIREMENT PLAN FOR PILOTS, Part A,

Plaintiffs

Vv.

BANKERS TRUST COMPANY AS TRUSTEE; and W. P. Mc-

. DONALD, DANIEL P. HULSEY, GERALD S. Ross and

N.G. RoBsoN and V.A. QUATTLEBAUM on their own

behalf and on behalf of all PLAN BENEFICIARIES and

PENSION BENEFIT GUARANTY CORPORATION,

Defendants

Memorandum Opinion *

In this adversary proceeding the Debtor is seeking a

court ordered date for the termination of its pension

1 This opinion is substituted for the one rendered December 8,

1982 to correct a misstatement of the facts. The result remains

the same.

32a

plan pursaunt to 29 U.S.C. § 1348 of the Employee Re-

tirement Income Security Act (“ERISA”).

Under ERISA the Pension Benefit Guaranty Corpora-

tion (“PBGC”) guarantees certain levels of payment to

participants of pension plans. The guaranty extends

through the first four statutory categories defined in 29

U.S.C. § 1344. The issue presented at the outset con-

cerns the formula by which category three benefits are to

be computed. That issue has relevance to the date of

termination because the statutory provisions regarding

termination procedure are dependant upon whether the

plan is sufficient or insufficient. (See my memorandum

opinion of November 9, 1982 dealing with the termina-

tion date for the Retirement Plan for Management Em-

ployees of Braniff Airways, Incorporated.) A plan is

sufficient when it has sufficient assets to pay the first

four guaranteed statutory levels. All parties agree that

if one formula is utilized the plan is sufficient; if an-

other, it is insufficient. The PBGC contends the court

should not concern itself with the formula upon which

category three benefits are calculated until the PBGC has

ruled on the matter administratively. However, in this

case the question of sufficiency and the date of termina-

tion are inextricably linked thus requiring my decision

on this point.

The undisputed facts are that there were different

benefit levels being paid to eligible pilots in the three

year period prior to termination: (1) Benefits calculated

on a formula of $14,400 for those pilots who retired be-

fore August, 1976; (2) Benefits calculated on a formula

of $16,400 for those who retired after January 1, 1978

which escalated automatically for this group to a 40%

formula on May 1, 1979. Thus, depending upon his date

of retirement an eligible pilot is paid amounts based upon

either the 40% or the $14,400 formula. These automatic

increases were the result of the pilots’ collective bargain-

ing agreement and were part of the plan within five

33a

years of any possible termination date which might be

selected by the court.

The statutory provisions in question provide:

(a) In the case of the termination of a single-

employer defined benefit plan, the plan administra-

tor shall allocate the assets of the plan (available to

provide benefits) among the participants and bene-

ficiaries of the plan in the following order:

* * a *

(3) Third, in the case of benefits payable as an

annuity—

(A) In the case of the benefit of a participant or

beneficiary which was in pay status as of the begin-

ning of the three-year period ending on the termi-

nation of the plan, to each such benefit, based on the

provisions of the plan (as in effect during the 5-

year period ending on such date) under which such

benefit would be the least,

* * * ad

For the purposes of subparagraph (A), the lowest

benefit in pay status during a three year period shall

be considered the benefit in pay status for such

period.

29 U.S.C. § 1344.

The PBGC has issued Regulation § 2618 interpreting

this statute. The pertinent part of this regulation pro-

vides:

(a) Definition. The benefits in priority category 3

are those annuity benefits that were in pay status

before the beginning of the 3-year period er jing

on the date of plan termination. and those annuity

benefits that could have been in pay status...

* * aa *

(b) Assigning benefits. The annuity benefit that is

assigned to priority category 3 with respect to a

34a

participant is the lowest annuity that was paid or

payable under the rules in Paragraphs (b) (2)

through (b) (6) of this section.

* * * *

(5) Automatic benefit increases. If plan provisions

adopted and effective before the beginning of the 5-

year period ending on the date of plan termination

provided for automatic increases in the benefit for-

mula for both active participants and those in pay

status or for participants in pay status only, the

lowest annuity benefit payable during the 5-year pe-

riod ending on the date of plan termination deter-

mined under Paragraph (b) (3) of this section in-

cludes the automatic increases scheduled during the

forth and fifth years preceding termination, subject

to the following restrictions. Benefit increases for

active participants in excess of the increases for

retirees shall not be taken into account.

§ 2618(a), (b), (b) (5)

One sub-class of defendants represented by the defend-

ant, McDonald, asserts the proper formula to determine

category three benefits is the 40% formula because it

was “in effect” during the relevant period. If the 40%

formula is selected as the proper formula the plan be-

comes insufficient. Under the $14,400 formula the plan

is sufficient. McDenald’s argument is based upon para-

graph (b) (5) of the regulation which contains the rule

for automatic increases such as are involved here. He

argues the statute is incomprehensible and focuses on the

absence of the word “all” in the regulation when refer-

ring to increased benefits for participants in pay status.

From this he contends the term “lowest annuity” must

be the one resulting from the application of the 40%

formula because it was an “automatic increase scheduled

during” the relevant period payable to some of the par-

ticipants in pay status. The omission of the word “all”

is not crucial here because the regulation refers to in-

ee ee a ty

35a

creases for “those is pay status.” Such language clearly

implies all of those in pay status, not some or a portion

as McDonald urges. The lead-in phrase to subdivision

(b) expressly provides that category three is to be the

lowest annuity under paragraphs (b) (2) through (b) (6).

The statute also deals with the possibility that there

may be more than one level of benefits paid to partici-

pants during the relevant period. The least benefit dur-

ing the five year period is specified as the category three

benefit. The relevant section concludes with the require-

ment that it be the lowest paid in the three year period.

Those provisions apply to the situation presented here.”

Although not models of clarity, the intent of both the

statute and the regulation is that the lowest annuity paid

or payable is to be used. Of the various formulas in ef-

fect, the $14,400 formula is obviously the lowest and ac-

cordingly is the one to be used to determine category

three benefits.

/s/ John Flowers

JOHN FLOWERS

U.S. Bankruptcy Judge

2 Although not an issue here, the regulation may be inconsistent

with the statute in those cases where all participants in pay status

receive an automatic increase within three years of termination.

They would have been paid at different levels of benefits and under

the regulation the highest level would seem to be the proper one.