Respondents Brief — Pension Benefit Guaranty Corporation v. LTV Corp.

IN THE JOSErh F. SPANICL, JR

Supreme Court of the Anited

October Term, 1989

PENSION BENEFIT GUARANTY CORPORATION.

Petitioner

v

THE LTV CORPORATION; LTV STEEL COMPANY, INC.,

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

Epcar H. Booru

Counsel of Record

RicHarD H. Kun

Mary S. ZITWEerR

WARSHAW BURSTEIN COHEN

ScHLesiIncerR & Kun

555 Fifth Avenue

New York, New York 10017

(212) 984-7700

ES

es QUESTIONS PRESENTED

it

ik. spondent Official Committee of Equity Security Hold-

es ("Equity Committee”) adopts the Questions Presented

as rephrased in the brief of the Respondents The LTV

Corporation, et al

il

TABLE OF CONTENTS

esky ys |

ps by ty | Os

CONSTITUTIONAL PROVISIONS AND STATUTES

EERE Rene ccccccescccccssccecss

Simsemeeins OF THE CASE .......................

SUMMARY OF ARGUMENT ......................

ARGUMENT

THE PBGC ACTION, PROPERLY BRANDED

BELOW AS “ARBITRARY AND CAPRICIOUS,”

CANNOT SURVIVE STATUTORY AND CONSTI-

Nec ccc ccecescccccces:

A. PBGC Restoration Authority, When Properly

B.

Exercised, Is Beyond Dispute ...............

As the Courts Below Ruled, the PBGC's

Authority to Restore Was Not Properly Exer-

Ne nn cwcccccccces

In a Number of Critical Areas, the PBGC's

Action Was Taken Without Adequate—or

EE

i. PBGC’s claim of improvement in LTV’s

financial condition ..... DEREGSRSaceeeccec:

2. PBGC’s claim of its assumption of a “two

billion dollar” liability ....................

3. PBGC’s failure to adequately consider the

Bankruptcy Court proceedings ...........

to

-1

iv

4. PBGC'’s conclusion that the Plans con-

stitute abusive follow-on plans ...........

5. PBGC's September 22, 1987 preordained

AP ait > ie PT ee OR

D. PBGC's Failure to Have Accorded Procedural!

Due Process Vitiates Its Notice to Restore ...

CRED 80 sedasnitustincivaseeneencaae

SPINOR 6.0 6é5 ubscnunesetuazicticbantieiiek

Vv

TABLE OF AUTHORITIES

PAGE

CASES:

Atkins v. Parker, 472 U.S. 115 (1985) .............. 25

A-T-0, Inc. v. Pension Benefit Guaranty Corp., 634

P.26 BOGS (Othe Cie. 1900)... . wc ccc ccc ccccccss ll

Baltimore & Ohio R. Co. v. Aberdeen & Rockfish

R. Co., 393 U.S. BT (BBGB). ... sc ccccccccccoeees 24

Belland v. Pension Benefit Guaranty Corp., 726

F.2d 839 (D.C. Cir), cert. denied, 469 U.S. 880

Gs 6 onde ce cebusedenheansteasdavedinsbic: ll

Bowen v. Georgetown University Hospital,

U.S. , 109 S.Ct. 468 (1988)... _... 24

Bowman Transportation, Inc. v. Arkansas-Best

Freight System, Inc., 419 U.S. 281 (1974) ...... 13

Burlington Truck Lines, Inc. v. United States,

Gee ED cnevwudacbenuaktcen ke 11-12, 17, 24

Chevron U.S.A., Inc. v. Natural Resources

Defense Council Inc., 467 U.S. 837 (1984) ..... 10-11

Citizens to Preserve Overton Park, Inc. v. Volpe,

i oe a 13

Curtis-Wright Corp. v. General Electric Co., 446

sii okius ke eecdsn wudeenioekes sok: 7

ETSI Pipeline Project v. Missouri, 484 U.S. 495

Misc adeensschiaadken ewan ees beckon 24

Immigration and Naturalization Service v.

Cardoza-Fonseca, 480 U.S. 421 (1987)......... 12

Marsh v. Oregon Natural Resources Council.

U.S. , 109 S.Ct. 1851 (1989)...... 13

Matthews v. Eldridge, 424 U.S. 319 (1976)......... 24-25

Motor Vehicle Manufacturers Association v. State

Farm Mutual Automobile Insurance Co., 463

CF FRR RS Aa ere 12,19

Nachman Corp. v. Pension Benefit Guaranty

Corp., 446 U.S. 360 (1900) ..............0005: 21

National Labor Relations Board v. Metropolitan

Life Insurance Company, 380 U.S. 438 (1965). . 24

vi

New Haven Inclusion Cases, 399 U.S. 392 (1970) ..

New York Council, Association of Civilian Techni-

cians Vv. Federal Labor Relations Authority,

757 F.2d 502 (2d Cir.), cert. denied, 474 U.S.

DT ‘od cedngnencquedhesneuneeseséseece

Panichella v. Pennsylvania R. Co., 252 F.2d 452

(3d Cir. 1958), cert. denied, 361 U.S. 932 (1960).

Perez v. Campbell, 402 U.S. 637 (1971) ............

Rettig v. Pension Benefit Guaranty Corp., 744 F.2d

eee i ebiecceues

United States v. Merz, 376 U.S. 192 (1964).........

Vermont Yankee Nuclear Power Corp. v. Natural

Resources Defense Council, Inc., 435 U.S. 519

Dt). Sheaves tnuesenecedtadeseeuneedenedese

STATUTES:

Administrative Procedure Act

STEER eae i SELENE BeBe ete wet acy ee l,

ag RE LS OR EE LEE l,

Dr ta SN a ial OR he l,

& Re ere l,

Bankruptcy Code

U U.S.C.

RE Ee SS i A Acne 6,

DL cieauceacsutenéneedneneheseanedees

29 U.S.C.

§ pe ree ee

ee ae ee

ee a eee a denaent 2, 3,

)

De SD Decencescesss 5-6, 7, 9, 10, 17, 22, :

Pension Protection Act

Pub. L. No. 100-203, Title IX, Subtitle D,

part Ii, 101 Stat. 13390 (1967)..............

24

vii

Single Employer Pension Plan Amendments Act

Pub. L. No. 99-272, Title XI, 100 Stat. 237

DE Knddeccucceucaedecauentsoncaseues 9-10, 21

Federal Rules of Civil Procedure

i .ccsndbeeunnduccetensssddeweseeeue 7

LEGISLATIVE HISTORY:

H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess.,

reprinted in 1974 U.S. Code Cong. &

Admin. News 5038, 5157-58 .............. 15, 21

H.R. Conf. Rep. No. 495, 100th Cong., Ist Sess.

at 879-85, reprinted in 1987 U.S. Code

Cong. & Admin. News 2313—1625-31 ..... 21

H.R. Conf. Rep. No. 241, 99th Cong., 2nd Sess.

pt. E, at 51-55, reprinted in 1986 U.S. Code

Cong. & Admin. News 685, 709-715 ....... 21-22

PENSION BENEFIT GUARANTY CORPORA.

TION OPINION LETTERS:

77-132 (February 18, 1977), Resp. Eq. Appx. 7a. 15

81-11 Pens. Rep. (BNA) No. 367 at R-3, Pet.

Ss Eo ébcktnesensasaeSonsesescoces 22

82-11 (April 1, 1982), Resp. Eq. Appx. la ....... 15

83-5 (February 2, 1983), Resp. Eq. Appx. 5a ... 15

86-27 Pension Rep. (BNA) No. 10 at 306

(Dec. 17, 1986), Pet. Appx. 172a ........... 22

No. 89-390

IN THE

Supreme Court of the Hnited States

October Term, 1989

PENSION BENEFIT GUARANTY CORPORATION,

Petitioner.

Vs.

Tue LTV Corporation; LTV Stree: Company,

Inc.; OFFICIAL COMMITTEE OF UNSECURED

CrepiTors oF LTV Stree. Company, INC. AND

CERTAIN AFFILIATES; PARENT CREDITOR’'S

ComMITTEE OF THE LTV Corporation; LTV

Bank Group; OFFiciAL COMMITTEE OF Equity

Security Ho_pers; BANcCTexas DaLias, N.A.:

FirtH THIRD BANK: HUNTINGTON NATIONAL

Bank; CiTIBANK, N.A.; Davip H. Micter: anp

WiLiiaM W. SHAFFER,

Respondents

s

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

BRIEF OF RESPONDENT, OFFICIAL COMMITTEE

OF EQUITY SECURITY HOLDERS

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

This case involves The Fifth Amendment to the United

States Constitution, the statutes referred to in the briefs of

the Petitioner and the Respondents, The LTV Corporation,

et al., and the Administrative Procedure Act, 5 U.S.C.

$§ 554(c), 556(a) and (e), 557(a) and (c) and 706(2\ Ai, (D) and

(E). See Appendix A to this brief.

2

STATEMENT OF THE CASE

This case concerns the ongoing effort of The LTV Cor-

poration, its creditors and equity holders to restructure

LTV’s obligations— including its pension obligations—in a

Chapter Il case under the United States Bankruptcy Code.

On or about July 17, 1986 (the “Petition Date”), LTV and

sixty-six related affiliates, including LTV Steel Company,

Inc. (collectively, the “Debtors” or “LTV”), filed petitions for

reorganization under Chapter Il of Title IL United States

Code (the “Bankruptcy Code”) in the United States Bank-

ruptcy Court for the Southern District of New York

(“Bankruptcy Court”) The cases have been consolidated

procedurally and are being jointly administered pursuant

to an order of the Bankruptcy Court.

The principal reason given by the Debtors for filing the

Chapter ll petitions was the need to resolve their multi-

billion dollar pension liability problem. As of the Petition

Date, LTV Steel was the plan sponsor of four single

employer defined benefit pension plans (the “Plans”), as

defined by ERISA. LTV was the plan administrator of the

Plans, as defined by ERISA, 29 U.S.C. § 1002.

Almost immediately after LTV filed its Chapter UI peti-

tions, the Pension Benefit Guaranty Corporation (“PBGC”)

became an active player in the drama. LTV Steel took the

position that its bankruptcy filing prevented it from

making pension plan payments except by order of the

Bankruptcy Court because such contributions would oth-

erwise constitute an improper payment of pre-petition

debts. As a resuit, on August 28, 1986 LTV Steel applied to

the Internal Revenue Service (“IRS”) for a waiver of its

minimum annual pension funding obligations in the

amount of $215 million for the four LTV Stee! Plans for the

plan year ending December 31, 1985. On September 30, 1986

the District Court entered an order. with the consent of

LTV, terminating one of the Plans pursuant to the involun-

tary termination provisions of ERISA. 29 U.S.C. § 1342. The

terminated Plan is not at issue in this case.

3

In November, 1986 the IRS, after consultation with

PBGC, denied LTV Steel's funding waiver requests for the

three remaining Plans for the plan year 1985 in the amount

of $205 million, and additionally revoked the previously

granted waiver for plan year 1984 in the amount of $175

On December 15, 1986, PBGC staff personnel in the form

of a “SEPPAA Trusteeship Working Group” met to deter-

mine whether to terminate the three remaining Plans

involuntarily because of (1) the denial (in which PBGC had

played a role) of funding waivers by the IRS which left the

Plans in violation of the minimum funding standards; and

(2) the views of Mr. Mike Wells, Associate Director, Insur-

ance Operations Department and senior financial person

for PBGC, that “the probability that LTY can survive with

the Plans intact is ‘de minimis.” JA 121-24.

PBGC's Working Group met twice more on December 18,

1986 and January 5, 1987, and recommended involuntary

termination of the three Plans to the agency's Executive

Director, after the Group concluded that “LTV could not

afford to maintain the Plans,” and that a projected and

optimistic $300 million cash flow per year and a “cash

build-up of just over $1 biliion by the end of 1988 would not

be sufficient to finance a plan of reorganization and the

ongoing Plans.” The groups conclusion was that the

termination must occur “now or later.” JA 128-31 137-40.

On January 12, 1987, upon application by PBGC and

consent of LTV, the District Court entered orders terminat-

ing the Plans pursuant to the involuntary termination

provisions of ERISA, 29 U.S.C. § 1342. JA 141-42; See also

AR 1533-41 As a result of the terminations of the Plans,

PBGC became the statutory guarantor and trustee of each

Plan, and was vested with complete authority and control

As utihzed in Petitioners Brief. references to the Joint Appendix are

designated herein as “JA.” and to the Administrative Record as “AR”

References to the Appendix to the Certiorari Petition are designated

herein as “Pet. Appx.” with the letter “a” following the indicated pages.

and to the Equity Committee's Appendix to its Certiorar opposition as

“Resp Eq Appx.” with the letter “a” following the indicated pages

4

over the administration of each Plan. PBGC also became

liable for funding the payment of a portion of the non-

forfeitable benefits due beneficiaries under the Plans.

The United Steelworkers of America (“USWA” or

“Union”), the collective bargaining representative for

hourly-paid employees of LTV Steel, strenuously objected

to termination of the two plans for hourly employees and

to the resulting reduction in benefits paid to its members.

The Union unsuccessfully appealed the termination

orders and also filed suit in the Bankruptcy Court on

January 16, 1987, seeking to obtain payment of benefits

under the Plans on the grounds that the reduction in

pension benefits constituted a breach of the existing

collective bargaining agreement between the Union and

LTV Steel and section 113 of the Bankruptcy Code, ll U.S.C.

§ 113. The Union also threatened a strike if its demands

remained unsatisfied. Fearing that a strike would paralyze

the Debtors early in their reorganization effort, and

prepared to alleviate some of the hardships imposed on

active and retired employees, LTV Steel took the steps

needed to address the Union demands, including the

negotiation of an interim collective bargaining agreement.

LTV Steel obtained Bankruptcy Court approval to make a

single hardship payment to retirees affected by the Plan

terminations. Additionally, LTV Steel and the Union

entered into a modified collective bargaining agreement to

remain in effect only until the earlier of confirmation of a

plan of reorganization for LTV Steel or April, 1990 (the

“Interim Agreement”) JA 275-310, at 282. The Interim

Agreement resolved the Union’ lawsuit by granting its

members some additional pension benefits. Over the

objection of PBGC, a voluntary and active participant in

the bankruptcy proceedings, the Interim Agreement was

approved by the Bankruptcy Court on July 30, 1987. AR

1554-56. The Bankruptcy Court, the District Court and the

Court of Appeals denied PBGC's applications to stay the

implementation of the Interim Agreement.

Immediately thereafter, PBGC asserted that the benefit

5

plans provided by the Interim Agreement were nothing

more than abusive “follow-on plans” that allowed LTV

Steel to offer as high a level of benefits to present and

former employees as had been provided by the terminated

Plans while shifting a substantial portion of the costs to

PBGC. JA 312-18. On August 12, 1987, the SEPPAA Trust-

eeship Working Group, without a formal hearing, issued a

recommendation that the three LTV Steel Plans be

restored to prevent the so-called abuse of the pension

insurance program. This recommendation was based upon

the Working Group's conclusions that: (1) LTV Steel had

established abusive follow-up plans which provided sub-

stantially the same benefits to present and former

employees as the terminated Plans and were partially

funded by PBGC; (2) the improvement in LTV Steel's

financial position in the six months since termination of

the three Plans at issue justified restoration; and (3) LTV

Steel had demonstrated a willingness to fund its emplovee

retirement Plans. JA 319-20.

These conclusions contain obvious substantive and pro-

cedural problems for PBGC. First, the finding of improve-

ment in LTV SteelS financial position was a dramatic

turnaround from PBGC's conclusion, when the Plans were

terminated just over six months earlier, that LTV lacked the

long-term capacity to fund them. Second, PBGC never

acknowledged any responsibility to work within the bank-

ruptcy framework to assist plan beneficiaries while a court-

supervised reorganization was in progress and never

explained how the Interim Agreement was “abusive” or how

PBGCS long-run financial concerns had been dispelled by

LTVs sudden, short-term improvement. Before making a

decision, the Executive Director consulted with the Board of

Directors of PBGC which upheld the authority of the

Executive Director to determine when particular plans

should be restored. Pet. Appx. 180a-8la; JA 363.

On September 22, 1987, PBGC issued a notice of restora-

tion, pursuant to ERISA section 4047, directing the restor-

ation of three of the terminated LTV Steel Plans to their

6

pretermination status. Appx. l82a-83a. PBGC commenced

this lawsuit to enforce its notice of restoration on October

9, 1987, in the United States District Court for the South-

ern District of New York. LTV then brought an action in

the Bankruptcy Court alleging that restoration violated

the automatic stay provision of the Bankruptcy Code, ll

U.S.C. § 362\a) The District Court granted PBGC's motion

to withdraw LTV’s action from the Bankruptcy Court and

The District Court denied PBGC's motion for summary

judgment on June 22, 1988, and by judgment dated

District Court upheld the power of PBGC to restore

previously terminated plans, that court ruled that the

agency had acted arbitrarily and capriciously in failing to

observe the standards of the Administrative Procedure Act

“APA”. The court, in effect, drew a roadmap for the

agency outlining the steps in plan restoration.

Instead of accepting the remand, PBGC appealed. On

May 12, 1989 the United States Court of Appeals for the

Second Circuit found, inter alia, that PBGC exceeded the

bounds set by statutory procedures and permissible dis-

cretion because (1) PBGC could not restore the LTV Steel

Plans solely by claiming that the Interim Agreement with

USWA set up abusive follow-on plans; and (2) PBGC could

not ignore the minimal procedures mandated by the APA

in making the factual findings of improved economic

circumstances and in failing to consider the impact of

central policies of federal bankruptcy and labor laws

applicable to this bankruptcy reorganization in reaching

its decision. The appellate court also drew a roadmap

outlining the steps in plan restoration for the agency. Not

satisfied with the District Court and Court of Appeals

decisions, PBGC still refuses to accept the remand and

presses this appeal.

Although Section 4047 (29 U.S.C. § 1347) of the Emplovee

Retirement Income Security Act of 1974 (“ERISA”) permits

PBGC to restore terminated benefit plans, Congress set no

substantive standards for such restoration, or for the

procedure to be utilized by the agency other than as

articulated in the Administrative Procedure Act, 5 U.S.C

Respondent Equity Commuttee’ claims were not disposed of by the District

es ee ee ee oe ee Corp, 875 F.2d 1008, 1013-15.

102) (2d Cur 989. And Fed. R.Civ.P Rule 54b) provides for the entry of an

8

Insofar as PBGC's action was premised upon purported

umprovements in LTV’s financial condition, the record only

reflects PBGC's evaluation of that financial condition for a

penod of five months prnor to the restoration order No

projection of LTV’s long-term financial condition is

reflected any place in the record, and so—for all that the

record reveals—there would be considerable peril of reter-

mination of the three Plans at issue.

Moreover, PBGC expresses concern that its own action of

terminating the Plans burdens it with a liability of more

than two billion dollars threatening its own financial

pursuant to law, are compelled to fund PBGC. This two

bilhon dollar projection, however, is demonstrably

unsound.

Were the PBGC restoration directive to be effective.

PBGC’s failure to have considered the pending proceedings

in the Bankruptcy Court, and the impact of PBGC'S actions

would endanger the Chapter Il reorganization, and hence

LTV’s ability to continue operations and its employment of

tens of thousands of working people.

PBGC’ conclusion that the Plans were to be restored

because LTV had created so-called abusive “follow-on

plans” is not only without statutory authority, and at odds

with ERISA’ Congressional history, but is unsupported by

any side-by-side comparison of the Plans and the mis-

labeled “follow-on plans.”

Indeed, PBGC's restoration decision is arbitrary and

capncious, having taken place without formal hearings

and any opportunity of LTV to present evidence and to

cross-examine witnesses. PBGC's restoration decision.

indeed, was made at the very moment that the Office of

PBGC'’s Executive Director was in negotiations with LTV

representatives on possible modes of resolving the LTV

PBGC differences and had falsely given LTV assurances of

advance notice if PBGC action was to be taken.

Overall, PBGC'S action so failed to accord LTV reason-

9

able administrative safeguards as to deprive it of minimal

due process protections, and—were the PBGC's admin-

istrative mandate to be enforced—to threaten the assets

being administered in the Chapter ll cases and to seriously

endanger LTV’ ability to reorganize.

ARGUMENT

I. THE PBGC ACTION, PROPERLY BRANDED

BELOW AS “ARBITRARY AND CAPRI-

CIOUS,” CANNOT SURVIVE STATUTORY

AND CONSTITUTIONAL SCRUTINY.

A. PBGC’S Restoration Authority, When Properly

Exercised, Is Beyond Dispute.

Section 4047 of ERISA expresses Congress’ clear stat-

utory grant of authority to PBGC to restore terminated

pension plans. In pertinent part the section reads:

In the case of a plan which has been terminated

under section 1342 of this title, the corporation

{PBGC] is authorized in any such case in which

the corporation determines such action to be

appropriate and consistent with its duties under

this subchapter, to take such action as may be

necessary to restore the plan to its pre-termina-

tion status, including, but not limited to, the

transfer to the employer or a plan administrator

of control of part or all of the remaining assets

and liabilities of the plan.

29 U.S.C. § 1347 (“4047”).

In its Brief PBGC notes that Congress enacted extensive

amendments to ERISA in the Single-Employer Pension

Plan Amendments Act of 1986 (“SEPPAA”), that one of the

SEPPAA provisions amended Section 4047 and, with that

as a jumping off point, states that “[t)he legislative history

therefore confirms what the plain language of the statute

says—that Congress granted PBGC the discretion to

decide when to restore pension plans, and that it intended

10

the agency to do so whenever the PBGC determines that

restoration is ‘appropriate and consistent’ with its stat-

utory duties.” (Pet. Brief, p. 23.)

If anything is clear in the SEPPAA Amendments to

Title IV, it is that Congress intended to limit voluntary

terminations of single employer pension plans and to

enhance PBGC's ability to force a quick and final judicial

decree of involuntary termination. SEPPAA expanded the

period involved in the filing of a notice of intent to

terminate from ten to sixty days (29 U.S.C. § 134la\(2)),

precluded PBGC from processing a termination when an

existing collective bargaining agreement was in force (28

U.S.C. § 134la\3)), and severely limited an employer's

ability to voluntarily terminate an underfunded plan for

purely financial reasons to those situations where an

employer was bankrupt, or in a reorganization case after

the Bankruptcy Court approved the termination because

the employer would be unable to stay in business and pay

its debts when due (29 U.S.C. § 134lic)).

Congress permitted PBGC to use a “simplified pro-

cedure” for involuntary terminations of small plans (29

U.S.C. § 1342(a)), and made it clear that PBGC could invol-

untarily terminate a plan despite the pendency of a

bankruptcy or reorganization case (29 U.S.C. § 1342(c)). Al-

though the 1986 amendments made conforming changes to

section 4047, Congress did not deal with or even discuss

PBGC’s ability to restore a previously terminated plan.

Yet, and with virtually no record to support its restora-

tion decision, in September 1987 PBGC directed the restor-

ation of the earlier terminated Plans, thereby seeking to

relieve PBGC of the fiscal obligations it had assumed on

their termination, and returning to the LTV entities, their

creditors and equity holders, in Chapter IL, the funding

obligations associated with the Plans which had precipi-

tated, in part, the bankruptcy filing.

Recognizing that deference must ordinarily be given to

an agency’ interpretation, the judicial branch and not the

executive branch of government is the “final authority on

ll

issues of statutory construction.” Chevron U.S.A., Inc. v.

Natural Resources Defense Council Inc., 467 U.S. 837, 843

n.9 (1984); Rettig v. Pension Benefit Guaranty Corp., 744

F.2d 133 (D.C. Cir. 1984). As the D.C. Circuit so aptly noted:

(I)n ascertaining the congressional intent under-

lying a specific provision, we are not required to

grant any particular deference to the agency's

parsing of statutory language or its interpreta-

tion of legislative history.

Rettig, 744 F.2d at 141

B. As the Courts Below Ruled, the PBGC’s

Authority to Restore Was Not Properly Exer-

cised.

PBGC cannot dispute that, as an administrative agency,

it is subject to the provisions of the Administrative Pro-

cedure Act, and that it is not free to act on its own

misplaced pronouncements of policy, not in accordance

with its Congressional mandate. See, e.g. Belland v.

Pension Benefit Guaranty Corp., 726 F.2d 839, 844 (D.C.

Cir.), cert. denied, 469 U.S. 880 (1984); A-T-0, Inc. v. Pension

Benefit Guaranty Corp., 634 F.2d 1013, 1019 n.10 (6th Cir.

1980).

The Administrative Procedure Act requires the review-

ing court to “set aside agency action... found to be... arbi-

trary, capricious, an abuse of discretion.” 5 U.S.C.

§ 706(2)A). An agency’s action must also be set aside when

not in accordance with procedures required by law

(5 U.S.C. § 706(2D)), or when not supported by substan-

tial evidence (5 U.S.C. § 706(2E)). And applicable provi-

sions specify the right to a hearing, with proposed findings

and conclusions (5 U.S.C. §§ 554(c), 556(a) and (e), and

557\a) and (c)), none of which were here afforded. This

Court, in directing the amendment of an order of the

Interstate Commerce Commission in Burlington Truck

Lines, Inc. v. United States, 371 U.S. 156, 167 (1962), referred

2

to the Administrative Procedure Act when noting:

There are no findings and no analysis here to

justify the choice made, no indication of the basis

on which the Commission exercised its expert

discretion. We are not prepared to and the

Administrative Procedure Act will not permit us

to accept such adjudicatory practice. [Authorities

omitted) Expert discretion is the lifeblood of the

administrative process, but “unless we make the

requirements for administrative action strict and

demanding, expertise, the strength of modern

government, can become a monster which rules

with no practical limits on its discretion.

The Equity Committee position, that PBGC’s action is

without necessary support in the record, was—after quite

complete and lengthy analysis—accepted by both courts

below. Each court ruled that the agency could not restore

the Plans without following procedures mandated by the

APA, which it had not done, and without giving due regard

—which, on the record, it had not given—to the applicable

provisions of federal bankruptcy and labor law as well as

ERISA.

PBGC, having terminated the Plans in January 1987,

acted to restore them in September of that year This

Court, in Immigration and Naturalization Service v. Car-

doza-Fonseca, 480 U.S. 421, 446 n.30 (1987), considering the

question of judicial review of agencies rulings, noted “\a)n

agency interpretation...which conflicts with the agency's

earlier interpretation is ‘entitled to considerably less

deference’ than a consistently held agency view”. And in

Motor Vehicle Manufacturers Association v. State Farm

Mutual Automobile Insurance Co., 463 U.S. 29, 42 (1983),

this Court declared that “an agency changing its

course ...is obligated to supply a reasoned analysis for that

change beyond that which may be required when an

agency does not act in the first instance.”

PBGC, however, supplied no “reasoned analysis.”

Indeed, here the appellate court below, in rejecting the

13

PBGC'’s summary judgment motion, noted:

In the instant case, PBGC neither apprised LTV

of the material on which it was to base its

decision, gave LTV an adequate opportunity to

offer contrary evidence, proceeded in accordance

with ascertainable standards by which to evalu-

ate when a plan sponsor's financial condition has

so improved as to warrant restoration, nor

provided a statement showing its reasoning in

applying those standards. Failure to do any of

these things renders the decision arbitrary and

capricious.

On remand, PBGC may be able to justify its

decision. However, based on the administrative

record presented to the District Court and to us,

its decision cannot be upheld. Because PBGC's

decision was not sustainable on the admin-

istrative record, the District Court provided the

appropriate remedy by vacating PBGC’s Restora-

tion Notice and remanding the matter to PBGC.

See Vermont Yankee Nuclear Power Corp. \.

Natural Resources Defense Council, Inc., 435

U.S. 519, 549 (1978); Camp v. Pitts. 401 U.S. at 143.

875 F.2d at 1021

In reviewing the “arbitrary and capricious” finding by

the courts below, this Court will weigh whether PBGC's

decision was based upon “consideration of the relevant

factors and whether there has been a clear error of

judgment.” See, Marsh v. Oregon Natural Resources Coun-

ci, __._ U.S. ____, ____., 109 S.. Ct. 1851, 1861 (1989); see also

Bowman Transportation, Inc. v. Arkansas-Best Freight

System, Inc., 419 U.S. 281, 285 (1974) (“The agency must

articulate a ‘rational connection between the facts found

and the choice made’”); Citizens To Preserve Overton Park.

Inc. v. Volpe, 401 U.S. 402, 416 (1971).

l4

Here, despite the soundness of judicial renew of agency

decisions (see Point I D, infra at p. 24), the essence of

PBGC's position is that it—PBGC— is the law; involuntary

restoration of the Plans is appropriate principally because

PBGC wills it, and Congress having given it the power to

restore pension plans, PBGC's judgment as to the manner

of the exercise of those powers is not to be questioned.

C.In a Number of Critical Areas, the PBGC's

Action Was Taken Without Adequate—or Any—

Foundation.

An agency has acted arbitrarily when, choosing or

implementing a particular course of action, it has:

(1) relied on factors that Congress did not want it

to consider; (2) failed to consider an important

aspect of the problem; (3) given an explanation

for its decision that is contrary to the evidence

before it; or (4) given an explanation so implausi-

ble that it cannot be ascribed to any view of the

facts or to the agency expertise.

New York Council, Association of Civilian Technicians

Federal Labor Relations Authority, 757 F.2d 502, 508

(2d Cir), cert. denied, 474 U.S. 846 (1985). Yet these are the

sorts of failings that were here indulged in—as noted by

the courts below—by PBGC in arriving at its restoration

directive.

L PBGCS claim of improvement in LTVS financial con-

dition. In taking its September 1987 action directing the

Plans’ restoration, the PBGC found, and in part relied

upon, purported adequate LTV financial improvement—

since January of that yvear—to justify restoration. In this

regard the appellate court below noted:

While improvement in financial circumstances is

a basis for restoration the administrative record

does not support PBGC's finding that LTV’s finan-

15

cial circumstances had improved oubstentially

enough to justify restoration.

Interestingly, ERISA containe no standard by

which to determine whether an employer can

afford to resume liability for terminated pension

plan programs. PBGC was thus left to its own

discretion in assessing the financial well being of

LTV. We believe that its assessment was

erroneous.

875 F.2d at iI.

The Equity Committee concedes that, when appropriate

due to experience gains or increased funding, the PBGC

has authority to end ongoing termination proceedings and

to restore a plan to its former status. H.R. Conf Rep. No.

1280, 93rd Cong., 2d Sess., reprinted in 1974 U.S. Code

Cong. & Admin. News 5038, 5157-58. Yet here no long-term

funding capacity is reflected in the record, nor does PBGC

claim such long-term funding capacity has been found to

exist. And PBGC’s actions here in examining LTV’ income

trend for a mere handful of months also is inconsistent

with earlier PBGC opinion letters addressing proposals for

plan restoration. PBGC had previously consistently

required plan sponsors to demonstrate the long-term

capacity to fund plans and to avoid any prospective

necessity for retermination. See, e.g. PBGC Opinion Let-

ter 83-5 (February 2, 1983) (Resp. Eq. Appx. 5a-Ga) (“The

Company agrees that it will not ...terminate the Plan for at

least five years after the date of the restoration of the

Plan”); PBGC Opinion Letter 82-Il (April 1, 1982) (Resp. Eq.

Appx. la-4a); PBGC Opinion Letter 77-132 (February 18,

1977) (Resp. Eq. Appx. 7a).

In this case, the administrative record is devoid of any

consideration of the possibility of retermination. This is

clearly inconsisvent with the role of PBGC and the goals of

ERISA. Restoration, without a reasoned determination of

how LTV Steel would be able, going forward, to fund the

Plans in a way highly unlikely to lead to retermination,

16

threatens the interests of the LTV entities, their creditors.

their equity holders, plan participants, all PBGC premium

payers and of PBGC itself

In rejecting PBGC's finding that LTV's changed financial

circumstances justified restoration of the Plans, the Court

of A ls identified | sienifi Seficiencies in

financial analysis that reviewed LTV’s income trend only

for a five month period; (2) PBGC's assumption that LTV

would be able to obtain funding waivers from the Interna!

Revenue Service for the years 1984 through 1986 and after.

despite the fact that the IRS had denied LTV’s request for a

waiver for 1985 and had revoked a waiver for 1984; (3)

PBGC's assumption that pension savings based upon job

reductions in the Interim Agreement would be preserved

in future labor agreements when the Union would be less

likely to grant such concessions; and (4) PBGC's complete

failure to assess the impact of LTV's status as « Chapter I

debtor on its financial condition. 875 F.2d at 1018-20. The

Court of Appeals criticized PBGC for focusing on LTV's

short-term economic conditions, without considering the

long-term implications of plan restoration, including the

likelihood of retermination. 875 F.2d at 1020.

2. PBGC%s claim of its assumption of a “two billion dollar”

liability. PBGC and the Solicitor General urge that barring

restoration of the Plans, the PBGC will be assuming in

excess of two billion dollars of LTV liabilities (Petitioner's

brief, pp. 4, 8-9; Solicitor General's brief, pp. 7, 16 at n.10),

and that this endangers PBGC and massively saddles gi-

gantic expense upon those entities compelled to support it.

But this two billion dollar figure is far, far in excess of

the real cost to the PBGC resulting from its being tem-

porarily required to fund a portion of the Plans’ liabilities.

In fact, the two billion dollar figure is not the present cost

of projected PBGC outlays during the Chapter Il and

pending remand. The assets of the Plans are sufficient to

fund current payments to beneficiaries at ERISA mini-

17

mum guaranteed levels, so that PBGC has not been

required to make any payments from the insurance fund.

The two billion dollar figure is the present value—appar-

ently, as calculated by PBGC—of its projected payment

stream for the remainder of the lives of participants in the

three Plans, over many decades, after plans of reorgan-

by the Bankruptcy Court.

Even as such it is defective. The PBGC calculation uses

an annuity interest rate, in the seven percent range; if a

realistic market rate had been used—several percentage

points higher to reflect PBGC’s actual rate of return on

assets—the projected underfunding would have been seen

as dramatically less.

3. PBGC% feilure to adequately consider the Benkruptcy

Court proceedings. The Court of Appeals rejec d PBGC's

claim that the agency need not have considered the

policies of federal labor law and of federal bankruptcy law

implicated by its actions. 875 F.2d at 1015-16. Given that the

legislative history of ERISA section 4047 demonstrates

conclusively that changes in financial circumstances were

the central factor for determining when restoration should

be ordered (see discussion, infra, at p. 21), and given PBGC's

ongoing voluntary participation in the bankruptcy pro-

ceedings, it is difficult to see how consideration of LTV'’s

bankruptcy filing and the policy concerns of bankruptcy

law could have been ignored by the agency.

Administrative agencies must always consider the

concerns, and competing concerns must be accommo-

dated. Burlington Truck, 371 U.S. at 172-73. In Burlington

Truck the Supreme Court directed a lower court to remand

proceedings to the Interstate Commerce Commission

because of the Commission’ failure to have fully consid-

ered the impact of its decision on national labor policy and

the requirement of federal labor laws.

The concideration of competing policies and statutes is

particularly important here because of the critical status

of the reorganization proceedings, and the impact of those

proceedings on tens of thousands of participants in the

Plans, and upon hundreds of thousands of creditors and

equity security holders. PBGC itself had participated in

there to that court’ approval of the LTV/United Steel-

workers 1987 collective bargaining agreement which had

adopted the interim pension plans. Having been unsuc-

cessful there, PBGC's Notice of Restoration ignored—and.

in effect, sought to undo—the collective bargaining agree-

ment and the Interim Plans that had received Bankruptcy

Court approval.

To make a reorganization most viable, the Bankruptcy

Code—upon the commencement of reorganization pro-

ceedings—precludes a debtor from paying pre-petition

debts, without Bankruptcy Court approval, which

approval is granted upon finding that such action will not

hamper the reorganization effort. See I] U.S.C. § 362. The

goal of the automatic stay of payment of pre-petition debts

is to enable debtors, their creditors, owners and others to

jointly formulate plans for the satisfaction of pre-petition

claims (such as most of the claims for funding the Plans).

Perez v. Campbell, 402 U.S. 637, 648 (1971). But PBGC

appears to have assumed that upon its ordered restora-

tions, LTV would—or at least should—recommence fund-

ing the Plans as if nothing had happened.

Most of the funding obligations, however, are pre-pet-

tion liabilities for past service rendered by covered

emplotees, which obligations may not be payable without

Bankruptcy Court approval. The existence of conflicts and

restraints created by problems of the Bankruptcy Code

may well render unilateral, unconditional administrative

restoration, as attempted by PBGC, unworkable because,

absent Bankruptcy Court approval, LTV cannot perform

that which PBGC seeks to achieve in its Notice of Restora-

tion. The record's failure to answer the question of feasi-

bility reinforces the conclusion that PBGC's non-

consideration of those restraints was capricious.

PBGC’s failure to consider and attend upon the alter-

native of restoration in the context of a plan of reorgan-

ization—which could serve to protect the interests of all

make it impossible for this Court to conclude that the

rescission of termination was the product of reasoned

decision making. Cf State Farm, 463 U.S. at 52. While an

agency is not required to review every conceivable policy

alternative, Vermont Yankee Nuclear Power (orp. v. Natu-

ral Resources Defense Council, Inc., 435 U.S. 519, 551 (1978),

it must consider those alternatives “within the ambit of

the existing standard.” Id.

It is at least arguably improper for an agency not to

U.S. at 46 and 5L Restoration as an incident of a plan of

reorganization would be one example of such a less drastic

alternative. However, for PBGC to craft restoration upon

viable economic terms requires a searching examination of

LTV Steel's ability to fund the Plans—a searching exam-

ination not engaged in by PBGC. What PBGC has done

instead is to stubbornly insist upon adherence to a policy it

has purportedly promulgated, that so-called “follow-on

plans” are abusive of the pension insurance system.

4. PBGCS conclusion that the Plans constitute abusive

follow-on plans. This case presents a problem PBGC has

never addressed previously and has been unwilling to

consider in a responsible manner throughout this proceed-

ing. That problem is whether an entity like LTV, compelled

by economic necessity to seek Bankruptcy Court protec-

tion in order to confront its many financial problems and

the burden of its pension obligations, can be found to have

established so-called abusive “follow-on plans.” if, after its

original Plans were involuntarily terminated, the company

agreed to establish interim plans limited to the duration of

the reorganization. As noted, LTV Steel's interim pension

plans were part of a collective bargaining agreement,

approved by the Bankruptcy Court, that had been negoti-

20

ated under the threat of a strike that would have affected

LTV’s ability to reorganize. PBGC has promulgated no

regulations applicable to this situation, has issued no

relevant opinion letters and, in fact, has refused to recog-

nize the problem once it arose.

In recommending restoration of the Plans, the agency

relied, at least in part, upon its conclusion that the Interim

Agreement negotiated between LTV Steel and the Union.

that PBGC had terminated, but designed to pass a major

portion of the financial burden from LTV Steel to PBGC.

As a basis for restoration, this conclusion is doubly

defective: (i) the PBGC'S administrative record failed to

demonstrate near identity between the Plans terminated

by PBGC and the interim plans, and (ii) ERISA’ legislative

history fails to condemn follow-on plans, if this is in fact

what they are.

First, in affirming the District Court’ finding that that

agency’ action was “arbitrary and capricious,” the United

States Court of Appeals for the Second Circuit concluded.

“PBGC offers no detailed comparison of the two sets of

plans to support its conclusion that the [Interim Plans!

were merely continuations of the old Plans.” 875 F.2d at 1017.

This failure by PBGC leaves a vacuum wholly unsupportive

of the novel contention PBGC makes, namely that

reorganizing debtor's interim pension plans, established

pursuant to a collective bargaining agreement and Bank-

ruptcy Court approval, after termination of the preexisting

Plans, constitute “abusive follow-on plans.”

Second, even had the record here established that the

court-approved interim plans were follow-on plans, the

legislative history of the most recently enacted amend-

ments to Title IV, the Pension Protection Act of 1987 (“PPA”)

(subtitle D of Title [IX of the Omnibus Reconciliation Act of

1987, Pub. L. No. 100-203, 101 Stat. 1330 (1987)) clearly shows

that Congress considered and rejected the idea of outlawing

“follow-on plans.” In 1987 at least four Congressional

|

)

.

|

21

committees proposed legislation to amend Title [IV The

Code Cong. & Admin. News 2313 - 1625-31). -

To the extent that Congress can be said to have

to abusive follow-on plans, its concern was that solvent,

The Court of Appeals recognized that Congress acknowl.

edged that the situation in this case, in which an interim

plan ts approved by the Bankruptcy Court solely to further

the reorganization effort. is not an abusive follow-on plan.

875 F.2d at 1016-17.

reprinted in 1974 U.S. Code Cong. & Admin. News 5038

5157-58. Congress continued this policy choice when it

enacted the SEPPAA amendments to ERISA, Pub. L. No.

not

consider whether a follow-on plan constituted grounds for

restoration. /d. (citing H.R. Rep. No. 241, 99th Cong., 2nd

22

Sess., pt. E at 51-55, reprinted in 1986 U.S. Code Cong. &

Admin. News 685, 709-713)

PBGC’s rehance on its two opimon letters condemning

follow-on plan abuse does not support its position. Both

PBGC Opinion Letter 81-ll (May I, 1981) (Pet. Appx.

159a-64e, and AR 198-202) and PBGC Opinion Letter 86-27

17, 1986) (Pet. Appx. I72a-79a, and AR 211-16) deal

23

soon commence negotiations with the Union for a new

labor agreement.

In seeking to enforce its self-proclaimed policy against

so-called “follow-on plans,” PBGC has been blind to the

consequences of its actions which have delayed the

reorganization of LTV to the disadvantage of its many

thousands of creditors, equity holders and work force. But

for this stubborn adherence to policy by PBGC these

bankruptcy cases could have produced a consensual plan

of reorganization during the three and one-half years since

the filing.

5. PBGCS September 22, 1987 pre-ordained restoration

action. On September 22, 1987 the Principal Deputy

Executive Director of PBGC (Dellinger) met with LTV

representatives considering various “options” that the

agency then apparently believed it had. AR 1575-76.

Dellinger had earlier enumerated the possible alter-

natives, on September 14, 1987, in a letter to Raymond Hay

of LTV, stating that the “options”, as purportedly seen by

PBGC, were (1) restoration, (2) equitable adjustment, i.e.

reducing PBGC payment to retirees to reflect payments

made by LTV, (3) continuation of existing litigation, and (4)

to do nothing. AR 668-69. Yet the administrative record is

devoid of any internal agency references to any option

other than restoration. One month before Dellinger's

letter, on August 13, 1987, PBGC staff already had recom-

mended immediate restoration, and had not outlined a

single alternative form of action. AR 630-36. The staff

reiterated the recommendation without modification on

September 18, 1987. AR 640-45.

The illusory—and misleading—suggestion that PBGC,

in good faith, gave due consideration to alternatives to

restoration is dramatically demonstrated by PBGC's

Executive Director Utgoffs September 22, 1987 Notice of

Restoration—issued the very day of the PBGC-LTV meet-

ing discussing “options”—which Notice was effective at

10:30 that morning and was specified to be “not subject to

administrative review by the PBGC...." Compare AR

24

1575-76 with 1578-79.

Dellinger, on that very day, had “reiterated” to the LTV

representatives that “we would give them as much

advance notice as possible”! AR 1576.

D. PBGC’s Failure to Have Accorded Procedural

Due Process Vitiates Its Notice to Restore.

This Court has consistently ruled that delegations

of authority by Congress to administrative agencies do

not deprive the judiciary of its responsibilities—soundly

exercised here by the Courts below—to police and curtail

unbounded administrative power. See, e.g., Burlington

Truck, 371 U.S. at 167 (“Congress did not purport to

transfer its legislative power to the unbounded discretion

of the regulatory body”); Bowen v. Georgetown University

Hospital, __. U.S. ___., 109 S. Ct. 468, 474 (1988); ETSI

Pipeline Project v. Missouri, 484 U.S. 495, 517 (1988); New

Haven Inclusion Cases, 399 U.S. 392, 432-33 (1970);

Baltimore & Ohio R. Co. v. Aberdeen & Rockfish R. Co..,

393 U.S. 87, 91-92 (1968); National Labor Relations Board v.

Metropolitan Life Insurance Company, 380 U.S. 438,

442-43 (1965); United States v. Merz, 376 U.S. 192, 198-99

(1964 ).

PBGC's failures, noted by the Court below—to have

informed LTV of the materials on which it was to base its

decision, to provide an adequate opportunity to tender

contrary evidence, to utilize ascertainable standards in

evaluating LTV’s financial condition, to provide a state-

ment of its reasoning, and the like (875 F.2d at 1021)—

render reasoned judicial review of PBGC's actions impossi-

ble. Indeed, these arbitrary actions, threatening to deprive

all LTV entities including the Equity Committee of assets

in which all have a stake, are violative of that due process

guaranteed by the Fifth Amendment to the United States

Constitution. See Matthews v. Eldridge, 424 U.S. 319, 332

(1976) (“Procedural due process imposes constraints on

governmental decisions which deprive individ-

25

uals of ‘liberty’ or ‘property’ interests within the meaning

of the Due Process Clause of the Fifth or Fourteenth

Amendment”); cf Atkins v. Parker, 472 U.S. 115, 128 (1985)

(“(T}he procedures that are employed (administratively, re

the food stamp program] must comply with the commands

of the Constitution”).

Considering PBGC's entire procedural record here, the

Court of Appeals noted:

(Wjhen assessing an agency's actions under the

arbitrary and capricious standard, it is a princi-

ple of fundamental fairness that

|a) party is entitled...to know the issues on

which decision will turn and to be apprised of

the factual material on which the agency relies

for decision so that (it) may rebut it. Indeed,

the Due Process Clause forbids an agency to

use evidence in a way that forecloses an

opportunity to offer a contrary présentation.

Bowman Transp., Inc. v. Arkansas-Best Freight

System, Inc., 419 U.S. 281, 288 n.4, (1974).

875 F.2d at 1020-21

If this Court, as here urged, affirms the action below,

denying PBGC'’s motion for summary judgment (which,

essentially, sought enforcement of its Notice of Restora-

tion), the matter will thereby be remanded to PBGC. It,

acting pursuant to relevant provisions of the APA, can

then appropriately evaluate LTV’s financial condition and

explore the interplay of ERISA, the bankruptcy law (and

LTV’s position in Chapter I) and the labor law, and can

consider LTV’s ability to fund the Plans. Some rapproche-

ment among competing interests can then be accom-

plished. But if not, at least due process will arguably have

26

been accorded LTV, its creditors and equity holders, with a

full record—allowing for sound judicial review—having

been made.

Thus the Court of Appeals for the Second Circuit

soundly affirmed the remand order and held that PBGC's

reading of ERISA section 4047 was unreasonable. The

statutory language, legislative history and decisional law

all fail to support the conclusion that restoration of the

Plans as directed by PBGC, was appropriate under section

4047. Indeed, such conclusions as PBGC apparently

reached, as predicates to its restoration directive, are

patently unsound.

CONCLUSION

The action of PBGC having been arbitrary and

capricious and neither in compliance with the standards

set forth in the Administrative Procedure Act nor in accord

with Constitutional due process, the decision of the United

States Court of Appeals for the Second Circuit should be

affirmed and the matter remanded to the Second Circuit

for its action, essentially causing PBGC to withdraw its

restoration directive and to conduct appropriate admin-

istrative proceedings.

Respectfully submitted,

Edgar H. Booth

Counsel of Record

Richard H. Kuh

Mary S. Zitwer

Warshaw Burstein Cohen

Schlesinger & Kuh

555 Fifth Avenue

New York, New York 10017

(212) 984-7700

Dated: January 16, 1990

APPENDIX

Al

APPENDIX A

Administrative Procedure Act

5 U.S.C. §554. Adjudications

* * ~

(c) The agency shall give all interested parties opportu-

nity for—

(1) the submission and consideration of facts, argu-

ments, offers of settlement, or proposals of adjustment

when time, the nature of the proceeding, and the public

interest permit; and

(2) to the extent that the parties are unable so to

determine a controversy by consent, hearing and deci-

sion on notice and in accordance with sections 556 and

557 of this title.

5 U.S.C. §556. Hearings; presiding employees;

powers and duties; burden of proof; evidence;

record as basis of decision

(a) This section applies, according the provisions thereof,

to hearings required by section 553 or 554 of this title to be

conducted in accordance with this section.

ie oe

(e) The transcript of testimony and exhibits, together

with all papers and requests filed in the proceeding,

constitutes the exclu.ive record for decision in accordance

with section 557 of this title and, on payment of lawfully

prescribed costs, shall be made available to the parties.

When an agency decision rests on official notice of a

material fact not appearing in the evidence in the record, a

party is entitled, on timely request, to an opportunity to

show the contrary.

A2

5 U.S.C. §557. Initial decisions; conclusiveness;

review by agency; submissions by parties; con-

tents of decisions; record

(a) This section applies, according to the provisions

thereof, when a hearing is required to be conducted in

accordance with section 556 of this title.

* * *

(c) Before a recommended, initial, or tentative decision,

or a decision on agency review of the decision of subordi-

nate employees, the parties are entitled to a reasonable

opportunity to submit for the consideration of the

employees participating in the decisions—

(1) proposed findings and conclusions; or

(2) exceptions to the decisions or recommended deci-

sions of subordinate employees or to tentative agency

decisions; and

(3) supporting reasons for the exceptions or proposed

findings or conclusions.

The record shall show the ruling on each finding, con-

clusion, or exception presented. All decisions, including

initial, recommended, and tentative decisions, are a part of

the record and shall include a statement of—

(A) findings and conclusions, and the reasons or basis

therefor, on all the material issues of fact, law, or

discretion presented on the record; and

(B) the appropriate rule, order, sanction, relief, or

denial thereof.

5 U.S.C. §706. Scope of review

To the extent necessary to decision and when presented,

the reviewing court shall decide all relevant questions of

A3

law, interpret constitutional and statutory provisions, and

determine the meaning or applicability of the terms of an

agency action. The reviewing court shall—

* * *

(2) hold unlawful and set aside agency action, find-

ings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law;

*~ * ”

(D) without observance of procedure required by

law;

(E) unsupported by substantial evidence in a case

subject to sections 556 and 557 of this title or other-

wise reviewed on the record of an agency hearing

provided by statute,....