Amicus Curiae Brief — Beck v. Pace Intern. Union

No. 05-1448

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JEFFREY H. BECK, LIQUIDATING TRUSTEE OF THE

ESTATES OF CROWN VANTAGE, INC., AND

CROWN PAPER COMPANY, PETITIONER

PACE INTERNATIONAL UNION, ETAL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

HOWARD M. RADZELY

Solicitor of Labor

Department of Labor

Washington, D.C. 20210

JEFFREY B. COHEN

Chief Counsel

Pension Benefit Guaranty

Corporation

Washington, D.C. 20005

PAUL D. CLEMENT

Solicitor General

Counsel of Record

EDWIN S. KNEEDLER

Deputy Solicitor General

MATTHEW D. ROBERTS

Assistant to the Solicitor

General

Department of Justice

Washington, D.C. 20580-0001

(202) 514-2216

QUESTION PRESENTED

Whether an employer that sponsors and administers a

single-employer defined benefit plan has a fiduciary obliga-

tion under the Employee Retirement Income Security Act of

1974, 29 U.S.C. 1001 et seg., to consider merger as a way to

implement the employer’s decision to terminate the plan.

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TABLE OF CONTENTS

Page

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Pe cc cdeciscdnantkessebeekedunssscsbedkee evans 6

A. The decision of the court of appeals is incorrect ...... 7

B. This Court’s review is warranted ................. 16

ED Sadddbancedsdaeevasathanascssuceusduensvet 20

TABLE OF AUTHORITIES

Cases:

Auer v. Robbins, 519 U.S. 452 (1997) ................. 13

Boivin v. U.S. Airways, Inc., 446 F.3d 148 (D.C. Cir.

DD diautthdneksneeeeenees hana enwabanenats 13

Brillinger v. General Elec. Co., 130 F.3d 61 (2d Cir.

1997), cert. denied, 525 U.S. 1138 (1999) ......... 16,17

Chait v. Bernstein, 835 F.2d 1017 (3d Cir. 1988) ....... 18

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73

DE kd¢vcctescuidebimeaddeedeesGeanekis 7, 8, 9, 16

Flanagan v. General Elec. Co., 242 F.3d 81 (2d Cir.),

cert. denied, 534 U.S. 1065 (2001) ................. 17

Hawkeye Nat’! Life Ins. Co. v. Avis Indus. Corp.,

122 F.3d 490 (Sth Cir. 1908) 2... cece ccc cccccees 18

Hughes Aircraft Co. v. Jacobson, 525 U.S. 432

PPPrer eer Peer eee 2,8, 9, 11, 12, 16

King v. National Human Res. Comm., Inc.,

Se Fe UMP COU EMEC ENED cccccccccesccccesesecs 17

Lockheed Corp. v. Spink, 517 U.S. 882 (1996) ... 8, 9, 10, 16

Malia v. General Elec. Co., 23 F.3d 828 (3d Cir.),

cert. denied, 513 U.S. 956 (1994) ............ 10, 16, 17

Mead Corp. v. Tilley, 490 U.S. 714 (1989) ....-...... 3, 12

(III)

IV

Cases—Continued: Page

Nachman Corp. v. PBGC, 446 U.S. 359 (1980) ........ 2,9

Schaffer ex rel. Schaffer v. Weast, 1268. Ct. 528

BEE S46 sndknveadhs icddveddénandsdddssonencass 14

Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1983) ......... )

Sutter v. BASF Corp., 964 F.2d 556 (6th Cir. 1992) .. 10,17

Systems Council EM-3 v. AT&T Corp., 159 F.3d 1376

Se ED cncdkeneddatesecuddtstdiesesecons 17

Statutes and regulations:

Employee Retirement Income Security Act of 1974,

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SPD oc cccnecavesedadecevesnadsuas 4

REE icc udinndidupeenbouenaen 15, 16

CEE dccuccwetkukiedudvadésedsasies 2

DUE ccicceateusdenssaben nes eennnsens 2

29 U.S.C. 1102(b)(3) (§ 402(b)(3), 88 Stat.

DUE bbe cccnscccdscdancvacccscccvasecesceens 7

V

Statutes and regulations—Continued: Page

STE GENED 600550 455sd00k0000%0ReReee 12

SP UB, TRGGAMEMA) oc ccccccvccccsscccceces 1,9

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SP SEED oc cdcncncdcnnscevdscovecns 1

PUBL. TG of cnt: CER. FG) oc acccccccsscvenses 2

SPU SEED. i cececseecccceseicninnane 4

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SPT SHEE ccc cdcceecusenscsssessuuneee 19

SP PEE. ecccasccccsessseesmsoeees 11,15

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SOULE. TRE ss ccntcacesccssistineeee 6

29 U.S.C. 1341(b)3)(A) ......... eee eee 3, 6, 11, 18

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VI

Statutes and regulations—Continued: Page

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iid ine a anid ieeneael 15

i ods 16

I, | oe i ce eete ced ck nuenkads 15

EE ES eS 15, 16

ES a academe 15

Pension Protection Act of 2006, Pub. L. No. 109-280,

120 Stat. 780:

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is ne cer nannnactannnsew 20

26 U.S.C. 402(c) (2000 & Supp. IT] 2008) .............. 14

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26 C.F.R.:

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29 C.F.R.:

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Regulations—Continued: Page

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a a an ee ee ee ae 3, 14

Miscellaneous:

PBGC, Annual Mangement Report, Fiscal Year 2006

(Nov. 15, 2006) <http://www.pbge.gov/does/

PE sevscnsdnquaskeccadusneseees 19, 20

PBGC Op. Ltr.:

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SL TED atcnccisincdedheencamunes 12

In the Supreme Court of the Gnited States

No. 05-1448

JEFFREY H. BECK, LIQUIDATING TRUSTEE OF THE

ESTATES OF CROWN VANTAGE, INC., AND

CROWN PAPER COMPANY, PETITIONER

v.

PACE INTERNATIONAL UNION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

This brief is filed in response to the order of this Court

inviting the Solicitor General to express the views of the

United States. In the view of the United States, the petition

for a writ of certiorari should be granted.

STATEMENT

1. The Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. 1001 et seg., sets minimum standards for

employee benefit plans to ensure their equitable character

and financial soundness. See 29 U.S.C. 1001(a). Among those

standards are requirements that plan fiduciaries discharge

their duties solely in the interest of plan participants and ben-

eficiaries, for the exclusive purpose of providing benefits to

participants and their beneficiaries, with prudence, and in

accordance with the documents and instruments governing

the plan insofar as they are consistent with ERISA. 29 U.S.C.

1104(a)(1 (A), (B) and (D). In general, a person is a fiduciary

“to the extent” he exercises “discretionary authority or dis-

cretionary control” over plan “management,” exercises “au-

(1)

2

thority or control” over plan “assets,” or has “discretionary

authority or discretionary responsibility” in the plan’s “ad-

ministration.” 29 U.S.C. 1002(21)(A)(i) and (iii).

One kind of pension plan governed by ERISA is a defined

benefit plan. 29 U.S.C. 1002(35). In a defined benefit plan,

employees are entitled, upon retirement, to fixed periodic

payments. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432,

439 (1999). To ensure the availability of sufficient funds to

make those payments, ERISA sets minimum funding stan-

dards for defined benefit plans. 29 U.S.C. 1001(¢), 1081(a),

1082. Title 1V of ERISA, 29 U.S.C. 1301 et seg., also provides

an insurance program, administered by the Pension Benefit

Guaranty Corporation (PBGC), to protect plan participants

and beneficiaries from loss of certain promised benefits upon

plan termination. See 29 U.S.C. 1001(c); Nachman Corp. v.

PBGC, 446 U.S. 359, 361-362 (1980).

An employer may initiate termination of a single-employer

defined benefit plan “only” through “standard” or “distress”

termination procedures prescribed in Title IV of ERISA. 29

U.S.C. 1341(a)(1). This case concerns a standard termination.

In a standard termination, the plan administrator must pro-

vide advance notice to affected parties, actuarial information

indicating to the PBGC that the plan’s assets will be sufficient

to satisfy benefit liabilities, subsequent notice to each partici-

pant and beneficiary of the amount of benefit liabilities attrib-

utable to him or her, and additional information required by

PBGC regulations. 29 U.S.C. 1341(a)(2), (b)(1)(A) and (B),

(b)(2); 29 C.F.R. 4041.23-4041.27. The PBGC then decides

whether the plan has sufficient assets to satisfy all benefit

liabilities and whether other requirements have been met.

See 29 U.S.C. 1341(b)(2)(C); 29 C.F.R. 4041.31. If the PBGC

does not issue a notice of noncompliance, and if the plan as-

sets are sufficient to satisfy benefit liabilities on the termina-

3

tion date, the plan administrator makes a final distribution of

plan assets. 29 U.S.C. 1341(b)(2)(D); 29 C.F.R. 4041.28.

Pursuant to 29 U.S.C. 1341(b)(3)(A), the plan administra-

tor must “distribute” the assets of the plan “in accordance

with” 29 U.S.C. 1344, which allocates the assets “among the

participants and beneficiaries of the plan” in a specified order

of priority. 29 U.S.C. 1344(a). If assets are left over after

benefits are satisfied, any assets attributable to employee

contributions must be distributed to the participants who

made the contributions or to their beneficiaries. 29 U.S.C.

1344(d)(3). After that distribution, the employer sponsoring

the plan may recover any residual assets if the plan so pro-

vides and the distribution does not violate any law. 29 U.S.C.

1344(d)(1); see Mead Corp. v. Tilley, 490 U.S. 714, 717-718

(1989). To distribute the assets, the plan administrator must

either “purchase irrevocable commitments [7.e., annuities]

from an insurer to provide all benefit liabilities under the

plan,” or, “in accordance with the provisions of the plan and

any applicable regulations, otherwise fully provide all benefit

liabilities under the plan.” 29 U:S.C. 1341(b)(3)(A).

The PBGC’s regulations similarly require the plan admin-

istrator, “in accordance with all applicable requirements un-

der the [Internal Revenue] Code and ERISA,” to “distribute

plan assets in satisfaction of all plan benefits by purchase of

an irrevocable commitment from an insurer or in another

permitted form.” 29 C.F.R. 4041.28(c)(1). The regulations

stress that “[a] plan administrator violates ERISA if plan

assets are allocated or distributed upon plan termination in a

manner other than that prescribed in [29 U.S.C. 1344].” 29

C.F.R. 4044.4(a). The regulations also impose various other

requirements, including that the plan administrator inform

each participant and benef! viary that, after distribution of

plan assets, “the PBGC no longer guarantees that partici-

pant’s or beneficiary’s plan benefits.” 29 C.F.R. 4041.23(b)(9).

4

2. a. Crown Vantage, Inc., and its subsidiary Crown Paper

Co. (collectively Crown) operated paper mills. Crown’s board

of directors served as administrator of Crown’s 18 pension

plans. PACE International Union (PACE) represénted em-

ployees covered by seventeen of the plans. Pet. App. 2, 4.

In March 2000, Crown filed for bankruptcy and began

liquidating its assets. In July 2001, Crown’s board of direc-

tors began to consider terminating its pension plans under a

standard termination through the purchase of annuities. Pet.

App. 4. PACE proposed that Crown instead merge the plans

covering employees represented by PACE with the PACE

Industrial Union Management Pension Fund (PIUMPF), a

multiemployer plan. /d. at 5; see 29 U.S.C. 1002(37), 1301(a)(3)

(defining “multiemployer plan”). Crown’s board of directors

decided to terminate twelve of the plans (which, by then, had

been combined into a single plan) by purchasing annuities.

Crown paid $84 million for the annuities, with the expectation

that, after termination and distribution of the annuity con-

tracts to participants and beneficiaries, approximately $5

million would revert to Crown. Pet. App. 5-7.

b. After Crown purchased the annuities, respondents

PACE and two plan participants brought an adversary action

against Crown in bankruptcy court. Pet. App. 7; see 28 U.S.C.

157. Respondents alleged that Crown had breached its fidu-

ciary duties under ERISA by failing to give adequate consid-

eration to PACE’s merger proposal. Pet. App. 7.

The bankruptcy court agreed with respondents that

Crown had breached its fiduciary duties. Pet. App. 51-73.

The court acknowledged that the board of directors’ decision

to terminate the plan was a “business” rather than a fiduciary

decision. /d. at 65. The court nonetheless reasoned that the

decision whether to “annuitize” the plan or to merge it into

PIUMPF was a fiduciary decision. /d. at 66. And the court

5

found that the board did not seriously consider the proposed

merger with PIUMPF. /d. at 65.

The court did not, however, order Crown to cancel the

annuity purchase, because that would have triggered a $4

million penalty for breach of the purchase agreement. Pet.

App. 61, 66-67. Instead, the court issued a preliminary injunc-

tion preventing Crown from recovering the $5 million in sur-

plus plan assets remaining after the annuity purchase. /bid.

In later decisions, the court kept that injunction in effect, but

approved termination of the plan and distribution of the resid-

ual assets to the participants and beneficiaries. /d. at 74-83.

The distribution of the residual assets was stayed pending

resolution of any appeals. See Pet. 9.

c. Petitioner, the liquidating trustee of the Crown bank-

ruptcy estates, appealed to the district court, which affirmed

the bankruptcy court’s order. Pet. App. 29-50. The district

court rejected petitioner’s argument that the decision to ter-

minate the plan by purchasing annuities rather than to merge

the plan with PIUMPF was a business, rather than a fidu-

ciary, decision. /d. at 45-48. The Court reasoned that merger

is an alternative method, permitted by ERISA, of implement-

ing a termination because a merger can “otherwise fully pro-

vide all benefit liabilities under the plan.” /d. at 46 (quoting

29 U.S.C. 1341(b)(3)(A\ii)). ~The court also rejected peti-

tioner’s contention that the terms of the Crown plan did not

permit merger as a method of termination. /d. at 47.

d. Petitioner appealed, and the Ninth Circuit affirmed the

district court’s judgment in relevant part. Pet. App. 1-24.

The court of appeals acknowledged that “the decision to ‘er-

minate a pension plan is a business decision not subject to

ERISA’s fiduciary obligations.” /d. at 9. The court stated,

however, that “the implementation of a decision to terminate

is discretionary in nature and subject to ERISA’s fiduciary

obligations.” /bid. (citing Waller v. Blue Cross, 32 F.3d 1337,

6

1342-1344 (9th Cir. 1994)). The court then reasoned that

whether Crown breached its fiduciary duty turns on whether

merger was a permissible means of implementing the decision

to terminate the plan. /bid.

The court concluded that merger was a permissible way to

implement plan termination. In reaching that conclusion, the

court refused to consider whether the terms of the Crown

plan permitted merger as a means of termination, because

Crown had not raised the issue in the bankruptcy court. Pet.

App. 10. Turning to the provisions of ERISA and the PBGC’s

regulations, the court construed 29 U.S.C. 1341(b)(3)(A) and

29 C.F.R. 4041.28(c)(1) to permit any method of termination,

including merger, that is “sufficient to cover plan liabilities.”

Pet. App. 12. The court rejected petitioner’s arguments that

merger is a procedure distinct from termination and that

merging the Crown plan into PIUMPF would not “distribute”

plan assets as required by Section 1341(b)(3). /d. at 12-14.

The court next concluded that Crown breached its fidu-

ciary duty to act solely in the ‘terest of plan participants and

beneficiaries by failing to undertake an intensive and scrupu-

lous investigation of the proposed PIUMPF merger as an

alternative to the purchase of annuities. Pet. App. 15-20. In

a separate, unpublished opinion, the court upheld the bank-

ruptcy court’s ordered distribution of residual plan assets as

a remedy for Crown’s fiduciary breach. /d. at 25-28.

e. Petitioner sought rehearing and rehearing en banc.

The PBGC and the Department of Labor filed amicus briefs

in support of petitioner’s request, but the court of appeals

denied further review. Pet. App. 84-85.

DISCUSSION

The decision of the court of appeals seriously miscon-

strues ERISA. It disregards the distinction this Court has

consistently drawn between settlor and fiduciary functions,

7

and it is in significant tension with decisions of other courts of

appeals that have adhered to that distinction. The court of

appeals’ decision also imposes substantial burdens on plan

sponsors, plan participants and beneficiaries, and the PBGC.

This Court’s review is therefore warranted.

A. The Decision Of The Court Of Appeals Is Incorrect

The court of appeals misinterpreted ERISA in two impor-

tant respects. First, the court erroneously held that ERISA’s

fiduciary duties apply to an employer’s decision whether to

terminate a pension plan by purchasing annuities or instead

to merge the plan with another pian. Second, the court fur-

ther erred in holding that merger is a permissible means of

terminating a defined benefit pension plan.

1. ERISA draws a fundamental distinction between settlor

and fiduciary functions. Decisions about the design, composi-

tion, and structure of pension plans are settlor functions,

which plan sponsors may make based on business consider-

ations. Decisions about the administration and management

of plan assets are fiduciary functions, which must be made in

the best interests of plan participants and beneficiaries. An

employer’s choice between terminating a plan by purchasing

annuities and merging the plan with another plan is a decision

about plan design, composition, and structure. That decision

is therefore a settlor function that is not subject to ERISA’s

fiduciary duties.

a. This Court has repeatedly recognized the distinction

between settlor and fiduciary functions. The Court first dis-

cussed it in Curtiss-Wright Corp. v. Schoonejongen, 514 U.S.

73 (1995), which held that a provision in a welfare plan stating

that the sponsor could amend the plan at any time was valid

under ERISA § 402(b)(3), 88 Stat. 875 (29 U.S.C. 1102(b)(3)).

In reaching that holding, the Court noted that “[e]mployers

or other plan sponsors are generally free under ERISA, for

8

any reason at any time, to adopt, modify, or terminate welfare

plans.” 514 U.S. at 78. The Court explained that employers

do not act as fiduciaries when taking those actions. /bid.

The Court applied that principle to a pension plan in

Lockheed Corp. v. Spink, 517 U.S. 882 (1996). Spink held that

Lockheed did not breach any fiduciary duty under ERISA

when it amended its retirement plan for business reasons. /d.

at 889-891. Relying on Curtiss-Wright, the Court stated that

“{pjlan sponsors who alter the terms of a plan do not fall into

the category of fiduciaries.” /d. at 890. The Court explained

that “amending or terminating a plan” involves “plan design”

rather than “plan ‘management’ or ‘administration.’” /d. at

890 (citations omitted).

The Court provided further elaboration in Hughes Air-

craft Co. v. Jacobson, 525 U.S. 432 (1999). In that case, the

Court held that claims that Hughes breached its fiduciary

duties in amending its pension plan were “directly foreclosed

by Spink’s holding that, without exception, ‘|pjlan sponsors

who alter the terms of a plan do not fall into the category of

fiduciaries.’” 525 U.S. at 445 (quoting Spink, 517 U.S. at 890).

The Court explained that, “[iJn general, an employer’s deci-

sion to amend a pension plan concerns the composition or

design of the plan itself and does not implicate the employer’s

fiduciary duties which consist of such actions as the adminis-

tration of the plan’s assets.” /d. at 444. Thus, “ERISA’s fidu-

ciary duty requirement simply is not implicated where” an

employer, acting as a plan’s “settlor, makes a decision regard-

ing the form or structure of the |p]lan.” /bid.

-b. The distinction bétween settlor and fiduciary functions

follows from ERISA’s definition of fiduciary. See Spink, 517

U.S. at 890. As relevant here, ERISA provides that a person

is a plan fiduciary “to the extent * * * he exercises any dis-

cretionary authority or discretionary control respecting man-

agement of such plan or exercises any authority or control

9

respecting management or disposition of its assets,” or “has

any discretionary authority or discretionary responsibility in

the administration of such plan.” 29 U.S.C. 1002(21)(A)(i) and

(iii). Thus, a person is a fiduciary under ERISA “only when

fulfilling certain defined functions, including the exercise of

discretionary authority or control over plan management and

administration.” Spink, 517 U.S. at 890 (citation omitted).

Those functions do not include plan design, composition, or

structure. /bid.; Hughes Aircraft, 525 U.S. at 444.

The limitations on the scope of ERISA’s fiduciary duties

reflect the statute’s basic requirements and purposes.

ERISA does not require employers to create benefit plans or

to provide any particular kind or level of benefits. See Spink,

517 U.S. at 887; Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 91

(1983). ERISA therefore generally allows employers to de-

cline to adopt, to alter, or to terminate benefit plans for any

reason, including the employers’ business interests.

ERISA does seek to encourage plan formation and the

provision of benefits, 29 U.S.C. 1001a, 1001b, and the employ-

ers’ freedom to alter or to terminate plans furthers those

goals. It reassures employers that they retain substantial

authority over the structure of and the benefits provided by

the plans that they create.

ERISA also seeks to ensure that employees receive the

benefits that they have been promised by employers. Spink,

517 U.S. at 887; Nachman Corp. v. PBGC, 446 U.S. 359, 375

(1980); 29 U.S.C. 1001(b) and (c). For that reason, ERISA

requires that decisions about the administration and manage-

ment of existing plans be made “solely in the interest of the

participants and beneficiaries.” 29 U.S.C. 1104(a)(1)(A).

c. The court of appeals’ decision cannot be squared with

the distinction between settlor and fiduciary functions. An

employer's decision whether to terminate a pension plan is a

settlor action. Spink, 517 U.S. at 890; Curtiss-Wright, 514

10

U.S. at 78. It “eannot be an action of plan ‘management’ or

‘administration.’” Spink, 517 U.S. at 890 (citation omitted).

Rather, it is a decision whether fundamentally to alter the

plan’s design, composition, and structure by ending the plan

altogether. An employer’s decision whether to merge a pen-

sion plan with another plan is likewise a settlor action. Like

the decision to terminate a plan, the decision to merge plans

is a decision about the design, composition, and structure of

the plans. The courts of appeals that have considered the

question have therefore refused to impose ERISA’s fiduciary

obligations on employer decisions to merge plans. See Malia

v. General Elec. Co., 23 F.3d 828, 833 (3d Cir.), cert. denied,

513 U.S. 956 (1994); Sutter v. BASF Corp., 964 F.2d 556, 562

(6th Cir. 1992).

Because an employer’s decision whether to terminate a

plan and its decision whether to merge a plan with another

plan are, considered separately, settlor rather than fiduciary

functions, it follows that the choice between the two is also a

settlor function. That choice is necessarily a decision about

plan design, composition, and structure. Thus, Crown’s deci-

sion whether to terminate its pension plan by purchasing an-

nuities or instead to merge it with PACE’s multiemployer

plan was not a fiduciary decision. It was a settlor decision

that Crown was free to make for business reasons.

d. The court of appeals mistakenly concluded that Crown

had a fiduciary duty to consider merger on the theory that

merger was a possible means of implementing Crown’s deci-

sion to terminate the plan. As discussed below, the court was

incorrect in concluding that merger is a method of plan termi-

nation. See pp. 11-16, infra. Even apart from that error,

however, the court was incorrect in concluding that the choice

between terminating a plan by purchasing annuities and

merging the plan with another plan is a fiduciary decision.

11

The court of appeals incorrectly analogized that decision

to choosing between two insurance companies to provide an-

nuities upon termination. See Pet. App. 9 (citing Waller v.

Blue Cross, 32 F.3d 1337, 1342-1344 (9th Cir. 1994)). The

choice between two annuity providers is a fiduciary decision

because it is a decision about how to expend plan assets. See

29 C.F.R. 2509.95-1; Waller, 32 F.3d at 1342-1343. But an em-

ployer’s choice whether to merge a plan with another plan—

like an employer’s choice between two potential merger part-

ners—is not a decision about how to expend or otherwise

manage or administer plan assets. It is, as described above,

a decision about plan design, composition, and structure.

That decision is not transformed into a fiduciary act simply

because it is (mis)characterized as a method of implementing

a plan termination. It remains a settlor rather than a fidu-

ciary function, however it is labeled.

2. The court of appeals also erred in holding that merger

is a permissible method of terminating a defined benefit plan.

ERISA’s provisions governing plan termination and the

PBGC’s implementing regulations establish that merger is

not a means of accomplishing plan termination. Instead,

merger is a separate and distinct procedure that plan spon-

sors may use to alter the structure or composition of a plan.

a. As this Court noted in Hughes Aircraft, 29 U.S.C. 1341

provides the exclusive means for voluntary termination of a

single-employer defined benefit plan. See 525 U.S. at 446.

Section 1341(b), which governs the standard termination in-

volved here, makes clear that merger is not a permissible

method of effectuating termination. It states that, in a termi-

nation, plan assets must be distributed “in accordance with [29

U.S.C. 1344].” 29 U.S.C. 1341(b)(3)(A). A merger does not

comply with the requirements of Section 1344.

Section 1344(a) requires that the assets of the terminating

plan be allocated “among the participants and beneficiaries of

12

the plan.” 29 U.S.C. 1344(a). In a merger, however, assets

are not allocated among the participants and beneficiaries of

the terminating plan. Instead, they are transferred to the

merged plan. Moreover, once they have been transferred, the

assets are used to satisfy the benefit claims not only of the

participants and beneficiaries of the terminating plan, but

also of the other participants and beneficiaries of the merged

plan. See 26 C.F.R. 1.414(/)-1(b)(1) and (2).

Section 1344(a) also sets out a specific order of priority for

the allocation of assets. See 29 U.S.C. 1344(a); Mead Corp. v.

Tilley, 490 U.S. 714, 717-718 & n.3 (1989). That allocation

priority is not followed in a merger. Instead, the assets of the

merging plans are combined and commingled to provide for

the benefits of all participants in the merged plan. See 26

C.F.R. 1.414(/)-1(b)(1) and (2); Hughes Aircraft, 525 U:S. at

440 (noting that, in a defined benefit plan, “no plan member

has a claim to any particular asset that composes a part of the

plan’s general asset pool”).

In addition, Section 1344(d) provides that, if all benefits

are satisfied, there may in some circumstances be a reversion

or distribution of residual assets to the employer.' In a

merger, however, there is no possibility of a reversion to the

employer. The plan assets are all transferred to the merged

plan. And, once the assets are in the merged plan, they are

subject to ERISA’s anti-inurement rule, which prohibits their

use for the benefit of the employer. Sve 29 U.S.C. 1103(e).”

' Section 1344(d) permits a reversion if all benefit liabilities have been

satisfied, the plan allows the reversion, and the reversion does not contravene

any provision of law. 29 U.S.C. 1344(d)(1). Section 1344(d)(3) further requires

that, after all benefits are satisfied and before any reversion, any assets of the

plan attributable to employee contributions be distributed to the participants

who made the contributions or their beneficiaries. 29 U.S.C. 1344(d)(3).

* Respondents incorrectly assert (Br. in Opp. 22) that PBGC Opinion Letter

85-25 (Oct. 11, 1985) (Br. in Opp. App. 14a-16a) allows a reversion of assets

following a merger. The letter says that 1984 Joint Guidelines issued by the

13

b. Section 1341(b) also requires distribution of the assets

of a terminating plan to be accomplished by the purchase of

annuities or by “otherwise fully provid|ing] all benefit liabili-

ties” “in accordance with the provisions of the plan and any

applicable regulations.” 29 U.S.C. 1341(b)(3)(A). Thus, any

alternative method of distributing assets must be authorized

by the PBGC’s regulations. The PBGC does not view its regu-

lations as authorizing merger as an alternative method of

asset distribution. The PBGC’s interpretation of its regula-

tions is reasonable and entitled to deference. See Aver v.

Robbins, 519 U.S. 452, 461 (1997); Boivin v. U.S. Airways,

Ine., 446 F.3d 148, 154 (D.C. Cir. 2006).*

PBGC, the Department of Labor, and the Internal Revenue Service (IRS)

generally do not apply to a transfer of assets and liabilities from a single-

employer plan to an ongoing multiemployer plan followed by the termination

of the single-employer plan. The letter makes clear, however, that “{a] valid

plan termination is a prerequisite to a reversion of surplus plan assets to an

employer.” /d. at 15a. The other PBGC letters cited by respondent (Br. in

Opp. 15-16) address circums.ances under which an employer can split a plan

into two plans, terminate one plan, and obtain a reversion. PBGC Op. Ltr. 85-

11 (May 14, 1985) (Br. in Opp. App. 6a-9a); PBGC Op. Ltr. 85-21 (Aug. 26, 1985)

(Br. in Opp. App. 10a-13a). None of the letters suggests that an employer may

obtain a reversion without following termination procedures, including distri-

bution of the assets of the terminating plan by purchasing annuities or by

another method that complies with all statutory and regulatory requirements.

* The Crown plan also did not authorize merger as a means of distributing

assets. See C.A. E.R. 386 (providing that “distributions” upon termination

“may be effectuated in the discretion of the Plan Administrator by the purchase

of nontransferable annuities, or by continuing the | Plan] in existence, or by a

cash settlement with any Member with the Member’s consent”). The court of

appeals refused to consider the plan terms because it reasoned that petitioner

had waived reliance on them by failing to invoke them in the bankruptcy court.

Pet. App. 10. That was error, because whatever transpired in the bankruptcy

court, the district court considered the plan terms on appeal. Moreover, the

plan's failure to provide for merger as a method of distribution was not a

defense subject to waiver by petitioner if he did not raise it. Because ERISA

authorizes distribution by means other than the purchase of annuities only if

the alternative distribution method is specified in the plan, 29 U.S.C.

1341(b)(3)(A)Gi), respondents bore the burden of proving that the plan

14

The PBGC’s regulations require distribution of the assets

of the terminating plan “in accordance with all applicable re-

quirements under * * * ERISA,” 29 C.F.R. 4041.28(c¢)(1),

and, in particular, the allocation requirements of Section 1344,

29 C.F.R. 4044.4(a). As explained above, merger does not

result in distribution in accordance with those requirements.

The regulations also require the administrator to “distrib-

ute plan assets in satisfaction of all plan benefits.” 29 C.F.R.

4041.28(c)(1). The PBGC interprets that distribution require-

ment to contemplate that (1) the assets will be divided among

the participants and beneficiaries of the terminating plan, and

(2) those participants and beneficiaries will actually receive

their benefits, either through an annuity, which is the distri-

bution form authorized by the statute, or through a lump sum

payment equal to the present value of the benefits. See 29

C.F.R. 4041.28(c)(1) and (2); note 5, infra.*

Those criteria are not satisfied in a merger. Instead, as

described above, the assets are transferred to the new

merged plan, where they are used to provide benefits to other

individuals besides the participants and beneficiaries of the

terminating plan. In addition, participants and beneficiaries

do not actually receive their benefits in the form of annuity

contracts or cash. Rather, they receive only the promise of

future payments from the merged plan—payments which,

unlike lump sum distributions or annuities, are contingent on

the continued health of that plan.

authorized merger as a distribution method. Petitioner had no obligation to

disprove that fact, which was an essential element of respondents’ claim that

failure to consider merger was a breach of fiduciary duty. See Schaffer ex rel.

Schaffer v. Weast, 126 3. Ct. 528, 584 (2005) (the general rule is that “plaintiffs

bear the burden of persuasion regarding the essential aspects of their claims”).

* In order to avoid taxation, a participant or beneficiary may elect to have

his or her lump sum payment transferred or “rolled over” into an individual

retirement account (IRA) or another qualified plan. 26 U.S.C. 402(¢) (2000 &

Supp. ITT 2003).

15 .

Other components of the PBGC’s regulations reinforce the

conclusion that merger is not a permissible method of accom-

plishing plan termination. For example, the regulations re-

quire that the notice of plan termination inform each partici-

pant that, after distribution of the plan assets, “the PBGC no

longer guarantees that participant’s or beneficiary’s plan ben-

efits.” 29 C.F.R. 4041.23(b)(9). But a merger does not extin-

guish the PBGC’s guarantee. Instead, the PBGC continues to

guarantee benefits under the new merged plan.”

c. The structure of ERISA confirms that merger is not

simply a method of terminating a plan. ERISA treats merger

and termination as separate and distinct procedures. Merg-

ers are addressed in separate statutory sections from termi-

nations. Compare 29 U.S.C. 1058 (mergers generally), 29

U.S.C. 1411, 1412 (mergers involving multiemployer plans),

and 26 U.S.C. 414(/) (tax implications of mergers) with 29

U.S.C. 1341 (terminations of single-employer plans) and 29

U.S.C. 1341a (terminations of multiemployer plans).

Moreover, the statutory provisions addressing mergers

impose different requirements from those applicable to termi-

nations. For example, the merger provisions generally re-

quire that participants’ benefits be no lower after a merger

than they were before the merger. See 29 U.S.C. 1058,

1411(b)(2), 1412(b). Those provisions do not, however, give

* The court of appeals incorrectly concluded that the PBGC’s regulations

authorize merger as a method of plan termination because they allow distri-

bution of assets in a termination to be effected by the purchase of annuities “or

in another permitted form.” 29 C.F.R. 4041.28(c)(1). The phrase “another

permitted form” refers to a lump sum cash distribution, if permitted by the

plan, or the rollover of such a distribution into an IRA or an other qualified

plan. See p. 14 & note 4, supra. The phrase could conceivably encompass a

distribution method other than a lump sum payment if that method was per-

mitted by the relevant plan, ERISA, and the PBGC’s regulations and provided

the same degree of assurance that participants and beneficiaries would receive

their promised benefits. Merger, however, meets none of those criteria.

16

participants the same rights to receive plan assets that the

participants have in a plan termination. See, e.g., Brillinger

v. General Elec. Co., 130 F.3d 61, 63 (2d Cir. 1997), cert. de-

nied, 525 U.S. 1138 (1999), and Malia, 23 F.3d at 831-832 (dis-

cussed at p. 17, infra). In addition, a plan administrator can-

not begin a termination without providing notiee to the PBGC.

The PBGC can then block the termination if it finds that as-

sets will not be sufficient to provide for benefit liabilities. 29

U.S.C. 1341(b)(2)(C) and (D). The PBGC has no comparable

authority to block a merger, and it may not even receive no-

tice of a merger until after it is completed. See 29 U.S.C.

1343(a), 1343(c)(8) (requiring notice after merger); compare

29 U.S.C. 1411(b) (advance notice required for merger of

multiemployer plans) with 29 U.S.C. 1412 (no advance notice

required for merger of single-employer plan into multi-

employer plan).

B. This Court’s Review Is Warranted

1. This Court should grant review because the Ninth Cir-

cuit’s decision departs significantly from the teaching of the

Court’s cases. As explained above, in Curtiss-Wright, Spink,

and Hughes Aircraft, this Court drew a clear distinction be-

tween settlor and fiduciary functions. See pp. 7-8, supra.

Those cases establish that decisions about plan design, com-

position, and structure are settlor functions that are not sub-

ject to ERISA’s fiduciary requirements. See Curtiss-Wright,

514 U.S. at 78; Spink, 517 U.S. at 890-891; Hughes Aircraft,

525 U.S. at 444-445. The choice between terminating a plan

by purchasing annuities and merging the plan with another

plan is plainly a decision about plan design, composition, and

structure. The holding of the court of appeals that the deci-

sion is nonetheless subject to ERISA’s fiduciary requirements

cannot be reconciled with the principles set out in Curtiss-

Wright, Spink, and Hughes Aircraft.

17

The decision below is also in significant tension with deci-

sions of other courts of appeals. Consistent with this Court’s

rulings, two courts of appeals have held that an employer’s

decision to merge pension plans is not a fiduciary decision.

See Malia, 23 F.3d at 833; Sutter, 964 F.2d at 562. Other

courts of appeals have held that decisions by an employer to

“spin off” part of a plan or to transfer assets and liabilities

from one plan to another plan, which are similar to mergers,

are not fiduciary decisions. See, e.g., Flanigan v. General

Elec. Co., 242 F.3d 78, 87-88 (2d Cir.), cert. denied, 534 U.S.

1065 (2001); King v. National Human Res. Comm., Inc. , 218

F.3d 719, 723-724 (7th Cir. 2000); Systems Council EM-83 v.

AT&T Corp., 159 F.3d 1376, 1379-1380 (D.C. Cir. 1998). The

Ninth Circuit’s decision cannot be reconciled with the reason-

ing of those cases because it treats an employer’s decision not

to transfer assets through a merger as a fiduciary decision.

The Ninth Circuit’s decision is also in tension with deci-

sions of other courts of appeals holding that, in a merger, plan

participants do not have the same rights to plan assets that

they would have in a termination. See Brillinger, 130 F.3d at

63 (holding that plan participants affected by a merger do not

have a right to have their accrued benefits increased by the

share of the residual assets that they would have received in

a plan termination under 29 U.S.C. 1344(d)(3)); Malia, 23 F.3d

at 831-832 (same). Brillinger and Malia recognize that mer-

ger and termination are alternative settlor options that entail

distinct procedures, are subject to distinct requirements, and

trigger distinct rights for plan participants. The decision

* A merger is a combining of two plans into one plan, while a transfer

of assets and liabilities occurs when there is a diminution of assets in one

plan and the acquisition or assumption of them by another plan. 26 C.F.R.

1.414(/)-1(b)(2) and (3). A “spinoff” means splitting one pian into two plans. 26

C.F.R. 1.414(/)-1(b)(4). A transfer of assets and liabilities is treated as a

combination of a merger and a spinoff, e.g., assets and liabilities are spun off

from one plan and then combined with another plan. 26 C.F.R. 1.414(/)-1(0).

18

below, in contrast, incorrectly treats merger as a mere

method of implementing plan termination rather than an al-

ternative to termination and a separate procedure.

2. This Court’s review is also warranted because the deci-

sion below is likely to cause significant harm to plan sponsors,

plan participants and beneficiaries, and the PBGC.

a. Plan sponsors in the Ninth Circuit will be harmed by

the court of appeals’ decision. If employers have a fiduciary

duty to consider merger as an alternative to terminating plans

by purchasing annuities, they will not be free to choose termi-

nation even when it makes business sense. In particular, they

may be precluded from terminating over-funded plans in or-

der to recoup excess plan assets. The court of appeals’ deci-

sion therefore imposes substantial burdens on the freedom of

employers in the Ninth Circuit to operate their businesses.

More fundamentally, because the decision below impedes

employers from obtaining reversions from over-funded plans,

it is likely to undermine ERISA’s goal of promoting adequate

funding of pension plans. The authority to recover residual

assets reassures employers that they will be able to recoup

their money if they provide plans with more resources than

the plans ultimately need. That authority thus encourages

adequate plan funding. Depriving employers of that author-

ity, in contrast, deprives them of the assurance that they can

recoup any over-funding and therefore creates an incentive

for employers to minimize the amount that they contribute to

their plans. See Hawkeye Nat'l Life Ins. Co. v. Avis Indus.

Corp., 122 F.3d 490, 502 n.7 (8th Cir. 1997); Chait v. Bern-

stein, 835 F.2d 1017, 1027 (3d Cir. 1988).

b. The court of appedls’ decision could also harm plan

participants and beneficiaries in the Ninth Circuit. In the

judgment of the PBGC and the Department of Labor, the

purchase of annuity contracts from a financially sound insur-

ance company provides the best assurance (other than lump-

19

sum payments) that plan participants and beneficiaries will

receive the full benefits to which they are entitled. That is

particularly true because, in the view of the Department of

Labor, an employer that terminates a pension plan by pur-

chasing an annuity contract generally has a fiduciary duty to

obtain the safest annuity available. 29 C.F.R. 2509.95-1(c).

When a plan is merged rather than terminated by the pur-

chase of annuities, participants and beneficiaries face a

greater risk that they will not receive their full benefits. The

merger provides them only a promise of future benefits under

the merged plan, the payment of which is contingent on the

continued health of that plan. The added risk to participants

and beneficiaries is particularly great in the type of merger

involved in this case—merger of a single-employer plan into

a multiemployer plan. Although the PBGC continues to guar-

antee benefits under the multiemployer plan, the PBGC’s

guarantee is substantially less than under the single-employer

plan. Compare 29 U.S.C. 1322 with 29 U.S.C. 1322a; see

PBGC, Annual Management Report, Fiscal Year 2006, at 12-

13 (Nov. 15, 2006) <http://www.pbge.gov/docs/PBGCAMR.

pdf> (PBGC Report). -

ce. Finally, if certiorari is not granted, the PBGC will be

harmed by the court of appeals’ decision because it will have

to administer different termination regimes in different parts

of the country. In the Ninth Circuit, the PBGC will have to

accept merger as a method of distributing assets in a termina-

tion. In the remainder of the country, however, iuwerger will

remain an impermissible method of effectuating a termina-

tion, in accordance with the PBGC’s regulations, correctly

interpreted.

The PBGC will also be harmed because it will have to con-

tinue to insure some plans that would have terminated and

satisfied their full benefit liabilities but are instead required

under the Ninth’s Circuit’s rule to merge with other plans.

20

Despite some improvement in the PBGC’s financial condition

in the past two years, existing plans are massively under-

funded, and the PBGC’s future exposure to losses from finan-

cially troubled sponsors remains high. See PBGC Report 3-5,

15-16. The single-employer insurance program has an $18.1

billion deficit, and the PBGC estimates a reasonably possible

exposure to $73 billion in underfunding. /d. at 4-5, 14-15. The

total underfunding in all single-employer plans is estimated

at $350 billion. /d. at 15. The PBGC’s separate multiemploy-

er plan insurance program has a deficit of $739 million, and

$83 million in reasonably possible liability. Jd. at 5, 14, 16.

The total underfunding in multiemployer plans is estimated

at more than $150 billion. /d. at 15. Although the Pension

Protection Act of 2006, Pub. L. No. 109-280, Titles I, II, 120

Stat. 784, 858, attempts to address underfunding problems

with new funding rules, PBGC Report 8, the PBGC is not in

a position unnecessarily to assume responsibility for more

underfunded plans.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

PAUL D. CLEMENT

Howarb M. RADZELY Solicitor General

Solicitor of Labor EDWIN S. KNEEDLER

Department of Labor Deputy Solicitor General

JEFFREY B, COHEN MATTHEW D. ROBERTS

Chief Counsel Assistant to the Solicitor

Pension Benefit Guaranty General

Corporation

DECEMBER 2006