Petition for Writ of Certiorari — Kotrosits v. GATX Corp. Non-Contributory Pension Plan for Salaried Employees

92-648 ;°

Case Number:

IN THE

SUPREME COURT OF THE UNITED STATES

SEPTEMBER TERM, 1992

EDWIN KOTROSITS, ET AL.,

Petitioners

vs.

GATX CORPORATION NON-CONTRIBUTORY

PENSION PLAN FOR SALARIED EMPLOYEES,

Respondent

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Seymour Traub, Esq.

Counsel of Record for

Petitioners

TRAUB, BUTZ & FOGERTY, P.C.

Suite 200, 1620 Pond Road

Allentown, PA 18104

(215) 395-1010

QUESTION PRESENTED

Whether the Third Circuit Court of

Appeals' decision reversing the decision of

the District Court and denying Petitioner

class members certain retirement and welfare

benefits represented an inappropriate

disregard of the District Court's

discretionary findings of fact that the Plan

fiduciaries acted in bad faith and under a

conflict of interest when they denied

Petitioners' claims for benefits, thereby

effectively circumventing the arbitrary and

Capricious test developed by the Eleventh

Circuit Court of Appeals in Brown v. Alabama

Blue Cross/Blue Shield, Inc., 889 F.2d 1556

(lith Cir. 1991), cert. den. 484 U.S. 1012,

111 S. Ct. 712, 112 L. Ed. 2d 701 (1991), and

Substantially impairing employees' rights to

recover pension and welfare benefits under

ERISA?

CERTIFICATE OF INTERESTED PARTIES

I hereby certify that:

1. The panel of judges below at the

Third Circuit Court of Appeals are The

Honorable Walter K. Stapleton, The Honorable

Anthony J. Scirica, and The Honorable Jane R.

Roth.

Re Plaintiffs below, Petitioners in

this Court, are Edwin Kotrosits, Julius

Ruggeri and Marvyn Souders, on their own

behalf, and on behalf of all others Similarly

Situated.

3. Counsel for Plaintiffs below,

Petitioners in this Court, is Seymour Traub,

Esq., Of Traub, Butz & Fogerty, P.C.

4. Defendant below, Respondent in this

Court, is GATX Corporation Non-Contributory

Pension Plan for Salaried Employees.

5. Counsel for Defendant below,

Respondent in this Court, is Herbert L.

and Kenneth E. Wile, of Mayer, Brown & Platt.

Basti cane pane

By: Ley, Hb tar> af

Seymouf/ Traub, BSquire

Traub, Butz & Fogerty, P.C.

Suite 200, 1620 Pond Road

Allentown, PA 18104

(215) 395-1010

Attorneys for Petitioners

TABLE OF CONTENTS

Page

Question Presented............ 2

Certificate of Interested

ag ee ee 4

wemecze GE CONEOGRES. «ccc cccccuae 5

Table of Authorities.......... 6

Cites to the District

Court and Court of Appeals.... 9

Statement of Grounds on

which Jurisdiction Invoked.... 10

Statutes and Regulations

Rea ns & Se eo ee ke a ll

Statement of the Case

i By 2 a 12

Basis for Federal

Roig! ol ot 26

Pe 6 4.6 W666 he eek ARKO OR 27

TABLE OF AUTHORITIES

Cases Page(s)

Anderson v. Blue Cross/Blue 45

Shield of Alabama, 907

F.2d 1072 (llth Cir. 1990)

Anderson v. Ciba-Geigy Corp., 50

a9 F.a@ i516, 1522

(llth Cir. 1988)

Bass v. The Prudential Insurance 46

Company of America, 1991 U.S.

Dist. LEXIS 7720 (D. Kan.

May 29, 1991)

Brown v. Blue Cross/Blue 24, 30, 34-36,

Shield of Alabama, Inc., 41, 44-46, 47-

898 F.2d 1556 ' 49, 50-51

Cargile v. Confederation Life 45

Insurance Group Plans, 748

F. Supp. 874 (N.D. Ga. 1990)

CBS Inc. v. International 32

Photographers of the

Motion Picture Industries,

Local 644, 603 F.2d 1061

(2d Cir. 1979)

Daniels v. Anchor Hocking Corp., 46

758 F. Supp. 326, 355

(W.D. Pa. 1991)

Dennard v. Richards Group, Inc., 49

681 F.2d 306, 314

(Sth Cir. 1982)

Firestone Tire & Rubber Co. a7,

v. Bruch, 489 U.S. 115, 48,

109 S. Ct. 948, 103 L.Ed.

2d 80 (1989)

Fox v. Kane-Miller Corp.,

398 F. Supp. 609 (D. Md.

1975), aff'd., 542 F.2d 915

(4th Cir. 1975)

Guy v. Southeastern Iron

Workers Welfare Fund, 877

F.2d 37 (lith Cir. 1989)

Harper v. R. H. Macy & Co.,

928 F.2d 544 (8th Cir. 1990)

In Re: Gulf Pension Litiga-

tion, No. 86-4365, 1991

U.S. Dist. LEXIS 4631

(S.D. Texas, April 10, 1991)

International Alliance of

Theatrical Stage Employees

v. Gulf Int'l Cinema Corp.,

568 F. Supp. 1396

(E.D. La. 1983)

Kotrosits v. GATX Corpo-

ration Non-Contributory

Pension Plan for Salaried

Employees, 757 F. Supp.

1434, 1156 (E.D. Pa. 1991)

Mainline Investment Corp. v.

Gaines, 407 F. Supp. 423

(N.D. Tex. 1976)

Miller v. Metropolitan Life

Insurance Co., 925 F.2d

979 (6th Cir. 1991)

34,

50

40

50

34

46

3d

37

40

46

4

“2 om

a

44,

Newell v. Prudential

Insurance Company of America,

904 F.2d 644 (llth Cir. 1990)

Niagra Paper Corp. v. Paper

Industrial Union Manage-

ment Pension Fund, 800 F.2d

742, 745-46 (8th Cir. 1986)

Poole v. Seattle-First

National Bank, 741 F.

Supp. 837, 846

Short v. Central States

Southeast and South West

Areas Pension Fund, 729

F. 2d 567, 571 (8th Cir.

1984)

say WV. B.R. Mallory & Co.

712 F.2d 1209 (7th Cir.

1983)

Taylor v. Continental

Group, 933 F.2d 1227

(3d Cir. 1991)

Van Boxel v. Journal Co.

Employees Pension Trust,

836 F.2d 1048 (7th Cir.

1987)

Miscellaneous

BNA Pension Reporter,

Volume 17, No. 38

Pp. 1591 (Sept. 17, 1990)

G. Bogert & G. Bogert, The

Law of Trusts and Trustees,

section 543 at 197-98 (rev.

2d ed. 1978)

45

49

45

49

34

Ww

~J

40

CITES TO THE DISTRICT COURT

AND COURT OF APPEALS

The opinion of the District Court is

found at 757 F., Supp. 1434 (E.D.Pa. 1991).

The opinion of the Court Of Appeals is

found at 1992 U.S. App. LEXIS 1510, 15 E.B.c.

1729 (1992).

STATEMENT OF GROUNDS ON

WHICH JURISDICTION INVOKED

The final judgment by the District Court

was entered on February 25, 1991. On

April 15, 1991, an Order was entered in the

District Court denying the Plan's Motion for a

New Trial, or in the alternative, to Amend the

Judgment. The opinion of the Court of Appeals

reversing the District Court decision was

filed on July 6, 1992.

Petitioners are authorized to seek review

of this matter by Rule 17, Rules of the United

States Supreme Court and 28 U.S.C.

section 2101.

STATUTES AND REGULATIONS INVOLVED

The Empioyee Retirement Income Security

Act, 29 U.S.C. §1001 et. seq.

pant

—

STATEMENT OF THE CASE AND THE FACTS

Plaintiffs are former longtime employees

of Fuller Company. Fuller was a direct

subsidiary of GATX Corporation from 1954 to

1975, at which point it became a wholly-owned

Subsidiary of General American Transportation

Company ("GATC"), a Subsidiary of GATX. ac

remained so up until December 31, 1986, when

GATX and GATC severed their relationships with

Fuller by selling all its stock to an entity

known as F. A. Holding Company.

As a result of their Fuller employment,

Plaintiffs were participants in the GATX

CORPORATION NON-CONTRIBUTORY PENSION PLAN FOR

SALARIED EMPLOYEES ("the rian”). The Plan

document provided for payment of a particular

form of retirement benefits, i.e., "the 75/80

benefits," to any employee (a) whose age and

years of service added up to 80, or who was at

least 55 years of age, and his age and years

of service added up to 75; and (b) who

a je. a

experienced a termination of employment due to

layoff, permanent plant shutdown or

disability. The Plan contained no definition

or explanation of the term, “,aver?.”

The Plan is a non-contributory defined

benefit plan. That is, the employer makes all

of the contributions, and the monthly amount

received by each pensioner is determined based

upon a formula taking into consideration the

employee's salary during a certain period of

employment with a participating company.

Under the Plan, a participating

Subsidiary such as Fuller was responsible for

making contributions associated with its

employees. However, after its December ah»

1986 sale of Fuller, GATX was solely

responsible for any contributions needed after

that date to fund payment of retirement

benefits to any former Fuller participants in

the Plan.

The GATX/GATC sale of the Fuller stock on

December 31, 1986, took place pursuant to a

Stock Purchase Agreement executed by the

pertinent parties (i.e., GATX, GATC and F.A.

Holding Co.), on October 12, 1986. This

Agreement contained a specific provision

providing that the sale constituted a

“termination of employment" of all Fuller

employees. Furthermore, there was no language

whatsoever in the Agreement obligating F.A.

Holding to continue operating Fuller or to

retain or rehire any of the people who had

worked for Fuller prior to the December ai,

1986 closing. The Stock Purchase Agreement

differed from an earlier draft which had

called for Fuller-related assets and

liabilities under the Plan to be transferred

to F.A. Holding; indeed, there was no language

even obligating F.A. Holding or the new Fuller

Company to adopt their own pension plan. The

Agreement also obligated GATX to indemnify

F.A. Holding against "any and all claims,

liabilities, losses, damages, costs and

expenses relating to or arising directly or

indirectly out of a claim that [the Plan}

required providing subsidized early retirement

benefits [ i.e., 75/80 benefits] ...."

At the time of the Fuller sale, the three

representative Plaintiffs each qualified, from

an age and years of service standpoint, for

75/80 benefits. Each requested those benefits

before December 31, 1986 but was rejected.

When the Stock Purchase Agreement was

Signed on October 12, 1986, the Plan

Administrator, James Herbert (who also

happened to be Director of Employee Benefits

at GATX), had not yet decided whether to

permit Fuller employees who were being

terminated pursuant to that Agreement to

pursue 75/80 retirements. He did, however,

request GATX' actuaries to determine the

increased pension cost which would result if

a 15 -

Fuller employees elected the 75/80 option.

The actuaries advised that it would cost at

least an additional $2 Million.

On November 19, 1986, Mr. Herbert

travelled to Fuller's offices in Bethlehem,

PA, and made two significant announcements:

(a) he would not allow any Fuller

employees to elect the 75/80 point

retirement option, and

(b) that any Fuller employee who

did not retire before December 31, 1986,

would lose certain welfare benefits

(i.e., lifetime medical and life

insurance benefits), which up to then had

been available to all retiring Plan

participants.:

As the District Court correctly noted,

the timing of Mr. Herbert's decision to deny

No threats were made nor was any action

taken to deprive any Plan participants other

than Fuller employees of these welfare

benefits.

16

75/80 benefits (i.e., after receiving

notification of the significant amount those

benefits would cost the Plan) is significant

because the Stock Purchase Agreement had

already been signed at that point and GATX

knew it would have suffered a significant loss

in the net proceeds in that t¥ansaction since

it could not pass those additional pension

costs on to the purchaser, F. A. Holding. Of

equal if not greater Significance is that by

denying Plaintiffs' claim for 75/80 point

benefits, GATX was further able to avoid the

expense of the lifetime medical and life

insurance benefits which would have been

payable to the Souders' subclass if its

members had been allowed to elect 75/80

retirement before December 31, 1986. As with

the added pension costs, GATX could not pass

these on to F. A. Holding since they had

already signed, sealed and delivered the Stock

Purchase Agreement, and that document (in

- OF

Section 5.10(i)) Obligated F. A. Holding to

reimburse GATX only a fixed Sum, i.e.,

$600,000.00, of the annual costs incurred by

GATX in providing post-sale health and welfare

benefits "to former employees of Fuller who

have retired prior to the Closing

GBte « « « «*

Edwin Kotrosits and Julius Ruggeri

represent a subclass of employees who were 55

years of age or older as of the December 31,

1986, closing. Based on their age and years

of service, the members of this subclass

qualified to elect (which they did when their

75/80 requests were rejected) an actuarially-

reduced 55/15 early retirement. They did so

however, only because they were threatened and

Scared that if they did not they would lose

the lifetime welfare. Marvyn Souders

represents a subclass of Fuller

employees/participants who had not yet reached

595 years of age as of the Closing date.

- 18 ion

None of the Plaintiffs knew whether they

would have jobs with the new company when they

left work on December 31, 1986. They were

told they would learn after the sale. On

January 2, 1987, both Messrs. Kotrosits and

Ruggeri received calls inviting them to work

with the new Fuller Company. Mr. Souders was

told on January 5, 1986 to report on

January 6, 1986 to the Fuller facility where

he had worked previously.

After the December 31, 1986 closing, the

representative Plaintiffs pursued claims under

the Plan's administrative process. The Plan

Administrator, James Herbert (Director of

Employee Benefits at GATX) denied those

Claims. Plaintiffs appealed to the three-

person Benefits Committee, James Glasser,

President and Chief Executive Officer of GATX;

Paul Heinen, Vice President and General

Counsel of GATX; and Roland Finkelman (also

Mr. Herbert's boss), Vice President of Human

19 -

»

Resources at GATX. The Benefits Committee

denied the appeals on the grounds that the

employees did not suffer a "layoff" under

Section 4.5(a) of the Plan.

These "fiduciaries" attempted to rest

these not-unexpected denials on the Supposed

Similarity and applicability of prior GATX

transactions involving (1) Marine Transport

Lines, Inc., (2) GARD Division, (3) Richmond

Terminal, (4) Pollock, and (5) GATC (Sharon,

PA). However, these were readily

distinguishable (in ways they were not told or

knew and chose to disregard) from the Fuller

sale.

In 1983, GATX spun off the shares of a

wholly-owned subsidiary, Marine Transport

Lines, Inc ("MTL"), as a special dividend to

GATX shareholders. This transaction differed

from the Fuller sale in that GATX received no

consideration in return for the spun-off MTL

Shares. Furthermore, MTL management (not the

20

Plan fiduciaries), gave five employees the

option of electing a layoff prior to the spin

off so they could obtain a 75/80 retirement.

On April 12, 1984, GATX sold the property

and assets of its GARD, Inc.,

division/subsidiary to Chamberlain

Manufacturing Corporation. Chamberlain

assumed all liabilities for pension benefits

arising under the plan relative to GARD

employees. In addition, the Asset Purchase

Agreement obligated Chamberlain to establish a

separate pension plan to cover GARD employees,

which had to be substantially similar to

Chamberlain's existing plan. F. A. Holding

was not obligated here to provide a Plan for

the new Fuller employees.

In September, 1984, GATX Tank Storage

Terminals Corporation sold its Richmond

Terminal to Unitank Terminal Service. The

language in the Agreement of Sale Specifically

provided that (a) the Richmond Terminal

>

employees "shall" become employees of the

buyer, and (b) the asset/sale transaction was

not to be considered a termination of

employment for the salaried employees of the

Richmond Terminal.’

TEC was a wholly-owned subsidiary of GATC

and a second tier subsidiary of GATX. In

June, 1984, GATX sold TEC's assets to Brown

Minneapolis Tank and Fabricating Company.

Notwithstanding its knowledge that Brown

Minneapolis was considering hiring some TEC

employees, the Plan granted 75/80 pensions to

all 11 TEC employees who qualified in terms of

age and years of service. Two of TEC's

employees, Messrs. Deason and Miller, received

75/80 layoff pensions as well as jobs with

Brown Minneapolis.

Following the rejection by the Benefits

Committee, Petitioners filed this action in

‘AS noted before, the Agreement here

provided the opposite.

22

the United States District Court for the

Eastern District of Pennsylvania. After

extensive discovery and the filing of numerous

Briefs and Stipulations of Fact with the

Court, the Honorable Edward N. Cahn issued a

seventy-eight (78) page Opinion in Support of

an Order wherein he held that (a) members of

both subclasses were entitled to 75/80

benefits, and (b) members of the SOUDERS

subclass were also entitled to the lifetime

medical and life insurance welfare benefits

‘io would have received had they been

properly permitted to elect 75/80 retirement

on or before December 31, 1986. In his

detailed and well-reasoned Opinion, Judge Cahn

made factual findings that (a) the Plan

fiduciaries had been operating under a

conflict of interest, (b) Petitioners had

indeed suffered a "layoff" because of their

temporary suspension of work at the time of

the December 31, 1986 Closing, and that the

- 23 on

Plan had acted in bad faith in first refusing

to disclose to the Petitioners how their

pension benefits were to be handled in

conjunction with the sale and in later using

the threat of the loss of the lifetime welfare

benefits to intimidate and coerce the

Plaintiffs into submitting forms electing an

actuarially-reduced 55/15 retirement. Under

the test established by the Eleventh Circuit

Court of Appeals in Brown v. Blue Cross/Blue

Shield of Alabama, Inc., 898 F.2d 1556, 1566-

67 (llth Cir. 1990), Judge Cahn determined

that the Plan fiduciaries abused their

discretion in denying Plaintiffs' claims for

75/80 benefits.

The Plan appealed Judge Cahn's decision.

In reversing, the Third Circuit Court of

Appeals essentially disregarded all of Judge

Cahn's factual findings, made its own factual

findings that there was no bad faith or a

conflict of interest, and applied a fully

deferential standard of review which doomed

ail of Plaintiffs' claims.

BASIS FOR FEDERAL JURISDICTION

This suit invoked federal jurisdiction

pursuant to the Employee Retirement Income

security Act, 29 U.S.C. §1001, et seq.

26 -

ARGUMENT

The issue before this Court is of

considerable significance in the arena where

employers and employees wage battle over

pension rights. It also goes to the heart of

a District Court's fact-finding

responsibilities and an appellate court's

ability to disregard those findings to change

the outcome of a case to its own liking.

In 1989, this Court issued its decision

in Firestone Tire & Rubber Co. v. Bruch, 489

U.S. 115, 109 S. Ct. 948, 103 L.Ed. 2d 80

(1989), essentially holding that trial courts

were to apply a de novo standard of review in

evaluating decisions of ERISA plan

fiduciaries, unless the plan provided for a

more deferential standard. The obvious effect

of that decision was that every employer which

did not already incorporate a highly

deferential standard in its plans to

immediately cause them to be amended to take

advantage of that more relaxed standard of

review. The net effect for employees has been

that virtually all claims for ERISA benefits

are now governed by an arbitrary and

capricious standard. However, application of

this standard, particularly where a conflict

of interest (i.e., a factual finding) is

unnecessarily and improperly disturbed by an

appellate court, will clearly result in

employees having less rights under ERISA than

they would have had prior to the enactment of

ERISA. In pre-ERISA cases where contract law

principles applied, an employee could at least

count on being able to argue that questionable

plan provisions should be interpreted against

the drafter, i.e., the employer. Now,

however, this is not so, even where (as here)

the Plan does not condition receipt of

benefits on an event (i.e., "permanent"

unemployment) on which the fiduciaries claim

to have based their decision.

= 28 on

In the case before this Court, the Third

Circuit Court of Appeals has truly compounded

the workers' dilemma. The District Court

engaged in a detailed and studied

consideration of all the evidence and

determined that the Plan fiduciaries had been

acting in bad faith, under a conflict of

interest and in an arbitrary and capricious

manner in finding (as a factual matter) there

had been a "temporary suspension" of

employment (i.e., a layoff). The Court of

Appeals disregarded all of that effort and

concluded that a layoff or cessation of

employment had not occurred, despite the fact

that (a) the Stock Purchase Agreement between

GATX and F. A. Holding specifically provided

that the sale was a "termination of

employment" for purposes of the Plan for all

Fuller participants, (b) Petitioners had been

sent letters by the Plan Administrator after

the sale confirming there had been a

-_ 29 -

"termination" of their employment for Plan

purposes, and (c) the lower courts factual

determination that the Plaintiffs left work on

the last day of their employment without jobs,

and that they would not know until after the

first of the year whether or not they would

have jobs at the new Fuller Company. In

reaching its decision, the District Court

properly applied and relied upon the Eleventh

Circuit's decision in Brown v. Blue Cross/Blue

Shield of Alabama, Inc., Supra. As a result,

the Third Circuit's rejection of the District

Court's rationale creates a likelihood of

confusion among lower and appellate courts as

to precisely what the arbitrary and Capricious

and/or abuse of discretion standard involves,

and to what extent factual determinations of a

District Court should be disregarded by a

Court of Appeals.

To start with, there was a "layoff,"

there can be no doubt the Petitioners were

= 30 on

terminated, even though it may have been

briefly, since (1) the Plan sponsor

characterized the Fuller sale as a termination

‘Of employment in the Stock Purchase Agreement;

and (2) GATX, the Plan sponsor, sent betters

in March, 1987 to a member of Fuller

participants confirming that "[their] services

with GATX terminated on December 31, 1986."

The underlying issue is whether this

termination resulted from a "layoff" under the

Plan document.

Respondent continuously argued that the

term "layoff" has a meaning other than its

common usage, i.e., temporary suspension of

employment, and necessarily entails a long-

term or permanent period of employment.

However, the Plan does not state this, indeed,

it contains no definition of "Levert .*

Respondent also contends that Petitioners did

not suffer a layoff (hence, no termination of

employment) because they were offered

positions with the new Fuller Company and

suffered no break in their employment

relationship. However, the District Court

properly found (which the appellate court paid

no heed) that since the Plan document did not

make 75/80 point benefits contingent upon any

specific period of unemployment, the fact that

their jobs were temporarily suspended

(terminated according to GATX) the Plan

fiduciaries had read into the Plan a condition

which did not exist. This, 7” course, is the

essence of arbitrary and capricious conduct.

The Third Circuit, however, disagreed

with the District Court's factual

interpretation (and, essentially that of other

courts which have been forced to define the

term "layoff" where no other meaning is

ascribed under the plan document) of a

layoff.’ Indeed, the Third Circuit agreed

“See CBS Inc. v. International

Photographers of the Motion Picture

industries, Local 644, 603 F.2d 1061 (2d Cir.

- 32 os

with Respondent that the “most common"

understanding of a layoff is where an employee

suffers a loss of work time and direct

compensation, yet there is neither evidence of

this meaning under the Plan nor any other

Supporting authority offered on this issue.

In short, the Third Circuit has held that it

is not arbitrary and capricious for plan

fiduciaries to "rewrite" a plan by imposing

non-existent conditions. However, had GATX

intended a requisite length of time to pass

for a layoff to exist, they could have very

easily done so in the Plan document. The fact

that they didn't, yet later attempted to

1979) (A layoff consists of a period of

temporary dismissal -- inherent in the term is

the anticipation of recall); and International

Alliance of Theatrical Stage Employees v. Gulf

Int'l. Cinema Corp., 568 F.Supp. 1396 (—.D.

La. 1983) (Layoff is no more than a suspension

of work of an individual employee).

aa *

impose that requirement, is the essence of

arbitrariness.’

The Plan fiduciaries were allowed by the

Third Circuit to interpret the Plan document

in any way they saw fit under the

circumstances; regardless of the level of

their conflict of interest.

On the conflict of interest issue, the

Eleventh Circuit's decision in Brown is

pivotal. In applying this Court's holding in

Firestone Tire and Rubber Company v. Bruch,

489 U.S. 115, 109 S.Ct. 948, 103 L.Ed.2d 80

‘Other employers have had no trouble more

Clearly defining the meaning of a layoff

and/or the various possible types of

terminations warranty certain enhanced levels

of benefits. See Taylor v. The Continental

Group, 933 F.2d 1227 (3d Cir. 1991) (Severance

benefits due on "involuntary termination",

defined as "any ... termination .... within

two years after a change in control taow 88

and Harper v. R.H. Macy & Co., 928 F.2d 544

(8th Cir. 1990) (Severance benefits available

when employee is “permanently terminated or

laid off for periods that exceed ninety

days").

a4 =

es Psat ,

ARCA NTH Ds italia np sa Sian MES: Ge 2 Nae

‘aia aay ailbtieses OP NIE wb

aie

tT

davetelaht-litedte' _— = , Oed

(1989), the Eleventh Circuit held in Brown as

follows:

A wrong but apparently

reasonable interpretation is

arbitrary and capricious if it

advances the conflicting

interest of the fiduciary at

the expense of the affected

beneficiary or beneficiaries

unless the fiduciary justifies

the interpretation on the

ground of its benefit to the

class of all participants and

beneficiaries."

Brown v. Blue Cross/Blue Shield of Alabama,

Inc., 898 F.2d 1556, 1566-67 (llth Cir. 1990).

The Brown court correctly followed the

Restatement (Second) of Trusts §187, Comment d

(1959) which provides six factors in

determining whether there is an abuse of

discretion: (1)the extent of the discretion

conferred upon the trustee by the terms of the

trust; (2) the purposes of the trust; (3) the

nature of the power; (4) the existence or non-

existence), the definiteness or

indefiniteness, of an external Standard by

which the reasonableness of the trustee's

= 35 =-

OR ae ee DRS

Ss *

COP MEMES

Strid. Kell Kini eV TE RE MED NLC A CNM I SE Ste FS Nat Se ht Spee 8 tia

0 ee ee ee

conduct can be judged; (5) the motives of the

trustee in exercising or refraining from

exercising the power; and (6) the existence or

nonexistence of an interest in the trustee

conflicting with that of the beneficiaries.

In the case subjudice, the District Court

followed Brown and found the Plan fiduciaries

to have had "an interest" conflicting with

that of the beneficiaries, i.e., a conflict of

interest, when they denied Petitioners' claims

for benefits. The Third Circuit simply

refused to recognize this obvious conflict;

perhaps that was the only way they could avoid

directly test challenging Brown.

One undeniable indicator of the conflict

found by the District Court was that the

three-person benefits committee consisted

entirely of high-ranking GATX officers who

held the highest positions within the company.

There was not a single voice on that Committee

which would be inclined to speak up for the

== 36 =

ed Tipe PAL a Oh a ol

ek Shor in ek Lot eee

ch tia = Sis oaks 5 sit. class,

at Sard ag OS BO LON 2

workers whose lives were being affected by

pension decisions such as this one. Moreover,

since GATX sponsored the Plan, the District

Court correctly found there was a monetary

conflict.

Because GATX had just sold Fuller,

it had no incentive to consider the

effect of the benefits decision on

the morale and productivity of

Fuller employees. Moreover, the

fact that the denial affected a

large number of employees and

resulted in an estimated savings of

$2 million for the Plan undermines

the rationale for deferential

review. The larger the expenditure,

the greater the possibility that the

sponsor will eventually have to

replenish the Plan's funds."

Kotrosits v. GATX Corporation Non-Contributory

Pension Plan for Salaried Employees, 757 F.

Supp. 1434, 1156 (E.D. Pa. 1991). See also,

Van Boxel v. Journal Co. Employees Pension

Trust, 836 F.2d 1048 (7th Cir. 1987).

A trustee is required to "exclude all

selfish interest and all consideration of the

interest of third person" in making fiduciary

decision. G. Bogert & G. Bogert, The Law of

-_ 37 _

NN otk Ra RY Se ol

Trust and Trustees, Section 543 at 197-98(2d)

Rev. R. Ad. 1978). Here, GATX as Plan sponsor

was unquestionably obligated to make all

future contributions to this Plan which might

result from any actuarial shortfalls. The

Third Circuit, inexplicably felt this to be of

no significance, even though the savings

resulting to the Plan would be in excess of at

least $2,000,000.00, because the Plan was

"fully funded." This conclusion, however,

overrode yet another factual finding of the

District Court that such a significant

considerable outlay would unquestionably have

an effect on the company which is required to

fund the Plan in the future, irrespective of

the current financial condition of the Plan.

Quite frankly, it is hard to fathom how

avoiding such a major outlay of funds could

not be deemed in GATX's interest (i.e.,

contrary to Plan beneficiaries' interests)

when GATX is the company required to make all

o~ 38 o_

Thee

future contributions to the Plan, the amount

of those contributions will obviously be

affected by such a major outlay, regardless of

whether or not at any given point in time the

Plan happens to have more or less assets than

its accrued liabilities.’

Perhaps more importantly, the Third

Circuit improperly and unfairly brushed aside

here were differences of interpretation

concerning actuaries' reports submitted

concerning Plan assets and liabilities.

Respondent contends it was "fully funded,"

Claiming it had an $8.79 Million "surplus" as

of January, 1986 and a $10.2 Million Claiming

"surplus" as of January 1, 987. However, the

"accrued benefit" figure on which these

numbers are based includes only benefits

earned as of the valuation date; it does not

anticipate future service or future salary

increases which will undoubtedly occur

("|. . . the accrued benefit values are very

different from the Ongoing (i.e., future)

funding requirements which do include

assumptions about future benefits to be

earned") (emphasis supplied). In other words,

it indicates "full funding" if the Plan would

have been terminated (which obviously did not

happen) on those dates. However, and more

Significantly, there is nothing on the record

indicating that the Benefits Committee was

aware of this supposed current (as opposed to

future) funding “surplus" when it denied

Plaintiffs' claims for benefits.

on 39 -

ANS at De SRR RE Tt 2 ERED ON be URE

an even more direct and compelling indication

of the fiduciaries' conflict of interest,

i.e., that by denying Petitioners' 75/80

claims, Gé«TX avoided its direct out-of-pocket

liability for the lifetime medical and life

insurance benefits for the Souders class.

These are precisely the type of unfunded

welfare benefits which courts have repeatedly

and consistently found trigger a conflict of

interest. Moreover, there was nothing

preventing the Third Circuit from taking

judicial notice of the high cost of retirees'

medical costs. See Fed.R.Evid. 201(f). See

Mainline Investment Corp. v. Gaines, 407 F.

Supp. 423 (N.D. Tex. 1976) (judicial notice

taken of rising oil prices). Fox v. Kane-

Miller Corp., 398 F. Supp. 609 (D. Md. 1975),

aff'd., 542 F.2d 915 (4th Cir. 1975). See

also BNA Pension Reporter, Volume 17, No. 38,

p. 1591 (September 17, 1990) (discussing costs

of retiree medical benefits. However, the

- 40 -

elias KE

Third Circuit ignored this authority and

blithely shrugged off the significance of

these welfare benefits as they related to the

conflict of interest issue.

It is submitted that the Third Circuit

felt compelled to override the District

Court's factual finding that there has

conflict of interest because of its critical

Significance under the Eleventh Circuit's

decision in Brown v. Blue Cross/Blue Shield of

Alabama. It is further submitted that the

effect of the Third Circuit's action is to do

an end run on Brown, thereby establishing

precedent for other courts to avoid the sound

rationale and holding of Brown, particularly

given the imminent demise of the de novo

standard of review as previously discussed.

The logic and holding of the Brown decision is

SO important it bears discussion.

In that case, the defendant/

insurer/administrator had denied plaintiff's

on 41 as

claim for hospitalization benefits under a

group health plan. The denial was based on

the plaintiff's supposed failure to obtain

pre-certification for the hospital admission.

The District Court for the defendant,

holding that the denial of benefits denial was

not arbitrary and capricious.” In reversing,

the Eleventh Circuit first noted that under

Firestone, courts should consider common law

principles applicable to trusts in evaluating

whether there has been an abuse of

discretion.’ The court then dutifully

“Interestingly, the effect of the Third

Circuit's decision in this case is the same as

holding that the District Court should have

entered summary judgment in favor of the Plan

and against the within Petitioners. That is,

the Third Circuit essentially held that taking

all facts as true before the District Court

(even though the Third Circuit redefined those

facts on its own), Petitioners could not

prevail as a matter of law.

‘In Firestone, this Court when speaking

the application of the abuse of discretion

standard, noted that the fiduciary's conflict

of interest should be weighed as “a factor" in

determining whether there has been an abuse of

discretion. Firestone Tire & Rubber Co., 489

== 42 -

followed this Honorable Supreme Court's

direction in Firestone, citing and discussing

the six factors enumerated in Section 187 of

the Restatement (Second) of Trusts. (Id. at

1564-65). After an exhaustive review of those

criteria, plus the history of and rationale

behind the abuse of discretion standard, the

court established the following rule:

When a plan fiduciary

demonstrates a substantial

conflict of interest on

the part of the fiduciary

responsible for benefits

determinations, the burden

shifts to the fiduciary to

prove that its

interpretation of plan

- provisions committed to

its discretion was not

tainted by self-interest.

That is, a wrong but

apparently reasonable

interpretation is

arbitrary and capricious

if it-advances the

conflicting interest of

the fiduciary at the

expense of the affected

beneficiary or

beneficiaries unless the

U.S. at 115, 109 S.Ct. at 956, 103 L.Ed. 2d at

95.

= 43 =

fiduciary justifies the

interpretation on the

ground of its benefit to

the class of all

participants and

beneficiaries. Id. at

1566-67.

The Brown court shifted the burden to the

fiduciaries to justify their actions because

people having a conflict of interest

‘ inherently implicate

the hobgoblin of self-

interest. Adverse

benefits determinations

Save considerable sums

that are returned to the

fiduciaries' corporate

coffers. The presumption

that the fiduciaries acted

for the future Stability

of the fund cannot be

entertained. Id. at

1568.°

The court further noted that,

[t]he area of discretion

to which deference is paid

must’ be confined narrowly

to decisions for which a

“The Brown court also went on to hold

that if the fiduciary sufficiently justifies

his conduct, the burden then shifts back to

the plaintiff to demonstrate that conduct is

“arbitrary and capricious by other measures"

(Id. at 1568).

im 44 -

conflicted beneficiary can

demonstrate that it is

operating exclusively in

the interests of the plan

participants and

beneficiaries ... . The

fiduciary, however, should

bear the burden of

dispelling the notion that

its conflict of interest

has tainted its judgment.

Id. *

Since Brown was decided, it has been

approvingly cited by two other panels of the

llth Circuit. See Anderson v. Blue Cross/Blue

Shield of Alabama, 907 F.2d 1072 (llth Cir.

1990) and Newell v. Prudential Insurance

Company of America, 904 F.2d 644 (llth Cir.

1990). It has also been followed in Poole v.

Seattle-First National Bank, 741 F. Supp. at

846 ("find[ing] the reasoning in Brown to be

persuasive"); and Cargile v. Confederation

Life Insurance Group Plans, 748 F. Supp. 874

(N.D. Ga. 1990).° Other courts have taken

*In Cargile, the defendants' effort to

justify their decision on the basis of its

benefit to other participants, consisted of a

Single self-serving sentence in defendant's

_ 45 -

notice of the general principles of Brown,

even though not having to apply its specific

holding of to their facts. Bass v. The

Prudential Insurance Company Of America, 1991

U.S. Dist. LEXIS 7720 (D. Kan. May 29, 1991);

In re: Gulf Pension Litigation, No. 86-4365,

1991 U.S. Dist. LEXIS 4631 (S.D. Texas,

April 10, 1991). Miller v. Metropolitan Life

Insurance Co., 925 F.2d 979 (6th Cir. 1991);

Daniels v. Anchor Hocking Corp., 758 F. Supp.

326, 355 (W.D. Pa. 1991). Seen.

Petitioners have been unable to locate a

Single decision challenging or criticizing the

abuse of discretion test established in Brown.

Brief that the fiduciary had sought to

conserve the plan assets. (Id. at 880). The

court ruled that this "naked assertion" cannot -

“purge the taint of self-interest." Id.

Ironically, in this case, Respondent made a

last-minute desperate effort to place evidence

before the District Court that the Plan

Administrator was acting in the best interest

of all participants. This consisted of a

conclusory and virtually meaningless Affidavit

submitted by the Plan Administrator, Mr.

Herbert, which the District Court correctly

gave little credence.

- 46 a

Here, the District Court found as a

factual matter that the Plan had failed to

sustain its burden of proving that denial of

Plaintiffs' 75/80 claims benefitted other

participants or beneficiaries (757 F. Supp. at

1461). Under Brown, this absolutely mandates

a conclusion that the Plan fiduciaries abused

their discretion in denying Plaintiffs' claims

for benefits. Critically however, the Third

Circuit's refusal to get to this issue by

overruling the District Court's finding of a

"conflict" completely undermines Brown and

sends conflicting and confusing signals to

trial and appellate courts. In particular,

can an appellate court wishing to avoid the

effects of Brown do so by simply reversing the

District Court's factual finding that there

was a conflict of interest? Or shouldn't the

appropriate level of deference be accorded the

lower court's factual findings, with an

appellate court then being bound to follow the

- 47 =

test laid down in Brown, i.e., once a conflict

exists, then has the fiduciary met its burden

o: proving it acted in the best interest of

all Plan participants and if he hasn't, then

he has abused his discretion.

Lastly, the Third Circuit's decision has

implications concerning the application of the

arbitrary and capricious standard above and

beyond its side-stepping of Brown. Here, the

Taird Circuit advocates that unless there is a

"direct" conflict (not "a conflict" as

Giscussed in Brown and in Restatement of

—

trust, Section 167), a plan fiduciary's

cecision should be afforded full deference

irrespective of the fact that the fiduciaries

2s here) consist of a stacked deck of

-ndividuals who are obviously pro-employer and

énti-employee.

There was certainly a divergence of

-Dinion, even prior to this Court's decision

-. Firestone, as to what constituted an abuse

‘ - 68. ~ ‘

of discretion or arbitrary and capricious

conduct by plan fiduciaries.

The Fifth Circuit followed a three part

test to evaluate a plan administrator's good

faith: (1) uniformity of construction; (2)

“fair reading" and reasonableness of that

reading; and (3) unanticipated costs. Dennard

v. Richards Group, Inc., 681 F.2d 306, 314

(Sth Cir. 1982). The Eighth Circuit defined

the arbitrary and capricious standard as

requiring a determination of whether the

fiduciary's decision was supported by

substantial evidence, was contrary to law or

was made in bad faith. See Niagara Paper

Corp. v. Paper Industrial Union Management

Pension Fund, 800 F.2d 742, 745-46 (8th Cir.

1986); Short v. Central States Southeast and

South West Areas Pension Fund, 729 F.2d 567,

571 (8th Cir. 1984). The Seventh Circuit

required proof that the fiduciary's decision

was arbitrary, fraudulent or in bad faith.

- 49 o

Siv_v. P.R. Mallory & Co., 712 F.2d 1209 (7th

Cir. 1983). The pre-Firestone and pre-Brown

test in the Eleventh Circuit was "whether [the

trustees] interpretation was made rationally

ard in good faith - not whether it was right."

Arderson v. Ciba-Geigy Corp., 759 F.2d at,

1522. In a post-Firestone case, but pre-

deting Brown, the llth Circuit cited the three

pert test referenced in Dennard, supra. See

Guy v. Southeastern Iron Workers Welfare Fund,

877 F.2d 37 (lith Cir. 1989).

It is submitted that, having given the

-restone decision a chance to be digested and

acDlied by the District and Circuit Courts,

trere is confusion as to (a) a District

Ccurt's fact-finding responsibilities, and

certicularly as to how far an appellate court

sould transgress in overturning well

substantiating findings such as were made in

t-=is case by the District Court, and (2) how

rrecisely the arbitrary and capricious

_—

standard is to be applied, particularly the

extent which a conflict of interest plays, and

to what level (i.e., direct, indirect,

intermediate, etc.) that conflict must rise to

trigger the test enunciated by the Eleventh

Circuit in Brown. However, regardless of the

test formulated, it is submitted that the

Third Circuit here did precisely what it

admonished the District Court not to do, i.e.,

it ignored the District Court's well-supported

factual findings of bad faith, conflict of

interest and interpretation of plain Plan

language. By contrast, it is inconceivable,

as a matter of law, that an injustice has not

occurred here, and that the obviously

conflicted fiduciaries (all major officers of

GATX) did not abuse their discretion, in

applying an interpretive gloss to the word

“layoff" which did not exist in the Plan, when

(a) they did not have any information before

them concerning the funded status of the Plan,

_ 51 a

(b) the fiduciaries put nothing meaningful on

the record before the lower court from which

anyone could reasonably conclude they were

acting in the interest of anyone other than an

impermissible party i.e., GATX, (c) they

attempted to claim there was no "termination"

of employment, despite the fact that the Stock

Purchase Agreement and a post-closing letter

sent by Plan representatives clearly indicated

that there had been such a termination, (d)

they sought to base their decision on the

existence of a pension plan for the new Fuller

Company which had not yet been adopted and

which Fuller had no duty to adopt, and (e)

they sought to "rely" on the prior

transactions (i.e., MTL, TEC, etc.) was

completely misguided because the scanned

information which they had received from the

Plan Administrator was very misleading as to

the nature of those transactions and indeed on

closer scrutiny, those transactions undercut

the decision made by the fiduciaries in this

TRAUB, BUTZ & FOGERTY, P.C.

Respectfully submitted,

y: Sev Le uA- fie

Se: ymout Traub,“Esquire

Attorheys for Petitioners

EDWIN KOTROSITS, et al.

1620 Pond Road, Suite 200

Allentown, PA 18104

(215)395-1010