RICHARD J. RYBARCZYK, MINORU MIZUBA, and WILLIAM RITTENHOUSE, Plaintiffs-Appellees, v. TRW, INC. and TRW SALARIED PENSION PLAN, Defendants-Appellants.
No. 97-4167
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
Decided and Filed: December 21, 2000
Argued: December 9, 1998
2000 FED App. 0418P (6th Cir.)
Before: WELLFORD, NELSON, and DAUGHTREY, Circuit Judges.
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 File Name: 00a0418p.06. Appeal from the United States District Court for the Northern District of Ohio at Cleveland. Nos. 95-02800; 96-02493—Ann Aldrich, District Judge.
ARGUED: David S. Cupps, VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, for Appellants. Eric H. Zagrans, ZAGRANS LAW FIRM, Elyria, Ohio, for Appellees. ON BRIEF: David S. Cupps, Robert N. Webner, VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, John Winship Read, Amanda Martinsek, VORYS, SATER, SEYMOUR & PEASE, Cleveland, Ohio, for Appellants. Eric H. Zagrans, ZAGRANS LAW FIRM, Elyria, Ohio, Robert D. Gary, Lorain, Ohio, Paul E. Slater, SPERLING, SLATER & SPITZ, Chicago, Illinois, for Appellees.
NELSON, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. WELLFORD, J. (pp. 22-23), delivered a separate opinion concurring in part and dissenting in part.
OPINION
DAVID A. NELSON, Circuit Judge. Here we have an appeal by a manufacturing company and its pension plan from a summary judgment in favor of a class of employees who took early retirement from the company. The plaintiff class-members claimed that the lump sum pension benefits distributed to them at retirement were too low in amount.
The district court concluded that the employer (TRW, Inc.) was collaterally estopped to make its lump sum benefit calculations under a methodology less favorable to the retirees than that mandated by this court in an earlier class action, Costantino v. TRW, Inc., 13 F.3d 969 (6th Cir. 1994). The district court further held that the members of the class were entitled to prejudgment interest at the greater of the interest rate on 52-week U.S. Treasury bills or the rate of return
Upon de novo review of the benefit calculation issue, we conclude that the plaintiff class is not entitled to avail itself of the collateral estoppel doctrine. We further conclude, however, that the portion of the lump sum payments attributable to service rendered prior to a certain plan amendment adopted on December 18, 1986, reflects a violation of the “anti-cutback rule” contained in the Employee Retirement Income Security Act of 1974 (“ERISA“) and the Internal Revenue Code (the “I.R.C.” or “Code“). There was no violation, in our view, with respect to the portion attributable to service rendered subsequent to the amendment.
As to the district court‘s resolution of the prejudgment interest question, we find no abuse of the court‘s discretion.
The challenged judgment will be affirmed in part and reversed in part.
I
As of 1984 — prior to the enactment by Congress of the first of a series of ERISA and
The plan also provided that retirees could elect to take their pension benefits in a lump sum, payable up-front, rather than as a series of monthly payments. The amount of the lump sum was calculated under a prescribed formula that discounted the monthly payment stream to its present value. Prior to 1986, the plan provided that the interest rate used in making the present value calculation would be the Moody‘s Aaa bond rate.
In the Retirement Equity Act of 1984,1 Congress set a ceiling on the interest rates that could be used in calculating the present value of future pension payments. (It will be helpful to keep the following relationship in mind: the higher the interest rate utilized in the present value calculation, the lower the lump sum produced by that calculation.) Under the statute, the interest rate was capped at a level set by the Pension Benefit Guaranty Corporation. This rate — the technical derivation of which need not concern us here — is commonly called the “PBGC rate.” The statutory cap meant that TRW employees electing to take their early retirement benefits in a lump sum would receive payments substantially greater in amount than the payments to which they would have been entitled under the plan as originally written.2
Because of the ballooning effect of the Retirement Equity Act on early retirement lump sum distributions (or so we surmise), TRW eventually decided to eliminate any early retirement subsidy where the lump sum form of payment was
With the December 18 amendments, which were made retroactive to January 1, 1985, TRW‘s retirement plan provided in relevant part as follows:
“The lump sum benefit shall be the present value of the monthly single life annuity (excluding any early retirement subsidy) to which the Participant would have been entitled except for the election of the lump sum form of payment. The lump sum shall include the present value of the anticipated Post-Retirement Adjustments which would have been made had the Participant elected monthly payments.” TRW Salaried Pension Plan, Section 5.9(b)(i), as amended December 18, 1986 (emphasis supplied).
The elimination of the early retirement lump sum subsidy gave rise to the class action in which we issued the decision reported as Costantino v. TRW, Inc., 13 F.3d 969 (6th Cir. 1994). The Costantino class was made up of TRW employees who had taken early retirement between January 1, 1985, and October 22, 1986, and who had elected to receive lump sum distributions. It was claimed on behalf of this class that the retroactive amendments adopted on December 18, 1986, violated the anti-cutback rule quoted in note 2, supra.
As of October 22, 1986, the Tax Reform Act of 19864 retroactively raised the interest rate ceiling where the vested accrued benefit (calculated in a manner specified by statute) exceeded $25,000. The new ceiling for such distributions was 120 percent of the PBGC rate. (The amended ceiling — i.e., the PBGC rate for distributions of $25,000 or less and 120 percent of the PBGC rate for distributions exceeding $25,000 — is commonly called the “§ 1139 rate,” after the relevant section of the Tax Reform Act.) The Code and ERISA also provided that a plan could not distribute a benefit in a lump sum without the participant‘s consent if the benefit was over $3,500.5
TRW also argued in Costantino that the rate cap was applicable only to “accrued benefits,” a term that according to TRW meant only unsubsidized benefits. Id. at 978. This court rejected TRW‘s arguments in a two-part analysis. First, we noted, a Treasury Department regulation codified at
Turning to the case at bar, we note that plaintiff Richard Rybarczyk represents a class of TRW retirees who retired between October 23, 1986, and July 1, 1996. Plaintiffs Minoru Mizuba and William Rittenhouse represent a class of retirees who retired between January 1, 1989, and July 1, 1996. The two classes have been merged for purposes of the lawsuit. All members of the merged class have received lump sum distributions of more than $25,000.
The members of this class were beneficiaries of certain plan amendments adopted by TRW on Oct. 24, 1988, retroactive to Jan. 1, 1985. Insofar as lump sum payments of more than
In granting summary judgment to the plaintiffs, the district court relied on the doctrine of collateral estoppel. Costantino, said the district court, had “clearly held that § 1139 applies whenever a plan calculates the present value of subsidized benefits.” Rybarczyk v. TRW, Inc., 1997 U.S. Dist. LEXIS 3186, at *23 (N.D. Ohio 1997). Therefore, the district court concluded, TRW could “no longer assert . . . that the law allows it to calculate the present value of a subsidized benefit without using the § 1139 rate. TRW raised these very
The district court also awarded prejudgment interest to the plaintiffs at a rate determined in accordance with the following formula:
“[T]he greater of (a) interest at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the initial lump sum distribution to the class member, compounded annually, or (b) interest equal to the rate of return actually earned on the principal amount of the underpayment during the prejudgment period.” Rybarczyk, 1997 U.S. Dist. LEXIS 13848, at *15 - *16.
In the present appeal, TRW challenges both the district court‘s use of collateral estoppel and the court‘s prejudgment interest rate formula.
II
A
The doctrine of collateral estoppel, as the district court explained, precludes a party from relitigating issues resolved against that party in a prior proceeding. See Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 (1979). If the benefit of the collateral estoppel doctrine is to be claimed successfully,
“(1) the precise issue raised in the present case must have been raised and actually litigated in the prior proceeding;
(2) determination of the issue must have been necessary to the outcome of the prior proceeding;
(3) the prior proceeding must have resulted in a final judgment on the merits; and
(4) the party against whom estoppel is sought must have had full and fair opportunity to litigate the issue in the prior proceeding.” United States v. Sandoz Pharmaceuticals Corp., 894 F.2d 825, 826-27 (6th Cir. 1990).
The first of these requirements, as we see it, has not been met in the case at bar. TRW asserted in Costantino that the regulations did not require use of the § 1139 rate for subsidized benefits under the 1986 plan amendments inasmuch as adoption of the amendments meant that the plan did not offer a subsidized lump sum as an option. The Costantino court responded that while TRW‘s assertion “may be true, it is not relevant in the present case, in which Plaintiffs qualified for their subsidies prior to the 1986 plan amendment.” Costantino, 13 F.3d at 979. In the case at bar, however, the plaintiff class is presumably made up largely, if not entirely, of people who did not take early retirement until after the 1986 amendments. This class thus includes retirees who assert that they qualified for subsidies at least partially on the strength of service performed after the 1986 amendments. To that extent, obviously, this case does not involve the “precise issue” decided in Costantino.9
In Costantino, moreover, nothing much turned on the 1988 amendments. In the present case, by contrast, the plaintiffs concentrate most (if not all) of their fire on the 1988 amendments. That being so, we are not persuaded that the plaintiffs are entitled to avail themselves of the collateral estoppel doctrine.
The inapplicability of collateral estoppel does not mean that TRW automatically wins. We must still examine the parties’ arguments in light of the Costantino decision (which has precedential effect under the doctrine of stare decisis) and the relevant federal law and regulations.
The plaintiffs make much of the statement in Costantino that
TRW further points to this court‘s definition of “optional form of benefit” in Ross v. Pension Plan for Hourly Employees of SKF Indus., 847 F.2d 329 (6th Cir. 1988), as meaning a benefit that “involves the power or right of an employee to choose the way in which payments due to him under a plan will be made or applied.” Id. at 333. TRW argues that the plaintiffs do not have the “power or right” to choose a subsidized lump sum for payment; once a given retiree has chosen a lump sum distribution, rather, the plan “automatically determines the payment amount based solely upon whether the Section 1139 rate applied to the standard
Finally, TRW stresses that ERISA does not mandate any particular benefits. Specifically, TRW points out, nothing in ERISA requires that pension plans “offer subsidized lump sum early retirement payments.”
TRW‘s argument seems sound as far as it goes. It is certainly true that until the 1988 amendments liberalized the lump sum benefit calculation for early retirees, the 1986 version of the plan did not provide for lump sum distributions of subsidized benefits; the only lump sum on offer to an early retiree under the 1986 plan was a sum based on the present value of the normal (i.e., unsubsidized) retirement annuity benefit. And setting aside the anti-cutback rule for the moment, we see absolutely nothing wrong in this. The applicable Treasury Department regulations say, unambiguously, that
“if a plan provides a subsidized early retirement annuity benefit specifies that the single sum distribution benefit available at early retirement age is the present value of the normal retirement annuity benefit, then the normal retirement annuity benefit is used to apply the valuation requirements of this section and the resulting amount of the single sum distribution available at early retirement age.”
26 C.F.R. § 1.411(a)-11(a)(2) (emphasis supplied).
With the liberalization of the benefit calculation formula in 1988, of course, the plan introduced a possibility that the subsidized early retirement annuity benefit would play a role in the calculation. But such use of the subsidized benefit was prescribed only where application of the Moody‘s rate to that benefit yielded a larger lump sum than the retiree would have received under the 1986 edition of the plan, in which the § 1139 rate had to be applied to the unsubsidized retirement annuity benefit. The 1988 amendments merely provided for the possibility of some icing on the early retirement cake — and we are aware of nothing in ERISA, the Code, or the
Unless we ignore the anti-cutback rule embodied in
As mentioned in n.8, supra, Mr. Rybarczyk raised this issue in paragraph 23 of his class action complaint. Paragraph 23 reads as follows:
“TRW‘s Plan violates the anti-cutback provisions of ERISA and the Code, and provides lower lump sum distributions to Plan participants than they are properly entitled to receive, when it applies the present value calculation to an impermissible benefit, excluding the early retirement subsidy, notwithstanding the fact that the calculation uses the permissible interest rate.”
Curiously, however, the plaintiffs have failed to press this point on appeal.
The Tax Reform Act, as we have seen, required TRW to determine the present value of the annuity benefits of employees electing early retirement “using an interest rate no greater than 120 percent of the [PBGC] rate if the vested accrued benefit exceeds $25,000 . . . .”
Our conclusion is not undermined, as we see it, by the favorable “determination letter” that TRW received from the Internal Revenue Service with respect to the TRW pension plan as amended effective January 1, 1989. Although this letter, by its terms, “relates only to the status of [TRW‘s] plan under the Internal Revenue Code,” ERISA contains a provision requiring the Secretary of Labor to accept favorable determination letters “as prima facie evidence of initial compliance by the plan with the standards [of relevant portions of ERISA].”
This is so because of the representations that TRW made to the IRS in requesting the letter. In an IRS form entitled “Application for Determination for Employee Benefit Plan,” TRW was asked this question: “Does any amendment to the plan reduce or eliminate any section 411(d)(6) protected benefit?” (It may be recalled that § 411(d)(6) is the
TRW‘s answer, as we have demonstrated, was incorrect. The IRS, however, was entitled to assume that TRW had answered the question correctly — and a favorable
The Second Circuit, moreover, has said that a “favorable determination letter indicates only that an employee retirement plan qualifies for favorable tax treatment by meeting the formal requirements of I.R.C. § 401(a).” Esden v. Bank of Boston, 229 F.3d 154, 176 (2d Cir. 2000). That court went on to say that “adjudication of [an employee‘s] rights is for the federal courts, not the field offices of the IRS.” Id. at 177. Subject to the qualification that determination letters carry a rebuttable presumption of validity, we are constrained to agree. The determination letter does not change our analysis in the case at bar.
In brief summary, then, our conclusion is this:
- Employees taking early retirement after December 18, 1986, and electing to receive their accrued retirement benefits in a lump sum, are entitled to have the § 1139 rate used in the determination of the present value of subsidized benefits attributable to service before the amendment;
- With respect to unsubsidized retirement benefits attributable to service after the amendment, such employees are entitled to receive the advantage of the alternative present value calculation prescribed by the plan amendments adopted on October 24, 1988; and
- Each member of the plaintiff class should be awarded judgment for the amount, if any, by which the lump sum to which he or she is entitled exceeds the lump sum actually paid.
As to the district court‘s award of prejudgment interest under the formula described at p. 11, supra, we have “long recognized that the district court may [award prejudgment interest] at its discretion in accordance with general equitable principles.” Ford v. Uniroyal, 154 F.3d 613, 616 (6th Cir. 1998). We therefore apply an “abuse of discretion” standard in reviewing the award.
Among the constraints on a district court‘s discretion to shape an award of prejudgment interest in an ERISA case is the fact that we look with disfavor on simply adopting state law interest rates. ERISA is “not an area ‘primarily of state concern.‘” Ford, 154 F.3d at 617. Interest awards should not be punitive, but should “simply compensate a beneficiary for the lost interest value of money wrongly withheld from him or her.” Id. at 618.
The question faced by the district court in this case, then, was how best to calculate the “lost interest value of money wrongly withheld . . . .” TRW urges that the only appropriate rate would be either that established by
We have upheld a district court‘s award of prejudgment interest calculated under
This is not to say, however, that the
Using the interest rate actually realized by TRW on the relevant funds seems an appropriate way of avoiding unjust enrichment. As we declared in an earlier case, “[t]o allow the Fund to retain the interest it earned on funds wrongfully withheld would be to approve of unjust enrichment.” Sweet v. Consolidated Aluminum Corp., 913 F.2d 268, 270 (6th Cir. 1990) (quoting Short v. Central States, Southeast & Southwest Areas Pension Fund, 729 F.2d 567, 576 (8th Cir. 1984)).
We are aware of no decision approving a formula like the one used here, where the plaintiffs are to receive the higher of the
TRW argues that the district court‘s award of prejudgment interest has the effect of amending the plan “to confer a benefit which no other Plan participant will receive.” This argument is, in our view, misguided. If the plaintiffs received lump sum distributions in amounts less than those to which they were actually entitled, the entry of judgment for the amount of the shortfall with interest through the end of the litigation would simply make the plaintiffs whole. This is not a “benefit” for which other plan participants are ineligible; other participants would have been equally eligible for prejudgment interest had they found it necessary to go to court to obtain benefits wrongfully denied them.
TRW also argues that the award of prejudgment interest under the formula challenged here will result in a “windfall recovery for plan participants.” We disagree. If the award of prejudgment interest were lower than TRW‘s actual rate of return, it is TRW that would arguably receive a windfall. Because the plan with which we are concerned in this case is a defined benefit plan, TRW has to contribute only enough money to fund the plan‘s defined obligations. If TRW were able to keep part of the return on wrongfully withheld funds, it would have to contribute that much less to fund the plan‘s obligations to other retirees.
The judgment of the district court is AFFIRMED in part and REVERSED in part, and the case is REMANDED for further proceedings not inconsistent with this opinion.
HARRY W. WELLFORD, Circuit Judge, concurring in part and dissenting in part. I concur entirely with my colleague, Judge Nelson, through part II.B of his opinion. I would hold, however, that we should adhere to our usual procedure and deem that plaintiffs have waived any anti-cutback argument in this appeal under Brindley v. McCullen, 61 F.3d 507 (6th Cir. 1995); see also Wright v. Holbrook, 794 F.2d 1152 (6th Cir. 1986). This case is not about loss of vested benefits under our ruling as to pre-December 18, 1986 provisions of the plan and amended plans. TRW has, indeed, dealt generously with its employees, and I would not stretch our procedures to consider that which plaintiffs have failed adequately to argue or brief. I think that the rationale to reverse is supported by the effect of the IRS’ approval or “favorable ‘determination letter‘” issued with respect to the TRW plan, amended effective January 1, 1989.
In general, I deem Costantino not controlling under the differing facts and circumstances of this case. Plaintiffs are not entitled to the post-amendment claim that they assert.
I dissent with respect to the award of prejudgment interest, particularly in view of the generous awards heretofore ordered by this court as to retirement benefits deemed to be accrued. In the first place, “ERISA does not mandate the award of prejudgment interest to prevailing plan participants.” Ford v. Uniroyal Pension Plan, 154 F.3d 613, 616 (6th Cir. 1998). It may be awarded at the reasonable discretion of the district judge. See id. The purpose of any such award is not to punish the employer. See id. at 617. I would hold that plaintiffs are more than adequately compensated by award under
Notes
The corresponding section of the Internal Revenue Code,“(1) The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan . . . .
(2) For purposes of paragraph (1), a plan amendment which has the effect of—
(A) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or
(B) eliminating an optional form of benefit,
with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy. . . .”
ERISA‘s parallel provision (since amended) was codified at“(2) Plan may distribute benefit in excess of $3,500 only with consent. — If —
(A) the present value of the qualified joint and survivor annuity or the qualified preretirement survivor annuity exceeds $3,500, and
(B) the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consent in writing to the distribution,
the plan may immediately distribute the present value of such annuity.
(3) Determination of present value. —
(A) In general. — For purposes of paragraphs (1) and (2), the present value shall be calculated —
(i) by using an interest rate no greater than the applicable interest rate if the vested accrued benefit (using such rate) is not in excess of $25,000, and
(ii) by using an interest rate no greater than 120 percent of the applicable interest rate if the vested accrued benefit exceeds $25,000 (as determined under clause (i)).
In no event shall the present value determined under subclause (II) [sic] be less than $25,000.
(B) Applicable interest rate. — For purposes of subparagraph (A), the term ‘applicable interest rate’ means the interest rate which would be used (as of the date of the distribution) by the Pension Benefit Guaranty Corporation for purposes of determining the present value of a lump sum distribution on plan termination.”