Compliance January 12, 2015

Court Lays Out Rules for Partial Plan Termination

Staff reductions over several years must be related to be considered together when deciding if a partial plan termination occurred.
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A federal appellate court has ruled that a series of reductions in the number of participants in the Household International Tax Reduction Investment Plan were not related and cannot be combined to determine if a partial plan termination occurred.

Ruling in the fifth appeal in a 19-year-long case, the 7th U.S. Circuit Court of Appeals reiterated its previous definition of “partial termination.” The court noted that there was no usable statutory or regulatory definition of partial termination when the case began, so it adopted its own in a 2004 opinion in the current case.

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The court determined that a 20% or greater reduction in plan participants is a partial termination and a smaller reduction is not. However, the court assumed a band from 10% to 40%, whereby a reduction of less than 10% of participants would be conclusively presumed not to be a partial termination, and a reduction greater than 40% of participants would be conclusively presumed to be a partial termination.

According to the appellate court’s latest opinion, the Internal Revenue Service (IRS) adopted its suggested 20% presumption in Revenue Ruling 2007-43.

In general, the court said, the period over which reductions in force may be aggregated to determine whether a partial plan termination has occurred is one plan year. However, in a decision in the current case handed down in 2000, the court conceded that corporate reorganizations or other significant events may not occur over the course of one plan year, so participant terminations in multiple years can be aggregated for consideration of a partial plan termination, but the multiple year terminations must be proven to be related.

Household International, Inc. (now known as HSBC Finance Corporation) began selling off a number of its subsidiaries in 1993. The lead plaintiff in the case, Robert J. Matz, claimed that in 1993, Household adopted a restructuring plan that included elimination of some subsidiaries and layoffs of other workers in 1994, 1995 and 1996. Taken alone, these reductions did not meet the 20% requirement for a partial plan termination, so participants were not 100% vested in company match accounts immediately.

The appellate court accepted a district judge’s decision that there was no restructuring plan—“that the decisions to sell particular subsidiaries had been made sequentially, on the basis of economic conditions in the particular market in which each subsidiary operated, and that these conditions had varied from market to market.” The court also pointed out that even if the reductions were taken together, the percentage of participants terminated would total 17%, below the 20% threshold.

The 7th Circuit determined the suit has no merit and affirmed the district court’s dismissal of the case.

The decision in Matz v. Household International Tax Reduction Investment Plan is here.

Compliance January 12, 2015

J.P. Morgan Settles Lawsuit for $500M

J.P. Morgan has agreed to pay approximately $500 million to settle a class-action lawsuit over poor-quality mortgage-backed securities.
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Lawyers for the plaintiffs in a class-action lawsuit involving J.P. Morgan Chase & Co. stated, “the parties have reached an agreement in principle,” the Wall Street Journal reports. J.P. Morgan has agreed to pay approximately $500 million to settle the lawsuit over nearly $18 billion worth of poor-quality mortgage-backed securities sold by Bear Stearns Cos.

Investors alleged that Bear Stearns “misrepresented the quality of the loans in the loan pools” and garnered credit ratings for the loans from ratings agencies that were “unjustifiably high,” according to a complaint filed with the court. The complaint also included the pension funds’ claim that the documents associated with the certificates had false statements regarding the underwriting standards used to originate the loans.

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The plaintiffs, led by the New Jersey Carpenters Health Fund and the Public Employees’ Retirement System of Mississippi, said they purchased certificates that were “far riskier than represented, not of the ‘best quality’ and not equivalent to other investments with the same credit ratings.” The plaintiffs further stated that most of the certificates were downgraded to below investment-grade level and their value sank.

The complaint advanced strict liability and negligence claims, not claiming fraud on behalf of Bear Stearns. The letter of agreement to resolve the lawsuit was filed in U.S. District Court in Manhattan on Thursday, January 8, according to the Wall Street Journal. It is one of several lawsuits involving J.P Morgan, which has paid more than $20 billion to government and private investors to settle mortgage-related claims over the past two years. Many of the claims originate from acquisitions it made during the financial crisis, including the 2008 purchase of Bear Stearns and the banking assets of Washington Mutual.

The news report says J.P. Morgan’s chairman and chief executive, James Dimon, confessed in October 2013 that he had not fully anticipated how much the bank would have to pay to defend itself against matters passed down from Bear Stearns and also believed the bank would be insulated from problems involving Washington Mutual. He went on to say, “But that doesn’t mean people can’t come after you, so that’s a lesson learned.”

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