Delphi Retirees Lose Bid to Have Pension Takeover by PBGC Reversed

In 2009, a group of Delphi Corp. salaried retirees filed a lawsuit against Pension Benefit Guaranty Corporation (PBGC), which had taken over the auto parts maker’s pension plans.

The retirees claimed in their suit that they stood to lose between 30% and 70% of their pension benefits because PBGC does not cover supplementary benefits, such as payments intended to bridge a retiree until he’s eligible to take Social Security benefits, and because PBGC caps annual payments to retirees. In addition, the suit claimed the agency violated federal law governing retirement plans because it acted in the best interest of the company and industry, rather than participants, when requesting the plan terminations.

On July 22, 2009, PBGC took over the plans, with a termination date of July 31, 2009.

The termination was executed through an agreement between PBGC and Delphi pursuant to 29 U.S.C. Section 1342(c)—a part of labor law that governs the employee retirement security program. The appellants—retirees affected by termination of Delphi’s Salaried Plan—brought several challenges to the termination. First, the retirees argued that Section 1342(c) requires a judicial adjudication before a pension plan may be terminated. Second, the retirees contended that termination of the plan violated their due process rights. Third, the retirees asserted that PBGC’s decision to terminate the Salaried Plan was arbitrary and capricious.

The 6th U.S. Circuit Court of Appeals has affirmed a lower court ruling and found subsection 1342(c) permits termination of distressed pension plans by agreement between PBGC and the plan administrator without court adjudication. The court also said the retirees have not demonstrated that they have a property interest in the full amount of their vested, but unfunded, pension benefits, and PBGC’s decision to terminate the Salaried Plan was not arbitrary and capricious.

The appellate court notes that the title of the subsection, “[a]djudication that plan must be terminated,” may lend some support to the retirees’ assertion that an adjudication must occur before a pension plan is terminated. Still, it said, while subsection titles “are of use when they shed light on some ambiguous word or phrase … they cannot undo or limit what the text makes plain.”

Section 1342 outlines the procedure for institution of proceedings by PBGC to terminate a distressed pension plan. After reviewing the statutory text comprehensively and applying relevant canons of statutory interpretation, the 6th Circuit concluded that subsection 1342(c)(1) provides two alternative mechanisms for terminating a distressed pension plan: (1) by application to a United States district court for a decree that the plan must be terminated, or (2) by agreement between PBGC and the plan administrator. The court said PBGC correctly argued that the statutory scheme provides two procedural alternatives for terminating a distressed pension plan, including by agreement between PBGC and the plan administrator.

The appellate court found that the retirees do not have a property interest in the full amount of their vested pension benefits because the Salaried Plan document provides that only funded benefits at the time of plan termination are nonforfeitable. “And, since the retirees do not have a protected property interest in the full amount of their vested, but unfunded, pension benefits, no due process violation has occurred,” it wrote in its opinion.

The source of the purported property interest is a private contract between the retirees and Delphi, the 6th Circuit explained. The Salaried Plan document provides that, in the event of plan termination, the “right of all affected employees to benefits accrued to the date of such termination … to the extent funded as of such date, is nonforfeitable.” In other words, the document provides that funded benefits accrued up to the date of plan termination are nonforfeitable.

The retirees advanced several arguments in support of their contention that PBGC’s decision to terminate the Salaried Plan was arbitrary and capricious. First, they contended that GM was willing to consider reassuming the Salaried Plan during its negotiations with the government. And, they argued, PBGC believed that assumption of the Salaried Plan by General Motors (GM) was a viable option until PBGC folded under pressure by the Treasury Department.

But, when viewing the evidence in the light most favorable to the retirees and drawing all reasonable inferences in their favor, the 6th Circuit found there is ample countervailing evidence to demonstrate that GM was unwilling to assume the Salaried Plan’s liabilities. “Even if GM was willing to consider assuming the Salaried Plan, and even if PBGC was initially in favor of GM’s assumption of the plan, GM never demonstrated an affirmative willingness to assume the Salaried Plan,” the opinion states. The appellate court conceded that GM considered assuming the Salaried Plan as part of the broader negotiations between GM and the government, and PBGC initially listed assumption of the Salaried Plan by GM as an alternative to plan termination. But, the court noted, the retirees acknowledge that GM refused to assume the Salaried Plan and there is no evidence demonstrating that GM’s assumption of the plan was a viable alternative to termination. “Thus, PBGC’s action cannot be found to be arbitrary and capricious based on its failure to convince GM to assume the Salaried Plan when GM never expressed more than willingness to consider accepting the plan’s liabilities,” the 6th Circuit concluded.

The appellate court pointed out that the retirees’ main contention seems to be that PBGC should have exerted more pressure on the Treasury Department to ensure that GM would assume the Salaried Plan. “First, the retirees’ main grievance on this point seems to be with the Treasury’s decision not to bail out the Salaried Plan. And, as PBGC notes, the district court dismissed the claims against the Treasury defendants early in the litigation and the retirees chose not to appeal that dismissal,” the court says. “Ultimately, PBGC’s action cannot be found to be arbitrary and capricious because of a failure of the Treasury Department.”