Court Opinion

ID: 2963770
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:14:58.95221+00
Date Added: 2024-06-11T11:42:45.928737
License: Public Domain

USCA1 Opinion

	

          December 1, 1995
                            UNITED STATES COURT OF APPEALS
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                FOR THE FIRST CIRCUIT

                                 ____________________

        No. 94-2318

                                   JAMES H. COOKE,

                                 Plaintiff, Appellee,

                                          v.

                              LYNN SAND & STONE COMPANY,
                        TRIMOUNT BITUMINOUS PRODUCTS COMPANY,
                        LOUIS E. GUYOTT, II, and STUART LAMB,

                               Defendants, Appellants.

                                  __________________
                                  __________________

                                     ERRATA SHEET
                                     ERRATA SHEET

            The opinion  of this  court issued  November 27,  1995, should  be

        amended as follows:

            On page 3, second paragraph, line 3:   Change "PBGC specified"  to

        "PBGC-specified".

            On page 5, second paragraph, line 4:  Change " 22," to "  22,".

                            UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________

        No. 94-2318

                                   JAMES H. COOKE,

                                 Plaintiff, Appellee,

                                          v.

                              LYNN SAND & STONE COMPANY,

                        TRIMOUNT BITUMINOUS PRODUCTS COMPANY,

                        LOUIS E. GUYOTT, II, and STUART LAMB,

                               Defendants, Appellants.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                      [Hon. Nancy Gertner, U.S. District Judge]
                                           ___________________

                                 ____________________

                                        Before

                                Boudin, Circuit Judge,
                                        _____________

                            Coffin, Senior Circuit Judge,
                                    ____________________

                              and Stahl, Circuit Judge.
                                         _____________

                                 ____________________

            Robert  M. Gault with  whom Alan  S. Gale and  Mintz, Levin, Cohn,
            ________________            _____________      __________________

        Ferris, Glovsky and Popeo, P.C. were on briefs for appellants.
        _______________________________

            Joseph  F. Hardcastle with whom  Ralph D. Gants and Palmer & Dodge
            _____________________            ______________     ______________

        were on brief for appellee. 

                                 ____________________

                                  November 27, 1995

                                 ____________________

                 BOUDIN, Circuit Judge.  This troublesome appeal involves
                         _____________

            a determination of benefits  due following the termination of

            a  pension  plan.    On May  18,  1983,  Trimount  Bituminous

            Products  Co. ("Trimount")  purchased Lynn  Sand &  Stone Co.

            ("Lynn").   At the time of the purchase, Lynn had in place an

            employer-sponsored, defined-benefit  pension plan.   The plan

            was subject to the Employee Retirement Income Security Act of

            1974 ("ERISA"), 29 U.S.C.   1001 et seq.
                                             _______

                 At  the time of the  purchase, in May  1983, James Cooke

            was president and treasurer of Lynn and also a trustee of the

            plan.  Shortly thereafter, Cooke was terminated as an officer

            under circumstances not entirely to  his credit, see Cooke v.
                                                             ___ _____

            Lynn Sand & Stone Co., 640 N.E.2d 786 (Mass. 1994), and later
            _____________________

            in the year Lynn replaced the  trustees of the plan and voted

            to terminate  it.  Article XIV of  the plan permitted Lynn to

            amend or terminate the plan at any time.

                 The  proposed termination  required  a clearance  by the

            Pension  Benefit Guaranty  Corporation ("PBGC"),  the federal

            agency that insures ERISA-covered pension plans and regulates

            terminations.   See  29  U.S.C.    1341.   When  an  employer
                            ___

            voluntarily  terminates  a  single-employer,  defined-benefit

            pension plan, all  accrued benefits  vest automatically,  and

            the employer  must  distribute benefits  in  accordance  with

            ERISA's allocation  schedule.  29  U.S.C.    1344(a).   Funds

            left  over  may  revert  to  the  employer  if  the  plan  so

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                                         -2-

            specifies, 29  U.S.C.   1344(d),  as the Lynn plan  did.  The

            present litigation  presents the question how  much Cooke was

            entitled to receive on termination of the plan.

                 In 1983 Cooke--who was then 53 years of age--had accrued

            a monthly retirement benefit of $1,856.93, starting at age 65

            and continuing  for ten years  or until his  death, whichever

            came  first.   The  plan  permitted  the  trustees  to  offer

            beneficiaries  an option,  in  lieu of  monthly payments,  of

            receiving a lump sum  distribution of equal value.   Choosing

            to  offer this option to Cooke, the trustees had to determine

            the   present  value   of  the  promised   monthly  payments.

            Mortality  assumptions aside,  this required  selection  of a

            "discount"  rate--effectively  an  assumed interest  rate--to

            compute  a present lump sum  equal to the  stream of promised

            future  payments.     See  Robert  Anthony   &  James  Reece,
                                  ___

            Accounting Principles 199-203 (1983).
            _____________________

                 The trustees  retained an actuarial  firm which  advised

            that, if the trustees  chose to offer lump sum  payments, the

            appropriate choice  of rates  was between the  PBGC-specified

            interest rate of  9.5 percent1 or a somewhat  higher interest

            rate  of  11 to  11.5  percent,  reflecting the  figure  that

            certain insurance companies  would employ  if Lynn  purchased

                                
            ____________________

                 1The 9.5 percent figure appeared  in a PBGC schedule for
            calculating lump-sum values of  annuities as of a  given plan
            termination  date.   See  29 C.F.R.     2619, App.  B (1986),
                                 ___
            setting forth a 9.5 percent rate for plans terminated between
            September 1, 1983 and February 1, 1984. 

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                                         -3-

            annuities instead of  providing lump  sums.   The higher  the

            rate selected, the  smaller will  be the lump  sum needed  to

            equal the future stream of payments.  Ultimately, the actuary

            recommended the  9.5 percent figure, stating  later that this

            was the actuary's best judgment as to the proper rate as well

            as the rate then commonly used on termination of a plan under

            ERISA.

                 The use of the  9.5 percent figure equated to a lump sum

            payment for Cooke of  $58,987.98.  Cooke's attorneys disputed

            this computation,  urging (based  on certain language  in the

            plan yet  to be described)  that a  6 percent rate  should be

            used; on this premise,  Cooke would have obtained a  lump sum

            of  $96,892.42.    The trustees  maintained  their  position.

            Ultimately,  the  PBGC issued  a  notice  in September  1984,

            finding  that the assets of  the plan would  be sufficient to

            cover  all guaranteed benefits  and rejecting without comment

            Cooke's objections as to the rate selected.

                 On  June 14,  1985,  Cooke  filed  a  complaint  in  the

            district court, contending inter alia that the use of the 9.5
                                       _____ ____

            percent interest rate violated  the plan and therefore ERISA.

            Cross-motions  for  summary  judgment  were  filed,  and  the

            district court issued an initial  non-dispositive decision in

            July 1986, relying in part on the trustees' interpretation of

            the plan.  See  Cooke v. Lynn Sand & Stone  Co., 673 F. Supp.
                       ___  _____    ______________________

            14 (D. Mass  1986).   Delay then ensued  because the  Supreme

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                                         -4-

            Court granted review in another case  to determine the weight

            to  be given  under ERISA  to  a trustee's  interpretation of

            disputed  terms in a pension  plan.  Firestone  Tire & Rubber
                                                 ________________________

            Co. v. Bruch, 489 U.S. 101 (1989).
            ___    _____

                 After   Firestone,  the  present   case  was  eventually
                         _________

            transferred  to a different district judge.   In the decision

            now  before  us,  the   district  court  decided  that  under

            Firestone  the  trustees' interpretation  was entitled  to no
            _________

            weight; and based on the court's own reading of the plan, the

            court granted summary judgment  in favor of Cooke.   Cooke v.
                                                                 _____

            Lynn Sand  & Stone  Co., 875  F. Supp.  880 (D.  Mass. 1994).
            _______________________

            Defendants in the district court--Lynn, Trimount and the plan

            trustees  (collectively  "Lynn")--have now  appealed, arguing

            that their interpretation deserves weight and is in any event

            correct.       Cooke's  main  argument  in  favor  of  the  6

            percent rate, adopted  by the district  court, was that  this

            rate was mandated by  the plan and was not  inconsistent with

            PBGC regulations.   The plan states in article  I,   22, that

            "[f]or  purposes  of   establishing  actuarial   equivalence,

            present value  shall be determined by  discounting all future

            payments for interest and mortality on the basis specified in

            the [plan's] Adoption Agreement."  Section 1.09 of the plan's

            adoption agreement, a boilerplate form with checked boxes and

            inserted  figures, provides  that  in establishing  actuarial

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                                         -5-

            equivalence  the  figure  of 6  percent  should  be used  for

            "[p]re-retirement interest."

                 In  response,  Lynn  has   argued  that  the  6  percent

            provision  applies where a lump sum is paid under the ongoing

            plan but does not apply to termination payments.  Lynn points

            to article  XIV,   2, of  the plan, which states  that in the

            event of termination, the trustee must "allocate the [plan's]

            assets"  in accordance with 29  U.S.C.   1344.   Section 1344

            provides a  mandatory priority schedule for  plan payments on

            termination.  Incident to  this and other sections  of ERISA,

            the  PBGC has  established regulations  that address  in some

            detail the determination of  the interest rate to be  used in

            lump sum computations when a plan is terminated.

                 The key  regulation, 29  C.F.R.   2619.26,  is concerned

            with the valuing of a lump sum paid in lieu of normal monthly

            retirement benefits  where a plan's assets  are sufficient to

            cover all  of its  statutory obligations under  section 1344.

            The  regulation  requires the  use  of "reasonable  actuarial

            assumptions  as to  interest and  mortality"; it  directs the

            plan administrator  to specify  the assumptions  when seeking

            termination clearance from the PBGC; it makes the assumptions

            subject to PBGC  review and to  re-evaluation of benefits  if

            the assumptions  are found unreasonable  by the PBGC;  and it

            sets forth four "interest  assumptions" that are "among those

            that will normally be considered reasonable":

                                         -6-
                                         -6-

                 (i)   The rate by the plan for determining lump sum
                 amounts  prior to  the date  of termination.   This
                 rate may  appear in  the plan documents  or may  be
                 inferred from recent plan practice.
                 (ii)    The  rate  used   by  the  insurer  in  the
                 qualifying  bid under which  the plan administrator
                 will purchase  annuities not  being paid as  a lump
                 sum. . . .
                 (iii)    The interest  rate  used  for the  minimum
                 funding standard account pursuant to section 302 of
                 the Act and section  412(b) of the Internal Revenue
                 Code.
                 (iv)     The  PBGC  interest  rate   for  immediate
                 annuities in effect on the valuation date set forth
                 in Appendix B to this part.

                 Based  on  this  language,  Lynn argues  that  the  plan

            trustees were  entitled to  select any reasonable  rate, that

            the 9.5 percent PBGC rate actually adopted is one of the four

            "normally . . . considered reasonable" under  the regulation,

            and that  the evidence of the actuary hired by Lynn shows the

            9.5  percent figure was certainly reasonable here.  As to the

            plan  and adoption agreement, Lynn argues  that the 6 percent

            provision  does not apply to  terminations or, if intended to

            apply, is overridden by the regulation.

                 We start  with the  regulation because, if  so intended,

            there is little  doubt that it  would override contrary  plan

            provisions.   See 29 U.S.C.   1341(a); 29 C.F.R.   2619.3(a).
                          ___

            Given the wording  of the regulation and  its likely purpose,

            we agree that section  2619.26 would override any contractual

            provision   providing  for   a   rate  that   proved  to   be

            "unreasonable" under the regulation.  But the  reasonableness

                                         -7-
                                         -7-

            or unreasonableness of the 6 percent figure cannot readily be

            determined on the present state of the record.

                 Although  the  district  court  deemed  the  6   percent

            interest rate reasonable, apparently  because it was the rate

            specified  in the plan, the regulation does no more than make

            the  plan  rate  used   prior  to  termination  presumptively

            reasonable.  Further, it  appears from the record that  the 6

            percent interest rate would generate a lump sum sufficient to

            buy  two  annuities,  each  separately  providing  Cooke  the
                 ___

            promised  monthly payments.   Thus,  it is  at least  open to

            question whether  the 6  percent figure is  reasonable.   The

            record does show that the  9.5 percent figure is reasonable--

            indeed,  arguably generous  to Cooke--but  there can  be more

            than one reasonable rate.

                 If we  assume arguendo that  6 percent  is a  reasonable
                               ________                     _

            rate and that the  plan intended it to apply  on termination,
                 _______________________________________________________

            we see no reason why the plan  could not require the trustees

            to use  that rate.  It  is true that the  regulation might be

            read  to reserve  the  choice of  a  reasonable rate  to  the

            trustees on  termination, regardless  of what the  plan says.

            But the  regulation's language does not  compel that reading,

            and Lynn  does not show that  such a reading would  serve any

            purpose; after all, the PBGC can reject a plan-specified rate

            if the PBGC finds the rate unreasonable.  

                                         -8-
                                         -8-

                 We turn therefore  to the  contractual question  whether

            the  plan should  be read  to require  use  of the  6 percent

            figure not only in calculating lump sums paid during the life

            of the plan  but also lump  sums paid upon termination.   The

            district  judge who  first  dealt with  the  case deemed  the

            plan's language ambiguous on this issue,  673 F. Supp. at 22,

            and  we  share that  judgment.   This  led the  same district

            judge, as  the  law then  stood  before Firestone,  to  adopt
                                                    _________

            Lynn's interpretation  of  the agreement  as  a  "reasonable"

            interpretation proffered  by the plan trustees,  subject to a

            possible claim of bad faith.  Id.
                                          ___

                 This solution to plan ambiguities may be a sensible one,

            especially because  plan trustees typically (as  here) retain

            the power to alter plan provisions by express amendment.  But

            the Supreme  Court in Firestone concluded  that the trustees'
                                  _________

            reading of plan language may be given weight only if the plan

            so provided in  fairly explicit  terms.  Lynn  does point  to

            some plan  language marginally helpful to  its position, but,

            on  balance, we agree with  the district judge  who took over

            the  case after  Firestone that  the  plan language  does not
                             _________

            satisfy Firestone.   See  Rodriguez-Abreu v.  Chase Manhattan
                    _________    ___  _______________     _______________

            Bank, N.A., 986 F.2d 580, 583-84 (1st Cir. 1983).
            __________

                 Thus, in resolving the  merits we give no weight  to the

            trustees' interpretation and review the plan language de novo
                                                                  __ ____

            and as presenting  an issue of law, Rodriguez-Abreu, 986 F.2d
                                                _______________

                                         -9-
                                         -9-

            at 583, no one  having suggested that there is  any extrinsic

            evidence  that  reveals  the  actual  intent  of  the  plan's

            drafters.    See  Restatement  (Second),  Contracts    212(2)
                         ___  _________________________________

            (1979).   The  difficulty is  that the  plan language  can be

            plausibly read either way.   Nor is this surprising  since in

            all  likelihood the  plan drafters,  in completing  what were

            largely boilerplate  provisions, never had occasion  to think

            about the variation we confront in this case.

                 On  the  one  hand, the  plan  specifies  the  6 percent

            figure,  surely  with ongoing  plan  operations  in mind  but

            without specifically excluding a lump sum paid on termination

            of  the plan.  On the  other hand, termination is the subject

            of a  separate article;  the  article refers  to a  statutory

            provision; and  an associated regulation provides  that those

            terminating  the plan shall select a reasonable rate.  So far

            as  bare language goes, the choice between the Cooke and Lynn

            readings  is practically a coin  flip; and the  usual saws of

            interpretation--such as "the specific controls the general"--

            could be invoked by either side. 

                 Thus, another perspective must be sought.  One might ask

            how the plan drafters would have resolved the problem if they

            had  focused upon it, see  Prudential Ins. Co.  of America v.
                                  ___  _______________________________

            Gray  Mfg. Co., 328 F.2d  438, 445 (2d  Cir. 1964) (Friendly,
            ______________

            J., concurring), or  try to  assign the burden  of proof  and

            hold that the one having the burden has not carried  it.  See
                                                                      ___

                                         -10-
                                         -10-

            United Steelworkers  of America  v. North Bend  Terminal Co.,
            _______________________________     ________________________

            752 F.2d 256, 261 (6th Cir. 1985).  But both perspectives are

            debatable  in  application  and  both have  been  opposed  in

            principle as  well.  See, e.g., Alan  Farnsworth, Contracts  
                                 ___  ____                    _________

            7.16,  at  547  (2d   ed.  1990)  (rejecting   "hypothetical"

            expectations);  United  Commercial   Ins.  Service,  Inc.  v.
                            _________________________________________

            Paymaster  Corp., 962  F.2d 853,  856 n.2  (9th  Cir.), cert.
            ________________                                        _____

            denied,  113  S. Ct.  660  (1992)   (disagreeing  with  United
            ______                                                 ______

            Steelworkers).
            ____________

                 We think that the proper solution in a case such as ours

            should  turn   not   on  "hypothetical[s]"   or   "fictitious

            intentions" but on "basic principles  of justice that guide a

            court  in extrapolating  from  the situations  for which  the

            parties  provided  to  the  one  for  which  they  did  not."

            Farnsworth, supra,   7.16,  at 547-48.  On this  basis Lynn's
                        _____

            interpretation is  superior.   Plan termination is  a drastic

            and unique event; and for  that occasion the PBGC  regulation

            provides   a  detailed  regime  for  selecting  a  reasonable

            interest  rate.   A  reading of  the  plan that  leaves  that

            subject   solely  to   the  regulation   is  straightforward,

            workable,  and far less likely to result in a tension between

            the plan and the regulation.  

                 Further, it is hard to see how substantial injustice can

            be  done to the beneficiary  if the trustees  are confined to

            choosing  a "reasonable rate."   By contrast, insistence on a

                                         -11-
                                         -11-

            fixed rate can easily  produce anomalies such as  the alleged

            double  recovery that  might be  available  to Cooke  in this

            case;  and,  as  Lynn points  out,  it  could  easily be  the

            beneficiary who  suffered from a very small  lump sum payment

            if  the  plan's  contract  rate  happened  to  be  too  high.

            Finally,  letting the  PBGC regulation  govern increases  the

            likelihood that the trustees will afford a lump sum option to

            the employee in the first place.2  

                 One might  argue that  any ambiguity  in  an ERISA  plan

            should  be resolved in favor  of the beneficiary.   We take a

            more  agnostic view of the statute.  Beneficiaries come first

            on  the priority list but only  to the extent of the benefits

            due them;  and the statute expressly permits  the employer to

            reclaim  the  surplus, if  the plan  so  permits (as  it does

            here).   29 U.S.C.     1344(d).   Such plans  should be  read

            fairly, but not  automatically to maximize  the award to  the

            beneficiary.   Foltz v. U.S.  News & World  Report, Inc., 865
                           _____    ________________________________

            F.2d  364,  373  (D.C. Cir.),  cert.  denied,  490  U.S. 1108
                                           _____________

            (1989).

                 The  problem encountered in this case ought not to recur

            if  plan administrators  are vigilant.   It  could easily  be

                                
            ____________________

                 2Of  course, a  fixed figure  might be desirable  in the
            context of an ongoing plan, simply  for the sake of speed and
            certainty; but in that context, there  is no PBGC requirement
            that the specified figure be reasonable and no  potential for
            conflict between the  plan and the regulation where  the plan
            figure is arguably unreasonable.

                                         -12-
                                         -12-

            resolved  under  a plan  that  explicitly  gave the  trustees

            authority  to  interpret  in  terms  that   meet  Firestone's
                                                              _________

            delegation requirement.  Or,  a plan could explicitly provide

            that  a  specified   interest  rate  is   to  be  used   upon
                  _

            termination, or--conversely--that the trustees on termination

            may select any  reasonable rate.  Any  plan that faces up  to
                       ___

            the problem can avoid the ambiguity encountered here.

                 We  have considered whether there is a need for trial on

            the question whether the  trustees in this instance acted  in

            bad  faith,  as originally  alleged by  Cooke.   The district

            court did not find it necessary  to pass on this issue which,

            were  a ruling on it subject  to appeal, would be reviewed de
                                                                       __

            novo.  After examining the summary judgment filings, we think
            ____

            that Cooke's papers  do not generate a  trial-worthy issue on

            the charge of bad  faith.  Accordingly, we conclude  that the

            grant  of  summary judgment  in favor  of  Cooke must  be set

            aside, and that Lynn  is entitled to summary judgment  in its

            favor.

                 The  judgment is  reversed  and the  case remanded  with
                                   ________                ________

            directions to enter summary judgment in favor of Lynn.

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