Court Opinion

ID: 196429
Source: CourtListenerOpinion
Date Created: 2011-02-07 03:05:35+00
Date Added: 2024-06-11T12:38:00.001724
License: Public Domain

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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