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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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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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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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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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":
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(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
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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.
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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 _______________
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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 ___
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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
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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.
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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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