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Cash Balance Decisions Busting Out All Over (September 2007)

by Alvin D. Lurie

The following article was published in the New York Law Journal on June 29, 2007, and is reprinted here with permission of the Journal. 2007 ALM Properties, Inc. Alvin Lurie is a tax attorney in private practice in New York. He was recently awarded by the American Bar Association Taxation Section its inaugural Lifetime Employee Benefits Achievement Award.

By my count 23 courts1 have now explicitly ruled on the question whether cash balance pension plans unlawfully discriminate against participants because of age (i.e., advanced age, I should add, mindful of Candidate Reagan's gracious disavowal of an intent to denigrate his opponent's qualifications because of relative youth). Just think of that, 23 decisions have been adjudicated in just the 20-plus years since the first known cash balance plan (Bank of America's) surfaced. In fact, all 23 decisions in less than a seven-year span starting with the first decision in this area,2 13 in just the past 12 months! That total of 23 does not include inconclusive but significant action by the Supreme Court in considering and then declining to grant certiorari in a most important case decided by the Seventh Circuit.3 It also does not count an opinion by the First Circuit affirming a lower court's ruling upholding a cash balance plan, that, while expressing partiality to the trial court's position on age discrimination, declined on procedural grounds to review that aspect of the decision.4 Of course, also not counted is a fully briefed case, Hirt v. Equitable Retirement Plan, not yet decided by the Second Circuit that has been on appeal since last October.5

That Second Circuit decision is likely to become the most significant of the lot, whichever way it goes. If the Appeals Court denies the discrimination claim, it will add its authority to that of three other circuit courts that have so held, the Third,6 Seventh7 and Ninth,8 that one would have to think would finally put the matter to rest. If, contrariwise, it goes the other way, it will create the split in the circuits that will almost certainly induce the High Court this time to grant the certiorari that, as noted,9 it has once before refused, that would at long last bring this saga to its most belated end.

If I were betting on the outcome on Foley Square, I would put my money on the Second Circuit's going along with the other three circuits, not just because they are appellate decisions, but because they are right --clearly right on policy grounds, but also right on the strictest of strict constructionist grounds. Perhaps most basically, any other outcome would not be "sensible," to latch onto Judge Easterbrook's refreshingly plainspoken word in his opinion for the Seventh Circuit in the IBM cause celebre.10 However, it is far from foregone that the Second Circuit will join its appellate level colleagues, given the most astonishing state of the law in the district courts comprising the Second Circuit.

There have been seven cash balance decisions in just the lower courts of the Second Circuit since March 2006 --a remarkable confluence of judicial activity --five in the Southern District, two in the District of Connecticut, with four of the seven sustaining the age discrimination contentions of the plaintiffs,11 three opposing.12 The count in just the Southern District is three opposing, two sustaining, while the two Connecticut cases both upheld the discrimination claims.

It should be noted, however, that neither of the Connecticut cases is a final adjudication, only a denial of defendant's motion to dismiss on the ground that plaintiff had pleaded a valid claim; and, not incidentally, both were decided by the same district judge.13 The judge indeed characterized the defendant's motion in the second case14 as essentially requesting her to reconsider her earlier decision, which she declined to do for a second time, having previously rejected a motion for reconsideration in the first case. But there can be no doubt that, if the Connecticut cases were to reach final adjudication before decision is rendered in the Second Circuit appeal15 (a Southern District case), the judge would stand by her questionable, though thorough and well crafted, opinions on the interlocutory motions. However, it is doubtful that, given the pending appeal to the circuit court for her own district, she would rush to final judgment in her cases.

Therefore, the only lasting importance of the two Connecticut district court opinions is the influence they may have on the circuit court's decision. The same can be said of the two pro-plaintiff's decisions in the Southern District, also careful, well-reasoned (but nonetheless, in this observer's view, flawed) decisions. The three other recent decisions in the Southern District (one of which in the case on appeal) have sided with the defendants, rejecting the age discrimination argument. They also rest on very solidly constructed opinions. The circuit court will have what one could call an embarrassment of riches to draw upon from its own district judges, six of them, not to mention the unanimous decisions of three sister circuit courts, and, of course, the briefs of the parties and amici, and the slew of cases already decided around the country.16

Most unlikely of all about the present state of the law is that, of the full array of 23 decisions addressing this issue, only the four in the district courts of the Second Circuit and the trial decision in the IBM case17 have held the cash balance design inherently violative of the anti-age-discrimination statutes. The remaining 18, three in the circuit courts and 15 in district courts from ocean to ocean --California, Colorado, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Missouri, New Jersey, New York, and Pennsylvania18 --have lined up on the side of the cash balance plans; and one can add to that the First Circuit's opinion mentioned above19 that upheld the ruling of the Massachusetts district court sustaining the plan, with language strongly supportive of the plan's non-discrimination, but, as noted, without a direct ruling (because plaintiffs were deemed to have waived the issue below).

Until the recent four district decisions in the Second Circuit, an unbroken string of 13 cases decided after the IBM decision in the lower court in 2003 rejected it. To most commentators it seemed a sport, weakly grounded on a stretched interpretation of the governing statute,20 not even citing the only judicial authority then extant21 or the announced views of Treasury and IRS,22 that had unequivocally rejected the age discrimination charge. Nevertheless, the pension community was spooked by that decision, and in short order brought to a halt the then growing conversion to the cash balance model of defined balance plans that were rapidly falling into disfavor. Not even the ensuing run of over a dozen district court victories for cash balance plan sponsors stemmed the tide of disenchantment among the business community and its benefits advisers that the IBM decision had set in motion.

When, after almost three years of waiting for the hoped for reversal of the IBM decision it seemed would never come, the cash balance supporters turned to the Congress, that then took up the plight of the beleaguered plan design as part of its major pension reform efforts in 2006, that eventuated in enactment last summer, as part of the Pension Protection Act of 2006,23 of a rescue of the cash balance plan. But it was only made operative following a special effective date of June 29, 2005 for such plans.24 That left the thousands of cash balance plans then in force in limbo,25 until, fortuitously, one month after the PPA was signed into law, the Seventh Circuit unanimously reversed the lower court;26 and, to make that cheese more binding, the full court refused en banc review and, this past January, the Supreme Court denied certiorari.

That seemed to signal the rebirth --at least the liberation --of the cash balance plan. But barely had its supporters (your correspondent included27) trumpeted the good news in the trade journals and relevant blogs than two district courts for the Southern District of New York28 and one for Connecticut29 handed down in rapid succession three of the four decisions in favor of the participants mentioned above (the fourth had been decided in March 2006 before the Seventh Circuit's reversal in IBM30), explicitly or impliedly declining to be impressed, let alone bound, by the Seventh Circuit's opinion, or even the prospective-only legislative legitimizing of the cash balance design. "Here we go again," was the collective view of pension watchers.31

Then a funny thing happened. One month later, within a span of four days in January 2007 (the timing was presumably coincidental), the district court of New Jersey32 and the Third Circuit Court33 handed down two decisions completely under the sway and in the thrall of the Seventh Circuit opinion. The New Jersey district court pointedly even called the judge in one of the pro-participant SDNY cases to task for "taking the wrong word from the dictionary," leading to an erroneous interpretation of the statutory test for discrimination. On April 17, 2007, another district judge in the New York Southern District,34 more respectful of his colleagues' feelings (perhaps), but no more persuaded by their reasoning, noted that, of the "numerous courts (that) have confronted this issue recently," the two most recent SDNY decisions are among the minority that "have found that they (cash balance plans) are age discriminatory." But he went with the earlier two decisions in the Southern District, following the reasoning of those cases and the previously mentioned circuit court cases in the Third and Seventh Circuits. While he acknowledged that the Second Circuit has an appeal pending directly in point, that did not deter him from deciding that the plan sub judice in the case before him "is not age discriminatory."

So the stage is now set for the Second Circuit to take the spotlight and bring order not just to the courts within its circuit but to the pension community that has been roiling in the wake of this turbulence in courts generally across the land, most especially and unusually in the Second Circuit. The New York bar (of which your author is a member) has a special interest in seeing closure to this family squabble in its own house. The ability to advise clients with confidence as to the state of the law in New York is at stake. But, depending on the outcome in the Second Circuit, the decision there could finally bring closure nationwide. The five amici briefs filed with that court testify to the interest that case has excited.

One would think that all this division among the black-robed brethren bespeaks a difficult and important issue of pension law, that, however costly to the litigants and the court system, was worth the enormous expenditure of time and money to resolve. One would be wrong. It was all about a possible interpretation of four undefined words in the statute --"rate of benefit accrual" --that, had its drafters been able to anticipate a plan design that did not exist at the time of enactment of the statute, they would surely have foreclosed, since the interpretation argued for by its proponents, far from avoiding harm to older participants, would require them to be provided with windfall benefits out of all proportion to those of all younger participants. That, as Judge Easterbrook put it so simply, is "not sensible," let alone defying the time value of money principle. Even were the alleged age discrimination to exist, its remedy is not reverse discrimination.

Mr. Bumble of Oliver Twist put it even more simply: if that's what this statute requires, "the law is a ass."

1 Circuit Courts: Godinez v. CBS Corp., 81 Fed. Appx., 949 (9th Cir. 2003); Cooper v. IBM Personal Pens. Pl., 457 F.3d 636 (7th Cir. 2006), cert. den. 2007 WL 91579 (1/16/70); Register v. PNC Fin'l Serv. Group, Inc. 2007 WL 222019 (3d Cir. 2007)

District Courts: Eaton v. Onan Corp., 117 F. Supp. 2d 812 (S.D.Ind. 2000); Engers v. AT&T Corp, 2001 US Dist. LEXIS 25889 (D.N.J. 2001); Campbell v. BankBoston, 206 F. Supp. 2d 70 (D.Mass. 2002), aff'd oth. gds. 327 F.3d 1 (1st Cir. 3003); Godinez v. CBS Corp., 2002 WL 32155542 (C.D.Cal. 2002), aff'd. supra; Cooper v. IBM Personal Pens. Pl., 274 F. Supp 2d 1010 (S.D.Ill. 2003), aff'd supra; Tootle v. ARINC, Inc. 222 F.R.D. 88 (D.Md. 2004); Hurlic v. So. Cal. Gas Co. (C.D.Cal. 2005); Register v. PNC Fin'l Serv. Group, Inc., 2005 WL 3120268 (E.D.Pa. 2005), aff'd supra; Richards v. FleetBoston Fin'l Corp., 427 F. Supp. 2d 150 (D.Conn. 2006); Hirt v. Eqble. Retir. Pl., 441 F. Supp. 2d 516 (S.D.N.Y. 2006), app. pend. 2d Cir.; Laurent v. PriceWaterhouse Coopers, LLP, 2006 WL 2546805 (S.D.N.Y. 2006); Drutis v. Rand McNally & Co., slip. op. (E.D.Ky. 2006); In re J.P. Morgan Chase Cash Bal. Litigation, 460 F. Supp. 479 (S.D.N.Y. 2006); In re Citigroup Pens. Pl. ERISA Litigation, 2006 US Dist. LEXIS 8956 (S.D.N.Y. 2006); Parsons v. AT&T Pens. Ben. Pl., 2006 US Dist. LEXIS 93135 (D.Conn. 2006); Finley v. Dun & Bradstreet Corp., 2007 WL196753 (D.N.J. 2007); Sunder v. U.S. Bank Pens. Pl. No.4, 2007 WL 541595 (E.D.Mo. 2007); Wheeler v. Pens. Val. Plan for Employees of Boeing Co., 2007 WL 781908 (S.D.Ill. 2007); Tomlinson v. El Paso Corp., 2007 WL 891378 (D.Colo. 2007); Bryerton v. Verizon Communications, Inc., 2007 WL 1120290 (S.D.N.Y. 2007)

2 Eaton v. Onan Corp., supra n.1

3 Cooper v. IBM Pers. Pens. Pl., supra n.1

4 Campbell v. BankBoston, N.A., 327 F.3d 1; see also Goldman v. First Nat'l Bank of Boston, 985 F.2d 1113 (1st Cir. 1993), affirming district court's grant of the plan sponsor's motion for summary judgment dismissing plaintiff's age discrimination claim, but with only incidental discussion of the cash balance plan.

5 cited supra n.1

6 Register v. PNC Fin'l Serv. Group, Inc., supra n.1

7 Cooper v. IBM Pers. Pens. Pl., supra n.1

8 Godinez v. CBS Corp., supra n.1

9 See text accompanying n.3 supra

10 Ibid.

11 Claims against FleetBoston, J.P. Morgan Chase, Citigroup and AT&T, supra n.1

12 Claims against Equiitable, PriceWaterhouse Coopers and Verizon

13 Judge Janet Hall

14 Parsons v. AT&T Pens. Serv. Pl., supra n1

15 Hirt v. Eqble. Retir. Pl., supra n.1

16 See n.1 supra

17 Cooper v. IBM Pers. Pens. Pl., supra n.1

18 Gardinez and Harlic (Cal.), Tomlinson (Colo.), Wheeler (Ill.,), Eaton (Ind.), Drutis (Ky.), Tootle (Md.), Campbell (Mass.), Sunder (Mo.), Engers and Finley (N.J.), Laurent, Hiret and Bryerton (N.Y.), and Register (Pa.)

19 Supra n.4

20 Sec. 204(b)(1)(H)(I) of ERISA. Companion age discrimination provisions were enacted at the same time in the Internal Revenue Code, Sec. 411(b)(1)(H)(i), and the Age Discrimination in Employment Act, Sec.4(i)(1)(A)

21 Eaton v. Onan Corp., supra n.1

22 See preamble to final regulations issued in 1991 relating to general anti-discrimination rules for all qualified pension plans, under IRC 401(a)(4) (56 Fed. Reg. @ 47528, Sept. 19, 1991); and see IRS Not. 96-8, 1996-1 C.B. 359. In a regulation proposed by Treasury in 2002, specifically addressed to IRC 411(b)(1)(H), the front-loaded interest-crediting feature of the cash balance design was explicitly approved as satisfying the age discrimination statute. That proposed regulation was subsequently withdrawn when Congress indicated it would legislate on that issue.

23 P.L 109-280 701

24 Id. @ 701(e)(1)

25 IRS ceased to rule on so-called cash balance conversions (i.e., converting traditional defined benefit plans to cash balance plans) in 1999, resuming is ruling policy only after enactment of the Pension Protection Act in 2006 (see IRS Not. 2007-6, CCH Pension Plan Guide 17,135Q)

26 See n.3 supra

27 "How A Lawsuit Almost Strangled Pensions," blog posted on, Nov. 12, 2006

28 J.P. Morgan Chase and Citigroup cases, supra n.1

29 AT&T case, supra n.1

30 FleetBoston case, supra n.1

31 See author's article, "Another Bump In The Road: The Cash Balance Saga Never Ends," Jan./Feb 2007 Business Entities, Warren Gorham and Lamont, p.22

32 Dun & Bradstreet case, supra n.1

33 PNC case, supra n.1. See author's article, "Center Of Gravity Shifts To The Third Circuit," Mar/Apr 2007 Business Entities, Warren Gorham and Lamont, p.44

34 Verizon case, supra n.1

For more information on this and related topics, consult the CCH Pension Plan Guide.

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