Lewis v. Pension Benefit Guaranty Corporation

          MEMORANDUM OPINION

          REGGIE B. WALTON, UNITED STATES DISTRICT JUDGE.

         The plaintiffs, approximately 1, 700 former Delta Air Lines, Inc. (“Delta”) pilots, initiated this action against the defendant, the Pension Benefit Guaranty Corporation (the “Corporation” or the “PBGC”), challenging the Corporation's benefits determinations regarding the Delta Pilots Retirement Plan (the “Pilots Plan” or “Plan”) under the Employment Retirement Income Security Act (the “ERISA”), 29 U.S.C. § 1303(f) (2012). See First Amended Complaint (“Am. Compl.”) ¶¶ 1-14, 73-150.^[1] Currently pending before the Court are the Plaintiffs' Motion for Summary Judgment (“Pls.' Mot.”) and the Pension Benefit Guaranty Corporation's Cross-Motion for Summary Judgment and Opposition to the Plaintiffs' Motion for Summary Judgment (“Def.'s Mot.”). Upon careful consideration of the parties' submissions, ^[2] the Court concludes for the reasons that follow that it must deny the plaintiffs' motion and grant the Corporation's motion.

         I. BACKGROUND

         A. Statutory Background

         The ERISA, a “comprehensive and reticulated statute, ” Nachman Corp. v. PBGC, 446 U.S. 359, 361 (1980), was enacted in part to “ensure that employees and their beneficiaries would not be deprived of anticipated retirement benefits by the termination of pension plans before sufficient funds [had] been accumulated in the plans, ” PBGC v. R.A. Gray & Co., 467 U.S. 717, 720 (1984). “The PBGC administers and enforces Title IV of [the] ERISA, ” PBGC v. LTV Corp., 496 U.S. 633, 637 (1990), which “created the [PBGC] and a termination insurance program to protect employees against the loss of ‘nonforfeitable' benefits upon termination of pension plans that lack sufficient funds to pay such benefits in full, ” Nachman, 446 U.S. at 361 n.1; see also 29 U.S.C. § 1302(a)(2) (providing that the Corporation's purpose is to, inter alia, “provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries under plans to which [Title IV] applies”). As the Supreme Court has explained:

When a plan covered under Title IV terminates with insufficient assets to satisfy its pension obligations to the employees, the PBGC becomes trustee of the plan, taking over the plan's assets and liabilities. The PBGC then uses the plan's assets to cover what it can of the benefit obligations. The PBGC then must add its own funds to ensure payment of most of the remaining “nonforfeitable” benefits, i.e., those benefits to which participants have earned entitlement under the plan terms as of the date of termination. [The] ERISA does place limits on the benefits [the] PBGC may guarantee upon plan termination, however, even if an employee is entitled to greater benefits under the terms of the plan. In addition, benefit increases resulting from plan amendments adopted within five years of the termination are not paid in full.

LTV Corp., 496 U.S. at 637-38 (internal citations omitted). When the Corporation becomes a plan trustee, it becomes a fiduciary of the plan, see 29 U.S.C. § 1342(d)(3), and must “discharge [its] duties . . . solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan, ” id. § 1104(a)(1)(A).

         1. Compensation and Qualified Benefit Limits

         A provision of the tax code limits the “annual compensation of each employee” that an ERISA-qualified pension plan may “take into account” in calculating that employee's benefits under the plan (the “compensation limit”). See I.R.C. § 401(a)(17) (2012); see also AR 15 (“The IRC § 401(a)(17) limit . . . caps the amount of earnings a plan may use to calculate benefits under a tax-qualified plan . . . .”). On June 7, 2001, Congress increased the compensation limit to $200, 000 in the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “EGTRRA”). See Pub. L. No. 107-16, § 611(c)(1), 115 Stat. 38, 97 (2001); see also I.R.C. § 401(a)(17). Congress provided that the increased compensation limit applied to plan years beginning after December 31, 2001. See Pub. L. No. 107-16, § 611(i)(1), 115 Stat. at 100. An IRS notice setting effective dates for the increased compensation limit, issued September 17, 2001, further provided:

In the case of a plan that uses annual compensation for periods prior to the first plan year beginning on or after January 1, 2002, to determine accruals or allocations for a plan year beginning on or after January 1, 2002, the plan is permitted to provide that the $200, 000 compensation limit applies to annual compensation for such prior periods in determining such accruals or allocations.

I.R.S. Notice 2001-56, 2001-2 C.B. 277.

         Another provision of the tax code limits the annual benefit payments that a plan can make to a participant or beneficiary (the “qualified benefit limit”). See I.R.C. § 415(b). The EGTRRA increased the qualified benefit limit to $160, 000. See Pub. L. No. 107-16, § 611(a)(1), 115 Stat. at 96; see also I.R.C. § 415(b).^[3] Congress provided that the increase to the qualified benefit limit applied to plan years ending after December 31, 2001. See Pub. L. No. 107-16, § 611(i)(1), 115 Stat. at 100.

         2. Priority Categories

         The ERISA establishes six categories, in descending order of priority, to which the Corporation must allocate a terminated plan's assets upon its termination. See 29 U.S.C. § 1344(a)(1)-(6). The first two priority categories (“PCs”), which concern benefits “derived from the participant[s'] mandatory contributions, ” id. § 1344(a)(2), are not relevant in this case because the Plan “never required mandatory employee contributions, ” AR 877. Therefore, the highest priority category relevant in this case is PC3, which includes benefits for pilots who were retired or eligible to retire “as of the beginning of the [three]-year period ending on the termination date of the plan, . . . based on the provisions of the plan (as in effect during the [five]-year period ending on such date) under which such benefit would be the least.” 29 U.S.C. § 1344(a)(3)(A), (B).

         PC3 benefits are comprised of the following two categories:

(A) in the case of the benefit of a participant or beneficiary which was in pay status as of the beginning of the [three]-year period ending on the termination date of the plan, to each such benefit, based on the provisions of the plan (as in effect during the [five]-year period ending on such date) under which such benefit would be the least, [and]

(B) in the case of a participant's or beneficiary's benefit (other than a benefit described in subparagraph (A)) which would have been in pay status as of the beginning of such [three]-year period if the participant had retired prior to the beginning of the [three]-year period and if his benefits had commenced (in the normal form of annuity under the plan) as of the beginning of such period, to each such benefit based on the provisions of the plan (as in effect during the [five]-year period ending on such date) under which such benefit would be the least.

For purposes of subparagraph (A), the lowest benefit in pay status during a [three]-year period shall be considered the benefit in pay status for such period.

Id. § 1344(a)(3)(A)-(B). “These provisions exclude certain benefits from [PC3] based on whether (1) they were in pay status (i.e., actually being paid) or could have been in pay status (if an individual had retired) within three years of the date of the plan termination and (2) the provisions of the plan creating them were ‘in effect' within the five-year period prior to plan termination.” Davis v. PBGC, 734 F.3d 1161, 1165 (D.C. Cir. 2013) (“Davis II”).

         The other PC relevant to this case is PC5, which includes “all other nonforfeitable benefits under the plan, ” 29 U.S.C. § 1344(a)(5), that are not guaranteed by the Corporation, see id. § 1344(a)(4)(A), and has two sub-categories. The first subcategory, PC5(a), constitutes vested benefits as of five years prior to the plan's termination. See id. § 1344(b)(4)(A) (defining PC5(a) benefits as those “under the plan as in effect at the beginning of the [five]-year period ending on the date of plan termination”). The second subcategory, PC5(b), constitutes all other vested benefits that went into effect on a later date, which cannot be funded unless all benefits in PC5(a) are funded, see id. § 1344(b)(4)(B) (stating that PC5(b) benefits “shall be determined” only “[i]f the assets available for allocation under [PC5(a)] are sufficient to satisfy in full th[ose] benefits”).

         3. Recovery Benefits

         Benefits that are neither funded by the terminated plan's assets nor guaranteed by the Corporation may be funded, to the extent possible, by funds recovered by the Corporation from a plan's contributing sponsor. See id. §§ 1322(c); 1362(a)-(b); see also Allied Pilots Ass'n v. PBGC, 334 F.3d 93, 95-96 (D.C. Cir. 2003) (“If the terminated plan lacks sufficient funds to satisfy existing obligations to employees, thus requiring the PBGC to use its own funds to pay benefits, the PBGC has authority to recover ‘the total amount of the unfunded benefit liabilities' from the plan's sponsor and members of the sponsor's ‘controlled group, ' i.e., entities that belong to the same corporate family as the sponsor . . . .” (citation omitted)). When the Corporation recovers unfunded benefit liabilities, see 29 U.S.C. § 1362(b)(1)(A), it is required to share a portion of those recoveries under the priority allocation scheme set forth in § 1344(a), see id. § 1322(c). The statute designates how the Corporation should calculate the portion of the recovery funds available for payment to participants and beneficiaries: it must “multiply[]-(A) the outstanding amount of benefit liabilities under the plan (including interest calculated from the termination date), by (B) the applicable recovery ratio.” Id. § 1322(c)(2). For plans where “the outstanding amount of benefit liabilities exceeds $20, 000, 000, ” like the Plan in this case, the statute defines “recovery ratio” as the ratio of

(i) the value of the recoveries of the [C]orporation [for a single-employer plan terminated under a distress termination] to

(ii) the amount of unfunded benefit liabilities under such plan as of the termination date.

Id. § 1322(c)(3)(C).

         4. Benefit Determinations and Appeals

         The District of Columbia Circuit has summarized how the Corporation handles benefit determinations and appeals of those determinations as follows:

The PBGC makes initial determinations “with respect to allocation of assets under [29 U.S.C. § 1344].” 29 C.F.R. § 4003.1(b)(4). They are issued in writing and must “state the reason for the determination.” Id. § 4003.21. “Any person aggrieved by an initial determination . . . may file an appeal, ” id. § 4003.51, to be considered by the PBGC Appeals Board, which is composed of three PBGC officials, id. § 4003.2. In a written appeal, appellants can request to appear before the Board and present witnesses to testify before the Board. Id. § 4003.54. The Board has discretion to reject such requests. Id. § 4003.55(b). A decision issued by the Appeals Board “constitutes the final agency action by the PBGC with respect to the determination which was the subject of the appeal.” Id. § 4003.59(b).

Davis II, 734 F.3d at 1166 (alterations in original).

         B. Factual Background

         The plaintiffs in this case, former Delta pilots (or their beneficiaries), are participants or beneficiaries under the Plan, which is a single-employer, tax-qualified deferred benefit plan. Lewis v. PBGC, 197 F.Supp.3d 16, 19 (D.D.C. 2016) (Walton, J.). The relevant facts regarding the Plan and the Corporation's actions taken with respect to the Plan are set forth below.

         1. The Plan's Compensation Limit

         On June 21, 2001, two weeks after the EGTRRA was passed, see Pub. L. No. 107-16, § 611(c)(1), 115 Stat. at 38, Delta and the “pilots in the service of Delta[, ] . . . as represented by the Air Line Pilots Association, International” (the “ALPA”), signed the Pilots Working Agreement (the “PWA”), a collective bargaining agreement that updated the Plan, see AR 3411- 12. The PWA provides that any statutory increase to the compensation limit “will be effective for the . . . [Plan] as of the earliest date that the increased [q]ualified [p]lan [l]imits could have become legally effective for that Plan, had that Plan not been collectively bargained, ” AR 3697, and that the provision “will be effective on September 1, 2001, ” AR 3695.

         On June 27, 2003, Delta signed the Fourth Amendment to the Delta Pilots Retirement Plan As Amended and Restated Effective July 1, 1996 (the “Fourth Amendment”). See AR 244, 251. The Fourth Amendment, which states that it is “[e]ffective July 1, 2002, or such other effective date as may be provided in a provision below, ” explains that its purpose is “to reflect certain provisions of . . . [the] EGTRRA, ” and that it “is intended as good faith compliance with the requirements of [the] EGTRRA and is to be construed in accordance with [the] EGTRRA and guidance issued thereunder.” AR 244. To that end, the Fourth Amendment adds the following paragraph to the Plan:

The Earnings taken into account in determining benefit accruals of an Employee in any Plan Year beginning after June 30, 2002 shall not exceed $200, 000 . . . . In determining benefit accruals of [retired e]mployees . . . in Plan Years beginning after June 30, 2002, the annual compensation limit provided in this paragraph for Plan Years beginning before July 1, 2002 shall be $200, 000, or, if greater, the annual compensation limit in effect under Section 401(a)(17) of the Code for that Plan Year . . . .

AR 245.

         2. The Plan's Qualified Benefit Limit

         The PWA provision governing the qualified benefit limit also governs the compensation limit, and states that any statutory increase to the qualified benefit limit “will be effective for the . . . [Plan] as of the earliest date that the increased [q]ualified [p]lan [l]imits could have become legally effective for that Plan, had that Plan not been collectively bargained, ” AR 3697, and that the provision “will be effective on September 1, 2001, ” AR 3695.

         The Fourth Amendment amended the Plan to incorporate the EGTRRA's increase in the qualified benefit limit as follows:

Benefit increases resulting from the increase in the limit of Section 415(b) of the [Tax] Code under [the] EGTRRA shall be provided to all current and former participants (with benefits limited by Section 415(b)) who have an accrued benefit under the Plan immediately prior to July 1, 2001 (other than an accrued benefit resulting from a benefit increase solely as a result of the increases in limitations under Section 415)); provided, however, that such increase shall only be applied to the annuity payments made from this Plan to former participants on or after July 1, 2002.

AR 248. The Fourth Amendment also provided that it

shall be effective with the [Plan] year starting on July 1, 2001 for those Employees whose Annuity Starting Date is on or after July 1, 2001. With respect to [p]articipants whose Annuity Starting Date was before July 1, 2001, the increased 415 limit . . . shall be effective for annuity payments made on or after July 1, 2002.

AR 248.

         3. Bankruptcy Proceedings and Letter of Agreement #51

         In September 2005, Delta filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). AR 6. Thereafter, the Corporation determined that the Plan had insufficient assets to cover its guaranteed benefit liabilities as of the proposed date of the Plan's termination. AR 7. In the course of the bankruptcy proceedings, Delta negotiated with the ALPA regarding the Plan's termination and the benefits that non-retired Delta pilots (the “Active Pilots”) would receive, which resulted in the execution of Letter of Agreement #51. See AR 932. Upon approval by the Bankruptcy Court, Letter of Agreement #51 would modify the PWA by requiring Delta to issue $650 million in senior unsecured notes to the ALPA (the “ALPA Notes”), “[i]n the event the . . . Plan is terminated, ” AR 968, for the ALPA's distribution among its members, see AR 971 (noting that “[d]istribution mechanics, eligibility and allocation [of the ALPA Notes] among such pilots or pilot accounts [would] be determined by [the] ALPA”). Letter of Agreement #51 also provided the ALPA with a “general non-priority unsecured claim . . . in the amount of $2.1 billion (the ‘ALPA Claim'), ” AR 967, to be allocated among the Active Pilots by the ALPA's Delta Master Executive Council, see AR 966-67.

         The Corporation objected to Delta's motion for the Bankruptcy Court to authorize the execution of Letter of Agreement #51 on the grounds that the agreement would violate the ERISA. See AR 1050. The Corporation's objections were based on its position that the ALPA Notes and the ALPA Claim (collectively, the “ALPA Payments”) were intended “to replace unfunded benefits under the Pilots Plan by using the proceeds to fund follow-on retirement plans and other payments or distributions to pilots.” AR 1049. The Corporation argued that the ALPA Notes were intended to serve as replacement payments for Plan benefits because Letter of Agreement #51 “provides to the [A]ctive [P]ilots $650 million in notes if and only if the Pilots Plan terminates, ” AR 1064, and “the ALPA claim is clearly intended to make up for some portion of the [A]ctive [P]ilots' pension benefits lost as a result of the Pilots Plan termination” because Letter of Agreement #51 permits the proceeds of the ALPA Claim (as well as the ALPA Notes) to be received “as retirement benefits-i.e., on a pre-tax and tax-deferred basis, ” AR 1068.

         The Corporation objected to the execution of Letter of Agreement #51 because the ALPA Payments would violate the “ERISA's explicit statutory provision assigning the claim for a pension plan's total underfunding exclusively to [the] PBGC, and . . . [would] establish[] a follow-on arrangement to replace benefits under the Pilots Plan that may be abusive of the pension insurance system.” AR 1049-50. The Corporation explained in its objections that the total amount of unfunded guaranteed benefits that it can pay to beneficiaries “depends on the amount [it] recovers for unfunded benefit liabilities from the plan sponsor and its controlled group.” AR 1053. And, if Letter of Agreement #51 were executed, the Active Pilots “would recover [u]nfunded [n]onguaranteed [b]enefits from both the employer, ” in the form of the ALPA Payments, and from the Corporation once it became Plan trustee upon the Plan's termination, which would constitute an improper double recovery that “would be distributed contrary to the [ERISA] statutory scheme.” AR 1064.

         The Bankruptcy Court overruled the Corporation's objections to Letter of Agreement #51, finding no “sufficient basis . . . to reach the conclusion that [Letter of Agreement #51] infringes any provision of law or any legal ruling by a Court, ” AR 453, and authorized Delta and the ALPA to execute Letter of Agreement #51, see AR 1091, 1093. The Corporation initially noted an appeal of the Bankruptcy Court's ruling, see AR 1099-1102, but subsequently dismissed that appeal, AR 1153, after entering into a settlement agreement with Delta, AR 1105. In that settlement agreement, the Corporation received a “prepetition, general, non-priority unsecured claim against Delta . . . in the amount of $2.2 billion.” AR 1105; see also AR 1126, 1130.

         4. The Corporation's Allocations and Benefit Determinations

         In December 2006, Delta and the Corporation executed an agreement appointing the Corporation as the Plan trustee and terminating the Plan as of September 2, 2006. See AR 5436- 38. The Corporation valued the Plan's assets at approximately $1.984 billion and its liabilities at approximately $4.552 billion. See AR 848, 877. The Corporation also allocated the “plan liabilities by priority category” pursuant to the ERISA's statutory scheme. See AR 877; see also 29 U.S.C. § 1344(a). The Corporation's allocations and benefit determinations that are the subject of the plaintiffs' claims in this case are explained in further detail below.

         a. The Increased Compensation Limit

         The Corporation determined that the increased compensation limit established by the EGTRRA in 2001, which was incorporated into the Plan through the PWA in 2001 and the Fourth Amendment in 2003, see AR 15, did not apply to its calculations of the plaintiffs' PC3 benefits because the increased compensation limit did not go into effect until the plan year beginning on July 1, 2002, see AR 13-14 (“Since the plan year for the Pilots Plan began on July 1 and ended on June 30, [the] $200, 000 limit went into effect on July 1, 2002 (i.e., the first day of the plan year beginning after December 31, 2001).”), and the Plan terminated less than five years later, on September 2, 2006, see AR 2. Accordingly, because the ERISA requires a benefit to be in effect for five years prior to the date of the plan's termination in order to qualify as a PC3 benefit, see 29 U.S.C. § 1344(a)(3), the Corporation determined that the increased compensation limit did not apply to its calculations of the plaintiffs' PC3 benefits, see AR 16 (“[T]he benefit amount in PC3 is based on the plan provisions ‘in effect' during the five years before the plan's termination date ‘under which such benefit would be the least.'” (quoting 29 U.S.C. § 1344(a)(3))).

         b. The Increased Qualified Benefit Limit

         The Corporation also determined that although the PWA incorporated the EGTRRA's increased qualified benefit limit into the Plan on July 1, 2001, more than five years prior to the Plan's termination, the PWA did so only for pilots who were active at that time, i.e., pilots “who had not retired or separated from service prior to . . . July 1, 2001.” AR 22. However, for participants who retired before July 1, 2001, the Plan was not amended to incorporate the qualified benefit limit increase until the adoption of the Fourth Amendment in June 2003, which was less than five years prior to the Plan's termination. See AR 29-30. As a result, the Corporation applied the increased qualified benefit limit only for its calculations of the Active Pilots' PC3 benefits, and not for the plaintiffs' PC3 benefits. See AR 30.

         c. The Recovery Benefits

         The “PBGC determined that the total value of its recoveries [from Delta] under the settlement was $1, 279, 506, 423 as of May 3, 2007 (approximately [eight] months after [the Plan's termination]).” AR 42. But, “[t]o reflect interest, [the] PBGC discounted th[at] value . . . by $50, 501, 683, resulting in a . . . recovery value of $1, 229, 004, 740.” AR 43. The Corporation allocated $240, 263, 310 to the Plan's assets, which “significantly increased the funded PC3 benefits that [the] PBGC pa[id] to PC3-eligible participants and beneficiaries . . ., which include[d] the [plaintiffs], ” and allocated $988, 741, 430 to its unfunded benefit liabilities funds. AR 46.

         For the unfunded benefit liabilities funds, the Corporation calculated the recovery ratio, i.e., “the percentage of the [P]lan's otherwise unfunded benefits that bec[a]me funded due to [the] [unfunded benefit liabilities] recovery, ” which was 38.51%. AR 47. The Corporation then multiplied the value of the Plan's unfunded benefit liabilities, as of the date of the Plan's termination, by the recovery ratio to arrive at a total figure of $681, 259, 882, which was used “to pay otherwise unfunded nonguaranteed benefits.” See AR 47. That amount funded the remainder of the Plan's PC3 benefit liabilities, see AR 49 n.137, and almost 52% of the PC5(a) benefit liabilities, see AR 50. “[T]here were no remaining funds to allocate to [ ] ¶ 5(b).” AR 50.

         The Corporation determined that the increased compensation and qualified benefit limits, which it had already determined could not be applied to the plaintiffs' PC3 benefits, belonged in the PC5(b) category because those increases were not “in effect” for the full five-year period prior to the Plan's termination, as required for inclusion in PC5(a). See AR 48. Consequently, because there were no remaining funds to allocate to PC5(b), the Corporation was unable to pay these increases. See AR 48.

         5. The Appeals Board's Decision

         After the Corporation issued final benefit determinations for the Plan's participants and beneficiaries, see AR 2, the plaintiffs filed a consolidated appeal with the PBGC Appeals Board raising thirteen issues, see AR 1, 3. On September 27, 2013, the Appeals Board issued its final agency decision. See AR 1. The Appeals Board's conclusions that are relevant to the plaintiffs' claims in this case are set forth below.

         a. The ALPA Payments

         The plaintiffs argued before the Appeals Board that the Corporation should have taken into account the ALPA Payments that the Active Pilots received pursuant to Letter of Agreement #51 by construing those payments as received pension benefits under the Plan. See AR 35-36, 40-41. The Appeals Board disagreed, reasoning that “[t]he ALPA Payments were not made from Plan assets and, thus, they were never funds that ‘[left] the Plan just before [the] PBGC assumed its role as statutory trustee.'” AR 36 (second alteration in original) (citation omitted). Therefore, the Appeals Board concluded that the “PBGC [wa]s not required to take the ALPA Payments into account in allocating the Plan's assets and [the] PBGC's recoveries.” AR 36. As justification for its position, the Appeals Board explained:

[The] ERISA does not require [the] PBGC to account for the ALPA Payments for purposes of allocating the Pilots Plan's assets and [the] PBGC's recoveries to the Plan's benefit liabilities. [29 U.S.C. § 1344(a)] provides that [the] PBGC, upon plan termination, “shall allocate the assets of the plan (available to provide benefits) among the participants and beneficiaries of the plan.” [29 U.S.C. § 1322(c)] provides for [the] PBGC to allocate a portion of its recoveries under [29 U.S.C. § 1362] to benefit liabilities that are neither funded by plan assets nor guaranteed by [the] PBGC. The ALPA Payments were never Plan assets, nor were they funds that [the] PBGC recovered under Title IV of [the] ERISA.

. . . Rather, the ALPA Payments are funds that were transferred directly from Delta to [the] ALPA pursuant to a court-approved collective bargaining agreement. Furthermore, the ALPA Payments did not change the pension liabilities owed by the Pilots Plan to its ...