Free Order on Motion for Reconsideration - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. The Litigation Plaintiffs are former employees of the Garrett Corporation ("Garrett"), now part of Honeywell International, Inc. ("Honeywell"). (Doc. 1). They claim, among other things, Defendants' amendments to their retirement plan reduced their accrued retirement benefits in violation of the Employee Retirement Income Security Act's ("ERISA") anti-cutback rule, 28 U.S.C. § 1054(g), which provides that "[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan." Id. The amendments occurred in 1984 as a result of the merger of Garrett Corporation's retirement plan with Signal Companies, Inc.'s retirement plan. Id.
Case 2:04-cv-00424-ROS Document 481 Filed 08/12/2008 Page 1 of 9

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

) ) ) Plaintiffs, ) ) vs. ) ) Honeywell Retirement Earnings Plan, et) ) al., ) ) Defendants. ) ) Barbara Allen, et al.,

No. CV 04-424 PHX ROS ORDER

Pending before the Court is Defendants' Motion for Reconsideration. For the reasons stated herein, this motion will be granted. BACKGROUND

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The Court has jurisdiction over Plaintiffs' anti-cutback claims pursuant to 28 U.S.C. § 1132(a), which allows a plan participant to bring an action to recover "benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." II. The 2005 Opinion On March 31, 2005, the Court granted summary judgment in favor of Plaintiffs on their anti-cutback claims. (Doc. 71). An opinion issued on July 19, 2005, setting forth the Court's rationale (the "Opinion"). (Doc. 73). In that Opinion, the Court assumed, while some amendments to Plaintiffs' retirement plan decreased their annual retirement benefit, the amendments in toto increased their annual retirement benefit, i.e., that "Plaintiffs were better off."1 Id. at 13. Based on this assumption, Defendants asserted, because the plan

amendments increased Plaintiffs' annual retirement benefit overall, the anti-cutback rule was not violated regardless of whether any individual amendment reduced the annual retirement benefit. Id. at 13-14. Plaintiffs, on the other hand, asserted any amendment that retroactively decreased the annual retirement benefit violated the anti-cutback rule. Id. at 14. The Court found, if this issue were one of first impression, it would adopt Defendants' interpretation because it was based on common sense, consistent with the plain meaning of "accrued benefit" and the legislative history of the anti-cutback rule, and prudent from a policy perspective in that it affords employers flexibility to reexamine existing plans and adopt new benefit formulas that, as a whole, benefit participants. Id. at 14-18. The Court also noted a then-proposed (now in effect) Treasury Department regulation interpreting § 1054(g) that adopted the Defendants' interpretation of the anti-cutback rule:2

Initially, the Court was under the impression that Plaintiffs had conceded this fact. That is not the case. (See Doc. 138 at 3). Rather, "what Plaintiffs intended to say is that whether their net benefit is higher, as alleged by Defendants, or lower is of no consequence because the anti-cutback rule prevents a reduction in any component of a benefit formula." Id. The Treasury Department has been delegated the authority to administer the anti-cutback provision. See Treas. Dec. Int. Rev. 7501, available at 1977 WL 202014 (Aug. 23, 1977) -2Document 481 Filed 08/12/2008 Page 2 of 9

2

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"in determining whether a reduction [for the purposes of the anti-cutback rule] has occurred, all amendments with the same applicable amendment date . . . are treated as one plan amendment. [Proposed Treasury Regulation § 1.411(d)-3, 69 Fed. Reg. 13796, 13770 (the `Proposed Regulation')]". Opinion at 17. The Court went on to find that, under the Proposed Regulation, "if two amendments have the same amendment date and one amendment increases the participant's early retirement annuity, `and the other amendment decreases the early retirement factors that are used to determine the early retirement annuity, the amendments are treated as one amendment and only violate [the anti-cutback] rule if the net dollar amount of the early retirement annuity after the two amendments is lower at any point in time than it would have been without the two amendments.'" Id. (quoting the Proposed Regulation). The Court, however, held that controlling Ninth Circuit precedent mandated adoption of Plaintiffs' interpretation of the anti-cutback rule. In Michael v. Riverside Cement Co. Pension Plan, the Ninth Circuit held that courts must "look [] beyond the net effect of a plan amendment on annual benefit payments, to the features of the benefit formula itself, and [find] an impermissible reduction of an accrued benefit. [266 F.3d 1023, 1027 (9th Cir. 2001)]." Opinion at 18-19. And, although the Treasury Regulation sought to overrule Michael, the regulation was not yet in effect. Id. at 18. Therefore, the Court reluctantly granted summary judgment in Plaintiffs' favor. Id. at 25. III. The 2005 Motion For Reconsideration On August 12, 2005, the Secretary of Treasury adopted the Proposed Treasury Regulation. See 26 C.F.R. § 1.411(d)-3(a)(2) (the "2005 Regulation"). In their motion for reconsideration filed in 2005, Defendants argued, among other things, the 2005 Regulation mandated a reversal of the Court's prior holding. (See Docs. 80,

(citing 26 U.S.C. §§ 411, 7805); Reorganization Plan No. 4 of 1978, § 101, 43 Fed. Reg. 47,713, 92 Stat. 3790 (1978) as amended Pub. L. 99-514, § 2, 100 Stat. 2095 (1986). -3Case 2:04-cv-00424-ROS Document 481 Filed 08/12/2008 Page 3 of 9

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95). On October 31, 2005, the Court denied the motion to reconsider, finding that the 2005 Regulation was not retroactive. (Doc. 124). IV. The Instant Motion For Reconsideration On July 9, 2007, a bipartisan group comprising the Chairman and Ranking Member of the tax-writing committees of Congress3 sent a letter to Treasury Secretary Henry Paulson requesting guidance on the interpretation of ERISA's anti-cutback provisions. (Doc. 323, Ex. G). Specifically, they sought guidance regarding a Treasury regulation adopted in 1977, providing: For purposes of determining whether or not any participant's accrued benefit is decreased, all of the provisions of a plan affecting directly or indirectly the computation of accrued benefits which are amended with the same adoption and effective dates shall be treated as one plan amendment. 26 C.F.R. § 1.411(d)-3(b) (the "1977 Regulation") (emphasis added).

12 On August 7, 2007, the Treasury Department responded to that inquiry. (Doc. 323, 13 Ex. A (Letter from Eric Solomon, Assistant Secretary (Tax Policy), Dep't of the Treasury, 14 to Hon. Jim McCrery, Ranking Member, House Comm. on Ways & Means (the "Treasury 15 Letter"))). The Treasury Letter stated the 1977 Regulation, which is virtually identical to the 16 2005 Regulation in relevant respect, requires that simultaneous amendments adopted before 17 the 2005 Regulation's effective date that have a net effect of increasing benefits do not 18 violate ERISA's anti-cutback rule. Id. 19 On September 18, 2007, an article discussing the Treasury Letter was published by 20 the Bureau of National Affairs. Pensions: Net Effect of Simultaneous Amendments Applied 21 for Cutback Challenges, Official Says, 180 Daily Tax Report (BNA) G-7, 2007. 22 23 24 25 26 27 28
2

The specific members of Congress were Representative Charles B. Rangel, Chairman of the Committee on Ways and Means, Representative Jim McCrery, Ranking Member of the Committee on Ways and Means, Senator Max Baucus, Chairman of the Senate Finance Committee, and Senator Chuck Grassley, Ranking Member of the Senate Finance Committee. -4Document 481 Filed 08/12/2008 Page 4 of 9

Case 2:04-cv-00424-ROS

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STANDARD OF REVIEW Although the Federal Rules of Civil Procedure do not provide for a "motion to reconsider," the Court may reconsider any order resolving fewer than all of the parties' claims at any time before the entry of judgment. Fed. R. Civ. P. 54(b); see also United States v. Martin, 226 F.3d 1042, 1049 (9th Cir. 2000) ("The authority of district courts to reconsider their own orders before they become final, absent some applicable rule or statute to the contrary, allows them to correct not only simple mistakes, but also decisions based on shifting precedent, rather than waiting for the time-consuming, costly process of appeal."). Reconsideration is appropriate if the Court: (1) is presented with new facts or legal authority that could not have been brought to its attention earlier with reasonable diligence; or (2) committed manifest error. L. R. Civ. P. 7.2(g); see also Pyramid Lake Paiute Tribe of Indians v. Hodel, 882 F.2d 364, 369 n.5 (9th Cir. 1989). The Court finds that the Treasury Letter is a new fact or legal authority that could not have been brought to its attention earlier, which warrants reconsideration of the Court's prior Opinion. ANALYSIS The Treasury Letter's Interpretation of the 1977 Regulation Is Controlling. The Treasury Letter is controlling unless plainly erroneous or inconsistent with the 1977 Regulation. "An agency's interpretation of its own regulations is `controlling' unless `plainly erroneous or inconsistent with' the regulations being interpreted." Long Island Care at Home, Ltd. v. Coke, 127 S. Ct. 2339, 2349 (2007) (quoting Auer v. Robbins, 519 U.S. 452, 561-62 (1997)). It is controlling even when an agency interprets its own regulation through an informal process, i.e. not through the normal notice and comment process, and when the agency does not seek to make public its interpretation. See Long Island Care, 127 S. Ct. at 2349 (finding controlling "an `Advisory Memorandum' issued only to internal Department [of Labor] personnel and which the Department appears to have written in response to this litigation"); Auer, 519 U.S. at 51 (finding controlling a Department of

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Labor's legal brief); Bassiri v. Xerox Corp., 463 F.3d 927, 930 (9th Cir. 2006) (finding controlling several Department of Labor opinion letters). Plaintiffs assert that the Treasury letter is plainly erroneous because the 1977 and 2005 Regulations are not "virtually identical," as stated in the Treasury Letter. This is incorrect. The few differences in the relevant portions of the regulations are primarily grammatical.4 More importantly, the point of the two regulations is exactly the same: the anti-cutback provision applies to a plan amendment as a whole, not to discrete components of a plan amendment viewed in isolation. See generally 70 Fed. Reg. 47109, 47110-11 (Aug. 12, 2005) (noting that "the rules in [the 1977 Regulation] generally have been carried over to [the 2005 Regulation], except to the extent needed to reflect statutory changes" not relevant here). Plaintiffs next argue that the Treasury Letter is not applicable because the net effect of the challenged amendments reduced accrued benefits. This argument, however, is not relevant to whether the Treasury Letter is controlling. Rather, it raises a question of fact not relevant here. Finally, Plaintiffs argue that the Treasury Letter is not controlling because, they assert, it resulted from Treasury employees' misconduct and bad faith. The Court rejects this assertion. There is a "strong presumption of agency regularity." La. Ass'n of Indep. Producers v. FERC, 958 F.2d 1101, 1111 (D.C. Cir. 1992). To overcome this presumption, a party must demonstrate a strong showing of bad faith or improper behavior by the agency. Advanced Comm'n Corp. v. FCC, 376 F.3d 1153, 1157-58 (D.C. Cir. 2004); Animal Def. Council v. Hodel, 840 F.2d 1432, 1437 (9th Cir. 1988) ("Normally there must be a strong

Here is a redlined version of the 1977 Regulation showing the changes made in 2005, with the omitted portions in strikeout characters and the added portions in bold characters: For purposes of determining whether or not any participant's accrued benefit is decreased, all of the amendments to the provisions of a plan affecting, directly or indirectly, the computation of accrued benefits are taken into account which are amended with the same adoption and effective dates shall be treated as one plan amendment. -6Case 2:04-cv-00424-ROS Document 481 Filed 08/12/2008 Page 6 of 9

4

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showing of bad faith or improper behavior before the court may inquire into the thought processes of administrative decisionmakers."); McCrary v. Gutierrez, 495 F. Supp. 2d 1038, 1043 (N.D. Cal. 2007) (agency regularity is presumed; party needs to make a strong showing of bad faith or improper behavior to overcome this presumption); Modesto Irrigation District v. Gutierrez, No. 1:06-cv-00453, 2007 WL 763370, at *11 (E.D. Cal. 2007) ("Actual subjective motivation of agency decisionmakers is immaterial as a matter of law--unless there is a showing of bad faith or improper behavior."). Mere speculation of bad behavior is not enough. Hercules, Inc. v. EPA, 598 F.2d 91, 123 (D.C. Cir. 1978). Plaintiffs have not made a strong showing of bad faith or improper behavior by Treasury employees. As Plaintiffs admit, "Treasury employees were free to meet with Honeywell and routinely confer with members of Congress and their aides and such communications are proper." (Doc. 427 at 14 n.13). In the context of informal agency action, where proceedings need not be conducted on the record, the Administrative Procedure Act ("APA") does not bar ex parte communications. Am. Airlines, Inc. v. Dep't of Transp., 202 F.3d 788, 798 n.4 (2000) ("[T]he APA ban on ex parte communications . . . does not apply hear, because it does not cover informal adjudications."); Portland Audubon Soc'y v. Endangered Species Comm., 984 F.2d 1534, 1541 n.15 (9th Cir. 1993) ("The APA does not bar ex parte communications in informal rulemaking proceedings."). Therefore, the Treasury Letter is controlling, and the 1977 Regulation requires the Court to examine the effects of plan amendments overall, rather than the impact of isolated provisions. II. The Treasury Letter's Interpretation of the 1977 Regulation Trumps Michael. Courts are not bound by prior decisions that fail to address authoritative agency guidance. See Webster v. Fall, 266 U.S. 507, 511 (1925) ("Questions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents"); Omohundro v. United States, 300 F.3d 1065, 1067 (9th Cir. 2002) (per curiam); Miller ex rel. NLRB v. Calirfornia Pac. Med. Ctr., 991 F.2d 536, 541 (9th Cir. 1993) ("It is a venerable principle that a court -7Case 2:04-cv-00424-ROS Document 481 Filed 08/12/2008 Page 7 of 9

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isn't bound by a prior decision that failed to consider an argument or an issue the later court finds persuasive."). In Omohundro, a prior circuit precedent, Miller v. United States, 38 F.3d 473 (9th Cir. 1994), construed a provision of the Internal Revenue Code, I.R.C. § 6511(a), without addressing a contrary on-point IRS Revenue Ruling. Even though the parties raised the IRS Revenue Ruling below, the district court applied the Miller court's interpretation of Section 6511(a). The Ninth Circuit reversed. As the Ninth Circuit explained, "[i]n deciding Miller, we did not consider [IRS] Revenue Ruling 76-511 which was directly on point and in effect at the time." 300 F.3d at 1067. The court then found the IRS Revenue Ruling to be entitled to judicial deference, and adopted it despite the court's prior contrary interpretation in Miller. Id. at 1067-69. Here, Michael did not address the 1977 Regulation, nor did the parties raise it. See 266 F.3d 1023; Appellant's Opening Br., available at 1999 WL 33625977 (Oct. 19, 1999); Appellee's Response Br., available at 1999 WL 33625978 (Dec. 6, 1999); Appellant's Reply Br., available at 2000 WL 33997751 (Jan. 6, 2000). Therefore, the Court is not precluded from applying the 1977 Regulation, as expressed in the Treasury Letter, which interpretation of the 1977 Regulation is controlling. CONCLUSION Defendants' motion to reconsider shall be granted. Plaintiffs' motion for summary judgment on their anti-cutback claim shall be denied. Defendants' corresponding motion to dismiss, however, will not be granted because, contrary to the Court's initial impression, Plaintiffs' have not conceded that the plan amendments increased their annual retirement benefit overall. This raises an issue of fact not properly decided on a motion to dismiss. The parties are reminded that discovery regarding the remaining claims shall be completed within 60 days after the Court's ruling on the Plaintiffs' pending motions to compel. (Doc. 468). No extensions shall be granted. Accordingly, IT IS ORDERED the Motion to Reconsider (Doc. 323) is GRANTED. -8Case 2:04-cv-00424-ROS Document 481 Filed 08/12/2008 Page 8 of 9

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IT IS FURTHER ORDERED the Court's March 31, 2005 Order (Doc. 71) and July 19, 2005 Opinion (Doc. 73) are VACATED to the extent that they are inconsistent with this opinion. IT IS FURTHER ORDERED Plaintiffs' Motion for Summary Judgment (Doc. 23) is DENIED as to its anti-cutback claims (incorporated in Count II of the Amended Complaint).

DATED this 12th day of August, 2008.

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