Free Response in Opposition to Motion - District Court of Arizona - Arizona

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SUSAN MARTIN (AZ#014226) DANIEL L. BONNETT (AZ#014127) JENNIFER KROLL (AZ#019859) MARTIN & BONNETT, P.L.L.C. 3300 N. Central Avenue, Suite 1720 Phoenix, Arizona 85012-2517 Telephone: (602) 240-6900 [email protected] [email protected] [email protected] Attorneys for Plaintiffs IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Barbara Allen; Richard Dippold; Melvin Jones; ) Donald McCarty; Richard Scates and Walter G. ) West, individually and on behalf of all others ) similarly situated, ) ) Plaintiffs, ) ) vs. ) ) Honeywell Retirement Earnings Plan; Honeywell ) Secured Benefit Plan; Plan Administrator of ) Honeywell Retirement Earnings Plan; and Plan ) Administrator of Honeywell Secured Benefit ) Plan, ) ) Defendants. ) ) No. CV04-0424 PHX ROS

PLAINTIFFS SUR-REPLY IN OPPOSITION TO DEFENDANTS MOTION FOR RECONSIDERATION

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Plaintiffs hereby address matters first raised in Defendants reply brief. (Doc. 368.) CHEVRON DEFERENCE DOES NOT APPLY TO THE 1977 REGULATION AND THIS COURT DID NOT PREDETERMINE THIS ISSUE Defendants argue for the first time that it is not their contention that the Solomon letter trumps Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001), under National Cable & Telecomms. Ass n v. Brand X Internet Servs., 545 U.S. 967 (2005). Instead, they now claim that it is the 1977 regulation that trumps Michael and that the Court s ruling that the 2005 regulations were entitled to Chevron deference means that the 1977 regulations are also entitled to Chevron deference. (Defs. Br. pp. 4, 5.) The Court s ruling that Chevron deference applied to the 2005 regulations is not a fortiori that deference should be accorded to the 1977 regulation. The 1977 regulation are not entitled to Chevron deference. Chevron deference depends, in the first instance, on whether the regulation is interpretive or legislative. Interpretive rules are not entitled to deference under Chevron and therefore cannot trump conflicting circuit court authority under Brand X. See Long Island Care at Home, Ltd. v. Coke, 127 S.Ct. 2339, 2349-50 (2007) ( interpretive regulation, a kind of regulation that may be used, not to fill a statutory gap, but simply to describe an agency's view of what a statute means....may persuade a reviewing court, Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944), but will not necessarily bind a reviewing court. Cf. Mead, 533 U.S., at 232 ( interpretive rules ... enjoy no Chevron status as a class (emphasis in original)). In Gonzales v. Oregon, 546 U.S. 243, 255-56 (2006), the Supreme Court stated: Deference in accordance with Chevron, however, is warranted only when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority. United States v. Mead Corp., 533 U.S. 218, 226-227, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). Otherwise, the interpretation is entitled to respect only to the extent it has the power to persuade. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944). See also S.D. Warren Co. v. Maine Bd. of Environmental Protection, 126 S.Ct. 1843, 184849 (2006) ( Warren is, of course, entirely correct in cautioning us that because neither the

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EPA nor FERC has formally settled the definition, or even set out agency reasoning, these expressions of agency understanding do not command deference from this Court . ) (citing Gonzales v. Oregon, 126 S.Ct. at 908 ( Chevron deference... is not accorded merely because the statute is ambiguous and an administrative official is involved ); Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944)). With regard to the legislative/interpretive issue, it appears that the IRS has already taken the position and the Supreme Court has already found that the 1977 regulation was an interpretive rule. In Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981), the Supreme Court reviewed a different section of the 1977 regulation, 26 C.F.R. § 1.411(a)-4(a), which, like the section at issue here, was also issued under Section 411 of the Internal Revenue Code. The Supreme Court noted: The Regulation interprets 26 U.S.C. § 411, the section of the Internal Revenue Code which replicates for IRS purposes ERISA's nonforfeiture provision, 29 U.S.C. § 1053(a). 451 U.S. at 517-18. The court, noting that the regulation interprets 26 U.S.C. § 411, stated: the Government here represents that the Treasury Regulation is an interpretive rule. Brief for United States as Amicus Curiae 19, n.12. Because an agency empowered to enact legislative rules may choose to issue nonlegislative statements, we review this Treasury Regulation under the scrutiny applicable to interpretive rules. ... Id. at 517-18. In the referenced brief, the United States, as amicus curiae, asserted that the regulation is in our view interpretive for it explains and construes statutory language (26 U.S.C. 401(a), 411) rather than promulgates rules pursuant to a general congressional authorization containing no guidelines. 1981 WL 389754, at * 19 n. 12. Alternatively, if the Court were to find that the 1977 regulation somehow assumed the status of a legislative rule, it would not be entitled to Chevron deference because the notice and opportunity to comment when the 1977 regulation was proposed in 1975 would have been legally deficient under the APA. There was no notice prior to the 1977 regulation s adoption that any form of a purported net effect rule was ever under consideration. See 1975 proposed regulation, which did not include the sentence Defendants contend embodies

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an alleged net effect rule in the 1977 regulation. The 1977 regulation was adopted without hearing or further notice. 40 Fed. Reg. 51445, 51466 (1975); 42 Fed. Reg. 42318, 42340 (1977). To the extent that the Solomon letter purports to imbue the 1977 regulation with all of the rights, duties and obligations imposed by the 2005 regulations, the notice and comment deficiency invalidates the 1977 regulation. See Kristen E. Hickman, Coloring Outside the Lines: Examining Treasury's (Lack Of) Compliance with Administrative Procedure Act Rulemaking Requirements, 82 Notre Dame L. Rev. 1727, 1795, 1799-1800, 1806 (2007) ( Regardless of why Treasury regularly fails to follow APA rulemaking requirements, the implications of that failure are substantial. One obvious consequence is that Treasury regulations promulgated inconsistently with the requirements of APA section 553(b) are susceptible to invalidation by the courts on that basis. ). See also Long Island Care at Home, Ltd. v. Coke, 127 S.Ct. 2339, 2349-50 (2007). See Safe Air for Everyone v. United States EPA, 488 F.3d 1088, 1097-98 (9th Cir. 2007) (concluding that APA is violated where interested parties would not have the meaningful opportunity to comment because they would have no way of knowing what was actually proposed); National Resources Defense Council v. EPA, 279 F.3d 1180, 1186 (9th Cir. 2002) (noting that a final rule which departs from a proposed rule must be a logical outgrowth of the proposed rule....The essential inquiry focuses on whether interested parties reasonably could have anticipated the final rulemaking... ) (citations omitted). In short, Defendants motion for reconsideration made no claim that this Court, in approving the 2005 regulations, somehow predetermined that the 1977 regulation was entitled to Chevron deference. When Plaintiffs pointed out that the Solomon letter was not entitled to deference, Defendants first made this argument on reply. Defendants argument is without merit because, as a matter of law, no Chevron deference can be accorded to the regulation if it is an interpretive rule, and if it is merely such, Brand X has no application. If it is a legislative rule, it would represent a significant violation of the notice and comment requirements of the APA and would fail on that ground as well.

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DEFENDANTS ABOUT-FACE ON THE BASIS FOR THEIR NET EFFECT ARGUMENT DOES NOT DEFEAT PLAINTIFFS RIGHT TO SUMMARY JUDGMENT On reply, Defendants perform a complete about-face by abandoning the rationale they have advanced throughout this case for why they claimed the amendments were not unlawful and by asserting for the first time, (almost four years into this litigation, and in reply on a second motion for reconsideration), an entirely new and statutorily unauthorized argument concerning why the net effect of the challenged amendments allegedly increased Plaintiffs accrued benefits.1 Because Defendants failed to support the basis for their claim that application of the net effect analysis merited judgment in their favor, Plaintiffs

understandably endeavored to address the issues that Defendants had previously raised and explain why those arguments would not constitute increases cognizable under a net effect analysis. On reply, Defendants abandoned their previous arguments, claiming that Plaintiffs discussion of those arguments was puzzling. (Defs. Br. p. 3.) Defendants entirely new argument, which attempts to demonstrate an overall planwide increase, presents a view of accrued benefits that is completely at odds with the statute, case law and the regulations. Defendants actuary Kurt Denlinger s novel claim that there was a benefit increase is now based on the unsupported assertion that the Court should look at the alleged plan-wide aggregate net dollar value of benefits paid by the Signal Plan twenty-three years after the amendment and compare that to the aggregate value of plan-wide benefits on the date of the amendment, divorced from analysis of the accrued benefits of any

On summary judgment, Defendants relied on arguments that are irrelevant under the net effect analysis including the argument that the insurance company s interest rate on the Guaranteed Annuity Contract for the Secured Benefit Account and the distribution of surplus assets in the Garrett Severance Plan were evidence of a benefit increase. (See, e.g., Defendants Motion to Dismiss, Doc. 15, p. 6) (claiming participants had a benefit increase because they enjoyed an immediate and substantial increase in the rate of return they received on their Secured Benefit Accounts and that a one time allocation was made to Secured Benefit Accounts). These changes occurred under the separate Garrett Severance Plan and had different adoption and effective dates that had nothing to do with the challenged February 4, 1984 Signal Retirement Plan amendments.
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participant. The absurdity of Defendants new theory is illustrated by the following: 1) 2) Participant A and Participant B each have $1000 monthly benefit; The Plan is amended to take away $500 from Participant A and give $600 to Participant B;

Defendants conclusion: The net effect of the plan amendments is to increase benefits in the amount of $100 per month. (Denlinger Decl., Exh. 1 to Doc. 368, ¶ 6.) Defendants do not even attempt to ground this latest argument under the cloak of law, nor could they. ERISA Section 204(g) on its face requires a participant by participant analysis to determine whether accrued benefits have been decreased: (1) The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan, other than an amendment described in section 302(c)(8) or 4281. 29 U.S.C. § 1054(g). Meagher v. International Ass'n of Machinists and Aerospace Workers Pension Plan, 856 F.2d 1418, 1420 (9th Cir. 1988) ( Under the plain language of section [ERISA Section 302(c)(8)] No amendment ... which reduces the accrued benefits of any participant shall take effect unless the Secretary approves it. ) (emphasis supplied). Not surprisingly, the 2005 regulations that Defendants now claim are virtually identical to the 1977 regulation completely debunk Defendants newly proffered benefit increase argument. See 26 C.F.R. § 1.411(d)-3(a) ( General Rule... Under section 411(d)(6)(A), a plan is not a qualified plan (and a trust forming a part of such plan is not a qualified trust) if a plan amendment decreases the accrued benefit of any plan participant... )(emphasis supplied.). The first example contained in the 2005 regulations shows a situation where Participant M s benefits are increased by a plan amendment and Participant N s benefits are decreased and the conclusion is that: While the plan amendment increases the accrued benefit of Participant M, the plan amendment fails to satisfy the requirements of section 411(d)(6)(A) because the amendment decreases the accrued benefit of Participant N below the level of the accrued benefit of Participant N immediately before the applicable amendment date. 26 C.F.R. § 1.411(d)-3(a)(4). Defendants latest argument for a purported benefit increase is coupled with an
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equally flawed and unsupportable assertion, also made for the first time in their reply, that [u]nder the Signal Plan (as under the Garrett Plan), a participant s accrued benefits cannot even be calculated before termination of the participant s active employment. (Doc. 368, p. 11; Doc. 368 (emphasis in original), Exhibit 1, Denlinger Declaration, at ¶ 8 stating that the Plan s terms preclude the determination of a participant s accrued benefits until termination of employment.) This latter assertion would, if credited, upend the statute and topple thirty years of judicial interpretations of ERISA. Almost immediately following passage of ERISA, the Internal Revenue Service issued the following guidance regarding accrued benefits under a defined benefit plan: IRC section 411(a)(7)(A)(i) provides, in part, that in the case of a defined benefit plan, the accrued benefit must be expressed in the form of an annual benefit commencing at normal retirement age. The plan must provide a formula under which each participant's actual accrued benefit under the plan can be determined in each plan year. Internal Revenue Service T.I.R. No. 1403 (Sept. 17, 1975) (quoted in Shaw v. International Ass'n of Machinists and Aerospace Workers Pension Plan, 563 F.Supp. 653, 655

(D.C.Cal.1983), affirmed 750 F.2d 1458 (9th Cir. 1985)). In Hoover v. Cumberland, Maryland Area Teamsters Pension Fund, 756 F.2d 977, 981-82 (3d Cir. 1985), the court stated: An accrued benefit, then, represents the interest in a retirement benefit that a participant earns each year, and a plan must state a method or formula for determining a participant's annual accrual rate. This requirement enables a worker to mark his or her progress toward the full pension benefit due at retirement. Although Defendants assert that Plaintiffs expert Mr. Poulin s declaration errs by calculating benefits as if each participant terminated employment on January 1, 1984, that is precisely how accrued benefits are required to be measured. In Ashenbaugh v. Crucible Inc., 1975 Salaried Retirement Plan, 854 F.2d 1516, 1524 (1988), the court emphasized: [A]n employee's accrued benefit at any particular point in time is what a fully vested employee would be entitled to receive under the terms of the plan if employment ceased at that

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particular point in time. McDonald v. Pension Plan of NYSA-ILA Pension Trust Fund, 153 F.Supp.2d 268, 272 (S.D.N.Y. 2001) ( In contrast, an employee's "accrued" benefit refers to the portion of his normal retirement benefit that the employee has earned at any given time. 29 U.S.C. § 1002(23)(A). ) (affirmed in relevant part, 320 F.3d 151 (2d Cir. 2003). Defendants assertion that accrued benefits cannot be calculated until someone terminates employment is also in obvious conflict with the very regulations on which Defendants rely. Under 26 C.F.R. § 1.411(d)-3(a)(i), the 2005 regulations could not be more clear that the protection of section 411(d)(6) applies to a participant s entire accrued benefit under the plan as of the applicable amendment date... See also id.(a)(2)(ii) ( An amendment will violate Section 411(d)(6) if for any participant, the net effect is to decrease participants accrued benefit as of that applicable amendment date. );10 H.R. Conf. Rep. 93-1280 P. 286. P.L. 93-406 (Aug. 12, 1974) (whether an amendment reduced accrued benefits is determined as of the beginning of the first plan year to which the amendment applies). Plaintiffs have not been afforded an opportunity to respond to Defendants arguments regarding Section 4.10(c)(ii) of the Signal Retirement Plan as set forth in Defendants reply brief. Defendants arguments raised on reply ignore that this Court has already ruled that Defendants have no discretion to interpret the terms of the 1984 Signal Plan.2 Aside from attempting to reargue the standard of review, Defendants offer a new set of arguments without even purporting to argue that Section 4.10(c)(ii) of the Signal Retirement Plan says that accrued benefits as of December 31, 1983 cannot be reduced. That would have been a fairly simple sentence to include in the Plan. In fact, under the 2005 regulations, any savings provision is required to guarantee that a participants benefits cannot be reduced below the benefits existing on the applicable amendment date, which under the regulations would be February 4, 1984, the later of the adoption or the effective date. A plain reading of Section

See Allen v. Honeywell Retirement Earnings Plan, 382 F.Supp.2d 1139, 1162 (D.Ariz. 2005) ( This case concerns pension benefit plans under which Plaintiffs' benefits had vested and pursuant to which the plan administrator had no discretionary authority. ).
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4.10(c)(ii) does not guarantee that Plaintiffs benefits cannot be reduced by an amendment of the plan, and in fact, they were reduced by an amendment of the plan made on February 4, 1984. While Defendants argue that the Signal Plan was first applicable to Garrett Plan participants on January 1, 1984, Section 4.10(c)(ii) refers not to the applicable date of the plan provisions but rather to the effective date of the merger and applies on its face only to plans that merged effective January 1, 1984. Here, there can be no dispute that the Signal and Garrett Plans were merged effective December 31, 1983: Effective December 31,

1983, this Plan shall be merged with and into The Signal Companies, Inc. Retirement Plan (the Signal Retirement Plan ). (Doc. 16, Exh. C, at HW000304.) Nothing in Section 4.10(c)(ii) provides that the benefits of participants under the Garrett Plan as of December 31, 1983 cannot be reduced by an amendment of the Plan. Defendants argument that a promise that benefits under the Signal Plan on December 31, 1983 would be the same as the Garrett Plan benefits on December 31, 1983 is somehow equivalent to a promise not to reduce those benefits by amendments after December 31, 1983 is unsupported by the language and would require a wholesale re-writing of Section 4.10(c)(ii). The logical meaning of the provision is simply to provide an opening or closing balance for participants under plans being merged. For example, Amendment IX of the Garrett Plan states that: Subsequent to such merger, all benefits which are to be paid from this Plan shall be paid under the Signal Retirement Plan solely in accordance with the provisions of the Signal Retirement Plan. Upon such merger, no Participant in this Plan or any former Participant shall be entitled to any rights or benefits under this Plan except to the extent expressly provided under the Signal Retirement Plan. (Doc. 16, Exh. C, at HW000304 ¶ 4. See also Defendants statement of facts in opposition to Plaintiffs Motion for Summary Judgment, Doc. ¶ 4.) The obvious import of Section 4.10(c)(ii) (if an explanation beyond its plain terms is appropriate) is to provide an opening balance under the Signal Plan because the merged plans were no longer operative. This is a
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far cry from a provision that guarantees that benefits under the Signal Plan cannot be reduced by amendments made in the future. Section 4.10(c)(ii) merely provides a snapshot in time of benefits under a plan that ceased to be operative and was being replaced by the Signal Plan. It is not a guarantee by the Signal Plan of no harm. Defendants' unsupported

assertions regarding the intent of the Plan cannot overcome the clear language of the plan. Allen v. Honeywell Retirement Earnings Plan, 382 F.Supp.2d 1139, 1163 (D.Ariz. 2005) (citing McGee v. Equicor-Equitable HCA, Corp., 953 F.2d 1192, 1202 (10th Cir.1992) (holding that words cannot be written into an ERISA plan imparting an intent wholly unexpressed when it was executed)). Saffle v. Sierra Pac. Power Co. Bargaining Unit Long Term Disability Income Plan, 85 F.3d 455, 460 (9th Cir. 1996); See also Canseco v. Construction Laborers Pension Trust, 93 F.3d 600, 606 (9th Cir. 1996). While Defendants do not contend that Section 4.10(c)(ii) applies to early retirement benefits, disability benefits, optional retirement benefits and statutory joint and survivor annuities, they argue nevertheless on reply that Section 4.10(c)(ii) still provides a defense to the unlawful reduction in accrued benefits because the challenged amendments amended provisions of Section 4.2 (normal retirement benefits).3 However, Defendants unlawful amendments reduced class members early retirement benefits, disability benefits and optional forms of benefit alike.4 The allegedly virtually identical regulations make no

allowance for a savings provision that applies only to certain forms of protected accrued Contrary to Defendants assertions on reply, the record on summary judgment contained no evidence of intent or interpretation. Defendants statement of facts contained three paragraphs under the heading The Plan Administrator s Consistent Interpretation, none of which addressed Section 4.10(c)(ii) and all of which were stricken by the Court. (Doc. 72.) Defendants arguments about the meaning of the provision is also contradicted by the facts that Defendants undertook no procedures to ever calculate class members benefits under the Garrett Plan and that approximately 100 people are receiving or scheduled to receive lesser benefits at retirement. (Doc. 353, ¶ 18-19.) There can be no question that the amendments impact those who retired early (indeed the change in the SBA interest rate only affects those who leave employment prior to age 65).
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benefits and not to other accrued benefits. For a savings provision to have any merit, it must protect all accrued benefits, which Section 4.10(c)(ii) indisputably does not. Respectfully submitted this 22nd day of January, 2008. MARTIN & BONNETT, P.L.L.C. By: s/Susan Martin Susan Martin Daniel L. Bonnett Jennifer L. Kroll 3300 North Central Avenue Suite 1720 Phoenix, AZ 85012-2517 Attorneys for Plaintiffs

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CERTIFICATE OF SERVICE I hereby certify that on January 22, 2008, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: David B. Rosenbaum Dawn L. Dauphine Osborn Maledon, P.A. 2929 North Central Ave., Suite 2100 Phoenix, AZ 85012-2794 Michael Banks Azeez Hayne Morgan Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Howard Shapiro Proskauer Rose LLP 909 Poydras Street, Suite 1100 New Orleans, LA 70112 Amy Covert Proskauer Rose LLP One Newark Center, 18th Floor Newark , NJ 07102-5211 Christopher Landau Eleanor R. Barrett Craig Primis Kirkland & Ellis LLP 655 Fifteenth Street, N.W. Washington, D.C. 20005 Attorneys for the Defendants

s/ S. Martin

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