Free Reply in Support of Motion - District Court of Arizona - Arizona

1 2 3 4 5 6

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

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ) ) ) ) ) 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. ) ) Barbara Allen, Richard Dippold, Melvin Jones, Donald McCarty, Richard Scates and Walter G. West, individually and on behalf of all others similarly situated, No. CV04-0424 PHX ROS REPLY IN FURTHER SUPPORT OF PLAINTIFFS MOTION TO SUPPLEMENT OPPOSITION TO DEFENDANTS MOTION FOR RECONSIDERATION AND MOTION TO SUPPLEMENT MOTION TO RECONSIDER ORDER RE: DISCOVERY DISPUTE IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 1 of 7

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

Plaintiffs hereby reply to Defendants brief opposing Plaintiffs motion to supplement. Defendants make no claim of prejudice in permitting Plaintiffs to supplement, nor could they, as the motion was filed prior to close of briefing on Defendants motion for reconsideration. The Treasury documents show that the Solomon letter is a post hoc rationalization contrived for this litigation
1

and provides no basis under National Cable v. Telecomm.

Ass n v. Brand X Internet Serv., 545 U.S. 967 (2005), for the Court to reconsider its partial summary judgment order. Contrary to Defendants arguments, the Treasury documents are relevant because they establish that Auer v. Robbins, 519 U.S. 452 (1997) deference does not apply. In Auer, the Supreme Court was careful to note that the agency position advanced there was in no sense a post hoc rationalization. 519 U.S. at 462. The Supreme Court also made clear that [t]here simply is no reason to suspect that the interpretation does not reflect the agency's fair and considered judgment on the matter in question. Id.2 The documents from the Treasury Department are relevant because they show that

Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 24 (2004) (Scalia, J. concurring). See Bowen v. Georgetown University Hosp., 488 U.S. 204, 213 (1988) (refusing to defer to a post hoc agency rule: Deference to what appears to be nothing more than an agency's convenient litigating position would be entirely inappropriate. ). See also United States v. Mead Corp., 533 U.S. 218, 228 (2001) (degree of deference accorded to an agency opinion will vary with circumstances...and will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control. ) (citations omitted). Likewise, in Bassiri v. Xerox Corp., 463 F.3d 927 (9th Cir. 2006), which applied Auer, there was no suggestion that the interpretation involved a post hoc rationalization of prior agency action or that the agency interpretation under review lacked fair and reasoned consideration. See also Oregon Natural Resources Council Fund v. Brong, 492 F.3d 1120, 1125 (9th Cir. 2007) (agency interpretation does not control if inconsistent with regulation); Public Citizen, Inc. v. Mineta, 343 F.3d 1159, 1166-67 (9th Cir. 2003) ( While we ordinarily defer to an agency s interpretation of its own regulations, we need not accord any deference to an unreasonable construction that does not conform with the wording and purpose of the regulation ). 1
2

1

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 2 of 7

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

the Solomon letter was a post hoc rationalization and because they also effectively nullify any claim that the Solomon letter represents the agency s fair and considered judgment on the issue raised by Defendants motion for reconsideration. Contrary to Defendants contentions that the materials Plaintiffs seek to introduce highlight...consistent support for Honeywell s reading of the 1977 Regulation and that it is clear...that the Treasury Department personnel involved all reached the conclusion set forth in the Treasury Letter that [the] 1977 Regulation has the same import as the 2005 Regulation with respect to the operation of ERISA s anti-cutback rule, the Treasury documents establish just the opposite-that the draft of the Solomon letter circulated among the agency employees contained absolutely no mention of the 1977 regulation whatsoever. (Doc. 363, Exh. A, at 905TREAS00019, 25-28, 30.) The documents clearly show that the single sentence referencing the 1977 regulation in the Solomon letter appears as a mere afterthought. Each of the bullet-pointed quotes reprinted on page 2 of Defendants brief discuss a draft of the Solomon letter that makes no mention of the 1977 regulation at all. (Id.) Considering the vast differences between the 1977 and 2005 regulations, it is not surprising that the drafts make no mention of the 1977 regulation. The 1977 regulation on its face contains no net effect rule. See, e.g., Depenbrock v. Cigna Corp., 389 F.3d 78, 85 (3d Cir. 2004) (rejecting the claim that the 1977 regulation at issue here had the same import as the then-proposed Treasury regulations). The Treasury documents support this conclusion: Honeywell (as well as Congressional staff) has met with us and asked that we amend the regs to make them retroactive with respect to the simultaneous amendment issue and we have indicated that is a non-starter. (Doc. 363, Exh. A, at 957-TREAS00035.) The non-starter conclusion is an obvious recognition that Honeywell s request would violate 26 U.S.C. § 7805. It is also likely the result of the absence of any support for the proposition that the 1977 regulation meant the same thing as the 2005 regulations, and that a contrary ruling

2

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 3 of 7

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

presents both due process and Administrative Procedure Act problems.3

The 2005

regulations care in delineating their prospective application and the Solomon letter s expressed concern with 26 U.S.C. § 7805(b) would have been completely unnecessary and totally nonsensical if the very same rules already existed under the 1977 regulation. In the Treasury documents quoted by Defendants, the Treasury and IRS employees explicitly confirm that at the time the 2005 regulations were adopted, Michael v. Riverside Cement was the applicable law and that the 2005 regulations were Treasury s prospective response to that ruling. IRS Assistant Chief Counsel (Employee Benefits) Tawshunsky s use of the subjunctive tense and adjective referring to the future in his email dated July 24, 2007 makes clear that prior to the 2005 regulations, there was no net effect rule: I agree with including the sentence.[4] First, I think it does clarify what we
3

There was no notice prior to the 1977 regulation s adoption that any form of a purported net effect rule was under consideration. See 1975 proposed regulation, which did not include the sentence Defendants contend embodies the alleged net effect rule in the 1977 regulation, which was adopted without hearing or further notice. 40 Fed. Reg. 51445, 51466 (1975); 42 Fed. Reg. 42318, 42340 (1977). See Safe Air for Everyone v. United States EPA, 488 F.3d 1088, 1097-98 (9th Cir. 2007) (concluding that APA was violated where interested parties would not have the meaningful opportunity to comment because they had 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). See also Southeast Alaska Conservation Counsel v. U. S. Army Corp of Engineers, 486 F.3d 638, 648-49 (9th Cir. 2007); Alaska Trojan Partnership v. Guttierriez, 425 F.3d 620, 631-32 (9th Cir. 2005) ( RAM's interpretation suffers a second flaw: it is inconsistent with the intent of the LLP regulations as expressed by the Secretary at the time of final promulgation. ); Perez-Gonzalez v. Ashcroft, 379 F.3d 783, 794 (9th Cir. 2004) ( We decline to read the regulations in such an illogical manner. In the absence of a more complete agency elaboration of how its interpretation of § 212(a)(9) can be reconciled with its own regulations, we must defer to the regulations rather than to the informal guidance memorandum. ) (citations omitted). The reference to the sentence referred to in the quoted passage is to the sentence that Mr. Tawshunsky and other employees were asked to comment on, which stated: 3
4

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 4 of 7

1 2 3 4

would have said the law to be prior to the reg. Second, I would virtually never challenge a taxpayer taking a position that is based on an interpretation of the statute that we adopt in subsequent guidance....By taking the position in the reg, we are saying that, in our view, this is the best interpretation of the statute. (Doc. 363, Exh. A, at HW at 905-TREAS00034 (emphasis supplied).) There would have

5 been no reason to seek the blessing of IRS employees including Mr. Tawshunsky if the 1977 6 regulation already contained the same rule of law. Treasury s Mr. Reeder s request for 7 permission from the IRS to make the statement about what the IRS would or would not 8 challenge would have been entirely unnecessary if the 1977 regulation already contained the 9 net effect rule argued for by Defendants. (Doc. 363, Exh. A, at 905-TREAS00029.) 10 In sum, the Treasury documents support Plaintiffs position that the Solomon letter s 11 attempt to claim that the 1977 and 2005 regulations are identical is a post hoc rationalization 12 not entitled to any respect. The documents show that Honeywell and others efforts were 13 properly rejected in the 2005 notice and comment process as a non starter, and that the 14 letter is nothing but a contrived attempt at an end run around the 2005 regulations and 26 15 U.S.C. § 7805. The Solomon letter is an affront to notions of fairness and reasoned 16 consideration, is unsupported by the 1977 regulation and is also in conflict with the 2005 17 regulations. By authoritatively and unambiguously stating in the 2005 regulations that they 18 are prospective only and by recognizing Michael v. Riverside Cement as an applicable 19 authority, 20 (Doc. 138, p. 12.) To the extent the letter purports to offer an interpretation the agency 21 declined to make despite specific requests for such an interpretation during the notice and 22 23 24 25 26 27 28 Thus, the IRS would not challenge an amendment that would otherwise involve a prohibited cutback if it has the same applicable effective date as another amendment and the net effect of the two amendments does not involve a prohibited cutback, even if the issue arose prior to the effective date of the final regulation. (Doc. 363, Email dated July 18, 2007, Exh. A, at 905-TREAS00034.) 4 [t]here is nothing else Treasury could have said to make its intentions clearer.

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 5 of 7

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

comment period, it is neither authoritative nor persuasive. See Central Laborers' Pension Fund v. Heinz, 541 U.S. 739 (2004) (citation omitted) (unreasoned statement cannot trump a formal regulation with the procedural history necessary to take on the force of law ). As the Supreme Court observed in Christensen v. Harris County, 529 U.S. 576, 588 (2000): Auer deference is warranted only when the language of the regulation is ambiguous ... To defer to the agency's position would be to permit the agency under the guise of interpreting the regulation, to create de facto a new regulation. CONCLUSION For the foregoing reasons, Plaintiffs respectfully request that their motion to supplement be granted. Should the Court wish to receive additional briefing on the impact of this evidence on Plaintiffs opposition to Defendants November 16, 2007 motion for reconsideration, and on Plaintiffs Motion to Reconsider Order Re: Discovery Dispute, Plaintiffs request an opportunity to submit a supplemental brief or to file revised briefs in substitution for the briefs that were submitted.

Respectfully submitted this 17th 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 (602) 240-6900 Attorneys for Plaintiffs

5

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 6 of 7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 s/J. Kroll 20 21 22 23 24 25 26 27 28

CERTIFICATE OF SERVICE I hereby certify that on January 17, 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

6

Case 2:04-cv-00424-ROS

Document 377

Filed 01/17/2008

Page 7 of 7