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The National Retirement Fund v. Metz Culinary Management, Inc.

United States District Court, S.D. New York

March 27, 2017

THE NATIONAL RETIREMENT FUND and THE BOARD OF TRUSTEES OF THE NATIONAL RETIREMENT FUND, each on behalf of the Legacy Plan of the National Retirement Fund, Plaintiffs,
v.
METZ CULINARY MANAGEMENT, INC., Defendant.

          MEMORANDUM OPINION & ORDER

          VALERIE CAPRONI, United States District Judge.

         Plaintiffs, the National Retirement Fund and the Board of Trustees of the National Retirement Fund (the “Trustees, ” and together with the National Retirement Fund, the “Fund”), each on behalf of the Legacy Plan of the National Retirement Fund (“the “Plan”), bring this action against the Defendant, Metz Culinary Management, Inc. (“Metz”), pursuant to Sections 4221(b)(2) and 4301 of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. §§ 1401(b)(2), 1451, to modify or vacate the arbitration award issued by Arbitrator Ira F. Jaffe in Metz Culinary Management, Inc. and National Retirement Fund, American Arbitration Association (“AAA”) Case No. 01-14-0002-2075 (the “Arbitration”) on March 28, 2016 (the “Final Award”). Metz has cross moved to confirm the Final Award. For the following reasons, the Fund's motion to vacate the Final Award is GRANTED, and Metz's motion to confirm the Final Award is DENIED.

         BACKGROUND[1]

         I. Statutory Background Regarding Withdrawal Liability

         Among its several goals, ERISA “was designed to ensure that employees and their beneficiaries would not be deprived of anticipated retirement benefits by the termination of pension plans before sufficient funds have been accumulated in the plans.” Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 214 (1986) (quotation marks and citation omitted). “One type of pension plan regulated by ERISA is the multiemployer pension plan, in which multiple employers pool contributions into a single fund that pays benefits to covered retirees who spent a certain amount of time working for one or more of the contributing employers.” Trs. of Local 138 Pension Tr. Fund v. F.W. Honerkamp Co. Inc., 692 F.3d 127, 129 (2d Cir. 2012). Although multiemployer plans have many benefits, such as allowing employers to share the costs and risks inherent in the administration of pension plans, id.,

[a] key problem of ongoing multiemployer plans, especially in declining industries, is the problem of employer withdrawal. Employer withdrawals reduce a plan's contribution base. This pushes the contribution rate for remaining employers to higher and higher levels in order to fund past service liabilities, including liabilities generated by employers no longer participating in the plan, so-called inherited liabilities. The rising costs may encourage-or force-further withdrawals, thereby increasing the inherited liabilities to be funded by an ever-decreasing contribution base. This vicious downward spiral may continue until it is no longer reasonable or possible for the pension plan to continue.

Id. (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 722 n. 2 (1984)).

         In order to address this problem, Congress amended ERISA by enacting the Multiemployer Pension Plan Amendments Act of 1980 (“the MPPAA), Pub. L. No. 96-364, 94 Stat. 1208 (codified as amended in scattered sections of Titles 26 and 29 of the United States Code). Id. Pursuant to the MPPAA, “[i]f an employer withdraws from a multiemployer plan . . . the employer is liable to the plan in the amount determined under this part to be the withdrawal liability.” 29 U.S.C. § 1381(a). “Withdrawal liability is the withdrawing employer's proportionate share of the pension plan's unfunded vested benefits.” Trs. of Local 138 Pension Tr. Fund v. F.W. Honerkamp Co. Inc., 692 F.3d at 130; see also 29 U.S.C. §§ 1381, 1391. Unfunded vested benefits are “calculated as the difference between the present value of vested benefits and the current value of the plan's assets.” Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. at 725 (citing 29 U.S.C. §§ 1381, 1391). In other words, unfunded vested benefits reflect a plan's underfunding in light of its commitment to pay benefits to plan participants in the future. The calculation of an employer's withdrawal liability thus requires the allocation of a plan's unfunded vested benefits among the plan's contributing employers. Combs v. Classic Coal Corp., 931 F.2d 96, 98 (D.C. Cir. 1991). Section 4211 of ERISA allows a plan to choose one of four identified allocation methods or to develop its own method, subject to approval by the Pension Benefit Guaranty Corporation (“PBGC”). 29 U.S.C. § 1391. Withdrawal liability is required to be calculated “not as of the day of withdrawal, but as of the last day of the plan year preceding the year during which the employer withdrew.” Milwaukee Brewery Workers' Pension Plan v. Joseph Schlitz Brewing Co., 513 U.S. 414, 418 (1995) (citing 29 U.S.C. §§ 1391(b)(2)(A)(ii), (b)(2)(E)(i), (c)(2)(C)(i), (c)(3)(A), and (c)(4)(A)). The “last day of the plan year preceding the year during which the employer withdrew” will hereafter be referred to as “the Measurement Date.”

         In order to determine a withdrawing employer's withdrawal liability, the plan's actuary must first calculate the plan's unfunded vested benefits; to do so, the actuary must estimate the present value of the plan's vested benefits. Combs v. Classic Coal Corp., 931 F.2d at 98. The actuary makes certain assumptions in order to estimate the present value of the plan's vested benefits, including the interest rate necessary to discount the liability for future benefit payments. Id; Masters, Mates & Pilots Pension Plan v. USX Corp., 900 F.2d 727, 733 (4th Cir. 1990) (explaining that to “calculate the present value of the vested benefits that are to be paid out in the future, ” “[a]n interest rate, or rate of return, is applied in order to determine what present amount of investment will yield the future amounts required to satisfy those vested benefits”); In re HNRC Dissolution Co., 396 B.R. 461, 473 (B.A.P. 6th Cir. 2008) (“The calculation of the ‘present value' of vested benefits also requires the plan's actuary to discount the future stream of benefit payments at an appropriate interest.”). Although there are many actuarial assumptions necessary to calculate withdrawal liability, only the interest rate assumption is at issue in this case. Relevant to this case, “[i]ncreasing the interest rate assumption decreases the employer's withdrawal liability”-and vice versa. Combs v. Classic Coal Corp., 931 F.2d at 98; see also Masters, Mates & Pilots Pension Plan v. USX Corp., 900 F.2d at 733. ERISA does not dictate the interest rate. Instead, ERISA Section 4213(a) requires withdrawal liability to be based on “reasonable” actuarial assumptions and methods, “taking into account the experience of the plan and reasonable expectations, ” and to be “the actuary's best estimate of anticipated experience under the plan.” 29 U.S.C. § 1393(a).[2]

         II. Factual Background

         A. The Parties

         The Fund is a Taft-Harley trust fund, established and maintained pursuant to Section 302(c)(5) of the Labor Management Relations Act, 29 U.S.C. § 186(c)(5), with trustees equally divided between labor organizations currently and formerly affiliated with UNITED HERE and Workers United and employers that contribute to the Fund. Am. Compl. ¶ 4 (Dkt. 8). The Plan is a multiemployer plan within the meaning of Section 3(37) of ERISA, 29 U.S.C. § 1002(37). Id. ¶ 6.[3] Metz participated in the Fund as a contributing employer, meaning it made contributions to the Fund to provide pensions to its employees in accordance with the governing collective bargaining agreements. Answer to Am Compl. Ex. B (“Stip.”) ¶ 2 (Dkt. 16-1).[4]

         B. The Fund's Selection of an Interest Rate Assumption for Withdrawal Liability for Plan Years 2013 and 2014

         The Fund's plan year begins on January 1 and ends on December 31 (the “Plan Year”). Am. Compl. ¶ 12. Accordingly, under the Plan, the Measurement Date for withdrawal liability for a given year is December 31 of the prior year. As of December 31, 2012, Buck Consultants (“Buck”) was, and had been for years, the Fund's actuary. Id. ¶¶ 14-15; Stip. ¶ 7. Buck's interest rate assumption for the 2013 Plan Year for calculating withdrawal liability was 7.25%. Am. Compl. ¶ 15. Thus, the withdrawal liability for any employer that withdrew from the Plan during 2013 would be calculated using a discount rate of 7.25%.

         In October 2013, the Fund selected Horizon Actuarial Services LLC (“Horizon”) to replace Buck as the Fund's actuary. Id. ¶ 13. On June 5, 2014, Horizon informed the Fund's trustees that Horizon would use a PBGC rate as its interest rate assumption when it calculated withdrawal liability for Plan participants that withdrew on or after January 1, 2014. Id. ¶ 18. On October 3, 2014, Horizon sent a memorandum to the Fund's trustees explaining its decision to select the PBGC's interest rate assumption and the impact of the change on withdrawal liability. Stip. ¶ 12; Litvin Decl. Ex. F (Dkt. 32-1). The PBGC rate selected by Horizon was 3% as applied to the first twenty years of unfunded vested benefits and 3.31% thereafter. Am. Compl. Ex. B (“Interim Award”), at 4 (Dkt. 8-2); Litvin Decl. Ex. F, at 1. Because the interest rate assumption decreased from Plan Year 2013 to Plan Year 2014, withdrawal liability for withdrawing employers increased from Plan Year 2013 to Plan Year 2014. It is undisputed that the Fund was in dire financial circumstances in the time frame relevant to this case, leading it to freeze the accrual of benefits as of December 31, 2013. Stip. ¶¶ 16-18. The Fund did not provide any advance written notice in Plan Year 2014 to contributing employers regarding the interest rate assumption change. Id. ¶ 19.

         Although the Fund selected Horizon to replace Buck as its actuary in October 2013, Buck continued to perform some work for the Fund related to Plan Year 2013. Specifically, in November 2013, Buck completed and issued the Actuarial Valuation Report for the 2013 Plan Year. Id. ¶¶ 7, 13; Litvin Decl. Ex. G (Dkt. 32-2). On November 6, 2014, Buck completed and issued the Schedule MB for the Fund's Form 5500 for Plan Year 2013. Stip. ¶ 7; Litvin Decl. Ex. H (Dkt. 32-3).[5]

         C. Metz's Withdrawal from the Plan

         Metz withdrew from the Fund on May 16, 2014. Am. Compl. ¶ 17. That withdrawal triggered Metz's obligation to pay withdrawal liability, which would be calculated as of December 31, 2013. Def. Opp. 5. On June 16, 2014, the Fund sent Metz a notice and demand letter for the payment of withdrawal liability. Am. Compl. ¶ 19. In that letter, the Fund assessed Metz an estimated withdrawal liability of $954, 821, payable in installments. Id. ¶ 20. On December 26, 2014, the Fund issued a revised withdrawal liability assessment to Metz for $997, 734, payable in installments. Id. ¶ 21.

         D. The Arbitration

         On December 16, 2014, Metz filed a demand for arbitration against the Fund with the AAA in order to challenge the Fund's withdrawal liability assessment. Id. ¶ 22. The AAA appointed Ira F. Jaffe, Esq. (the “Arbitrator”) to serve as arbitrator. Id. ¶ 23. The Fund and Metz agreed that the Arbitrator would resolve a preliminary issue regarding the interest rate assumption used by the Fund to calculate Metz's withdrawal liability and that he would do so based solely on written stipulations and briefing. Interim Award 1-2. Accordingly, the parties did not conduct discovery except for limited document requests by Metz. Am. Compl. ¶ 24.

         On February 22, 2016, the Arbitrator issued an Interim Award, holding that the Fund improperly used the PBGC rate to calculate Metz's withdrawal liability. Id. ¶ 25; Interim Award 20. According to the Arbitrator, because there was no evidence that Buck or Horizon took any action on or before the Measurement Date to change the interest rate assumption, the 7.25% interest rate assumption that indisputably had been in effect for Plan Year 2013 continued as the interest rate assumption for Plan Year 2014. Interim Award 15-16, 19. The Arbitrator explicitly rejected the Fund's position that the Fund's actuary had made no interest rate assumption as of December 31, 2013. Id. at 16. In doing so, the Arbitrator concluded that “[a]bsent some change by the Fund actuaries, the existing assumptions and method remained in place as of December 31, 2013.” Id.[6] The Arbitrator then held that Horizon had improperly retroactively changed the withdrawal liability interest rate assumption in violation of ERISA and PBGC opinion letters. Id. at 11-16. The Arbitrator made clear that it would have been permissible for the actuary to have calculated unfunded vested benefits after the Measurement Date, but the actuary could only rely on assumptions and methods “that were actually adopted and in effect as of December 31, 2013.” Id. at 17. Because, according to the Arbitrator, the 7.25% withdrawal liability interest rate assumption was in effect as of the Measurement Date, the actuary was required to use that rate when calculating Metz's withdrawal liability. Id. at 15-17, 19.

         In his Interim Award, the Arbitrator directed the Fund to recalculate Metz's withdrawal liability “using the assumptions and methods that were in effect as of December 31, 2013.” Id. 19; Am. Compl. ¶ 26. On March 7, 2016, the Fund provided Metz an updated withdrawal liability assessment using the 7.25% withdrawal liability interest rate assumption from Plan Year 2013. Am. Compl. ¶ 27. The revised withdrawal liability assessment was approximately $250, 000, see Answer to Am Compl., Ex. A, at 1 (Dkt. 16-1), and Metz did not object to the revised assessment, Am. Compl. ¶ 28. On March 28, 2016, the Arbitrator issued his Final Award, affirming the revised calculation and converting the Interim Award to a final award. Id. ¶¶ 29-30; id. Ex. A. On March 31, 2016, the Fund initiated this action in order to vacate or modify the Final Award.

         DISCUSSION

         The principal issue before this Court is whether the Arbitrator correctly decided that the Fund violated ERISA by selecting the interest rate assumption for withdrawal liability for the 2014 Plan Year after the Measurement Date. The Arbitrator reached his conclusion by reframing the issue. The Arbitrator did not ultimately conclude that the Fund violated ERISA because its actuary selected a withdrawal liability interest rate assumption for the 2014 Plan Year after the Measurement Date. Instead, the Arbitrator concluded that the Fund violated ERISA because its actuary retroactively changed the interest rate assumption for the 2014 Plan Year after the Measurement Date. The Arbitrator's conclusion hinged on his determination that the existing interest rate assumption for the 2013 Plan Year became the interest rate assumption for the 2014 Plan Year because the Fund's actuary did not affirmatively change the interest rate assumption by the Measurement Date.

         The Court rejects the Arbitrator's premise as inconsistent with ERISA-the withdrawal liability interest rate assumption for the preceding plan year cannot become the interest rate assumption for the following plan year by inertia. Nor does ERISA prohibit a plan's actuary from selecting the withdrawal liability interest rate assumption after the Measurement Date. Accordingly, as explained more fully below, the Arbitrator's Final Award is vacated.

         I. The Court Reviews the Arbitration Award De Novo

         The parties dispute whether a de novo standard of review or a rebuttable presumption of correctness applies to resolve their cross motions to confirm and vacate the Final Award. In a dispute regarding withdrawal liability under ERISA, courts review de novo the legal conclusions of the arbitrator. 666 Drug, Inc. v. Tr. of 1199 SEIU Health Care Emps. Pension Fund, 571 F. App'x 51, 52 (2d Cir. 2014) (per curiam); HOP Energy, L.L.C. v. Local 553 Pension Fund, 678 F.3d 158, 160 (2d Cir. 2012). As to the review of factual findings, ERISA, as amended by the MPPAA, provides that “there shall be a presumption, rebuttable only by a clear preponderance of the evidence, that the findings of fact made by the arbitrator were correct.” 29 U.S.C. § 1401(c). The statutory framework does not expressly mandate a standard of review for mixed questions of law and fact. Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Louis Zahn Drug Co., 890 F.2d 1405, 1410 (7th Cir. 1989). The Second Circuit has not resolved the issue, but courts ...


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