Reproduced with permission from BNA Pension & Benefits Reporter, 36 BPR 2201 (Sept. 22, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) (http://www.bna.com)

The Delphi Salaried Retiree Association, along with three Delphi retirees, filed a lawsuit Sept. 14 against the Pension Benefit Guaranty Corporation, alleging the government agency violated federal pension law by failing to obtain court approval of its termination of Delphi's defined benefit pension plan (Black v. Pension Benefit Guaranty Corporation, E.D. Mich., No. 2:09-cv-13616-DPH-MAR, lawsuit filed 9/14/09).

The lawsuit alleges that PBGC violated the Employee Retirement Income Security Act by entering a summary agreement with Delphi's plan administrator to terminate the defined benefit plan of salaried workers. Among other things, the lawsuit alleges that PBGC has made no provision to safeguard the interests of plan participants and beneficiaries.

In addition, the lawsuit filed in the U.S. District Court for the Eastern District of Michigan charges that PBGC has failed to comply with ERISA by entering the agreement with Delphi's administrator, which allegedly is laboring under a conflict of interest.

According to the complaint, Delphi's plan administrator entered the agreement with PBGC under pressure from the federal government and without considering the interests of the plan's participants and beneficiaries. “Delphi's and its executives' interests in selling Delphi's assets as quickly as possible and in terminating the Salaried Plan consistent with the government's will directly conflict with the interests of the Plan's participants and beneficiaries against termination,” the complaint said.

Delphi's Bankruptcy

Delphi was originally an operating unit of General Motors Corp. until it was spun off from GM in 1999. When Delphi was spun off, it assumed responsibility for maintaining pension plans for all Delphi employees including both salaried and unionized employees. According to the complaint, there are approximately 15,000 participants in Delphi's pension plan for salaried workers.

Delphi filed for Chapter 11 bankruptcy in October 2005 (196 PBD, 10/12/05; 32 BPR 2217, 10/18/05). At the time of the bankruptcy filing, Delphi cited rising pension and health care costs as reasons for its decision to file for bankruptcy.

As the bankruptcy proceeded, Delphi announced in September 2008 that it had reached a deal with GM and PBGC in which Delphi could potentially transfer billions of dollars in pension liabilities from the plans for unionized workers to existing plans of GM (188 PBD, 9/29/08; 35 BPR 2238, 9/30/08). The deal did not apply to the Delphi salaried workers' pension plan. The complaint alleges that Delphi announced in press releases that it remained committed to maintaining the salaried plan with no intent to terminate the plan.

According to the complaint, Delphi's pension situation changed when GM filed for bankruptcy this past June (103 PBD, 6/2/09; 36 BPR 1377, 6/9/09). Shortly after GM filed for bankruptcy, Delphi filed papers in its own bankruptcy stating that it expected to enter into an agreement with PBGC whereby PBGC would initiate involuntary termination proceedings with respect to the salaried plan (105 PBD, 6/4/09; 36 BPR 1345, 6/9/09).

Delphi's announcement regarding the plan termination prompted the salaried retirees to file a lawsuit against the plan's fiduciaries in July. The retirees requested that an independent fiduciary be appointed for the salaried plan for purposes of negotiating any plan termination and protecting participants' and beneficiaries' rights in any termination proceedings. The complaint alleged that the plan's named fiduciaries were in a position where there responsibilities as Delphi officers prevented them from functioning with complete loyalty to the plan's participants and beneficiaries (137 PBD, 7/21/09; 36 BPR 1769, 7/28/09).

According to the complaint in the latest lawsuit, Delphi executives “plainly admitted” in their court filings that they did not treat the decision to enter the termination agreement as a fiduciary function, but as a “settlor” function and that they therefore would make decisions that were in the best interest of Delphi, not the plan's participants and beneficiaries.

“On information and belief, Delphi (including its Executive Committee) was under strong pressure by the federal government to agree to the termination of the Plan, which at the time was underfunded, because termination of the Plan would further the government's interest in restructuring the auto industry at the lowest cost to the government and expediently, notwithstanding that termination would not be in the best interests of the Plan's participants and beneficiaries,” the complaint said.

PBGC's Agreement With Delphi

The retirees' lawsuit against PBGC alleges that shortly after the retirees sued the plan's fiduciaries, PBGC signed a settlement agreement with Delphi. Under the settlement agreement, it was anticipated that PBGC would initiate involuntary termination procedures against Delphi's pension plans, and Delphi was obligated to direct the plan administrator to agree to summary termination of the plans. In exchange for this agreement, PBGC said it would release all of its liens against Delphi entities and would also unconditionally release Delphi and GM from any and all causes of action they could bring with respect to the plans.

Later in July, PBGC filed a complaint in the Eastern District of Michigan against Delphi seeking termination of the salaried plan and appointment of PBGC as statutory trustee of the plan (139 PBD, 7/23/09; 36 BPR 1737, 7/28/09). According to the complaint, after learning of PBGC's complaint the retirees voluntarily dismissed their lawsuit against the plan's fiduciaries, saying they intended to intervene in PBGC's lawsuit to protect their interests.

However, according to the complaint, the retirees were never able to intervene in PBGC's lawsuit because PBGC voluntarily dismissed its termination action in August. PBGC's actions came after the U.S. Bankruptcy Court for the Southern District of New York approved a modified reorganization plan that included the PBGC-Delphi settlement agreement calling for involuntary termination of the plan.

The lawsuit alleges that after PBGC voluntarily dismissed its termination action filed in the Eastern District of Michigan, the federal agency posted an announcement on its website stating that on Aug. 10, PBGC had assumed responsibility for the pension plans of Delphi. The retirees alleged in their lawsuit that this announcement by PBGC signaled that PBGC and the administrator of the salaried plan entered into an agreement to summarily terminate the plan without adjudication by or consent by a federal district court.

PBGC Must Seek District Court Approval

In their lawsuit against PBGC, the retirees allege that under ERISA the federal agency must obtain a decree by a federal district court before it can involuntarily terminate a plan. The only exception to this rule that would allow PBGC to enter a summary agreement would be if the plan qualified as a “small plan.”

“The Salaried Plan is not a small plan and therefore cannot be terminated through summary agreement between the PBGC and Plan Administrator, and the termination of the Salaried Plan through agreement between PBGC and the Plan Administrator therefore violates ERISA,” the retirees argued in their complaint.

Moreover, the complaint alleges that the agreement between PBGC and the plan administrator is null and void because the administrator was not acting as a plan fiduciary when it agreed to the settlement and therefore was not looking out for the interests of the plan's participants and beneficiaries.

“The PBGC's summary termination of the Plan based on an agreement with the Plan's Plan Administrator, when the Plan Administrator acted in the corporate interest as a settlor rather than as a fiduciary in the participants' and beneficiaries'best interests, violates ERISA, which requires that any such agreement(if at all allowable) be entered with a Plan Administrator properly acting in its fiduciary capacity,” the complaint said.

The lawsuit goes on to allege that the plan administrator “faced an irreconcilable conflict of interest”that required it to step aside in favor of a neutral fiduciary with respect to any termination issues. Among other things, the lawsuit charges that Delphi and executives reached the PBGC agreement only after being pressured by the federal government.

Due Process Claim

In addition, the complaint alleges that even if the agreement between PBGC and the plan administrator was allowable and authorized by ERISA, this would mean that ERISA's authorization for such summary plan terminations is unconstitutional in violation of the Due Process Clause of the Fifth Amendment to the U.S. Constitution.

“In all instances, the Salaried Workers, because they have a cognizable property interest in their vested pension benefits, are entitled to meaningful notice of any Plan termination and the opportunity for a hearing prior to the Plan's termination. Because any ERISA provisions allowing for summary plan termination deprive the Salaried Workers of protected interests without procedural safeguards, the provisions violate the Due Process Clause,”the complaint said.

The retirees are represented by Alan J. Schwartz and Howard S. Sher of Jacob & Weingarten, Troy, Mich., and Anthony F. Shelley, Timothy P. O'Toole, and Michael N. Khalil* of Miller & Chevalier, Washington, DC

*Former Miller & Chevalier attorney