Reading the Supreme Court Tea Leaves

Litigation brings home how fragile our common understanding of ERISA can be. Until the 9th Circuit decided Beck v. PACE International Union, 427 F. 3d 668, 673 (2005), practitioners understood that the only ways to distribute participants' benefits under a terminating defined benefit plan were annuities or lump sums. Unfortunately, the 9th Circuit didn't find it so clear. Yesterday's unanimous Supreme Court decision ultimately confirmed practitioners' understanding. However, Justice Scalia's analysis made it clear that it wasn't as clear as we had all thought.

While holding that a merger was the continuation of a plan rather than an acceptable way to terminate a plan, Justice Scalia pointed out in footnote 3 that:

We would not have to decide that question of statutory interpretation if Crown's pension plans disallowed merger. Any method of termination permitted by §[4041](b)(3)(A)(ii) must also be one that is "in accordance with the provisions of the plan." Crown thus could have drafted its plan documents to limit the available methods of termination, so that merger was not permitted.

Who would have ever thought to put such a provision in a plan? Instead of looking at the provisions of the plan that set forth the distribution methods, all of which would have been annuities or lump sums, Justice Scalia seems to be requiring defensive drafting to make it clear that the means of distribution permitted by the plan are the only means of distribution permitted on termination.

Who knows what other things might be read into a plan. Can we anticipate all of them? Hopefully, Justice Scalia's footnote, which is clearly dicta, won't turn into precedent or our plans will grow ever longer and less understandable. Defensive drafting, like defensive medicine, has a cost.

[Editor's note: More information on the Supreme Court's decision in Beck v. PACE International Union may be found in the June 12 edition of BNA's Pension & Benefits Daily.]

Comments

[Ron Dean]

But isn't fn3 just an idle Posnerian-like thought? He's just whining like we all did in law school that if both parties just had Googled "Peerless" before entering into their contract, they would have known there were two ships of that name and then we wouldn't have to read and try to understand the case.

[Judy Mazo]

Even more peculiar is the fact that most plans provide for (or add provision for) lump-sum distributions at plan termination even if they are not available while the plan is ongoing. So attempting defensive drafting here would make the plan even more than usually confusing, and even more of a challenge to describe understandably in the SPD.