
USCA1 Opinion

	




          December 1, 1995                            UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT                                 ____________________        No. 94-2318                                   JAMES H. COOKE,                                 Plaintiff, Appellee,                                          v.                              LYNN SAND & STONE COMPANY,                        TRIMOUNT BITUMINOUS PRODUCTS COMPANY,                        LOUIS E. GUYOTT, II, and STUART LAMB,                               Defendants, Appellants.                                  __________________                                  __________________                                     ERRATA SHEET                                     ERRATA SHEET            The opinion  of this  court issued  November 27,  1995, should  be        amended as follows:            On page 3, second paragraph, line 3:   Change "PBGC specified"  to        "PBGC-specified".            On page 5, second paragraph, line 4:  Change " 22," to "  22,".                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________        No. 94-2318                                   JAMES H. COOKE,                                 Plaintiff, Appellee,                                          v.                              LYNN SAND & STONE COMPANY,                        TRIMOUNT BITUMINOUS PRODUCTS COMPANY,                        LOUIS E. GUYOTT, II, and STUART LAMB,                               Defendants, Appellants.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                      [Hon. Nancy Gertner, U.S. District Judge]                                           ___________________                                 ____________________                                        Before                                Boudin, Circuit Judge,                                        _____________                            Coffin, Senior Circuit Judge,                                    ____________________                              and Stahl, Circuit Judge.                                         _____________                                 ____________________            Robert  M. Gault with  whom Alan  S. Gale and  Mintz, Levin, Cohn,            ________________            _____________      __________________        Ferris, Glovsky and Popeo, P.C. were on briefs for appellants.        _______________________________            Joseph  F. Hardcastle with whom  Ralph D. Gants and Palmer & Dodge            _____________________            ______________     ______________        were on brief for appellee.                                  ____________________                                  November 27, 1995                                 ____________________                 BOUDIN, Circuit Judge.  This troublesome appeal involves                         _____________            a determination of benefits  due following the termination of            a  pension  plan.    On May  18,  1983,  Trimount  Bituminous            Products  Co. ("Trimount")  purchased Lynn  Sand &  Stone Co.            ("Lynn").   At the time of the purchase, Lynn had in place an            employer-sponsored, defined-benefit  pension plan.   The plan            was subject to the Employee Retirement Income Security Act of            1974 ("ERISA"), 29 U.S.C.   1001 et seq.                                             _______                 At  the time of the  purchase, in May  1983, James Cooke            was president and treasurer of Lynn and also a trustee of the            plan.  Shortly thereafter, Cooke was terminated as an officer            under circumstances not entirely to  his credit, see Cooke v.                                                             ___ _____            Lynn Sand & Stone Co., 640 N.E.2d 786 (Mass. 1994), and later            _____________________            in the year Lynn replaced the  trustees of the plan and voted            to terminate  it.  Article XIV of  the plan permitted Lynn to            amend or terminate the plan at any time.                 The  proposed termination  required  a clearance  by the            Pension  Benefit Guaranty  Corporation ("PBGC"),  the federal            agency that insures ERISA-covered pension plans and regulates            terminations.   See  29  U.S.C.    1341.   When  an  employer                            ___            voluntarily  terminates  a  single-employer,  defined-benefit            pension plan, all  accrued benefits  vest automatically,  and            the employer  must  distribute benefits  in  accordance  with            ERISA's allocation  schedule.  29  U.S.C.    1344(a).   Funds            left  over  may  revert  to  the  employer  if  the  plan  so                                         -2-                                         -2-            specifies, 29  U.S.C.   1344(d),  as the Lynn plan  did.  The            present litigation  presents the question how  much Cooke was            entitled to receive on termination of the plan.                 In 1983 Cooke--who was then 53 years of age--had accrued            a monthly retirement benefit of $1,856.93, starting at age 65            and continuing  for ten years  or until his  death, whichever            came  first.   The  plan  permitted  the  trustees  to  offer            beneficiaries  an option,  in  lieu of  monthly payments,  of            receiving a lump sum  distribution of equal value.   Choosing            to  offer this option to Cooke, the trustees had to determine            the   present  value   of  the  promised   monthly  payments.            Mortality  assumptions aside,  this required  selection  of a            "discount"  rate--effectively  an  assumed interest  rate--to            compute  a present lump sum  equal to the  stream of promised            future  payments.     See  Robert  Anthony   &  James  Reece,                                  ___            Accounting Principles 199-203 (1983).            _____________________                 The trustees  retained an actuarial  firm which  advised            that, if the trustees  chose to offer lump sum  payments, the            appropriate choice  of rates  was between the  PBGC-specified            interest rate of  9.5 percent1 or a somewhat  higher interest            rate  of  11 to  11.5  percent,  reflecting the  figure  that            certain insurance companies  would employ  if Lynn  purchased                                            ____________________                 1The 9.5 percent figure appeared  in a PBGC schedule for            calculating lump-sum values of  annuities as of a  given plan            termination  date.   See  29 C.F.R.     2619, App.  B (1986),                                 ___            setting forth a 9.5 percent rate for plans terminated between            September 1, 1983 and February 1, 1984.                                          -3-                                         -3-            annuities instead of  providing lump  sums.   The higher  the            rate selected, the  smaller will  be the lump  sum needed  to            equal the future stream of payments.  Ultimately, the actuary            recommended the  9.5 percent figure, stating  later that this            was the actuary's best judgment as to the proper rate as well            as the rate then commonly used on termination of a plan under            ERISA.                 The use of the  9.5 percent figure equated to a lump sum            payment for Cooke of  $58,987.98.  Cooke's attorneys disputed            this computation,  urging (based  on certain language  in the            plan yet  to be described)  that a  6 percent rate  should be            used; on this premise,  Cooke would have obtained a  lump sum            of  $96,892.42.    The trustees  maintained  their  position.            Ultimately,  the  PBGC issued  a  notice  in September  1984,            finding  that the assets of  the plan would  be sufficient to            cover  all guaranteed benefits  and rejecting without comment            Cooke's objections as to the rate selected.                 On  June 14,  1985,  Cooke  filed  a  complaint  in  the            district court, contending inter alia that the use of the 9.5                                       _____ ____            percent interest rate violated  the plan and therefore ERISA.            Cross-motions  for  summary  judgment  were  filed,  and  the            district court issued an initial  non-dispositive decision in            July 1986, relying in part on the trustees' interpretation of            the plan.  See  Cooke v. Lynn Sand & Stone  Co., 673 F. Supp.                       ___  _____    ______________________            14 (D. Mass  1986).   Delay then ensued  because the  Supreme                                         -4-                                         -4-            Court granted review in another case  to determine the weight            to  be given  under ERISA  to  a trustee's  interpretation of            disputed  terms in a pension  plan.  Firestone  Tire & Rubber                                                 ________________________            Co. v. Bruch, 489 U.S. 101 (1989).            ___    _____                 After   Firestone,  the  present   case  was  eventually                         _________            transferred  to a different district judge.   In the decision            now  before  us,  the   district  court  decided  that  under            Firestone  the  trustees' interpretation  was entitled  to no            _________            weight; and based on the court's own reading of the plan, the            court granted summary judgment  in favor of Cooke.   Cooke v.                                                                 _____            Lynn Sand  & Stone  Co., 875  F. Supp.  880 (D.  Mass. 1994).            _______________________            Defendants in the district court--Lynn, Trimount and the plan            trustees  (collectively  "Lynn")--have now  appealed, arguing            that their interpretation deserves weight and is in any event            correct.       Cooke's  main  argument  in  favor  of  the  6            percent rate, adopted  by the district  court, was that  this            rate was mandated by  the plan and was not  inconsistent with            PBGC regulations.   The plan states in article  I,   22, that            "[f]or  purposes  of   establishing  actuarial   equivalence,            present value  shall be determined by  discounting all future            payments for interest and mortality on the basis specified in            the [plan's] Adoption Agreement."  Section 1.09 of the plan's            adoption agreement, a boilerplate form with checked boxes and            inserted  figures, provides  that  in establishing  actuarial                                         -5-                                         -5-            equivalence  the  figure  of 6  percent  should  be used  for            "[p]re-retirement interest."                 In  response,  Lynn  has   argued  that  the  6  percent            provision  applies where a lump sum is paid under the ongoing            plan but does not apply to termination payments.  Lynn points            to article  XIV,   2, of  the plan, which states  that in the            event of termination, the trustee must "allocate the [plan's]            assets"  in accordance with 29  U.S.C.   1344.   Section 1344            provides a  mandatory priority schedule for  plan payments on            termination.  Incident to  this and other sections  of ERISA,            the  PBGC has  established regulations  that address  in some            detail the determination of  the interest rate to be  used in            lump sum computations when a plan is terminated.                 The key  regulation, 29  C.F.R.   2619.26,  is concerned            with the valuing of a lump sum paid in lieu of normal monthly            retirement benefits  where a plan's assets  are sufficient to            cover all  of its  statutory obligations under  section 1344.            The  regulation  requires the  use  of "reasonable  actuarial            assumptions  as to  interest and  mortality"; it  directs the            plan administrator  to specify  the assumptions  when seeking            termination clearance from the PBGC; it makes the assumptions            subject to PBGC  review and to  re-evaluation of benefits  if            the assumptions  are found unreasonable  by the PBGC;  and it            sets forth four "interest  assumptions" that are "among those            that will normally be considered reasonable":                                         -6-                                         -6-                 (i)   The rate by the plan for determining lump sum                 amounts  prior to  the date  of termination.   This                 rate may  appear in  the plan documents  or may  be                 inferred from recent plan practice.                 (ii)    The  rate  used   by  the  insurer  in  the                 qualifying  bid under which  the plan administrator                 will purchase  annuities not  being paid as  a lump                 sum. . . .                 (iii)    The interest  rate  used  for the  minimum                 funding standard account pursuant to section 302 of                 the Act and section  412(b) of the Internal Revenue                 Code.                 (iv)     The  PBGC  interest  rate   for  immediate                 annuities in effect on the valuation date set forth                 in Appendix B to this part.                 Based  on  this  language,  Lynn argues  that  the  plan            trustees were  entitled to  select any reasonable  rate, that            the 9.5 percent PBGC rate actually adopted is one of the four            "normally . . . considered reasonable" under  the regulation,            and that  the evidence of the actuary hired by Lynn shows the            9.5  percent figure was certainly reasonable here.  As to the            plan  and adoption agreement, Lynn argues  that the 6 percent            provision  does not apply to  terminations or, if intended to            apply, is overridden by the regulation.                 We start  with the  regulation because, if  so intended,            there is little  doubt that it  would override contrary  plan            provisions.   See 29 U.S.C.   1341(a); 29 C.F.R.   2619.3(a).                          ___            Given the wording  of the regulation and  its likely purpose,            we agree that section  2619.26 would override any contractual            provision   providing  for   a   rate  that   proved  to   be            "unreasonable" under the regulation.  But the  reasonableness                                         -7-                                         -7-            or unreasonableness of the 6 percent figure cannot readily be            determined on the present state of the record.                 Although  the  district  court  deemed  the  6   percent            interest rate reasonable, apparently  because it was the rate            specified  in the plan, the regulation does no more than make            the  plan  rate  used   prior  to  termination  presumptively            reasonable.  Further, it  appears from the record that  the 6            percent interest rate would generate a lump sum sufficient to            buy  two  annuities,  each  separately  providing  Cooke  the                 ___            promised  monthly payments.   Thus,  it is  at least  open to            question whether  the 6  percent figure is  reasonable.   The            record does show that the  9.5 percent figure is reasonable--            indeed,  arguably generous  to Cooke--but  there can  be more            than one reasonable rate.                 If we  assume arguendo that  6 percent  is a  reasonable                               ________                     _            rate and that the  plan intended it to apply  on termination,                 _______________________________________________________            we see no reason why the plan  could not require the trustees            to use  that rate.  It  is true that the  regulation might be            read  to reserve  the  choice of  a  reasonable rate  to  the            trustees on  termination, regardless  of what the  plan says.            But the  regulation's language does not  compel that reading,            and Lynn  does not show that  such a reading would  serve any            purpose; after all, the PBGC can reject a plan-specified rate            if the PBGC finds the rate unreasonable.                                           -8-                                         -8-                 We turn therefore  to the  contractual question  whether            the  plan should  be read  to require  use  of the  6 percent            figure not only in calculating lump sums paid during the life            of the plan  but also lump  sums paid upon termination.   The            district  judge who  first  dealt with  the  case deemed  the            plan's language ambiguous on this issue,  673 F. Supp. at 22,            and  we  share that  judgment.   This  led the  same district            judge, as  the  law then  stood  before Firestone,  to  adopt                                                    _________            Lynn's interpretation  of  the agreement  as  a  "reasonable"            interpretation proffered  by the plan trustees,  subject to a            possible claim of bad faith.  Id.                                          ___                 This solution to plan ambiguities may be a sensible one,            especially because  plan trustees typically (as  here) retain            the power to alter plan provisions by express amendment.  But            the Supreme  Court in Firestone concluded  that the trustees'                                  _________            reading of plan language may be given weight only if the plan            so provided in  fairly explicit  terms.  Lynn  does point  to            some plan  language marginally helpful to  its position, but,            on  balance, we agree with  the district judge  who took over            the  case after  Firestone that  the  plan language  does not                             _________            satisfy Firestone.   See  Rodriguez-Abreu v.  Chase Manhattan                    _________    ___  _______________     _______________            Bank, N.A., 986 F.2d 580, 583-84 (1st Cir. 1983).            __________                 Thus, in resolving the  merits we give no weight  to the            trustees' interpretation and review the plan language de novo                                                                  __ ____            and as presenting  an issue of law, Rodriguez-Abreu, 986 F.2d                                                _______________                                         -9-                                         -9-            at 583, no one  having suggested that there is  any extrinsic            evidence  that  reveals  the  actual  intent  of  the  plan's            drafters.    See  Restatement  (Second),  Contracts    212(2)                         ___  _________________________________            (1979).   The  difficulty is  that the  plan language  can be            plausibly read either way.   Nor is this surprising  since in            all  likelihood the  plan drafters,  in completing  what were            largely boilerplate  provisions, never had occasion  to think            about the variation we confront in this case.                 On  the  one  hand, the  plan  specifies  the  6 percent            figure,  surely  with ongoing  plan  operations  in mind  but            without specifically excluding a lump sum paid on termination            of  the plan.  On the  other hand, termination is the subject            of a  separate article;  the  article refers  to a  statutory            provision; and  an associated regulation provides  that those            terminating  the plan shall select a reasonable rate.  So far            as  bare language goes, the choice between the Cooke and Lynn            readings  is practically a coin  flip; and the  usual saws of            interpretation--such as "the specific controls the general"--            could be invoked by either side.                  Thus, another perspective must be sought.  One might ask            how the plan drafters would have resolved the problem if they            had  focused upon it, see  Prudential Ins. Co.  of America v.                                  ___  _______________________________            Gray  Mfg. Co., 328 F.2d  438, 445 (2d  Cir. 1964) (Friendly,            ______________            J., concurring), or  try to  assign the burden  of proof  and            hold that the one having the burden has not carried  it.  See                                                                      ___                                         -10-                                         -10-            United Steelworkers  of America  v. North Bend  Terminal Co.,            _______________________________     ________________________            752 F.2d 256, 261 (6th Cir. 1985).  But both perspectives are            debatable  in  application  and  both have  been  opposed  in            principle as  well.  See, e.g., Alan  Farnsworth, Contracts                                   ___  ____                    _________            7.16,  at  547  (2d   ed.  1990)  (rejecting   "hypothetical"            expectations);  United  Commercial   Ins.  Service,  Inc.  v.                            _________________________________________            Paymaster  Corp., 962  F.2d 853,  856 n.2  (9th  Cir.), cert.            ________________                                        _____            denied,  113  S.Ct.  660  (1992)   (disagreeing  with  United            ______                                                 ______            Steelworkers).            ____________                 We think that the proper solution in a case such as ours            should  turn   not   on  "hypothetical[s]"   or   "fictitious            intentions" but on "basic principles  of justice that guide a            court  in extrapolating  from  the situations  for which  the            parties  provided  to  the  one  for  which  they  did  not."            Farnsworth, supra,   7.16,  at 547-48.  On this  basis Lynn's                        _____            interpretation is  superior.   Plan termination is  a drastic            and unique event; and for  that occasion the PBGC  regulation            provides   a  detailed  regime  for  selecting  a  reasonable            interest  rate.   A  reading of  the  plan that  leaves  that            subject   solely  to   the  regulation   is  straightforward,            workable,  and far less likely to result in a tension between            the plan and the regulation.                   Further, it is hard to see how substantial injustice can            be  done to the beneficiary  if the trustees  are confined to            choosing  a "reasonable rate."   By contrast, insistence on a                                         -11-                                         -11-            fixed rate can easily  produce anomalies such as  the alleged            double  recovery that  might be  available  to Cooke  in this            case;  and,  as  Lynn points  out,  it  could  easily be  the            beneficiary who  suffered from a very small  lump sum payment            if  the  plan's  contract  rate  happened  to  be  too  high.            Finally,  letting the  PBGC regulation  govern increases  the            likelihood that the trustees will afford a lump sum option to            the employee in the first place.2                   One might  argue that  any ambiguity  in  an ERISA  plan            should  be resolved in favor  of the beneficiary.   We take a            more  agnostic view of the statute.  Beneficiaries come first            on  the priority list but only  to the extent of the benefits            due them;  and the statute expressly permits  the employer to            reclaim  the  surplus, if  the plan  so  permits (as  it does            here).   29 U.S.C.     1344(d).   Such plans  should be  read            fairly, but not  automatically to maximize  the award to  the            beneficiary.   Foltz v. U.S.  News & World  Report, Inc., 865                           _____    ________________________________            F.2d  364,  373  (D.C. Cir.),  cert.  denied,  490  U.S. 1108                                           _____________            (1989).                 The  problem encountered in this case ought not to recur            if  plan administrators  are vigilant.   It  could easily  be                                            ____________________                 2Of  course, a  fixed figure  might be desirable  in the            context of an ongoing plan, simply  for the sake of speed and            certainty; but in that context, there  is no PBGC requirement            that the specified figure be reasonable and no  potential for            conflict between the  plan and the regulation where  the plan            figure is arguably unreasonable.                                         -12-                                         -12-            resolved  under  a plan  that  explicitly  gave the  trustees            authority  to  interpret  in  terms  that   meet  Firestone's                                                              _________            delegation requirement.  Or,  a plan could explicitly provide            that  a  specified   interest  rate  is   to  be  used   upon                  _            termination, or--conversely--that the trustees on termination            may select any  reasonable rate.  Any  plan that faces up  to                       ___            the problem can avoid the ambiguity encountered here.                 We  have considered whether there is a need for trial on            the question whether the  trustees in this instance acted  in            bad  faith,  as originally  alleged by  Cooke.   The district            court did not find it necessary  to pass on this issue which,            were  a ruling on it subject  to appeal, would be reviewed de                                                                       __            novo.  After examining the summary judgment filings, we think            ____            that Cooke's papers  do not generate a  trial-worthy issue on            the charge of bad  faith.  Accordingly, we conclude  that the            grant  of  summary judgment  in favor  of  Cooke must  be set            aside, and that Lynn  is entitled to summary judgment  in its            favor.                 The  judgment is  reversed  and the  case remanded  with                                   ________                ________            directions to enter summary judgment in favor of Lynn.                                         -13-                                         -13-
