Fifth Circuit Holds Retiree Benefits Provision in Asset Purchase Agreement Constituted Plan Amendment and that Acquiring Company Assumed the Provision in Bankruptcy
The U.S. Court of Appeals for the Fifth Circuit held that Sterling Chemicals, Inc. and related companies (collectively, Sterling) improperly reduced the health benefits of retirees who were former employees of Cytec Acrylic Fibers, Inc. and related companies (collectively, Cytec), because Sterling failed to obtain prior written consent from Cytec pursuant to an asset purchase agreement (APA) provision. Relying on Halliburton Co. Benefits Committee v. Graves, 463 F.3d 360(5th Cir. 2006), the Court held that the APA provision (§ 5.05(f)) constituted a valid amendment to the Sterling retiree benefit plans (collectively, Plan) as a matter of law that precluded Sterling from unilaterally increasing premiums for Sterling retirees who had become employees in connection with Sterling’s acquisition of Cytec assets. The Court also concluded that Sterling assumed § 5.05(f) in bankruptcy proceedings, and that reversal and remand of the district court’s post-bench-trial ruling in Sterling’s favor was warranted.
The APA and the Plan
In 1996, Sterling acquired the assets of Cytec’s acrylic fibers business pursuant to the APA, which was authorized by the companies’ boards of directors and signed by their representatives. Sterling hired about 100 former Cytec employees, known as “Acquired Employees” (collectively, plaintiffs). In § 5.05(f), Sterling agreed to provide Acquired Employees with post-retirement medical and other benefits that were “no less favorable” than those provided under Cytec’s plans and not to reduce the level of such benefits, including by raising premiums, without Cytec’s prior written consent.
Sterling immediately included plaintiffs as Plan participants without drafting any new provisions. The Plan documents reserved to Sterling the right to amend or modify the Plan “at any time and from time to time” through Sterling’s Employee Benefits Plans Committee (Committee). Several summary plan descriptions (SPDs) indicated that the Plan could be amended at any time by the Committee or the Board of Directors. No Plan document or SPD explicitly referenced § 5.05(f), however.
Plaintiffs eventually retired from Sterling and started receiving benefits and paying the same level of premiums that § 5.05(f) required. From December 1996 to April 2003, plaintiffs’ premiums were lower than those of Plan participants who were not Acquired Employees. In April 2003, however, after emerging from bankruptcy and without Cytec’s consent, Sterling increased plaintiffs’ premiums to levels equivalent to those of Plan participants who were not Acquired Employees. Such increases were considerable: the three lead plaintiffs’ premiums were raised in 2003 from $67.50, $14.73, and $83.45 to $1,600, $392.12, and $392.12, respectively.
In July 2001, Sterling filed for bankruptcy under Chapter 11. In November 2002, the bankruptcy court granted Sterling’s motion for authorization to reject the APA, among other contracts, as an executory contract. The bankruptcy court then entered an order (Confirmation Order) confirming Sterling’s reorganization plan, which stated that “[a]ny retiree benefits within the meaning of 11 U.S.C. § 1114 will be treated as executory contracts and assumed pursuant to Section 7.5 of the Plan.” The reorganization plan contained a similar provision.
District Court Rules for Sterling on All Claims
In February 2007, plaintiffs sued Sterling asserting several claims under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. The district court stayed the case for plaintiffs to exhaust their administrative remedies. The Committee, as Plan administrator, denied plaintiffs’ claims, concluding that: (1) the APA did not amend the Plan; (2) Sterling’s contractual obligation to Cytec ended when the APA was rejected in bankruptcy; and (3) the 2003 premium increase was permitted. The district court certified a class as to plaintiffs’ ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), claims, but not their other claims. Evans v. Sterling Chemicals, Inc., No. 07-CV-625 (S.D. Tex. Nov. 19, 2008). After a bifurcated trial, the district court granted judgment for Sterling on all claims. Evans v. Sterling Chemicals, Inc., No. 07-CV-625, 2010 BL 150034 (S.D. Tex. July 1, 2010), discussed in Bloomberg Law Reports, Labor & Employment, Vol. 3, No. 15 (July 19, 2010). The district court held that: (1) § 5.05(f) did not amend the Plan and that Halliburton was distinguishable; and (2) alternatively, § 5.05(f) was a contractual limitation that no longer applied after Sterling rejected the APA in bankruptcy, among other things. Plaintiffs appealed.
Plaintiffs argued that § 5.05(f) qualified as an amendment to the Plan and was “assumed,” not “rejected,” in the bankruptcy proceeding. The Fifth Circuit noted that, if § 5.05(f) was part of the Plan, it controlled the determination of plaintiffs’ rights, and whether or not § 5.05(f) was a valid Plan amendment depended on whether Halliburton was controlling.
The Court extensively summarized and analyzed Halliburton. Contrary to the district court’s conclusion that it was distinguishable, the Court found Halliburtonanalogous and controlling. As the Court stated, the Halliburton Court concluded that a retiree benefits provision in a merger agreement amended the relevant ERISA plan regardless of whether the agreement was explicitly intended to do so. Halliburton, 463 F.3d at 372.
Applying Halliburton, the Court concluded that § 5.05(f) constituted a Plan amendment because: (1) the APA was a written corporate agreement; (2) § 5.05(f) was directed to both Sterling’s and Cytec’s ERISA plans; and (3) the Sterling board’s approval of the APA and the Sterling chairman’s execution of the APA satisfied the formalities of having a Plan amendment procedure and a procedure for identifying those with amendment authority. Id. at 370-74.
The Court was not persuaded by Sterling’s arguments as follows. First, the Court rejected Sterling’s contention that § 5.05(f) was not intended to amend the Plan because such intent was immaterial and not required pursuant to Halliburton or the Plan. Second, the Court agreed with Sterling’s assertion that § 5.05(f) was a contractual obligation that Sterling owed to Cytec, but concluded that Sterling cited no authority for the proposition that § 5.05(f) could not be both a contractual obligation and a Plan amendment simultaneously. Third, the Court recognized that, although Sterling admittedly did not include the § 5.05(f) language in the Plan or distribute it to Plan participants, such failures did not detract from § 5.05(f)’s validity as a Plan amendment, although they might otherwise constitute ERISA violations. Fourth, the Court rejected Sterling’s assertion that one Sterling subsidiary had the sole contractual obligation to maintain benefits for the Acquired Employees and found that the validity of § 5.05 as an amendment was unaffected by “the inter-company organization of the various Sterling ERISA plans.” Fifth, the Court concluded that Halliburton was controlling, binding precedent, rejecting Sterling’s argument that the Fifth Circuit appeared to limit the ruling to the specific merger documents in the case on rehearing. See Halliburton Co. Benefits Committee v. Graves, 479 F.3d 360, 361(5th Cir. 2007).
Section 5.05(f) Was a Valid Plan Amendment Assumed, Not Rejected, in Bankruptcy
As the Court stated, the bankruptcy court’s Confirmation Order provided that all retiree benefits were “treated as executory contracts and assumed” under the reorganization plan, which also contained a similar provision. Thus, the Court found, § 5.05 was part of the Plan since 1996 and it was explicitly assumed in the bankruptcy proceeding. Although § 5.05 was also part of the APA rejected by Sterling, the Court concluded that it was incorporated into the Plan in 1996 by operation of law and created an ERISA obligation separate from Sterling’s and Cytec’s contractual obligations to each other. Thus, the Court explained, § 5.05 was part of the Plan enforceable by Plan participants and Sterling’s rejection of the APA had no effect on the Plan.
Notes on Employee Benefits in Mergers and Acquisitions
This case illustrates that companies involved in corporate mergers and acquisitions should pay close attention to and obtain expert legal advice regarding the implications of such transactions on employee benefit plans and the obligations of the respective companies. For more information on Halliburton and other transactional complications, please see Bloomberg Law Reports, Employee Benefits, Employee Benefits in Mergers and Acquisitions: Recent and Troubling Developments, Vol. 2, No. 4 (Feb. 23, 2009).
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.