ERISA-Second Circuit Court Rules That Over-Funded Pension Plan Was Transferred To Spun-Off Employer

In Lockheed Martin Corporation v. Retail Holdings, N.V., No. 09-2766-cv (2nd Cir. 2011), the dispute revolved around the interpretation of a 1986 Reorganization and Distribution Agreement (the “Spin-Off Agreement”) between the Appellee’s predecessor, The Singer Company (“Old Singer”), and Appellant’s predecessor, SSMC Inc. (“New Singer”). The issue is whether the Spin-Off Agreement transferred a particular pension plan, the Executive Office Foreign Service Retirement Plan (the “Plan”), from Old Singer to New Singer. The Plan is overfunded, and the party with legal rights to it will gain control of approximately $6 million in cash and stock. The district court, relying on extrinsic evidence, concluded that the Spin-Off Agreement did not transfer the Plan to New Singer, and accordingly ruled that Old Singer is entitled to the disputed assets. The Second Circuit Court found that the Spin-Off Agreement has only one reasonable interpretation, which is that the Plan was transferred to New Singer. Accordingly, the Second Circuit Court reversed the district court’s decision.

Prior to 1986, Old Singer had decided to spin off its sewing and furniture businesses. Old Singer carried out this plan in 1986 by executing the Spin-Off Agreement with New Singer (then a subsidiary of Old Singer known as SSMC Inc.). Pursuant to the Agreement, Old Singer was split into two entities: New Singer, which acquired the sewing and furniture businesses, and Old Singer, which retained the company’s aerospace technology businesses. But what did the Spin-Off Agreement do with the Plan?

In analyzing the Spin-Off Agreement, the Second Circuit Court concluded that the Plan was covered by Sections 2.01 and 4.02 of the Spin-Off Agreement. Those Sections have expansive asset and liability transfer provisions, which transferred “all” of Old Singer’s sewing-related assets and liabilities to New Singer. The provisions of those Sections included Old Singer’s rights and obligations under the Plan. The Spin-Off Agreement broadly include in the transferred assets “all of the assets of the sewing and related products and furniture businesses of [Old] Singer.” Under the Plan, any residual Plan surplus in excess of pension liabilities would revert to Old Singer at termination, in accordance with and subject to ERISA ยง 4044(d). The Plan pertained to Old Singer’s sewing businesses. Thus, Old Singer’s right under the Plan to any residual surplus are included in the transferred assets under Section 2.01. Similarly, the obligations owed to participants under the Plan are included in “liabilities.” That term is defined broadly in the Spin-Off Agreement to include “any and all debts, liabilities and obligations … including, without limitation, those arising under any … contract, commitment or undertaking.” Thus, Old Singer’s obligations under the Plan were covered by Section 4.02, which transferred “all” sewing-related liabilities to New Singer. Accordingly, the Court concluded that Sections 2.01 and 4.02 of the Spin-Off Agreement served to transfer the Plan to New Singer.

The Court referred to Section 8.02 of the Spin-Off Agreement. That Section enumerates six pension plans that would be fully or partially transferred to New Singer, and specifies certain actions that were to be taken with respect to those plans. The Plan at issue was not among them. However, the Court said that nothing in Section 8.02 indicates that it was intended to contain an exhaustive list of the plans to be transferred. The Court also ruled that the provisions in Sections 2.01 and 4.02, under which the Plan was transferred to New Singer, are clear and unambiguous on this point. Since there is no ambiguity with respect to the contract, the Court ruled that it was error for the district court to consider extrinsic evidence to interpret the Spin-Off Agreement.

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