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Benefits-related Provision in Asset Purchase Agreement is Valid Plan Amendment: Fifth Circuit
Practical Law Legal Update 8-509-3033 (Approx. 4 pages)
Benefits-related Provision in Asset Purchase Agreement is Valid Plan Amendment: Fifth Circuit
by PLC Employee Benefits & Executive Compensation
| Published on 18 Oct 2011 • USA (National/Federal) |
The US Court of Appeals for the Fifth Circuit has ruled that a retiree benefits-related provision included in an asset purchase agreement (APA) was a valid amendment of the acquiring company's retiree benefits plan governed by ERISA. The court also held that the company's rejection of the APA in its bankruptcy plan of reorganization did not invalidate the plan amendment.
Key Litigated Issues
On October 13, 2011, the US Court of Appeals for the Fifth Circuit issued an opinion in Evans v. Sterling Chemicals, Inc., ruling that a company ceded its right to alter the premiums of certain employees under its retiree medical plans when it entered into an asset purchase agreement (APA) with another company. The key issues in the case were:
- What effect a retiree benefits-related provision in an asset purchase agreement has on the acquiring company's retiree benefits plans governed by ERISA.
- Whether the provision was assumed as part of an employee benefit plan or rejected as an executory contract during the acquiring company's bankruptcy proceedings.
Background
In 1996, the defendant, Sterling Chemicals, Inc., acquired the acrylic fibers business of another company, Cytec, under the terms of an asset purchase agreement (APA). In connection with the acquisition, certain Cytec employees accepted employment with Sterling. The APA included a provision guaranteeing these employees a certain level of medical benefits and premiums upon retirement. Under this provision, benefits could not be reduced, or premiums increased, without Cytec's prior written consent. The former Cytec employees participated in Sterling's employee benefit plans, and, on retirement, paid the level of premiums agreed on in the APA.
In 2001, Sterling filed for bankruptcy. In November 2002, a bankruptcy court approved Sterling's motion to reject certain executory contracts, including the APA. However, an order confirming Sterling's plan of reorganization provided that Sterling's benefits programs would be assumed by the company. Under this arrangement, Sterling emerged from bankruptcy in December 2002.
On April 1, 2003, Sterling raised the premiums of the plaintiffs, a group of approximately 100 former Cytec employees, without obtaining Cytec's prior written consent. Premiums were raised again in 2004 and 2005. Objecting to these raises as a violation of the APA provision, the plaintiffs brought suit on February 16, 2007, arguing that the APA provision was a valid amendment to Sterling's plan, and was assumed, not rejected, in bankruptcy.
Following administrative proceedings, the district court granted summary judgment for Sterling on all claims, ruling that either:
- The APA's provision did not amend Sterling's plan and that a case cited by the plaintiffs, Halliburton Co. Benefits Committee v. Graves, 463 F.3d 360 (2006), was distinguishable.
- The contractual limitation of the APA provision was removed when Sterling rejected the APA during bankruptcy proceedings.
Outcome
Whether the APA Provision Was a Valid Plan Amendment
Citing Halliburton, the Fifth Circuit found that a corporate agreement can amend an ERISA plan, whether or not the agreement is expressly intended to amend the plan. To qualify as a valid amendment, the court found an agreement must:
- Be in writing.
- Contain a provision directed to an ERISA plan.
- Satisfy plan amendment formalities, including:
- the procedures for making an amendment; and
- execution by the persons with authority to amend the plan.
Observing that the APA was a written agreement, that the provision in question was directed at both Cytec's and Sterling's ERISA plans, and that it satisfied the required formalities, the Fifth Circuit concluded that the provision in the APA was a valid amendment to Sterling's plan and became part of the plan from its inception. The court brushed aside Sterling's argument that it had not intended to modify its plan, holding that, under the test articulated in Halliburton, the intent of the parties is irrelevant.
Interestingly, the court indicated that it was expressing no opinion as to whether an additional provision in the APA stating that no plan amendment was intended could have effectively prevented the APA provision at issue from being a valid plan amendment by operation of law.
Whether the Plan Amendment Was Invalidated in Bankruptcy
The court also concluded that Sterling's rejection of the APA in bankruptcy did not invalidate the amendment to its plan. Sterling had argued that its plan of reorganization rejected executory contracts, which included the contractual terms of the APA. However, the Fifth Circuit found that the APA provision was both a contractual term and an ERISA plan amendment. Therefore, even though Sterling had rejected the APA provision in bankruptcy, the court held that the provision had already been incorporated into Sterling's plan by operation of law and was assumed by Sterling as an employee benefit plan.
Having found that the APA provision was a valid plan amendment, which the company assumed in bankruptcy, the Fifth Circuit reversed the district court's order and remanded the case for further proceedings.
Practical Implications
The Fifth Circuit's decision clarifies that an agreement made in an APA may serve as a valid ERISA plan amendment even in the absence of express intent by the parties, so long as four factors are satisfied. Additionally, a discharge of purchase agreement contractual obligations in bankruptcy will not necessarily invalidate an otherwise valid plan amendment. Parties entering into purchase agreements should be mindful of this decision and careful in crafting provisions that could be construed as plan amendments, especially if changing the terms of ERISA plans is not the intent. Drafters may also want to include an additional provision expressly stating that no plan modification or amendment is intended, although the effectiveness of such a provision remains unclear.