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International Union v. Keystone Consolidated Industries Inc.

February 3, 1986


Appeal from the United States District Court for the Northern District of Illinois, Western Division. No. 82 C 20189 - Stanley J. Roszkowski, Judge.

Author: Flaum

Before COFFEY and FLAUM, Circuit Judges, and JAMESON, Senior District Judge.*fn*

FLAUM, Circuit Judge.

The issue presented in this case is whether the district court erred in enforcing an arbitrator's award requiring the defendant employer to make annual contributions to a pension plan even though the employer had obtained an ex parte waiver of the plan's annual minimum funding requirement pursuant to section 303 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1083 (1982). We reverse.


The International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (the "Union") and the National Lock Division of Keystone Consolidated Industries, Inc. ("Keystone") have been parties to a series of pension agreements since 1955. Beginning in 1968 and continuing to the present, these pension agreements have provided that Keystone shall make contributions to the pension's trust fund on an annual basis. The amount that Keystone must contribute each year is calculated according to the language of the agreement.

In June, 1981, Keystone issued a summary annual report to the pension plan's participants, the members of the Union, as required by ERISA. In this report, Keystone revealed that it had sought a waiver of its 1979-1980 pension plan contribution in December 1980 on the advice of its accountants pursuant to section 303 of ERISA, 29 U.S.C. § 1083 (1982). This provision empowers the Secretary of the Treasury to waive ERISA's statutory minimum funding requirement for a given plan year after the Secretary considers the financial condition of the employer and the effect of such a waiver on the employees. 29 U.S.C. § 1083(a). The amount that is waived pursuant to section 303 is then paid back into the plan over a fifteen-year period. § 1082 (b)(2)(C). The report issued by Keystone revealed that the Internal Revenue Service ("IRS"), acting on behalf of the Secretary of the Treasury, had granted Keystone's request for a waiver of its annual contribution based on evidence that Keystone was experiencing severe financial difficulties in 1979 and 1980. At that time, Keystone had suffered a net loss of almost $3.5 million for the fiscal year beginning on July 1, 1979, and a net loss of over $2.5 million in the following year due to serious downturns in the industries to which it sold its products. The IRS found that Keystone was experiencing great difficulty in maintaining a sufficient amount of working capital to prevent a technical default under its prime loan obligations to the Continental Illinois National Bank. However, the IRS concluded that Keystone would probable be able to recover from its temporary financial difficulties as a result of its modernization efforts and its program to reduce costs.

In September 1981, the Union filed grievances with an arbitrator pursuant to the Union's collective bargaining agreement with keystone, alleging that Keystone had violated the annual funding provision of the pension agreement by failing to make its contribution to the plan for the 1979-1980 plan year. After the arbitrator held an evidentiary hearing and reviewed the briefs submitted by the parties, he issued an award in favor of the Union and ordered Keystone to pay $2,147,932 to the pension fund with interest at 8 1/2% per year from July 1, 1980, until paid. After the issuance of the arbitrator's decision, the parties became involved in a dispute as to when the award was to be paid. The Union claimed that the award required the immediate payment of the full amount, while Keystone claimed that the award required payment of the full amount, but in conformity with the fifteen-year equal installment payment schedule as provided for in ERISA. As a result of this dispute over the construction of the arbitrator's award, the Union filed suit under section 301 of the Labor management Relations Act, 29 U.S.C. § 185 (1982), to have the district court enforce the award.

On June 16, 1983, the district court denied both the Union's and Keystone's motions for summary judgment without prejudice and remanded the case to the arbitrator for clarification of the award. However, the district court did state that while ERISA sets minimum standards for contributions to pension plans, it does not prohibit an employer from undertaking greater contractual obligations in a pension agreement. On July 5, 1983, the arbitrator explained that Keystone was to pay the 1979-1980 plan year contribution immediately because Article VI, section 2 of the pension agreement specifically provided that: "The Company agrees to make contributions to the trust fund on an annual basis . . . ." Both parties then renewed their motions for summary judgment before the district court. The Union requested that the district court enforce the arbitrator's decision. Keystone argued that the court should not enforce the arbitrator's award because the award directly conflicted with and nullified the waiver provision of ERISA. On February 27, 1984, the district court granted the Union's motion for summary judgment in a minute order, relying on the reasons that it had specified in its June 16, 1983 order.

On appeal, Keystone argues that the district court erred as a matter of law in enforcing the arbitrator's award because the award conflicts with the public policies embodies in ERISA. Keystone claims that the safeguards embodied in the waiver provision of ERISA cannot be overridden by a pension agreement because these safeguards were enacted for the benefit of pension plan participants.


Since arbitration has been generally favored by the courts as a means of resolving labor disputes, this circuit has held that a court's review of an arbitration award is extremely limited. Ethyl Corp. v. United Steelworkers, 768 F.2d 180, 183 (7th Cir. 1985); Amalgamated Meat Cutters & Butcher Workmen v. Jones Dairy Farm, 680 F.2d 1142, 1144 (7th Cir. 1982). Accord Amalgamated meat Cutters & Butcher Workmen v. Great Western Food Co., 712 F.2d 122, 124 (5th Cir. 1983). The Supreme Court has emphasized that under the well-established standards for the review of labor arbitration awards, a court must not refuse to enforce such an award merely because the court believes that its own interpretation of the collective bargaining agreement at issue would be preferable to that of the arbitrator. W.R. Grace & Co. v. Local Union 759, International Union of the United Rubber, Cork, Linoleum & Plastic Workers, 461 U.S. 757, 764, 76 L. Ed. 2d 298, 103 S. Ct. 2177 (1983). The Court has noted that the federal policy of settling labor disputes by arbitration would be undermined if courts could finally determine the merits of arbitration awards. United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 596, 4 L. Ed. 2d 1424, 80 S. Ct. 1358 (1960). Thus, the Court has concluded that even if the arbitral award is ambiguous, a court must enforce the award without reviewing the merits of the dispute unless the award does not draw its essence from the collective bargaining agreement. W.R.Grace v. Local Union, 461 U.S. at 764 (citing United Steelworkers v. Enterprise Wheel, 363 U.S. at 597).

Even though courts have acknowledged that their role in reviewing arbitration awards is limited, they have also noted that their role is not a meaningless part of the arbitral process. See, e.g., Sea-Land Service, Inc. v. International Longshoremen's Ass'n, 625 F.2d 38, 42 (5th Cir. 1980). The Supreme Court has held that one of the bases that a court can rely on in declining to enforce an arbitration award is that the award is contrary to public policy. W.R. Grace v. Local Union, 461 U.S. at 766. See Amalgamated Meat Cutters v. Great Western, 712 F.2d at 124-26 (arbitrator's award directing employer to reinstate a truck driver caught drinking liquor on duty violates public policy and should not be enforced); Amalgamated Meat Cutters v. Jones Dairy, 680 F.2d at 1144-45 (court declined to enforce on public policy grounds an arbitrator's award approving of a company's work rule that prohibited employees from reporting unsanitary working conditions directly to inspectors for the United States Department of Agriculture). However, the Court has stressed that such a public policy must be well-defined and dominant before a court can decline to enforce an award on public policy grounds. W.R. Grace v. Local Union, 461 U.S. at 766. See also Amalgamated Meat Cutters v. Jones Dairy, 680 F.2d at 1145. The Court has noted that public policy can be ascertained by reference to the Constitution, treaties, federal statutes, and applicable legal precedents rather than by reference to general considerations of supposed public interests. W.R. Grace v. Local Union, 461 U.S. at 766; Hurd v. Hodge, 334 U.S. 24, 34-35, 92 L. Ed. 1187, 68 S. Ct. 847 (1948); Muschany v. United States, 324 U.S. 49, 66, 89 L. Ed. 744, 65 S. Ct. 442 (1945). Before declaring that an arbitral award violates public policy, however, courts have noted that extreme caution should be exercised in determining what that public policy is. Amalgamated Meat Cutters v. Great Western, 712 F.2d at 124; Union of Transportation Employees v. Oil Transport Co., 591 F. Supp. 439, 443 (N.D. Tex. 1984). We hold that the arbitrator's refusal in the represent case to apply the waiver provision of ERISA when interpreting the annual funding requirement of the pension agreement violated the clearly defined public policy behind the enactment of ERISA.

The Supreme Court has held that one of Congress's central purposes in enacting ERISA in 1974 was to prevent the loss of all retirement savings by employees whose vested benefits in a pension plan are not paid when their employer terminates the plan. Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 374, 64 L. Ed. 2d 354, 100 S. Ct. 1723 (1980). In its findings and declaration of policy, Congress noted that the growth in the size, scope, and number of employee benefit plans in recent years had been rapid and substantial, that the operational scope and economic impact of such plans was increasingly interstate, that the continued well-being and security of millions of employees and their dependents were directly affected by these plans, that these plans had become an important factor affecting the stability of employment and the successful development of industrial relations, and that these plans had stimulated the interest of the public at large. 29 U.S.C. § 1001 (1982). Congress thus decided that it had to provide minimum standards for such plans in order to assure their equitable character and their financial soundness, to promote the interests of employees and their beneficiaries, to protect the revenue of the United States, and to provide for the free flow of commerce. Id. The Supreme Court concluded from this clear expression of legislative intent that Congress wanted to guarantee that an employee would receive any defined pension benefits to which he was entitled by providing for a minimum funding schedule and by prescribing standards of conduct for plan administrators. Nachman v. Pension Benefit, 446 U.S. at 375. See also H.R. Rep. No. 779, 93d Cong., 2d Sess. 80, reprinted in 2 Legislative History of the Employee Retirement Retirement Income Security Act of 1974, at 2669 (1976). The Court has stressed that there is no doubt as to what Congress intended in enacting ERISA: to discourage unnecessary termination of pension plans. Nachman v. Pension Benefit, 446 U.S. at 386.

Section 302 of ERISA provides that contributions to a pension plan must be made on an annual basis in order to satisfy the minimum funding standards. 29 U.S.C. § 1082. However, section 303 allows an employer to obtain a waiver of the minimum funding standards from the Secretary of the Treasury if the employer is unable to satisfy these standards for a particular plan year "without substantial business hardship and if application of the standard would be adverse to the interests of plan participants in the aggregate." 29 U.S.C. § 1083(a).*fn1 In deciding whether the employer will suffer a "substantial business hardship" without a waiver, the provision directs the Secretary to consider the following factors: (1) whether the employer is operating at an economic loss, (2) whether there is substantial unemployment or underemployment in the trade or business and in the industry concerned, (3) whether the sales and profits of the industry concerned are depressed or declining, and (4) whether it is reasonable to expect that the plan will be continued only if the waiver is granted. § 1083 (b)(1)-(4). If the Secretary grants the waiver, the employer must pay the amount necessary to amortize the waived funding deficiency for each prior plan year in equal annual installments over a period of fifteen plan years. § 1082(b)(2)(C). The employer is also required to pay interest on the outstanding balance of the deferred contributions over the period that the contributions are waived.

In the present case, we believe that enforcement of the arbitrator's award, which declined to apply ERISA's waiver provision, would be contrary to the well-defined and dominant public policy embodied in ERISA - to protect plan participants from the unnecessary termination of their pension plans. It is clear from the financial difficulties that led Keystone to seek the waiver in the first place that the plan participants very likely faced termination of the their benefits if the IRS did not grant Keystone the waiver of contributions for the 1979-1980 plan year.*fn2 This is precisely the situation that ERISA's waiver provision was designed to forestall.

In making its decision to grant the waiver, the IRS thus considered both the degree of business hardship that Keystone would have faced without the waiver and the interests of the plan participants in the aggregate. Furthermore, the IRS placed the following restrictions in its grant of the waiver: (1) the waiver would be rendered null and void if the pension plan was terminated before July 1, 1985, (2) the outstanding balance of contributions would become immediately due if Keystone made any changes in the rate of accrual or vesting of the benefits, and (3) Keystone could not be granted a waiver for more than five of any fifteen consecutive plan years. By refusing to permit Keystone to rely on the payment schedule outline in ERISA's waiver provision, the arbitrator jeopardized the continued existence of Keystone's pension plan, to the serious detriment of the plan participants. In view of the clear public policy voiced by Congress in enacting ERISA and reiterated by the courts in interpreting ERISA, we must decline to enforce the arbitrator's award requiring Keystone to pay the 1979-1980 plan year contribution immediately.*fn3

In conclusion, we reverse the district court's decision enforcing the arbitrator's award.

COFFEY, Circuit Judge, dissenting.

The majority holds that under the pension agreement, Keystone did not waive its right to obtain a waiver of the ERISA minimum funding requirement from the IRS and that the arbitrator's failure to give effect to the IRS' waiver of the minimum funding requirement violates public policy. In reaching its conclusion, the majority refuses to distinguish between the annual funding requirement contained in the pension agreement and the ERISA minimum funding requirement, set out in 29 U.S.C. § 1082. The validity of the majority's public policy determination depends upon not only the accuracy and fairness of the IRS' determination to grant the waiver of the ERISA minimum funding requirement but also upon the constitutionality of the procedure followed by the IRS in granting the waiver of the ERISA minimum funding requirement. The majority, relying upon an untenable waiver theory, refuses to address the Union's argument that the IRS' procedure for handling requests for waivers of the ERISA minimum funding requirement, which does away with giving the beneficiary notice or a right to be heard, and thus is an unconstitutional deprivation of due process and an unconstitutional delegation of Article II power to an administrative agency. I dissent from the majority's refusal to address these constitutional issues because a review of the record reveals that the Union's due process and Article II arguments were not waived. If we properly reach the constitutional arguments represented by the Union, it is clear that the majority's failure to distinguish between the company's minimum funding obligation under the collective bargaining agreement and under ERISA thrusts the IRS into the ...

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