WASHINGTON -- A U.S. District Court judge in New York dismissed an effort by a group of former Pan Am employees to have the Pension Benefit Guaranty Corp. replaced as trustee of the defunct airline's underfunded pension plans.
The PBGC took over Pan American World Airways Inc.'s pension plans in 1992, shortly after the airline went belly-up in January 1991. The three Pan Am plans had a shortfall of around $1 billion.
In her Nov. 26 decision in the case -- Al Pineiro, Richard Brooke and Leonard Beaumont vs. the PBGC -- Judge Loretta A. Preska of the U.S. District Court for the Southern District of New York dismissed all but one allegation made by 20,000 former Pan Am employees that the federal pension insurance agency breached its fiduciary duties to the pension fund.
"Judge Preska got it right," said Gary Ford, a principal in the Washington law firm of Groom & Nordberg, and general counsel at the PBGC in the late 1980s.
The case, he said, "presented questions which, if the court had gotten them wrong, could have really caused (the PBGC) expensive problems."
Judge Preska rejected the argument by former Pan Am employees that the PBGC, in fulfilling its role as the federal pension insurance agency, is subject to the fiduciary standards laid down in the Employee Retirement Income Security Act. She also threw out claims the PBGC had failed to respond to requests by former employees for information about the pension funds.
In her decision, Judge Preska stated the pension plan participants did not have legal recourse because the "plaintiffs have failed to exhaust their administrative remedies under the Freedom of Information Act before seeking relief from this court."
Moreover, she rejected their argument that the PBGC is subject to the same filing requirements as are employers and other plan administrators because the government agency cannot be considered an administrator under ERISA.
The law, she said, defines administrator as the employer, pension plan sponsor or an entity specified by the plan, and the PBGC does not fit into any of those categories.
She also said the participants' charge that the PBGC had failed to file annual reports documenting employer contributions and benefits paid out during the year "does not make sense . . . because those functions cease upon plan termination."
She also threw out an allegation that the PBGC had violated its fiduciary duty by mixing Pan Am's plan assets with those of other plans taken over by the agency, "because ERISA expressly authorizes PBGC to commingle plan assets."
Judge Preska said the allegation that the PBGC "blessed" funding waivers granted to the airline by the Internal Revenue Service did not make sense because the IRS, not the PBGC, grants the waivers. Very simply, she noted, "the plaintiffs have picked the wrong defendant."
Finally, she said that the allegation the PBGC wasted plan assets through its poor selection of outside organizations to perform benefit calculations does not matter to plan participants because the PBGC ultimately is responsible for paying out specified pension benefits. Consequently, the agency must pick up the tab for any shortfalls in plan assets resulting from its decisions.
She did, however, open the door for members of the Association of Former Pan Am Employees to prove in court that the PBGC might have delayed giving the former employees information about their benefits. Ms. Preska did not judge the merits of the charge, simply that "the plaintiffs may recast their complaint to allege such a violation if they so desire."
But agency officials defended the delay in providing benefit information.
"The records (received from Pan Am) were in an absolute state of disarray and it has taken us some time to re-create the records to determine what the benefits were," said Joseph Grant, deputy executive director and chief operating officer. Then, too, the bankruptcy proceedings complicated matters, Mr. Grant said. He explained those claims were only settled in 1994 and the agency began issuing "initial determination letters" to participants last fall. The PBGC already has informed more than half the 34,000 Pan Am participants about their benefits. "Two years after the close of the bankruptcy doesn't seem extraordinary," he said.
But lawyers for Pan Am participants reiterated the charges made in the lawsuit, contending the agency deliberately delayed giving participants detailed information about their plans because "if they keep delaying, one day (the retirees) won't be around to contend with," said Carole L. Fern, partner in the New York law firm of Berlack, Israels & Liberman. "You have all these people who worked for Pan Am for their entire life, and are getting older and older."
The lawsuit, filed by former Pan Am employees Sept. 26, 1996, alleged "the PBGC consciously created delays" in calculating pensions owed workers because without those determinations, "the PBGC would be unable to determine the level of benefits payable under its 'guarantee' in its capacity as statutory insurer. Thus for more than five years, the PBGC has refused to issue final benefit determinations."
Without those calculations, which detail pension benefits owed, participants receive only approximate benefits based on rough calculations. And they cannot appeal the benefits they receive on an interim basis, Ms. Fern said.
The lawsuit also had claimed that without the calculations, Pan Am's former employees "live with a daily uncertainty as to their income."
Given the judge's decision, lawyers representing former Pan Am employees intend to ask the court to force the PBGC to accelerate its issuing of the determination letters "because they routinely take 10 years .*.*. and we think that is unconscionable," said Harvey M. Katz, the lead lawyer for the plaintiffs.
If the agency errs in its rough calculations and pays too much, it can ask participants to return the excess benefits but, Mr. Katz said, "These are retirees. They spent the money years ago, and don't have the money to repay the PBGC."