OAKLAND, Calif. - An out-of-court settlement of a class-action lawsuit against Pacific Lumber Co. involving its purchase of Executive Life Insurance Co. annuities closes the book on one of the longest and most hotly litigated cases involving the failed insurer.
Pacific Lumber, Scotia, Calif., agreed to deposit $7 million in a settlement account to settle the suit filed by plan participants after the company terminated its pension plan in March 1986 and replaced it with an annuity contract from Executive Life, Los Angeles.
Pacific Lumber employees accused the company and MAXXAM Inc., its Houston parent, of improperly recovering about $62 million in surplus pension assets from the terminated plan (Pensions & Investments, May 15, 1995).
According to legal documents, Executive Life had underbid all competitors by at least $2.7 million. The financially unstable insurance company was taken over by California regulators in 1991. Benefits were suspended for a short time and resumed at 70% of previous levels; Pacific Lumber agreed to pay the other 30%. The Pacific Lumber annuities now are being paid by the Aurora Group, which acquired most of the old Executive Life business.
Pacific Lumber employees alleged the selection of Executive Life and the recovery of surplus pension assets violated federal pension law and constituted a prohibited transaction. The Department of Labor also entered the fray, alleging the annuity selection process used by Pacific Lumber trustees was flawed and participants did not have access to the best available contracts.
Many industry sources attribute the passage of the Pension Annuitants Protection Act of 1994 to the issues under dispute in the Pacific Lumber case.
The case became the first test of PAPA, when a federal appeals court last year reinstated the longstanding lawsuit against Pacific Lumber following a U.S. District Court ruling in 1993. That court dismissed the case on the grounds the plaintiffs no longer were plan participants or beneficiaries under the Employee Retirement Income Security Act and thus had no right to sue.
The Pension Annuitants Protection Act of 1994 allows former plan participants to sue employers for overlooking their fiduciary duties in terminating plans and purchasing annuities to cover vested benefits.
The 9th U.S. Circuit Court of Appeals last year said PAPA made it clear such suits are allowed and sent the Pacific Lumber case back to district court for a trial. But the agreement reached this month settled the matter without a trial.
If the court approves the agreement, as expected, each of about 3,693 participants will receive a pro rata share of the $7 million based on years of service and pay status. A final hearing on the settlement is set for July 12 in U.S. District Court in Oakland.
In return for establishing the $7 million fund, Pacific Lumber would be released from all claims in the original suit. The agreement does not constitute any admission or finding of wrongdoing.
Labor Department attorneys were satisfied with the agreement, saying it represents the final installment in a long and bitter dispute that clarified the legal status of annuitants and directed how companies are to go about purchasing annuities.
According to a prepared statement from MAXXAM, the new law and resulting court interpretations intensified efforts to settle the litigation "rather than to proceed to a lengthy and expensive trial."