The appeal addresses the impact of a retiree benefits provision in an asset purchase agreement (APA) on the retiree benefits plans of the acquiring company under ERISA. The court concluded that this provision constituted a valid amendment to the benefits plan and was assumed—not rejected—during bankruptcy proceedings. The factual background outlines that in 1994, American Cyanamid Corporation spun off its fibers business into three companies, which subsequently sold its acrylic fibers assets to Sterling Fibers, Inc. (a subsidiary of Sterling Chemicals, Inc.) in 1996. The APA authorized by the boards of directors included a provision ensuring continued medical benefits for certain Cytec employees, termed "Acquired Employees," who accepted employment with Sterling. Specifically, Section 5.05(f) of the APA mandated that Sterling provide postretirement medical and life insurance benefits that were at least as favorable as those offered by Cytec at the time of the agreement and restricted benefit reductions and premium increases without Cytec's prior written consent. Cytec was also required to inform Sterling of any reductions in its own retiree benefits. The court ultimately reversed the district court's decision and remanded the case for further proceedings.
Plaintiffs, approximately one hundred Acquired Employees, became employees of Sterling Fibers post-acquisition and participated in Sterling's employee benefits plans, specifically the Sterling Plan for retiree medical and prescription drug benefits. Upon retirement, Plaintiffs maintained their benefits and premium levels as outlined in Section 5.05(f) of the APA, and from December 1996 to April 2003, their premiums were lower than those of other retirees in the Sterling Plan. Although Plaintiffs were integrated into the Sterling Plan, no new provisions were added to the formal plan documents, which included reservation-of-rights clauses allowing amendments by Sterling’s Employee Benefits Plans Committee. Various summary plan descriptions (SPDs) indicated that the Sterling Plan could be amended and acknowledged the participation of Acquired Employee retirees, but did not reference Section 5.05(f) of the APA.
Sterling filed for Chapter 11 bankruptcy on July 16, 2001, with Plaintiffs’ benefits remaining unchanged throughout the proceedings. On October 18, 2002, Sterling sought to reject certain contracts, including the APA, and the bankruptcy court granted this motion on November 13, 2002. The Confirmation Order confirmed Sterling's Plan of Reorganization, stating that retiree benefits would be treated as executory contracts and assumed under the reorganization plan, in compliance with 11 U.S.C. 1114 and 1129(a)(13). Section 7.5 of the plan specified that all employee compensation and benefit programs would be treated as executory contracts, continuing in effect post-confirmation without modifying existing terms, thereby allowing Sterling to emerge from bankruptcy on December 19, 2002.
On July 16, 2001, the bankruptcy filing date, Sterling communicated with Plaintiffs through two letters and a handout, affirming that employee benefit programs, including pensions and retiree medical plans, would remain unchanged and that plan assets were secure. Plaintiffs were also provided bankruptcy proof of claim forms, and Robert Evans, although invited to join the creditors' committee, chose not to participate but monitored the bankruptcy case. Some Plaintiffs were aware of a motion to reject the Asset Purchase Agreement (APA) as an executory contract. On December 9, 2002, shortly before Sterling emerged from bankruptcy, a letter was sent to Plaintiffs stating their benefits and premiums were guaranteed only until March 31, 2003.
After emerging from bankruptcy on April 1, 2003, Sterling increased Plaintiffs' premiums to align with those of non-retired Sterling Plan participants, followed by two additional increases in 2004 and 2005. Notably, neither Cyanamid nor Cytec imposed similar increases, and Sterling did not obtain Cytec's consent for the premium hikes.
The procedural history began when Plaintiffs filed suit on February 16, 2007, in the Southern District of Texas. The district court denied Sterling’s motion to dismiss on August 23, 2007, acknowledging the APA's amendment to the Sterling Plan but withholding judgment on the APA's rejection's implications. The case was stayed for 2008 to allow Plaintiffs to exhaust administrative remedies. The Committee, acting as the plan administrator, denied Plaintiffs' claims on April 30, 2008, concluding the APA did not amend the Sterling Plan, Sterling's obligations to Cytec ceased upon the APA's rejection, and the premium increases were permissible under the Sterling Plan. The Committee's final determination on Plaintiffs' appeal was issued on August 12, 2008.
A bifurcated trial was held in November 2009, with post-trial briefs completed by March 2010. The court's focus was on whether the Halliburton Co. Benefits Committee v. Graves case was applicable. On July 1, 2010, the district court ruled in favor of Sterling on all claims, concluding that the APA did not amend the Sterling Plan, the rejection of the APA during bankruptcy lifted any contractual limitations, and the due process claim regarding notice was unfounded. The court's decisions were based on record evidence, including testimony beyond the APA and Sterling Plan documents. Plaintiffs appealed all rulings.
Plaintiffs argue that Section 5.05(f) of the Asset Purchase Agreement (APA) is a valid amendment to the Sterling Plan, thereby assumed rather than rejected during bankruptcy. Alternatively, they assert a due process violation due to Sterling's misleading assurances regarding the impact of bankruptcy on their rights. The court finds that Section 5.05(f) is indeed a valid plan amendment and has been assumed in bankruptcy, thus not addressing the due process claim related to Sterling's communications.
The legal standard for reviewing the validity of Section 5.05(f) is de novo, meaning the court independently assesses whether it constitutes an amendment to the Sterling Plan. The court clarifies that if Section 5.05(f) is determined to be part of the Sterling Plan, it governs the resolution of Plaintiffs’ rights. The court references the Halliburton case as controlling, where a merger agreement's language was pivotal in determining the maintenance of retiree plans. The court emphasizes that if Section 5.05(f) is valid and clear, it will dictate the terms of the Plaintiffs' rights without further inquiry into potential abuse of discretion by the plan administrator.
Halliburton and Dresser included a retiree benefits provision in their merger agreement to allow Dresser retirees to retain their benefits while granting Halliburton the ability to modify those plans, provided similar changes were made for active Halliburton employees. The merger agreement was executed on February 25, 1998, and became effective on September 29, 1998, with both companies' boards approving it. On July 16, 1999, Halliburton agreed to assume and administer the Dresser retiree plans, granting its benefits committee and CEO the authority to amend or terminate these plans. Instead of adopting the plans under the merger agreement, Halliburton chose to do so through the later agreement. By the end of 2002, Halliburton merged the Dresser and Halliburton plans, incorporating the Dresser plans as sub-parts of the combined plan, which remained unchanged until November 2003. At that time, Halliburton modified the Dresser plans to align benefits more closely with Halliburton retirees, freezing contribution costs and placing the burden of any premium increases on Dresser retirees, without making similar changes for active employees. A Dresser retiree's complaint regarding these amendments was denied by Halliburton’s benefits committee, which asserted that the changes complied with the merger agreement. Halliburton subsequently filed a declaratory action, while Dresser retirees counter-claimed. The district court ruled that the retiree benefits provision was a valid plan amendment, obligating Halliburton to maintain the Dresser plans and make identical benefit changes for active employees. On appeal, Halliburton contended that the provision did not constitute a plan amendment, that only its directors could enforce the merger agreement, and that maintaining the Dresser plans constituted impermissible benefit vesting. The appellate court reviewed the issue de novo, noting that the Dresser retiree plans allowed the company to amend or terminate the plan at any time.
Halliburton acquired the rights and obligations under the Dresser retiree plans following a July 1999 agreement. The court examined whether this merger agreement effectively amended the retiree plans, determining that under ERISA, an employer must follow established procedures for plan amendments, but there are no specific labeling requirements for documents to qualify as amendments. The court found that the Dresser retiree plans allowed amendments by a written instrument signed by the Vice President of Human Resources. However, corporate law principles indicate that actions approved by the board of directors can also constitute valid amendments.
Despite Halliburton's argument that the merger agreement was invalid due to lack of signature from Dresser's Vice President of Human Resources, the court concluded that the board's approval and the chairman's signature sufficed for amending the plan. It held that the benefits provision in the merger agreement was a valid amendment. Additionally, the court noted that Halliburton's subsequent administration of the retiree plans in line with the merger agreement further ratified this amendment.
The court addressed and rejected Halliburton's additional arguments: that the retirees could not enforce the benefits provision and that it constituted an impermissible grant of permanent benefits. It clarified that enforcement of plan provisions, including amendments, falls under ERISA's remedial framework, allowing retirees to seek clarification of their rights under the Dresser retiree plans, although they could not sue for breach of contract.
The merger agreement between Halliburton and Dresser did not guarantee an unchangeable benefit for Dresser retirees, but allowed Halliburton to amend or terminate the retiree plans provided it did the same for its active employees. The Halliburton court emphasized that while employers can generally modify ERISA plans, they are bound by contractual limitations if they relinquish that right. Consequently, Halliburton could not unilaterally alter the negotiated retiree rights established in the merger agreement.
The appeal focuses on whether Section 5.05(f) of the Asset Purchase Agreement (APA) validly amended the Sterling Plan. Halliburton established that corporate agreements can amend ERISA plans, regardless of explicit intent. A written agreement that addresses plan provisions can serve as a valid amendment if it meets amendment formalities. Section 5.05(f) of the APA meets the initial requirements by being a written agreement directed at ERISA plan provisions.
Regarding amendment procedures, the formal documents governing the Sterling Plan allow for amendments 'at any time' by the Committee, and the SPDs confirm that the Board of Directors can also amend the plan. The APA was approved by the boards of directors of the three Sterling companies and signed by their chairman, fulfilling the required formalities. This approval indicates that under Delaware law, the board retains authority to delegate and authorize amendments, thus validating the APA as an amendment to the Sterling Plan.
Section 5.05(f) of the Asset Purchase Agreement (APA) is deemed a valid amendment to the Sterling Plan, as established by the Halliburton ruling. Sterling's arguments against this conclusion are unconvincing. First, Sterling contends that Section 5.05(f) was not intended to amend the Sterling Plan or benefit the Acquired Employee retirees, asserting its primary purpose was to benefit Cytec regarding a separate obligation to Cyanamid, with any advantage to Plaintiffs being incidental. However, the Halliburton court's analysis did not focus on the parties' intent but rather confirmed that formal language stating an intent to amend is not necessary for a valid amendment under law or the Sterling Plan's terms.
Second, Sterling's claim that Section 5.05(f) was solely a contractual obligation to Cytec, rather than an amendment, is also found unpersuasive. While it is a contractual obligation, it can simultaneously function as a plan amendment if it pertains to ERISA provisions and meets amendment requirements. Sterling fails to provide legal authority indicating that these concepts are mutually exclusive.
Lastly, Sterling argues that because Section 5.05(f) was not included in formal plan documents or shared with participants, it cannot be considered part of the plan. This assertion is incorrect, as case law indicates that ERISA plans encompass documents provided to employees, but does not exclude documents that have not been publicly distributed or formally incorporated into plan documents from being part of the plan. Thus, Section 5.05(f) is validly enforceable under ERISA as a plan amendment, regardless of its contractual nature or lack of formal inclusion in plan documentation.
The Halliburton court's approach is applicable here, as it disregarded Halliburton’s omission of the merger agreement and retiree benefits terms from formal plan documents. Similarly, Sterling's failure to include Section 5.05(f) in its plan documents or distribute the Asset Purchase Agreement (APA) does not invalidate Section 5.05(f) as a legitimate plan amendment. While such omissions could breach ERISA rights, they do not affect the amendment's validity. Sterling’s assertion that Sterling Fibers, rather than Sterling Chemicals, was responsible for maintaining retiree benefits under Section 5.05(f) is inconsequential. The boards of all Sterling companies approved the APA in 1996, with Sterling Chemicals managing the ERISA plans and providing benefits for all employees and retirees, including those from Sterling Fibers. Post-acquisition, Sterling Fibers placed the Plaintiffs into the Sterling Plan, as required because it lacked its own plan. During bankruptcy, Sterling Fibers was sold and exited the Sterling Plan, yet Sterling Chemicals retained obligations to all retirees, including the Plaintiffs. Even if Sterling Fibers was initially the sole obligor under Section 5.05(f), Sterling Chemicals assumed this role during bankruptcy and maintained it until at least the first premium increase in 2003. The organization of Sterling's ERISA plans does not alter Section 5.05(f)'s amendment status. Furthermore, Sterling’s reference to the Halliburton court’s limited decision scope does not affect this analysis. The Halliburton case serves as controlling precedent due to its sound reasoning and analogous facts. Consequently, Section 5.05(f) is deemed a valid amendment to the Sterling Plan as of December 23, 1996.
Additionally, it must be established whether Section 5.05(f) was assumed or rejected in bankruptcy. This issue was not addressed in Halliburton, and no directly relevant precedents are cited. However, the bankruptcy court's Confirmation Order and the Plan of Reorganization clarify that all retiree benefits were treated as executory contracts and assumed under the plan.
Sterling’s benefits plans were treated as executory contracts assumed under the Plan of Reorganization without modifications to their terms. Section 5.05(f) of the Sterling Plan, established in 1996, was expressly assumed by Sterling per the Confirmation Order and the Plan. Although Sterling rejected the Asset Purchase Agreement (APA) on November 13, 2002, prior to the approval of the Plan on November 20, 2002, ambiguity arises regarding whether Section 5.05(f) was rejected alongside the APA. However, a distinction exists between contractual obligations and ERISA plan provisions, suggesting Section 5.05(f) served dual functions. The district court in Halliburton recognized that a merger agreement could constitute both a plan modification and a contractual commitment. Even though Sterling contended that Section 5.05(f) was merely a contractual term enforceable between Cytec and Sterling, this did not negate its status as part of the Sterling Plan, which was separately assumed by the bankruptcy court. The rejection of Section 5.05(f) pertained only to the ongoing contractual obligation to Cytec, not to the separate ERISA obligation to plan participants, as it was incorporated into the Sterling Plan via law and thus enforceable by those participants.
Sterling's rejection of the Asset Purchase Agreement (APA) does not impact the Sterling Plan, as the validity of its terms is independent of the APA. Sterling contends that Section 1114 and Section 1129 of the Bankruptcy Code do not limit its ability to modify the Plaintiffs' premium benefits during or after bankruptcy, arguing that these benefits do not qualify as "retiree benefits" under Section 1114. However, it is unnecessary to resolve this qualification issue, as Section 5.05(f) was incorporated into the Sterling Plan in 1996, and modifications to this provision require Cytec's prior written consent, which Sterling admits it did not obtain before attempting to raise premiums.
The incorporation of Section 5.05(f) into the Sterling Plan was valid regardless of the APA's current status, as the amendment did not rely on the APA for its ongoing effectiveness. The bankruptcy court recognized a distinction between standard executory contracts and ERISA plan provisions, highlighting that ERISA terms are not solely dependent on corporate agreements like the APA.
Additionally, Sterling's claim that maintaining Section 5.05(f) is unfeasible after the APA's rejection lacks legal basis. The requirement for prior written consent from Cytec does complicate compliance but does not render it impossible. Sterling can still seek information and consent from Cytec regarding retiree plan premiums, even if this may involve negotiation and potential costs. Ultimately, Plaintiffs maintain their rights under ERISA to benefits as stipulated in Section 5.05(f).
The bankruptcy court's approval of Sterling's rejection of the Asset Purchase Agreement (APA) did not imply approval for Sterling's subsequent attempt to modify the Plaintiffs’ premium benefits without adhering to the required procedures outlined in Section 5.05(f) or the Bankruptcy Code. The rejection of the APA did not invalidate Section 5.05(f) as a legitimate plan amendment; rather, it was included in the bankruptcy proceedings as part of Sterling's Plan of Reorganization. Employers have the discretion under ERISA to modify or terminate plans, but if they relinquish that right, they are bound by the terms of the contract, as established in Halliburton. Sterling waived its right to alter Plaintiffs' premiums by agreeing to the APA and its terms, including Section 5.05(f). Thus, Section 5.05(f) is deemed a valid amendment to the Sterling Plan, which was assumed during bankruptcy and remained enforceable. Since Sterling failed to obtain Cytec's prior written consent before increasing the Plaintiffs' premiums, the district court's order is reversed, and the case is remanded for further proceedings.
