Opinion
Case No. 1:09-cv-794
07-29-2013
William J. Schumacher, on behalf of himself and all persons similarly situated, Plaintiffs, v. AK Steel Corporation Retirement Accumulation Pension Plan, et al, Defendants.
ORDER
This case is before the Court upon remand from the Sixth Circuit Court of Appeals. That court affirmed the summary judgment granted on the merits in favor of Plaintiffs and awarding them "whipsaw" pension benefits, but reversed this Court's award of pre-judgment interest at the statutory rate of 0.12%. The parties have filed memoranda of law advocating their respective positions on this issue (Docs. 161, 169, 171). While Plaintiffs have requested oral argument, the Court concludes that the issue is fully presented in the briefs and that argument would not aid the Court in reaching its decision.
The facts and procedural history of this case are well known to the parties and need not be recited at length. As pertinent to the issue for decision, the record establishes that Plaintiffs were formerly members of the class this Court certified in West v. AK Steel, Case No. 1:02-cv-001 (S.D. Ohio). They were subsequently excluded from that class in this Court's September 2005 order, based on the execution of releases signed by each Plaintiff in conjunction with their acceptance of severance packages during a layoff at AK Steel. This Court entered judgment in favor of the West plaintiffs in March 2006, which the Sixth Circuit affirmed in April 2007. The U.S. Supreme Court denied Defendants' certiorari petition in January 2009. In October 2009, Plaintiffs filed this lawsuit, seeking the same "whipsaw" benefits that the West plaintiffs had been awarded on Plaintiffs' lump-sum pension payments.
This Court granted Plaintiffs summary judgment, and awarded prejudgment interest at the statutory post-judgment rate in effect when the judgment was entered, as it had done in West. When the West judgment was entered in 2005, that statutory rate was 4.7%; by the time judgment was entered in this case, that rate (based on the one-year Treasuries rate) had fallen to "an all-time low of 0.12%." Schumacher v. AK Steel, 711 F.3d 675, 686 (6th Cir. 2013). The Sixth Circuit found that this Court abused its discretion in automatically awarding interest at the exceedingly low 2012 statutory rate, and remanded with instructions to "fashion an award that considers and balances the interests involved...". The court noted the case-specific factors this Court should consider in determining an appropriate rate include, but are not limited to: "The remedial goal to place the plaintiff in the position that he or she would have occupied prior to the wrongdoing; the prevention of unjust enrichment on behalf of the wrongdoer; the lost interest value of money wrongly withheld; and the rate of inflation." Id. at 687.
The Sixth Circuit cited three of its prior cases that also provide guidance on the question of an appropriate prejudgment interest rate. One upon which Plaintiffs heavily rely is Rybarczyk v. TRW, Inc., 235 F.3d 975 (6th Cir. 2000), an appeal from plaintiffs' successful challenge to a pension plan's calculation of benefits that the district court held violated ERISA's anti-cutback rules. The court awarded prejudgment interest at the greater of the statutory rate or the rate of return actually earned by the plan during the relevant time period. The defendants appealed the use of that formula, arguing that the plan's rate of return would overvalue any lost interest on the withheld benefits, which the Sixth Circuit had previously identified, in Ford v. Uniroyal, 154 F.3d 613 (6th Cir. 1998), as a primary purpose for prejudgment interest:
Awards of prejudgment interest pursuant to § 1132(a)(1)(B), however, are not punitive, but simply compensate a beneficiary for the lost interest value of money wrongly withheld from him or her. See Tiemeyer [v. Comm. Mut. Ins. Co.]. 8 F.3d [1094] at 1102 [6th Cir. 1993]; see also Kinek v. Paramount Communications, Inc., 22 F.3d 503, 514 (2d Cir. 1994) ("Awards of prejudgment interest must not result in over-compensation of the plaintiff." (quotation omitted)); cf. Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 286 (2d Cir. 1992) ("Prejudgment interest is not intended to penalize the trustee but serves as compensation for the use of money withheld. Hence, such an award must be made with an eye toward putting the plan in the position it would have occupied but for the breach." (citation omitted)).Id. at 618. In Rybarczyk, the Sixth Circuit rejected defendants' challenge to the interest rate used by the district court. It noted that it and other courts had often upheld prejudgment interest awards at the statutory rate, citing Algie v. RCA Global Communications, Inc., 60 F.3d 956, 960 (2d Cir. 1995), which affirmed use of the Section 1961 rate because it provided a "closer approximation of the likely return on plaintiffs' unpaid benefits." But it also held that the statutory rate is not the only permissible rate, as reflected in cases affirming the use of rates tied to prevailing market rates; see, e.g., EEOC v. Wooster Brush Co. Employees Relief Ass'n, 727 F.2d 566, 579 (6th Cir. 1984), affirming use of an adjusted prime rate of interest; and Lorenzen v. Employees Ret. Plan of Sperry & Hutchinson Co., 896 F.2d 228, 236-37 (7th Cir. 1990), affirming use of the rate of interest earned by the plan. The Rybarczyk court rejected defendant's argument that the formula adopted by the district court (the greater of the statutory rate or the plan's rate of return) would result in a windfall for plaintiffs, noting that if the statutory rate "... were lower than TRW's actual rate of return, it is TRW that would arguably receive a windfall. Because the plan with which we are concerned in this case is a defined benefit plan, TRW has to contribute only enough money to fund the plan's defined obligations. If TRW were able to keep part of the return on wrongfully withheld funds, it would have to contribute that much less to fund the plan's obligations to other retirees." Id. at 987. Plaintiffs in this case argue that AK Steel's plan is also a defined benefit plan, and the same reasoning should apply with equal force here.
In its decision in this case, the Sixth Circuit also cited Ford v. Uniroyal, and United States v. City of Warren, 138 F.3d 1083 (6th Cir. 1998). Ford v. Uniroyal involved a claim for disability benefits under a pension plan; the district court found that the defendant acted in bad faith in denying plaintiff's applications, and had sanctioned defendant for misleading the court and an arbitrator. But the court rejected the plaintiffs' request to award prejudgment interest at the state's statutory rate (then 12%), because that rate was intended to compensate for delayed payment and for a prevailing party's litigation expenses. The Sixth Circuit affirmed the court's decision to award interest at the Section 1961 rate, which at the time was 8.68%. And in City of Warren, a Title VII disparate impact employment discrimination case, the district court awarded prejudgment interest on back pay awards at a rate commensurate with the consumer price index (CPI). While noting the great discretion normally afforded the district court in calculating interest rates, the Sixth Circuit found no authority for using the CPI as a substitute for a market-based interest rate. The CPI accounts for inflation's effect on money's purchasing power, not for the lost interest value of funds. The case was remanded to the district court to determine a more appropriate rate.
While not cited in the decision, the Sixth Circuit also addressed appropriate prejudgment interest rates in Caffey v. Unum Life Ins. Co., 302 F.3d 576 (6th Cir. 2002). There, the court approved the district court's use of a "blended rate," averaging the Section 1961 rate over the relevant time period, to award prejudgment interest in an ERISA case. See also, O'Callaghan v. SPX Corp., 2010 U.S. Dist. LEXIS 4119 (E.D. Mich., Jan. 20, 2010), applying a blended rate based on Section 1961 rates over the applicable period and citing Caffey; Perrin v. Hartford Life Ins. Co., 2008 U.S. Dist. LEXIS 53065 (E.D. Ky., July 7, 2008)(same); Rabuck v. Hartford Life & Acc. Ins. Co., 522 F.Supp.2d 844 (W.D. Mich. 2007)(same); Kolkowski v. Goodrich Corp., 2008 U.S. Dist. LEXIS 110951 (N.D. Ohio, July 23, 2008)(applying the average annual statutory rate for each year of the relevant period (2001-2006), and citing Caffey). And see, Johnson v. Conn. General Life, 2008 U.S. Dist. LEXIS 24026 (N.D. Ohio March 13, 2008) (awarding prejudgment interest at the then-applicable statutory rate of 2.08%).
Plaintiffs argue here that the most appropriate interest rate is the average rate actually earned by the Plan over the relevant time period as reported on the Plan's information returns, 8.66%. Alternatively, they urge the Court to apply the rate that AK Steel paid on corporate bonds it issued in 2003 and which matured in 2012, a borrowing rate of 7.75%. Another proposed alternative is the Department of Labor's "lost earning rate," used in DOL's voluntary pension plan correction program. According to Plaintiffs, the rate used to calculate lost earnings on delinquent plan contributions (based on Internal Revenue Code Section 6621(a)(2)) would be approximately the same as AK Steel's borrowing rate. Plaintiffs have also suggested using the same awarded in West, 4.7%, but note that a static rate based on the date of entry of judgment does not adequately account for the lost interest value over the entire period (in this case, beginning in 2004 and ending in 2013). Plaintiffs further note that the rate of inflation from 2004 to April 2013 averaged 2.39%, and they cite investment grade bond rates, which averaged 5% for Aaa and 6.15% for Baa rated bonds over the same period. A blended rate (based on a 50/50 portfolio) would be 5.58%. Plaintiffs argue that the overriding purpose of prejudgment interest is to prevent unjust enrichment, and that use of the Plan's rate of return or AK Steel's own borrowing rate is best suited to serve that goal.
Defendants disagree with all of Plaintiffs' proposed alternatives. They reject Plaintiffs' contention that the Sixth Circuit specifically directed this Court to award a rate higher than the inflation rate, or at least equal to the West rate. They note that the court of appeals remanded the matter to this Court, with instructions to fashion an award that "considers and balances the interests involved in determining a just pre-judgment interest award." Schumacher, 711 F.3d at 687. Defendants further assert that Plaintiffs never expected to receive "whipsaw" benefits because they are created by statutes and regulations, not by the express terms of the retirement plan. And they contend that there is no evidence of any ill will or bad faith; they characterize the Plan's failure to engage in the "whipsaw" calculation as "an unintended misapplication of very complex and technical ERISA and Internal Revenue Code provisions." (Doc. 169 at 2) While it is true that the whipsaw claims have involved complex issues, numerous cases have held that an award of prejudgment interest is not intended to punish bad behavior. See Ford v. Uniroyal, cited infra. The lack of ill will or bad faith is largely irrelevant to the Court's decision.
The Sixth Circuit instructed this Court to evaluate and weigh the relevant case-specific factors to determine an appropriate rate of prejudgment interest. Two of those factors are the remedial goal of placing Plaintiffs in the position they would have been if their lump-sum payments had been properly calculated, and the closely related goal of compensating Plaintiffs for the lost interest value of the unpaid whipsaw benefits. Those factors favor the use of a rate commensurate with what Plaintiffs would have earned had they received their whipsaw benefits with their lump-sum payments. That rate would undoubtedly be higher than the currently depressed Section 1961 rate, and this Court was remiss in failing to address that fact in its prior order. While the statutory rate has been commonly used (as reflected in the cases cited above,) a few district courts have also cited 26 U.S.C. § 6621(a)(1), the interest rate payable on certain tax overpayments, as one acceptable measure of the time value of money. See Safran v. Donagrandi, 2009 U.S. Dist. LEXIS 35459 (E.D. Mich., April 27, 2009)(Section 1961 and Section 6621(a)(1) "purportedly reflect an objective measure of the value of money," and awarding interest at the state statutory rate that ranged from 3.6 to 5.8% over the period, because it fell between the two federal rates); Pipefitters Local 636 Fund v. Blue Cross of Michigan, 2012 U.S. Dist. LEXIS 127574 (E.D. Mich. Sept. 7, 2012)(same).
Another relevant factor in setting a rate is to prevent unjust enrichment; this factor would favor awarding interest at the rate actually earned by the Plan over the relevant period, as Plaintiffs advocate. However, simply adopting that rate would ignore all of the other factors. And simply using that rate would not take account of investment risks that the Plan may willingly assume and that may be quite different from the risk levels willingly assumed by individuals investing their personal retirement funds. Moreover, the Sixth Circuit specifically labeled as "unusual" the rate adopted in Rybarczyk (the greater of the 52-week average statutory rate at the time of the initial lump sum distribution to each class member, compounded annually, or the plan's rate of return on the principal amount of the underpayment; see Rybarczyk v. TRW, Inc., 1997 U.S. Dist. LEXIS 13848, at **15-16 (N.D. Ohio, Sept. 15, 1997)); and no other court decision had previously approved a similar rate.
Another factor cited by the Sixth Circuit in determining an appropriate interest rate is inflation. Plaintiffs assert that over the period 2004 to 2013, inflation was 2.39%. But the inflation rate alone is not a relevant proxy for the lost time value of money, and would not serve all the goals of a prejudgment interest award. As the Sixth Circuit noted in City of Warren, 138 F.3d at 1096, prejudgment interest is intended to compensate "both for the time value of the lost money as well as for the effects of inflation." The district court's use of the consumer price index to set the prejudgment interest rate failed to account for the lost time value of the backpay awards.
Another relevant factor in this case that this Court cannot ignore is that the West Plaintiffs were awarded 4.7% prejudgment interest. Absent the releases signed by these Plaintiffs, they would have remained in the West class and would have received that rate of prejudgment interest. It would be anomalous to award these Plaintiffs a substantially higher rate than that awarded in West, particularly in view of the fact that Plaintiffs waited over four years after their exclusion from West to file this lawsuit. While the Court rejects Defendants' contention that Plaintiffs are not entitled to any prejudgment interest for that period of time, an argument Defendants have not raised before, the Sixth Circuit noted that awarding Plaintiffs the current statutory rate of 0.12% while the West plaintiffs received 4.7%, was "absurd," thereby approving some comparison between the two cases. The Court does not believe that there is any substantial reason why the Plaintiffs in this case should be awarded an interest rate much higher than that awarded in West, as Plaintiffs advocate.
The Sixth Circuit instructed this Court to "strike a balance" between all of the competing relevant factors in arriving at an equitable prejudgment interest rate. Prior to the exceedingly low Treasury rates that have prevailed since 2008, the Section 1961 rate was generally reflective of market conditions, and was an acceptable proxy for the lost time value of money and inflation. The cases cited above all reflect a general acceptance by the courts of using the statutory rate, and this Court has applied it in other ERISA cases. The Court has again reviewed Masters v. Supplemental Exe. Ret. Plan for Auto. Pkg. Systems, 2009 U.S. Dist. LEXIS 38194 (N.D. Ohio, May 1, 2009), which Plaintiffs cited in their first brief addressing prejudgment interest (Doc. 91 at p. 2). There, the district court observed that Section 1961 "may normally be a reasonable method for calculating interest even in the face of declining interest rates." But due to the precipitous decline in 2008 (and the low rates that have persisted since then), the current statutory rate would not adequately compensate the plaintiff for the lost use of funds while also satisfying ERISA's remedial goals. The court therefore fashioned an adjusted rate by starting with the statutory rates for the first two years of the relevant period, 2006 (4.94%) and 2007 (4.53%). It then applied the one-year decline in the statutory rate (0.41%) to the last two years in the relevant period, resulting in a "hybrid" rate of 4.12% for 2008, and 3.71% for 2009. While that case involved a stream of monthly pension benefits awarded to the plaintiff and not a lump sum, the court found that using an adjusted annual rate "recognizes the reasonableness of applying the federal statutory rate to prejudgment interest calculations, but also recognizes the unusual economic circumstances which have contributed to a federal statutory rate for 2008 and 2009 that will not adequately compensate plaintiff ...". Id.at *6.
Even in the currently depressed rate environment, at least one district court refused to award an interest rate higher than the current statutory rate; see Fura v. Fed. Express Corp. Long Term Disability Plan, 2012 U.S. Dist. LEXIS 95203 (E.D. Mich., July 12, 2012).
This Court concludes that a similar hybrid method in this case would appropriately balance all of the relevant case-specific factors that the Sixth Circuit directed this Court to consider. Plaintiffs contend that most of the class members received their lump-sum payments after January 1, 2004, although a few may have been shortly before that date. The Section 1961 annual one-year Treasury rate for the first five years of the period were: 2003 (1.24%), 2004 (1.89%), 2005 (3.62%), 2006 (4.94%) and 2007 (4.53%). Using the "hybrid" rate of 4.12% for 2008 and maintaining that annual rate through 2013 (to blunt the effect of suppressed Treasury rates in those years), compounded annually, would yield interest returns that this Court believes will adequately compensate Plaintiffs for the time value of the withheld benefits, will avoid unjust enrichment, and will place Plaintiffs in a position comparable to the one they would have been in had they received their whipsaw benefits with their lump-sum payments. Rather than apply a blended or average rate for the entire period, the yearly rates should be applied to each class members' additional whipsaw benefit, beginning with the date they each received their lump sum payment through the date of final judgment, compounded annually. This method was adopted in Kolkowski v. Goodrich, cited above, and the Court believes it more accurately places Plaintiffs in the position they would have been than using an average rate for those years. As the vast majority of the class members received their lump-sum benefits on one of three dates falling in the first quarter of 2004 (see Doc. 126), these calculations should not be unduly burdensome to perform.
Plaintiffs shall file under seal, no later than August 26, 2013, a revised class roster in the same format as Doc. 126, setting forth the corrected amount of prejudgment interest to be paid to each class member in accordance with the terms of this Order. Plaintiffs shall provide their interest calculations to the Defendants before filing the roster, and the parties are directed to use good faith best efforts to resolve any disagreements about the mathematical calculations. If they are unable to do so, they shall file a brief (no more than five pages) statement explaining the dispute along with the roster. The Court will enter judgment forthwith upon receipt of the roster and resolution of any calculation disputes.
SO ORDERED.
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Sandra S. Beckwith
Senior United States District Judge