DB participants’ Tax Court anti-cutback challenge estopped by prior Seventh Circuit decision

Defined benefit plan participants are collaterally estopped by a prior Seventh Circuit decision from pursuing Tax Court litigation related to their contention that plan amendments violated ERISA’s anti-cutback rules, the U.S. Court of Appeals in Chicago (CA-7) has ruled. The prior decision (Carter v. Pension Plan of A. Finkl & Sons Co., 654 F.3d 719 (CA-7 2011) (Carter I)) held in part that no anti-cutback violation occurred.

A company amended its defined benefit plan to insert a special provision for distributions to participants in connection with a contemplated plan termination. Months later, the company decided not to terminate the plan. It amended the plan a second time to delete the newly-inserted provision. It also sought (and subsequently received) from the Commissioner a determination that the plan retained its tax qualified status.

Anti-cutback rule

Seven participants filed suit in district court alleging that the second plan amendment violated either statutory Code Sec. 411(d)(6); ERISA Sec. 204(g); or contractual anti-cutback provisions. While that suit was pending in district court, the participants also sought a declaration in Tax Court that the plan’s new determination letter was issued in error. The district court and the Seventh Circuit ruled against the participants, holding that no anti-cutback violation occurred. The Seventh Circuit also held in Carter I that the plan had not been terminated. Undaunted, the participants attempted to revive their Tax Court challenge, but the Tax Court held the participants were collaterally estopped from challenging the determination letter.

Collateral estoppel

The Seventh Circuit agreed with the Tax Court. Under the doctrine of collateral estoppel, if an issue has been resolved by a court of competent jurisdiction, then that resolution is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation. The participants’ Tax Court case argued the Commissioner wrongfully concluded the plan had not been terminated. But, the Seventh Circuit reasoned, the participants had a “full and fair opportunity” (which they exercised) to litigate the issue of the plan’s termination in Carter I. Thus, the only issue under dispute in the Tax Court action—whether or not the plan had been terminated—was conclusively resolved in Carter I. “This scenario is textbook collateral estoppel,” the court concluded.

Source: Carter v. Commissioner of Internal Revenue (CA-7).

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