General release of claims does not bar unaccrued ERISA whipsaw calculation claims

A class action suit regarding a pension plan’s failure to utilize a “whipsaw” formula properly was not barred by the employees’ agreement to a general release of claims in exchange for severance, the U.S. Court of Appeals in Cincinnati (CA-6) has held. The whipsaw claims had not accrued at the time of the execution of the severance agreements and the releases made no mention of future ERISA claims.

Prior litigation

The 92 former employees included in the class had originally been part of the class whose claims were resolved in West v. AK Steel Corp. Retirement Accumulation Plan but they were excluded from participation in the West class due to their execution of severance agreements that included a general waiver of all claims.

In West, the Sixth Circuit held the plan failed to utilize the plan’s whipsaw formula to properly calculate lump sum payments. The West plaintiffs were awarded over $37 million in additional benefits and over $9 million in pre-judgment interest.

The 92 employees filed suit in district court to recover benefits similar to those awarded to the West employees. The district court certified their class action and awarded them additional benefits similar to those awarded under West, except that it used the current interest rate of 0.12% to calculate pre-judgment interest, rather than the 4.7% rate used by the West court. Both sides appealed.

Procedural issues

The appellate court first determined that the employees’ suit was not barred by the statute of limitations. A federal four-year limitations period was not applicable because the class’s claim did not arise under a post-1990 new federal law or an amendment to an existing one. Under the applicable state law six-year limitations period, the class’s action was timely.

In addition, the district court did not abuse its discretion when it certified the class. The determination of the scope and validity of the severance agreements signed by the members of the class did not require an individualized review of each of the agreements.

Claims waivers

The plan argued the district court erred in awarding benefits to the employees because they had waived their rights to the benefits when they signed the general waivers in exchange for severance.

The appellate court upheld the lower court’s ruling that the text of the waivers did not release future ERISA claims. The employees’ claims regarding the whipsaw violation had not accrued as of the dates the waivers were signed. In precedents where the release of future ERISA claims was upheld, the releases contained explicit references to ERISA, which was not the case in the releases at issue.

Pre-judgment interest

The district court abused its discretion when it “mechanically” applied the current statutory rate of 0.12% to determine the award of pre-judgment interest to the employees. District courts may award pre-judgment interest in accordance with general equitable principles. While it can be permissible to use the current statutory rate, in this case, given the much higher rate used to determine the award for the West class, use of the 0.12% rate would essentially reward the employer and the plan for their wrongdoing. Thus on remand the district court must re-calculate the interest award.

Source: Schumacher v. AK Steel Corporation Retirement Accumulation Pension Plan (CA-6).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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