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Miami

Cypen & Cypen
NEWSLETTER
for
JULY 10, 2008

Stephen H. Cypen, Esq., Editor

1. NOTICE OF DEVELOPMENT OF RULEMAKING:

The Florida Department of Management Services, Division of Retirement, Local Retirement, has given notice of development of rulemaking. The rules would amend Chapter 60T, which sets forth rules under which municipal and special district units of government are to provide information on their retirement systems plans to the Department of Management Services, Division of Retirement (Bureau of Program Services), pursuant to Part VII of Chapter 112, Florida Statutes. The provisions of said chapter are applicable to all counties, municipal governments and special districts (or agencies and instrumentalities thereof), which operate or administer a retirement system or plan for public employees funded in whole or in part by public funds. A rule development workshop will be held on July 14, 2008, at 9:00 A.M., in the Department of Management Services Director’s Conference Room Suite 208, 1317 Winewood Boulevard, Building 8, Tallahassee, Florida 32399-1560, telephone 850.488.5706. The proposed rules are complex and lengthy. They deal with new definitions, actuarial reports, actuarial impact statements, review of actuarial reports/actuarial impact statements, funding, additional benefits funded by experience and additional filing requirements.

A copy of the proposed rules is available from Garry Green at the above phone number or at https://www.flrules.org/gateway/readFile.asp?sid=1&tid=5802945&type=1&file=60T-1.001.doc. Pension Boards may want to advise their actuaries, so they can attend and provide input into the process.

2. SOME INTERESTING CASE BRIEFS:

A. Police recruit resigns after training officer suggests he do so. City enforces recruit’s agreement to pay $8,000 in training costs. Although the agreement does not violate Fair Labor Standards Act, withholding recruit’s final paycheck to help cover the debt is a violation. City of Oakland v. Hassey, Cal. Rptr. 3d (Cal. App. 1st, June 17, 2008).

B. Although Labor-Management Reporting and Disclosure Act’s extensive financial reporting requirements have for forty years been construed not to apply to public-sector unions, Department of Labor’s new interpretation that brings in those affiliated with national unions including private-sector employees is upheld. Alabama Education Association vs. Chao, 539 F. Supp. 2d 378 (D.C. DC, 2008).

C. In response to practice of drug users replacing tobacco in cigarettes and cigars with marij.uana and other legal drugs, city passed ordinance as to sale of tobacco products. To extent that ordinance replaces statutory scienter (intent) requirement with strict liability, ordinance is preempted. However, provision as to distance of tobacco shops from schools and churches is valid. Holt’s Cigar Company, Inc. v. City of Philadelphia, A 2d (Cmwlth. Ct. Pa., June 23, 2008).

Thanks to Chuck Carlson for the foregoing blurbs.

3. CALPERS SETTLES CLASS ACTION FOR $895 MILLION:

California Public Employees Retirement Systems has reached an $895 Million settlement of the two-year-old class-action lawsuit it brought against UnitedHealth Group, a Minneapolis-based health insurer. According to sacbee.com, CalPERS and Alaska Plumbing and Pipefitting Industry Pension Trust were lead plaintiffs in a suit filed in Minneapolis federal court over the way UnitedHealth dated stock options for top executives, including a $1.6 Billion grant to its chief executive. The practice, CalPERS claimed, cost the fund up to $22 Million on its investments in UnitedHealth stock -- about 6.7 million shares worth $322 Million at the time. Of course, UnitedHealth says the settlement is not an admission of wrongdoing. Ha.

4. REGULAR COMPENSATION INCLUDES SICK LEAVE AND VACATION WHEN TAKEN AS TIME OFF:

Katosh appealed a lower court judgment denying her petition for writ of mandamus by which she sought to compel Sonoma County Employees’ Retirement Association and Sonoma County Employees’ Retirement Board to designate the day following her last day of work as her effective retirement date and to overturn a decision of the Board determining the effective date of her retirement to be the day after she exhausted her accrued sick leave. The lower court determined that Katosh had failed to show the Board erred in setting her retirement date because she did not exhaust her accrued sick leave until the later date, and that her retirement could not be effective until she did so. Katosh argued that the court erred in construing the term “regular compensation” to include sick leave, but the appellate court affirmed. The term “regular compensation” is not defined. However, the dictionary defines “regular” as “steady or uniform in course, practice or occurrence; not subject to unexplained or irrational variations; steadily pursued; orderly or methodical.” The appellate court was not persuaded that use of the term “regular” to modify “compensation” suggests that the term should be equated with “actually working.” Both sick leave and vacation are accrued on a regular basis and when taken as time off, the employee receives regular salary or wages without necessity of performing services. Katosh v. Sonoma County Employees’ Retirement Association, Case No. A115094 (Cal. App. 1st, May 21, 2008).

5. MUTUAL FUND ADVISERS WIN BIG:

Harris Associates advises the Oakmark complex of mutual funds. Open-end funds (an open-end fund is one that buys back its shares at current asset value) have grown in recent years because their net returns have exceeded market average, and the investment adviser’s compensation has grown apace. Jones, who owned shares in several of the Oakmark funds, contended that the fees were too high and violated §36(b) of the Investment Company Act of 1940. The federal district court concluded that Harris Associates had not violated the Act, and granted summary judgment in its favor. Jones appealed, relying on several sections of the Act in contending that the court should have required Harris to return the compensation it had received. Section 36(b), added in 1970, provides, in pertinent part:

For purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser... . With respect to any such action the following provision shall apply:

(1) It shall not be necessary to allege or prove that any defendant engaged in personal misconduct; and the plaintiff shall have the burden of proving a breach of fiduciary duty.

(2) In any such action approval by the board of directors of such investment company of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, and ratification or approval of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, by the shareholders of such investment company, shall be given such consideration by the court as is deemed appropriate under all the circumstances... .

The appellate court affirmed, tossing aside 25-year old precedent from its sister court, the Second Circuit. A fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth. Section 36(b) does not say that fees must be “reasonable” in relation to a judicially-created standard. It says instead that the adviser has a fiduciary duty. That is a familiar word; to use it is to summon up the law of trusts. And the rule in trust law is straightforward: a trustee owes an obligation of candor in negotiation, and honesty in performance, but may negotiate in his own interest and accept what the settlor or governance institution agrees to pay. Harris Associates charges a lower percentage of assets to other clients, but this situation does not imply that it must be charging too much to the Oakmark funds. Different clients call for different commitments of time. Pension funds have low (and predictable) turnover of assets. Mutual funds may grow or shrink quickly and must hold some assets in high-liquidity instruments to facilitate redemptions. Federal securities laws, of which the Investment Company Act is one component, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. Section 36(b) does not make the federal judiciary a rate regulator (like the Federal Energy Regulatory Commission). Jones v. Harris Associates L.P., Case No. 07-1624 (U.S. 7th Cir., May 19, 2008).

6. A COUPLE OF BANKRUPTCY CASE BLURBS:

A. In re: Mati, 2008 Bankr. LEXIS 1702 (Bankr. D. Mass., June 9, 2008), illustrates that bankruptcy courts are generally upholding use of the provision in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) that allows debtors to exclude periodic retirement plan contributions from “disposable income” available to pay creditor claims in Chapter 13 bankruptcy. In Mati, the bankruptcy trustee creatively argued the debtor’s plan could not be confirmed because the debtor was acting in bad faith by continuing to make retirement contributions rather than making the money available to pay creditor claims during the period of the debtor’s Chapter 13 plan. The bankruptcy court held that debtor was not acting in bad faith but was merely taking advantage of what the law allows.

B. In re: Tucker, 2008 Bankr. LEXIS 1589 (Bankr. N.D. Ohio, May 20, 2008), illustrates how the argument over retirement plan contributions and plan loan repayments has now largely shifted to the stage of bankruptcy proceedings where bankruptcy trustees have the opportunity to challenge a Chapter 7 filing as “abusive” under other pro-creditor amendments made by BAPCPA. (Under these amendments, trustees have a greater ability to have a Chapter 7 filing dismissed, thereby forcing the debtor into Chapter 13 where presumably creditors stand a better chance of getting at least some of what they are owed.) Typically, for purposes of determining whether a debtor is needy enough to be deserving of Chapter 7 relief, the courts do not deduct voluntary pension contributions and retirement plan loan repayments from the debtor’s “disposable income” for purposes of the anti-abuse provisions. In Tucker, however, the bankruptcy court cut the debtor some slack, noting that debtor was in his early to mid-fifties and had few assets and that his retirement plan contributions and plan loan repayments represented an extremely modest portion of his income. Accordingly, the court denied the bankruptcy trustee’s motion to dismiss debtor’s Chapter 7 filing as abusive.

The foregoing cases point up something of an inconsistency in bankruptcy law created by recent bankruptcy act amendments. Retirement plan contributions and plan loan repayments are included in “disposable income” for purposes of determining whether a Chapter 7 filing is abusive, but when debtor is forced into Chapter 13, retirement plan contributions and plan loan repayments are deducted from “disposable income” for Chapter 13 purposes. We thank our colleague Wayne Schneider, general counsel of New York State Teachers Retirement System, for summarizing these interesting bankruptcy cases.

7. AUTOMOBILE CRASH KILLING EMPLOYEE NOT “ACCIDENT” FOR PURPOSES OF LIFE INSURANCE POLICY:

In a case under Employees Retirement Income Security Act, a federal appeals court was required to determine whether the plan administrator of an employee benefits plan governed by ERISA may reasonably conclude that the insured, who was killed in a one-car collision with a tree while driving with a blood alcohol content of three times the legal limit, did not die as a result of “an accident” for purposes of his Accidental Death and Dismemberment life insurance policies. After careful review of developing federal common law under ERISA, the appellate court affirmed the district court’s judgment, upholding the plan administrator’s determination that, in this case, the insured was so highly intoxicated that his death was not an “accident.” The ERISA plan at issue provided that basic and voluntary accidental death and dismemberment benefits would be paid if the insured was “physically injured as a result of an accident and dies within 90 days as a result of that injury or accident.” Where, as here, an ERISA plan grants the plan administrator discretionary authority to make benefit determinations, a court must uphold the administrator’s determination unless it was “arbitrary, capricious, or an abuse of discretion.” Courts have stated that the hazards of drinking and driving are widely known and widely publicized. Objectively, the decedent reasonably should have expected death or serious injury when he drove with a blood alcohol level of more than three times the legal limit. Stamp v. Metropolitan Life Insurance Company, Case No. 07-1061 (U.S. 1st Cir., June 30, 2008).

8. FMLA ALLOWS DAMAGES FOR ABSENCES CAUSED BY EMOTIONAL CONDITION RESULTING FROM WRONGFUL DENIAL OF FMLA LEAVE:

Farrell began working for Tri-County Metropolitan Transportation District of Oregon in 1996. During a pre-employment examination, Farrell learned that he had diabetes. By 2001, Farrell also suffered by eczema, chronic obstructive pulmonary disease, asthma, emphysema and chronic bronchitis. In September 2003, pursuant to the Family Medical Leave Act, Farrell repeatedly requested permission to be absent from work as a result of his medical conditions. Tri-County denied several of his requests, and, shortly thereafter, Farrell was diagnosed with an adjustment disorder, anxiety and depression. Farrell sued Tri-County under FMLA and other laws. A jury found that Tri-County wrongfully denied one or more requests by Farrell for leave under FMLA, and that the wrongful denials resulted in emotional stress or other mental problems that caused Farrell to miss additional days of work and that Farrell was entitled to lost wages for days of work that he missed because of stress or other mental problems resulting from the wrongful denial of FMLA leave. Tri-County appealed, contending that Congress did not intend FMLA to permit recovery of consequential or emotional damages. However, the jury’s verdict reflects that Farrell was not awarded FMLA damages for emotional distress, but rather for days of work that he missed because of stress or other mental problems resulting from wrongful denial of FMLA leave. The jury’s verdict is consistent with Tri-County’s position. The jury’s verdict was limited to wages actually lost as a result of Tri-County’s FMLA violation, and thus, the award was not a back-door means of recovery for psychic injuries. Judgment for Farrell was affirmed. Farrell v. Tri-County Metropolitan Transportation District of Oregon, Case No. 06-35484 (U.S. 9th Cir., June 27, 2008).

9. DETECTIVES NOT NECESSARILY ENTITLED TO QUALIFIED IMMUNITY FOR ARREST OF DISMISSED FIREFIGHTER WHO SHOT FORMER FELLOW FIREFIGHTER:

Parsons was arrested for the nonfatal shooting of another firefighter. Parsons was a former firefighter who was discharged as a probationary employee of the fire department shortly before the shooting. Following his arrest, Parsons was detained for two days before he was released, and no charges have ever been filed against him. Parsons sued the city and several city police officers pursuant to 42 U.S.C. §1983 and state law. He alleged that his constitutional rights were violated because he was arrested and detained without probable cause. The district court granted summary judgment in favor of all defendants. On appeal, the reviewing court reversed. The preliminary investigation into circumstances surrounding the shooting was conducted by responding officers, who indicated that Parsons knocked on the northwest door, and when the firefighter opened it, he was shot twice in the chest. Parsons had told his ex-girlfriend that he was upset at being fired and had a plan that she would “hear on the news when it happens.” Among other things, there was a genuine issue of fact as to whether or not the victim had opened the door to his assailant after hearing a knock at the window (the typical firefighter’s way of getting attention of the persons inside) or after hearing a knock at the door. Parsons v. City of Pontiac, Case No. 07-2299 (U.S. 6th Cir., June 24, 2008).

10. SENATORS CALL FOR INVESTIGATION OF PBGC PENSION PAYMENTS:

Trustees would agree that one of their most unpleasant tasks is asking for a retiree to return an overpayment. Well, in calling for an investigation of how Pension Benefit Guaranty Corporation calculates payments when it assumes responsibility for private pensions, thirteen U.S. Senators cited several examples in which retirees have been asked to pay back thousands of dollars worth of overpayments that resulted from incorrect PBGC pension estimates. (Among the signatories, are Hillary Rodham Clinton and Barack Obama.) Pensions of more than 44 million private sector workers and retirees are insured by PBGC, which is responsible for collecting premiums from plan sponsors and for providing timely and uninterrupted pension payments if plan sponsors file for bankruptcy or terminate plans. When PBGC assumes responsibility for payments, it initially pays a retiree an estimated benefit until it calculates the final amount that beneficiary will receive. However, it often take PBGC several years to calculate the final benefit amount! When the final benefit amount is lower than the estimated amount, not only do PBGC beneficiaries begin receiving lower pension payments, but they must return the overpayment accrued, which often results in financial hardship for retirees living on fixed incomes. The Senators have requested that GAO study several aspects of PBGC performance to determine how its benefit determination process can be improved. Specifically, the Senators request that GAO:

  • Explain how PBGC estimates initial benefits.
  • Determine why there have been noted delays in making final benefit determinations.
  • Examine the extent to which retiree benefits change significantly when they become final and the reasons for these changes.
  • Examine the discrepancies between negotiated and guaranteed benefits for those retirees whose benefit plans have come under PBGC administration due to plan termination.
  • Examine how PBGC appeals process functions, including the ease of participant access to the process and length of time that passes awaiting decision.

GAO’s answers should be quite enlightening.

11. HUMOR FOR LEXOPHILES:

The short fortune teller who escaped from prison was a small medium at large.

12. QUOTE OF THE WEEK:

“When you have to get up at 7:00 o’clock, 6:59 is the worst part of the day.” (That great philosopher) Charlie Brown

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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