Legal Alert

Third Parties Face Pension Liability Under Controlled-Group and Successorship Theories

September 18, 2018

Pension funding obligations for Employee Retirement Income Security Act (ERISA) pension plans are not limited to the immediate employer and sponsor of the pension plan. A recent decision from the 6th U.S Circuit Court of Appeals emphasizes that point.

Liability of Trades and Businesses Under Common Control

Under ERISA Section 4001(b)(1), all employees of “trades or businesses” that are under common control are treated as if they are employed by a single employer and any such trade or business is treated as a single employer.

Thus, where a single-employer pension plan is terminated in a distress or involuntary termination, all trades or businesses under common control (the controlled group) are jointly and severally liable to the Pension Benefit Guaranty Corporation (PBGC) for the plan’s unfunded benefit liabilities. Similarly, an employer withdrawing from a multi-employer pension plan (MEPP) is liable for the employer’s share of the plan’s unfunded vested benefits, and all members of the employer’s controlled group are jointly and severally liable for withdrawal liability of the employer.

Successor Liability

In addition to controlled-group liability, several courts have recognized a “federal successor doctrine” under ERISA and other federal statutes, in which even a bona fide purchaser of assets is subject to the liability of the seller “where the buyer had notice of the liability prior to the sale, and there exists sufficient evidence and continuity of operations between the buyer and seller.” See Einhorn v. M.L. Ruberton Const. Co., 632 F.3d 89, 99 (3d Cir. 2011).

MEPPs have been particularly aggressive in using successor liability to pursue withdrawal liability claims against asset purchasers and have prevailed in the 3rd, 7th and 9th Circuits against unrelated third parties who purchased assets of failed employers and had knowledge of the selling company’s withdrawal liability.

6th Circuit Adopts Expanded Controlled-Group Liability and Successor Liability

In Pension Benefit Guaranty Corporation v. Findlay Industries, Inc., et al., the PBGC sought to recover over $30 million in unfunded liabilities of a defunct auto parts maker’s pension plan. The 6th Circuit held, in an interlocutory appeal for this case, that (1) an irrevocable trust’s leasing of property to a commonly controlled entity is categorically considered a “trade or business” for ERISA purposes, and (2) the founder’s son and his businesses who purchased Findlay assets and continued much of Findlay’s business were successor employers. The case was remanded to the district court, where the trust, the founder’s son and the founder’s son’s businesses may be found jointly and severally liable for Findlay’s unfunded pension liabilities.

In 1986, Findlay’s founder transferred real estate to the irrevocable trust to provide for his sisters through the end of their lives. For most of the trust’s existence, however, the trust leased the land back to Findlay. When the Findlay pension plan terminated with unfunded benefit liabilities, the son of Findlay’s founder served as both Findlay CEO and trustee of the trust.

Soon after Findlay failed, the son’s new businesses purchased inventory, equipment and receivables of Findlay; hired former Findlay employees; and started selling to Findlay’s largest customer. The new businesses did not assume Findlay’s pension debt.

Trust Was “Categorically” a Trade or Business

PBGC argued that the trust was joint and severally liable for the pension liability as a “trade or business” under common control with Findlay, citing MEPP withdrawal liability decisions from the 7th, 8th and 9th Circuits. The district court ruled against PBGC, finding that MEPP withdrawal liability cases did not apply where PBGC sued for single-employer pension liabilities, and finding that the trust’s purpose of providing for the founder’s sisters negated “trade or business” status. 

The 6th Circuit disagreed with the district court, holding that MEPP controlled-group case law applied to single-employer cases and that a lessor of property to a commonly controlled entity is categorically a “trade or business” for ERISA controlled-group purposes. The 6th Circuit reasoned, in part, that categorically labeling this activity a trade or business prevents businesses from shirking ERISA obligations by fractionalizing operations into separate entities. The Findlay decision aligns the 6th Circuit with the 7th, 8th and 9th Circuits in adopting the “categorical test.”

Asset Purchasers Liable as Successors for Findlay’s Pension Underfunding

The 6th Circuit also vacated the district court’s judgment that the son and his companies were not liable under the federal common law doctrine of successor liability. The Court of Appeals agreed with the PBGC that successor liability promotes fundamental policies of ERISA and other labor and employment laws “by guaranteeing that substance matters over form.” The 6th Circuit reasoned that application of successor liability is necessary to promote fundamental ERISA policies. The court concluded that, under the facts of the case, refusal to apply the doctrine would frustrate ERISA policies. 

Lessons From Findlay Industries

Employers, investors, shareholders and lenders should be alert to the dangers of pension liability arising from membership in a controlled group or successorship. Where unfunded pension liabilities exist, the PBGC and MEPPs will carefully scrutinize the employer’s real estate and other leasing arrangements for “trade and business” controlled-group claims.  Likewise, purchasers of assets need to be mindful of the expanded successor liability doctrine used by MEPPs and the PBGC to recover unfunded pension liabilities. When purchasing assets from an employer who participates in an MEPP or sponsors a single-employer pension, the buyer should ensure the transaction is carefully structured to avoid facing unexpected successor liabilities.

For more information, please contact one of the authors of this alert or any member of the employee benefits practice.