Pension & Benefits News Company owners claiming due process violation lose bid to evade withdrawal liability
Wednesday, April 17, 2019

Company owners claiming due process violation lose bid to evade withdrawal liability

By Pension and Benefits Editorial Staff

Owners of two companies who did business in tandem failed in their effort to evade withdrawal liability by arguing that a pension fund’s notice of withdrawal liability violated the Fifth Amendment’s due process clause, the U.S. Court of Appeals in Chicago (CA-7) has ruled.

A construction company owned by two brothers did business in tandem with a second company owned and operated by one of the brother’s sons. The brothers’ company owned the construction equipment; the son’s company hired and provided employees. The brothers’ company participated in a multiemployer pension plan and the son’s company agreed to assume joint and several liability for the construction company’s obligations to the fund. In 2014, both companies ceased operations, dissolved and withdrew from the plan.

The fund assessed withdrawal liability of about $640,000. It mailed to the construction company and its related entities and individuals (including the son’s company) three separate notices: a notice of withdrawal liability (in April 2015); a past due notice (in August 2015); and an acceleration notice (in November 2015). At their depositions the brothers and the adult son acknowledged receiving those notices.

A district court ordered the construction company, along with several other entities and individuals under common control with the construction company, to pay the withdrawal liability. In so doing, the district court made a factual determination that each of the companies and related entities was a trade or business under common control. Thus, under ERISA’s controlled group rules, each was jointly and severally liable for the withdrawal liability.

Due process claim. On appeal, the company and its related entities argued that the fund’s notice of withdrawal liability violated the Fifth Amendment’s Due Process Clause. They asserted that due process requirements obligated the pension fund to include in its notice of withdrawal liability an explanation of the standard for controlled group liability under ERISA.

The Seventh Circuit rejected this argument which, it said, stemmed from a misplaced reliance on a 1950 Supreme Court decision. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) states that due process requires sufficient notice of a judicial proceeding. That standard was satisfied in this instance, as no one argues that they did not receive proper service of process with respect to the district court proceeding. However, the Mullane case has no bearing on ERISA’s controlled group liability provisions.

The real issue for the members of the controlled group, the court suggested, was that by failing to respond to the fund’s notices, the companies in effect also failed to submit their dispute to arbitration, as is required by ERISA Sec. 4221. Once a company fails to arbitrate, the fund can file suit to collect the entire amount of the assessed liability. In addition, with narrow exceptions not applicable here, the companies may not present defenses that could have been presented to an arbitrator. These are “serious legal consequences” for the companies in the controlled group, the court acknowledged. That being said, “in no way, shape or form did any due process violation occur here,” the court concluded.

SOURCE: Trustees of the Suburban Teamsters of Northern Illinois Pension Fund v. The E Company (CA-7).

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