Pension & Benefits News Court rejected employers’ invocation of irreparable harm as excuse for avoiding interim payments
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Friday, July 19, 2019

Court rejected employers’ invocation of irreparable harm as excuse for avoiding interim payments

By Pension and Benefits Editorial Staff

A controlled group of employers must make both past due and future interim withdrawal liability payments pending arbitration, a district court in Washington has ruled. The court rejected the employers’ assertion that the equitable exception excusing interim payments in the face of irreparable harm applied to this situation.

Stock purchase. In December 2016, Puglia Engineering purchased the stock of San Francisco Ship Repair, Inc. (SFSR). SFSR was required under two CBAs to make contributions to two multiemployer pension funds. The deal quickly soured when Puglia learned in early 2017 that at least $15 million in repairs to SFSR’s shipyard would be required.

Puglia Engineering ceased operating the shipyard. In April 2017, both Puglia Engineering and SFSR filed for Chapter 11 bankruptcy protection. SFSR stopped making contributions to the funds. The two funds filed proof of claims in both bankruptcy proceedings claiming ERISA withdrawal liability.

Puglia Engineering’s stock is owned by an individual who also owns other companies that did not file for bankruptcy. The pension funds sent demand letters to several of these nonbankrupt companies, followed by notifications of default. No payments were made.

Interim withdrawal liability. The funds filed suit against the individual owner and various corporate entities that the funds characterized as a control group. The funds sought an order requiring payment of interim withdrawal liability of about $1 million dollars. The funds also sought an injunction ordering the control group members to make future interim withdrawal liability payments, pending arbitration. As the court explained, under ERISA’s “pay now, dispute later” structure, disputes over withdrawal liability are subject to mandatory arbitration, but interim payments must be made, starting within 60 days of receipt of a demand letter.

The court first determined that the funds’ letters to the non-bankrupt businesses constituted a timely demand under ERISA Sec. 4219(c)(2) for the start of interim withdrawal liability payments. The court next determined that under ERISA Sec. 4001(b)(1), the four corporate defendants were under the common control of the individual and were thus jointly and severally liable for the withdrawal liability. The court also concluded that the individual owner was a member of the control group as a sole proprietor and therefore jointly and severally liable for the withdrawal liability.

Equitable exception. Rather than strongly dispute the conclusion that a common control group existed, the businesses and the individual owner instead urged the court to adopt an “equitable exception” that would excuse them from making interim withdrawal liability payments before arbitration. Irreparable harm would result if such payments were required, they asserted. Puglia Engineering’s assets are more than fully encumbered by the secured claims of a bank, the businesses asserted. Further, the individual owner asserted that a requirement to make interim withdrawal payments would effectively force him into personal bankruptcy and would not result in the funds receiving any payment.

The court rejected this argument, concluding that neither of the two forms of irreparable injury exceptions apply. The Fifth and Seventh Circuits have adopted an exception that fully excuses an employer that would suffer “irreparable financial harm” from making interim payments pending arbitration, but only if the pension fund’s claim appears “frivolous or not colorable.” In this instance, the court said, it is clear the funds’ claims are not frivolous.

Other circuits, including the Ninth Circuit, have permitted employers to present their arguments against withdrawal liability directly to a court if arbitration would cause irreparable injury. This “exhaustion requirement exception,” as the court describes it, does not apply in this instance because the control group still wishes to engage in arbitration.

Thus, regarding the $1 million in withdrawal liability payments the control group had already missed, the court granted the funds’ motion for summary judgment and ordered the control group to pay the amount requested. In addition, while the court determined injunctive relief was not appropriate in this instance, it issued a declaratory judgment that the control group is legally obligated to timely provide future interim withdrawal liability payments.

SOURCE: Marine Carpenters Pension fund v. Puglia Marine LLC (DC WA).

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