By Pension and Benefits Editorial Staff
An arbitrator did not apply the wrong burden of proof or fail to afford the findings of pension fund trustees the statutory presumption of correctness in concluding that the sale of a subsidiary was not for the principal purpose of evading or avoiding withdrawal liability, ruled the U.S. Court of Appeals in Richmond (CA-4). Accordingly, the employer was entitled to a refund of withdrawal liability payment amounting to more than $9.5 million.
Stock sale. Under ERISA Sec. 4201(a), an employer owes withdrawal liability when it makes a complete or partial withdrawal from a pension plan. All trades or businesses under common control are treated as a single employer, and each member of the controlled group is liable for the withdrawal of any other member. However, if a parent company sells the stock of a subsidiary, the parent is not liable for the subsidiary’s subsequent withdrawal liability unless a principal purpose of the transaction was to evade or avoid withdrawal liability. This principle was at the center of the long-running dispute in this case. At issue here was whether the parent company, Penske Logistics, was liable under ERISA for a subsidiary’s (Leaseway) withdrawal from a pension fund.
Leaseway had long been a contributing employer to the fund. It employed over 200 participants in 1996, but by 2003 it had only 33 participants. Penske acquired Leaseway in 1995, and Leaseway became a member of the Penske-controlled group for Multiemployer Pension Plan Amendments Act (MPPAA) purposes in 1996. On March 24, 2004, Penske sold 100% of the Leaseway stock to Performance Logistics Group (PLG) in exchange for a secured $25 million note and for Penske to receive 43.5% of the stock of PLG. In early 2006, the pension fund trustees assessed withdrawal liability against Penske for the partial withdrawal of Leaseway that was effective December 31, 2004. Penske objected to the assessment, alleging that its sale of Leaseway terminated its liability for Leaseway’s withdrawal liability. Upon review, the trustees determined that a primary purpose of the transaction was to evade or avoid withdrawal liability such that Penske should remain liable for Leaseway’s withdrawal. (Leaseway had filed for bankruptcy by the time the trustees completed their assessment.)
Penske paid the withdrawal liability and initiated arbitration to contest its liability. Subsequently, the trustees assessed Penske for a second partial withdrawal by Leaseway, and then for a complete withdrawal in 2006 after it ceased operations under the fund. Penske contested both of those assessments.
Arbitrator’s award. In 2015, an arbitrator determined that Penske was not liable for Leaseway’s complete withdrawal. The arbitrator concluded that evading or avoiding withdrawal liability was not a principal purpose of the transaction and issued an award providing that the fund must refund withdrawal liability payments amounting to more than $9.5 million. Penske filed suit to enforce the award in district court. After the district court summarily affirmed the award, the fund and trustees appealed to the Fourth Circuit.
On appeal, the fund alleged, among other things, that the district court erred in denying its motion to stay proceedings pending a decision by the arbitrator on a motion for modification, and in affirming the award because the arbitrator applied the wrong burden of proof, incorrectly concluded that the burden was satisfied, and erred in reaching several factual conclusions.
First appeal. In the first appeal, the Fourth Circuit issued a split decision. It held that the district court did not abuse its discretion in denying the motion to stay proceedings. As to the award, the appeals court held that the arbitrator erroneously placed the burden on the fund to prove by a preponderance that the principal purpose for the transaction was to evade or avoid withdrawal liability. Under the correct burden, the court said, the arbitrator should have found evidence disproving that Penske intended to evade or avoid withdrawal liability. The matter was remanded.
On June 22, 2018, the arbitrator issued a supplemental award, concluding that the evidence established that the transaction was entered into on an arms’ length basis for reasons wholly unrelated to withdrawal liability. Evasion or avoidance of withdrawal liability was not a principal purpose of the transaction. The arbitrator also called into question the good faith of the trustees in assessing Penske withdrawal liability and continuing to pursue the claims. The district court affirmed the award to Penske and this appeal ensued.
Review. In this second appeal, the fund and trustees argued that the district court erred in enforcing the supplemental award, asserting that the arbitrator failed to undertake a complete review of the entire arbitration record on remand. The appellate court rejected this argument, satisfied that the arbitrator properly followed its mandate. While in its first review the Fourth Circuit did not mandate that the arbitrator re-review the arbitration record, the arbitrator conducted an additional evaluation and thoroughly explained the record evidence that led him to conclude that the evasion or avoidance of withdrawal liability was not a principal purpose of the transaction.
Second, the fund and trustees argued that on remand the arbitrator again applied the wrong burden of proof and failed to afford the trustees’ findings the statutory presumption of correctness. However, the appeals court found no merit to this contention. The arbitrator recognized that the burden of proof rested with the employer and found that this was not a close case. Penske had shown overwhelmingly that the transaction was entered into for legitimate business reasons wholly unrelated to potential withdrawal liability claims by the fund. Thus, Penske clearly rebutted the presumption of correctness of the trustees’ conclusion that the principal purpose of the transaction was to evade or avoid withdrawal liability.
Penske Logistics LLC v. Freight Drivers and Helpers Local Union No. 557 Pension Fund (CA-4).
Interested in submitting an article?
Submit your information to us today!Learn More