By Pension and Benefits Editorial Staff
Adopting the “categorical test” for determining whether an entity is a trade or business under common control for purposes of ERISA, the U.S. Court of Appeals in Cincinnati (CA-6) has ruled in a divided opinion that a trust established by the original owner of a company may be held liable for the company's $30 million in unfunded pension liabilities with respect to the company's terminated plan. In addition, the Pension Benefit Guaranty Corporation (PBGC) may, under a successor liability theory, seek to recover from the son of the company founder and his newly launched business.
A single-employer pension plan terminated in 2009. The PBGC filed suit against several entities, claiming they were jointly and severally liable for the plan's unpaid liabilities. One entity was a trust originally established by the employer's owner to care for the owner's sisters. The trust generated income for this purpose by leasing land it owned to the employer. Upon the death of the sisters, the balance of the trust was split between the employer's sons. Two other entities named by the PBGC took over operation of two of the employer's plants via an asset purchase and transfers from a corporation wholly-owned by one of the sons of the employer's owner.
The PBGC argued that the trust was part of the employer's controlled group under ERISA Sec. 4062(a) and was therefore liable for its share of the plan's unpaid liabilities. Under PBGC Reg. §4001.3(b)(1), a controlled group for single-employer plans consists of all persons under common control, including “two or more trades or businesses under common control.” The Agency noted that other circuits have recognized a “categorical rule” in the multiemployer plan context stating that leasing property to a withdrawing employer constitutes a trade or business.
The PBGC further argued that it could recover from the owner's son under a theory of successor liability. The district court rejected the Agency's arguments on both issues.
Categorical test. On appeal, the Sixth Circuit reversed the lower court to conclude the PBGC could pursue both the trust and the company's son for the unpaid liabilities. With respect to the trust's liability, the court concluded that given the purpose and structure of the ERISA provisions at issue, the “categorical test” for determining the existence of a trade or business applies. Under this test, any entity that leases property to a commonly controlled company is categorically a trade or business for ERISA purposes.
In this instance, by giving the land to the commonly-controlled trust, the company guaranteed that it still had the benefit of use of the land, without the risk or responsibility that comes with outright ownership. In the court's view, “[t]his situation is precisely the type that the common control rules exist to prevent.”
The court rejected the dissent's concern that wholesale adoption of the categorical test could lead to unfair results. Proper application of the IRS regulations that currently govern the application of the common control rules should prevent the occurrence of such results, according to the court.
Successor liability. While agreeing with the district court that the creation of common law under ERISA is something to be done in “narrow circumstances", the appellate court determined it was appropriate to do so in this case. It cited the three-part standard used in making such determinations, and found they all weighed in favor of doing so: (1) ERISA is silent or ambiguous on the issue before the court; (2) there is an awkward gap in the statutory scheme; and (3) “federal common law is essential to the promotion of fundamental ERISA policies.”
Successor liability, the court explained, promotes fundamental ERISA policies by “guaranteeing that substance matters over form.” In this instance, taking the allegations in the complaint as true, the owner's son had extensive information about the plan's funding status when he offered to purchase the company's assets but declined to take on any pension liability. Operations continued at the sites formerly owned by the company, with former company employees, making the same products and selling to the former owner's principal customer. This, the court reasoned, “is certainly the kind of transaction that frustrates the fundamental policies of ERISA.” “If there is no successor liability here,” the court continued, “this case will provide an incentive to find new, clever financial transactions to evade the technical requirements of ERISA and, thus, escape any liability.”
The court therefore vacated the district court's dismissal of the PBGC's suit and remanded for further proceedings.
Source: PBGC v. Findlay Industries, Inc. (CA-6).
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