Court Finds Personal Trust May Be Liable for Pension Termination Costs

Reversing a federal district court’s decision, the 6th U.S. Circuit Court of Appeals has found that the Pension Benefit Guaranty Corporation (PBGC) may be able to recoup termination liabilities for a single-employer defined benefit (DB) plan from a personal trust of the owner or the asset purchasers of the sponsoring company.

Writing for the panel, Circuit Judge Martha Craig Daughtrey explains in the opinion that the PBGC sued to collect more than $30 million in underfunded pension liabilities from Findlay Industries following the shutdown of its operation in 2009. When Findlay could not meet its obligations, PBGC looked to hold liable a trust started by Findlay’s founder, Philip D. Gardner (the Gardner Trust), treating it as a “trade or business” under common control by Findlay. PBGC also asked the court to apply the federal common-law doctrine of successor liability to hold Michael J. Gardner, Philip’s son, liable for some of Findlay’s debt.

Michael, a 45% shareholder of Findlay and its former CEO, had purchased Findlay’s assets and started his own companies using the same land, hiring many of the same employees, and selling to Findlay’s largest customer.

In determining whether the Gardner Trust was a “trade or business” under Findlay’s common control, Daughtrey notes that the district court rejected the approach of sister circuits that apply a “categorical test” to determine liability. The categorical test treats any entity leasing to a commonly controlled entity as a trade or business under ERISA. Instead of the categorical test, the district court applied a fact-intensive test cribbed from Commissioner v. Groetzinger, a case interpreting the term “trade or business” as used in the tax code. The district court held, under the “Groetzinger test,” that the trust was not liable, and after analyzing the requirements for creating and invoking federal common-law principles of successor liability, the district court declined to apply successor liability in this case. The 6th Circuit concluded that the district court erred on both decisions.

Basically, the district court rejected the PBGC’s arguments about the standards for establishing successor liability, saying they are outlined in the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA) and do not apply to single-employer plans.

The 6th Circuit concluded that applying Groetzinger would not serve the Employee Retirement Income Security Act’s (ERISA)’s purposes. Under ERISA, what is important is determining whether assets were effectively Findlay’s and thus should be used to help pay what Findlay promised its employees. “The commonsense conclusion is yes: when a business gives land to the business’s sole owner, who then puts it in a trust—run by his sons—which then leases the land back to his business, that land never stopped being a part of the company’s functional assets. For all of these reasons, there is no plain and unambiguous reading of ERISA that supports adopting Groetzinger,” Daughtrey wrote.

According to the opinion, ERISA enforces employers’ promises by extending liability for those promises to commonly controlled entities. Citing another 6th Circuit opinion, Daughtrey wrote, “the primary purpose of the common control provision is to ensure that employers will not circumvent their ERISA and MPPAA obligations by operating through separate entities.” Put another way, ERISA generally seeks to hold employers liable for their promises to employees; the common-control rules stop employers from escaping that liability by spreading their assets.

The panel held that the categorical test applies. That test concludes simply that any entity that leases property to a commonly controlled company is categorically a trade or business for ERISA purposes.

Daughtrey said that the district court rejected case law when it reasoned that the cases relied on by PBGC arose under the MPPAA and did not address single-employer plans. “But the goal of stopping employers from splitting their assets to escape liability is equally as important for single-employer plans as it is for multiemployer plans.  Neither the district court nor defendants provided any reason why multiemployer plans should be treated any differently; thus, neither provided any grounds for limiting the extensive case law outlined above to cases arising under the specific portions of ERISA that address multiemployer plans. And upon reflection, we cannot think of any. After all, the rules against dissipating assets are meant to protect both ERISA and MPPAA obligations,” Daughtrey wrote.

Regarding the successor liability of Michael and his companies, the 6th Circuit argued that not only does successor liability promote fundamental policies of ERISA, but refusal to apply the principles of successor liability would frustrate ERISA policies. “If there is no successor liability here, 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 opinion says. “And if employers can so easily escape millions of dollars in liabilities, PBGC will be left to pay the underfunded pension benefits. That situation will force PBGC to raise its rates, which will strain still-existing plans further, and which risks forcing them to be underfunded and possibly fail.”

The appellate court concluded that successor liability is an equitable doctrine, and as such, its application will balance the interests of both parties—protecting asset purchasers from being blindsided by massive liabilities, and guaranteeing that employers cannot easily avoid their ERISA obligations through clever financial transactions.