PBGC Closer to Receiving Pension Plan Restitution Payments

Updated with additional information: 

The Pension Benefit Guaranty Corporation is approaching receipt of the damages it sought from a bankrupt construction company pension plan as restitution after the agency in 2017 took over the terminated fund.

The PBGC is closer to receiving the legally ordered payments following approval from a Pennsylvania federal court of the PBGC’s court filing against the terminated Fay Construction Co. Inc. Pension Plan and entry of default against the defendants.

U.S. District Judge Joshua Wolson called for the PBGC to move for a default judgment against defendants Fay Construction and Fay Development Inc. on or before July 23 in a filing made by the judge on July 2.

The PBGC sued the terminated pension plan in trusteeship on May 1, citing violations under the Employee Retirement Income Security Act and the fund’s failure to honor a settlement agreement negotiated with the PBGC. The U.S. District Court for the Eastern District of Pennsylvania last month approved the PBGC’s request for more than $1 million in liability payments in the case, Pension Benefit Guaranty Corporation v. Fay Construction Co. Inc. et al.

Defendants Fay Construction and Fay Development were required to answer the PBGC’s complaint within 21 days of receiving the summons and complaint, wrote attorneys for the PBGC.

“Fay Construction and Fay Development did not answer or otherwise defend the complaint filed against them within this period,” attorneys wrote in the entry of default request.

Extracting payments from the bankrupt defined benefit plan may take more time, as it could require additional litigation, explains Drew Oringer, partner in and general counsel at the Wagner Law Group, which was not involved in the litigation.

Generally, “once the PBGC has a judgment, it can presumably use the tools available to enforce that judgment that any holder of a judgment would have,” he says.

However, despite the court judgment against Fay, forcing payments from a penniless pension fund with no assets is problematic.

In such situations, “the PBGC might coordinate with the Internal Revenue Service regarding the collection of taxes and penalties by the IRS,” explains Oringer. “In extreme cases, the manner in which a plan has been administered could raise tax-qualification issues for the plan, which would be in the jurisdiction of the IRS.”

The original settlement agreement resulted from negotiations between the Fay pension fund and the PBGC to guarantee that participants and beneficiaries of the plan would continue to receive benefit payments following the PBGC’s 2017 determination that the plan should be terminated.

The PBGC collects insurance premiums, set by Congress, from employers that sponsor DB pension plans.

When a DB pension plan covered under ERISA terminates with insufficient assets to pay all benefits to participants and beneficiaries, the PBGC typically becomes the regulatory trustee of the plan and pays benefits up to the statutory limit.

The PBGC’s May filing requested the court direct Fay Construction and Fay Development to pay $1,529,572 in unfunded benefit liabilities and a premium liability of $19,403.37, including both annual fixed-rate and variable-rate premiums and termination premiums, plus interest and penalties.

Per the negotiated agreement to satisfy their liability for fiduciary breach to the pension plan, Stephen J. Fay and James S. Fay Jr. were to each have paid the pension plan by a reduction on the monthly amount of their pension benefits, which respectively represented actuarial equivalents of $533,000 and $412,000, as of June 14, 2017, the date established by PBGC when the pension plan terminated.

Representatives of the PBGC note that the federal agency does not comment on ongoing litigation. Representatives of Fay Construction Co. Inc and Fay Development Co. Inc. did not return a request for comment.

The PBGC is represented in the litigation by attorney Ralph Landy, with the office of the general counsel. The court docket does not include legal counsel for the Fay Construction Co. Inc. Pension Plan.