Court: Sale of Subsidiary Does Not Mean Shedding Benefits Responsibilities

September 10, 2007 ( - The U.S. 1st Circuit Court of Appeals ruled that Bowater Inc. did not give up responsibility for the health plans of its subsidiary's retirees when it sold the unit to another company, but it did so later when it decided on a plan consolidation.

Bowater Inc. argued that it relinquished responsibility for the health benefits of retired workers of its subsidiary, Great Northern Paper, Inc. (GNP), when Bowater sold the GNP to another company in 1999 or in 2003, when Bowater consolidated its benefit plans under an umbrella plan whose coverage did not cover GNP retirees.

The class of retirees said neither the 1999 sale nor the 2003 consolidation met procedural requirements governed by the Employee Retirement Income Security Act (ERISA). They said the plan coverage did not cease until April 2004. Some of the retirees who belonged to unions also claim that Bowater breached collective bargaining agreements that ensure them lifetime health coverage.

Bowater argued that selling a subsidiary terminates a parent company’s responsibilities for providing benefits and that even if the “automatic termination” rule is rejected, the particular documents and actions through which Bowater sold GNP ended its obligations.

The appeals court sided with the district court’s decision, ruling that Bowater retained responsibility for the ERISA plans beyond GNP’s sale, but only until its consolidated plan took effect on January 1, 2003.

“Although Bowater is correct that parent companies tend to terminate ERISA plans when selling a subsidiary, there is nothing automatic about this correlation,” according to the opinion.

The court goes on to say that “requiring parent companies to clarify their responsibility for welfare benefits upon the sale of a subsidiary is a modest requirement, fully compatible with ERISA’s substantive and procedural aims,” therefore rejecting Bowater’s argument that providing this clarification to plan participants would discourage employers from adopting ERISA plans for fear of unexpected outcomes.

With regard to the 2003 plan consolidation, Bowater established the Bowater Incorporated Benefit Plan (BIBP) as a unified plan to replace the various plans under which its employees received health and welfare benefits.

The plan was adopted to ease the administrative burden of filing separate tax returns and ERISA-mandated forms for each of Bowater’s benefit plans. Bowater, as plan administrator, determined that BIBP’s adoption effectively terminated its liability under its previous health and benefit plans, and the district court, and then the appeals court agreed.

Both courts also rejected the argument that collective bargaining agreements entitled them to lifetime benefits.

For the full opinion go  here .