Trust, Asset Purchaser Not Liable for Termination Liabilities of Single-Employer Plan

A federal court rejected the PBGC’s attempts to recoup termination liabilities from a personal trust and an asset purchaser of the sponsoring plan.

A federal court judge has concluded that the Pension Benefit Guaranty Corporation (PBGC) cannot recoup termination liabilities for a single-employer plan from a personal trust of the owner or the asset purchasers of the sponsoring company.

Findlay Industries, Inc. established a pension plan in June 1964. Findlay remained the sponsor and administrator of the plan from its inception until its termination effective July 2009. The PBGC claims several defendants are jointly and severally liable for the termination liabilities incurred by Findlay.

Philip D. Gardner founded and owned Findlay until his death. In January 1987, he established Trust 1987 and donated two parcels of property to the trust. The trustee was directed to “hold, manage and control the property comprising the Trust estate, collect the income therefrom, and . . . disburse the net income and distribute the corpus thereof” to provide for the “care, support, maintenance, and welfare” of Gardner’s sisters. Later, the funds were also to be used for the sisters’ funeral expenses as the trustee saw fit. After the passing of the last sister, the balance of the trust was to be split between Gardner’s two sons.

According to the opinion of Judge Jack Zouhary of the U.S. District Court for the Northern District of Ohio, the PBGC alleges Trust 1987 was “leasing a parcel of real property to [Findlay] from no later than July 1, 1993, through at least November 2009.” (Doc. 3 at ¶ 64). The agency alleges this lease “had a substantial economic nexus with [Findlay], such that including [Trust 1987] in [Findlay]’s controlled group would further the purpose of the controlled group rules, preventing employers from limiting their responsibilities by fractionalizing into separate entities.”

However, citing the case Commissioner v. Groetzinger, in which the Supreme Court held that to constitute a trade or business for tax purposes, a person must engage in an activity for the primary purpose of income or profit, and with continuity and regularity, Zouhary agreed with Trust 1987’s argument the the PBGC failed to plead facts necessary to establish the trust was a trade or business, and thus, Trust 1987 cannot be held liable for termination liabilities under the Employee Retirement Income Security Act (ERISA).

NEXT: Asset purchaser’s liability

According to the opinion, in December 2012, PBGC and Findlay agreed to terminate the plan effective July 2009. In May 2009, F I Asset Acquisition LLC (FIAA) purchased Findlay’s equipment, inventory, and receivables associated with the Springfield and Molded Products plants. FIAA then transferred these purchases to Michael Gardner and his wholly-owned corporation Milstein, Jaffe & Goldman Inc., which in turn transferred the assets to September Ends and Back in Black. September Ends now operates the Springfield plant, and Back in Black operates the Molded Products plant.

The PBGC advances a claim of successor liability under federal common law against September Ends and Back in Black, alleging both are subject to the termination liabilities because: (1) they had notice of Findlay’s termination liabilities; (2) Findlay was unable to pay the termination liabilities; and (3) there was “substantial continuity of operations” between Findlay and these two companies. September Ends and Back in Black argue that as asset purchasers they do not fall within the limited types of companies for which ERISA provides successor liability. Under the relevant ERISA statutes, those who may be liable include the contributing sponsor, the plan administrator, and members of the contributing sponsor’s controlled group. September Ends and Back in Black fit none of these categories.

With no statutory support, the PBGC asked the court to apply a federal common law doctrine of successor liability to the case, citing Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, and other cases. According to the opinion, the PBGC describes in great detail the similarities between withdrawal liability for multiemployer plans and termination liability for single-employer plans, arguing these similarities justify extending the federal common law doctrine from the first context to the second.

However, Zouhary noted that ERISA is neither silent nor ambiguous in terms of who may be pursued for termination liabilities. The statutory provisions at issue clearly identify who may be pursued for monetary recovery: namely, the plan administrator, the contributing sponsor along with members of the sponsor’s controlled group, as well as successor corporations which are essentially alter egos of their original corporations. “Nowhere in these provisions did Congress suggest, let alone endorse, successor liability for asset purchasers, leading this Court to conclude that Congress did not intend such entities to be included,” Zouhary wrote.

He added that, “As Congress has established several categories of persons and entities which may be pursued for contributions to underfunded single-employer pension plans, [PBGC] has avenues of redress to protect the pensions of vested employees. Adding more targets is not necessary to fulfill ERISA’s policy of protecting plan participants.”

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