December 02, 2020

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

“Controlled Group” Liability Under ERISA: The Gift That Keeps On Giving

By Michael Enright

“Controlled group” liability under ERISA is a thorny but common insolvency problem. It permits the government to pursue corporations or LLCs that are separate and distinct from an entity that has liabilities connected to underfunded benefit plans, if the distinct corporations or LLCs are under common control (as defined in ERISA) with the insolvent entity. These liabilities can be staggering sums, so the issue can create a bet-the-company situation. The 11th Circuit recently contributed to the minefield of jurisprudence on controlled group liability by holding that affiliates of a corporation that was the sponsor of a benefit plan and that went bankrupt and dissolved in 1992 could be pursued for the underfunding claims years later despite the bankruptcy and dissolution. In PBGC v. 50509 Marine, LLC, Case No. 19-14968 (11th Cir. Nov. 24, 2020), the court was faced with claims brought by the PBGC in 2018 against 19 entities owned by Joseph Wortley.  In 1992, an entity owned by Wortley that acted as the plan sponsor for a union pension plan, filed bankruptcy. Wortley himself filed bankruptcy a year later. The result of the bankruptcy cases was that Wortley surrendered all of his stock of the debtor, and the debtor was ultimately dissolved under state law. Nonetheless, for years afterward, Wortley continued to sign documents on behalf of the debtor entity as plan sponsor, despite the debtor’s dissolution. In 2012, the pension plan’s continuing shortfalls resulted in a resolution with the PBGC, which took the plan over and let Wortley off the hook going forward. In 2018, though, still looking to hold someone responsible for the shortfalls, the PBGC sued other entities owned by Wortley, alleging that they were liable as part of the same corporate “controlled group” as the bankrupt and dissolved plan sponsor.  Although state corporate law was not favorable to the PBGC, because it appeared to provide that the corporate plan sponsor had long ago ceased to exist, the 11th Circuit turned to federal common law, which governs for purposes of determining controlled group liability under ERISA. Because Wortley continued to execute documents on behalf of the dissolved corporation as plan sponsor, and someone had to be the plan sponsor, the court held this was enough to implicate ERISA’s harsh corporate affiliate liability rules. Therefore, the lower court’s grant of summary judgment to the PBGC was upheld. The case is another hard lesson regarding the risks associated with underfunded benefit plans. Any planning or strategy involving an entity that might have been in the same affiliated group as defined in ERISA must look long and hard at these issues if considering an insolvency proceeding or transaction.

 

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.