Pension Benefit Guaranty Corp. v. Findlay Industries, Inc., No. 17-3520 (6th Cir. Sept. 4, 2018)
The Court of Appeals for the Sixth Circuit issued an opinion on September 4, 2018 in Pension Benefit Guaranty Corp. v. Findlay Industries, Inc., No. 17-3520 (6th Cir. Sept. 4, 2018), finding that a trust established by Findlay Industries’ founder and the son of Findlay Industries’ founder and his companies liable to PBGC for Findlay Industries’ underfunded pension were liabilities. Findlay Industries was an auto part producer that offered pension benefits to some of its employees. In 2009, it went out of business with its pension obligations severely underfunded. PBGC brought suit in the United States District Court for the Northern District of Ohio to collect more than $30 million in underfunded pension liabilities from Findlay Industries.
Initially, PBGC filed suit against ten defendants who were all connected to Findlay Industries. After several of the defendants were dismissed with prejudice, PBGC sought to claim assets of the remaining defendants as assets of Findlay Industries from which it could collect to satisfy the pension liabilities. Specifically, these assets were (1) the trust established by Philip D. Gardner, the founder of Findlay Industries, and (2) assets purchased from Findlay Industries by Michael Gardner, Philip D. Gardner’s son, and his two companies, Back in Black Co. (Back in Black) and September Ends Co. (September Ends).
In 1986, Findlay Industries transferred two properties to Philip D. Gardner. Less than one month later, Philip D. Gardner transferred the two properties to an irrevocable trust, which was to provide for his sisters through the end of their lives and after which the trust was to be distributed equally to his two sons (Phillip J. Gardner and Michael Gardner). Philip J. Gardner was the trustee and Michael Gardner was his successor. During the majority of its existence, the trust was leasing back to Findlay Industries the two properties Findlay Industries had donated to the trust. In 2014, when Philip D. Gardner’s last sister passed away, the trust was split between Phillip J. Gardner and Michael Gardner, who ran and owned a majority stake in Findlay Industries before it went out of business.
In 2009, after Findlay Industries went of business, F I Asset Acquisition LLC (FIAA) purchased the equipment, inventory, and receivables from two of Findlay Industries’ plants, which housed all the equipment and machinery of value. Up until two months before the sale, Michael Gardner was the CEO and a director of Findlay Industries and owned almost 45% of Findlay Industries’ stock. It also happened that Michael Gardner was a member of FIAA. Another company had offered to purchase Findlay Industries’ assets at the end of 2008 but requested indemnification for Findlay Industries’ pension liabilities (presumably because it would assume the pension liabilities). Michael Gardner, who had access to information about this potential sale and while still at Findlay Industries, made an offer, on behalf of FIAA, to purchase Findlay Industries’ assets. However, the FIAA offer did not include an assumption of the pension liabilities. The FIAA offer was accepted, and FIAA paid only $3.4 million despite the substantial pension liabilities.
Findlay Industries’ assets were subsequently transferred from FIAA to another company Michael Gardner owned and then to Back in Black and September Ends, companies owned and controlled by Michael Gardner. Further, Back in Black and September Ends each set up a plant on one of the two former Findlay Industries properties. One company rehired the majority of Findlay Industries’ former employees while the other company rehired six of nine salaries employees and 15 of 25 hourly employees. Back in Black and September Ends sold auto parts to Findlay Industries’ largest customer and netted $11.9 million in income between May 2009 and December 2013.
The District Court granted the defendants’ motion to dismiss with respect to three of the fifteen counts pleaded by PBGC in the complaint, finding neither the trust nor Michael Gardner or his companies liable to PBGC for Findlay Industries’ underfunded pension liabilities. A “trade or business” under the common control of an employer is treated as part of the employer and, therefore, jointly and severally liable for pension liabilities under the Employee Retirement Income Security Act of 1974 (ERISA). 29 U.S.C. secs. 1362(a), 1301(a)(14)(B), 1301(b)(1). The District Court found that the trust was not a “trade or business” under Findlay Industries’ common control, and therefore not liable, after rejecting a categorical test adopted by other circuit courts and instead applying the test under Commissioner v. Groetzinger, 480 U.S. 23 (1987), to interpret the term “trade or business”.
The District Court relied on three grounds to support its reasoning: (1) the test under Groetzinger, which interpreted the term “trade or business” as used in the Internal Revenue Code (Code), and not the categorical test adopted by other circuit courts, embodied the “ordinary, common-sense meaning” of trade or business; (2) the categorial test was not appropriate to apply because the case law from the other circuit courts adopting this test arose in the context of the Multiemployer Pension Plan Amendments Act of 2018, not with respect to single-employer pension plans; and (3) neither the Groetzinger test nor the plain meaning, based on the dictionary definition, of the words “trade” and “business” supported a finding that the trust was a trade or business under ERISA because the trust was created with the primary purpose of providing for the care and funeral expenses of Philip D. Gardner’s sisters, not dissipating Findlay Industries’ assets or profiting Philip D. Gardner. Additionally, the District Court declined to apply the federal common law doctrine of successor liability to hold Michael Gardner and his companies liable. The District Court reasoned that successor liability was not essential to carry out ERISA’s fundamental policies.
The Sixth Circuit concluded that the District Court erred in both rulings. The issues before the Six Circuit were (1) whether the trust was a “trade or business” under common control by Findlay Industries for ERISA purposes and therefore jointly and severally liable to PBGC for Findlay Industries’ underfunded pension liabilities and (2) whether Michael Gardner and his companies were also liable to PBGC under the federal common law doctrine of successor liability.
First, the Sixth Circuit rejected the District Court’s application of the Groetzinger test and applied the categorical test, holding that an entity that owns land and leases it to an entity under common control is categorically a “trade or business” under ERISA. The Sixth Circuit reasoned that the dictionary did not provide a “plain and unambiguous meaning” of the term “trade or business” for purposes of ERISA and that the Groetzinger test did not embody the “ordinary, common-sense meaning” of the term “trade or business”. It emphasized that, in determining whether an activity constitutes a “trade or business”, the Groetzinger test required a determination of the primary purpose of the activity and that “reading a primary-purpose requirement into the statutory language would create dangerous incentives and would not serve ERISA’s purposes” because “companies can have more than one reason to dissipate assets.” In contrast, “the categorical test stops leases between commonly controlled entities as a way of offering those entities protection from ERISA liability at very little risk.” In this case, the two properties Findlay Industries donated to the trust continued to be part of Findlay Industries’ functional assets because it still had the benefit of the use of the two properties, albeit without the risks or responsibilities of ownership.
Second, the Sixth Circuit found it necessary to apply the federal common law doctrine of successor liability with respect to Michael Gardner and his companies to implement the fundamental ERISA policy of protecting employees. The Sixth Circuit determined, under a three-part standard, that it was appropriate to create federal common law under ERISA in this case because it was essential to promote fundamental ERISA policies and failure to apply successor liability would frustrate ERISA policies. According to the Sixth Circuit, “[s]uccessor liability promotes fundamental ERISA policies by guaranteeing that substance matters over form.” In its reasoning, the Sixth Circuit focused on Michael Gardner’s role in the sale of Findlay Industries’ assets and the use of the assets after the sale. It noted that “[e]very step of the sale went through the hands of Michael Gardner.” The Sixth Circuit held that when there was a sale not conducted at arm’s length, successor liability could apply.
In so holding, the Sixth Circuit vacated the District Court’s order of dismissal and remanded the case. The Sixth Circuit opinion can be found at: http://www.opn.ca6.uscourts.gov/opinions.pdf/18a0196p-06.pdf.
Federal Register Notice & Announcement of PBGC Disaster Relief (July 2, 2018)
On July 2, 2018, PBGC issued a Federal Register Notice and an Announcement, providing various changes with respect to PBGC’s approach to disaster relief.
First, PBGC announced changes to how it will announce disaster relief. The ERISA section 1033(h)(3) grants PBGC authority to extend deadlines by notice or otherwise when a disaster covered by Code section 1033(h)(3) occurs. Under this grant of statutory authority, PBGC would post a disaster relief announcement on its website each time the Internal Revenue Service (IRS) posted a disaster relief news release that included extensions for filing any Form 5500 series. PBGC’s announcement mirrored the IRS news release, but because PBGC’s announcements relied on the IRS news releases, PBGC filers had to wait for PBGC to post an announcement to ensure that PBGC was providing disaster relief.
Now, filers will not have to wait for PBGC to issue a separate announcement. PBGC will have one announcement explaining how its disaster relief will be keyed to the IRS’ news releases, what circumstances generally lead to relief, and the nature of relief generally granted. PBGC will therefore grant disaster relief when, where, and for the same relief period that the IRS grants relief for taxpayers affected by a disaster. Certain filings and actions will continue to be excepted from disaster relief, and taxpayers may continue to seek case-by-case relief for these filings. The Announcement describes the types of disaster covered, the requirements for disaster relief, and the relief granted.
Second, PBGC made the following changes and clarifications in the Announcement:
- The premium payment due date is extended to avoid any interest charges during the disaster relief period.
- Filers unable to submit a premium filing by the end of the relief period now simply need to notify PBGC of the filer’s eligibility by the end of the relief period for disaster relief to apply.
- Late annual financial and actuarial information reporting under ERISA section 4010 now falls under general relief rather than case-by-case relief.
- Post-event notices for five reportable events under ERISA section 4043 now fall under case-by-case relief rather than general relief. These five reportable events are failure to make required contributions under $1 million, inability to pay benefits when due, liquidation, loan default, and insolvency or similar settlement.
- Disaster relief is now based upon a service provider’s operations being “directly affected” by the disaster (i.e., be located in the disaster area) rather than based upon problems getting information or assistance from the service provider.
The Notice is effective for disasters for which the IRS has issued a disaster relief news release on or after July 2, 2018.
Federal Register Notice – PBGC Requests That OMB Extend Approval of Its Collection of Information on Forms 10, 10-Advance, and 200 (October 12, 2018)
On October 12, 2018, PBGC issued a Federal Register Notice, notifying the public of its request that the Office of Management and Budget (OMB) extend approval of its collection of information regarding reportable events and failure to make required contributions, information which is collected using Forms 10, 10-Advance, and 200.
Form 10, Post-Event Notice of Reportable Events, and 10-Advance, Advance Notice of Reportable Events
Plan administrators and plan sponsors must report certain plan and employer events to PBGC under ERISA section 4043 to give PBGC notice of events that may indicate plan or employer financial problems. To collect this information, PBGC issued Forms 10 and 10-Advance and related instructions under subparts B and C of PBGC’s regulation on Reportable Events and Certain Other Notification Requirements (29 C.F.R. part 4043), which implements the relevant provisions under ERISA section 4043.
OMB’s approval of this collection of information using Forms 10 and 10-Advance expired November 30, 2018. PBGC requested that OMB extend its approval for the collection of this information for another three years but with some modifications. PBGC proposed that certain reportable event filings include some or all of the following information: controlled group information, company financial statements, and the plan’s actuarial valuation report. This proposal would apply to the following reportable events: Active Participant Reduction, Distribution to a Substantial Owner, Transfer of Benefit Liabilities, Change in Contributing Sponsor or Controlled Group, and Extraordinary Dividend or Stock Redemption.
Form 200, Notice of Failure to Make Required Contributions
ERISA section 303(k) and Code section 430(k) impose a lien in favor of an underfunded single-employer plan covered by PBGC’s termination insurance program if any person fails to make a required payment when due and the total unpaid balances exceed $1 million. Only PBGC may perfect and enforce this lien. Upon a failure to make a required payment, ERISA section 303(k) and Code section 430(k) require persons to notify PBGC within 10 days of the due date. Notification is provided using Form 200. OMB’s approval of this collection of information using Form 200 expired November 30, 2018. PBGC requested that OMB extend PBGC’s approval for the collection of this information for another three years with minor modifications.
Reportable Events Reference Sheet for Small Plans
PBGC created a reference sheet consisting of a quick checklist to help practitioners identify possible reportable events when advising small plans (i.e., plans with 100 or fewer participants). The reference sheet is available to download.
Enhanced PBGC ERISA Section 4062(e) Webpage
PBGC expanded and modified the information on its website with respect to ERISA section 4062(e), which protects pensions when a company ceases operations and workers lose their jobs, to provide basic information about the provision, answers to frequently asked questions, and information about reporting an ERISA section 4062(e) event to PBGC.
ERISA section 4062(e) was amended by H.R. 83 on December 16, 2014. Before the amendment, ERISA section 4062(e) created liability when an employer ceased operations at a facility and more than 20% of the employees covered by the employer’s pension plan lost their jobs. The statute provided a formula for determining the amount of the liability and allowed employers to satisfy the liability by making payments to PBGC or by posting a bond.
H.R. 83 substantially amended ERISA section 4062(e) for cessations of operations occurring on or after December 16, 2014. Under the amendment, an ERISA section 4062(e) event occurs when there is a permanent cessation of operations at a facility and more than 15% of the employees covered by the employer’s pension plan lose their jobs. An employer must report the occurrence of an ERISA section 4062(e) event to the PBGC and must satisfy the resulting liability. Plans with fewer than 100 participants and plans that were 90% or better funded in the plan year before the cessation occurred are exempt from ERISA section 4062(e) and do not need to report the event. PBGC prepared answers to frequently asked questions to help practitioners understand the changes to ERISA section 4062(e).
The PBGC website clarifies that PBGC is working on a form for reporting an ERISA section 4062(e) event. When drafted that form will be published in the Federal Register and subject to comment. Although a specific form has not yet been developed, employers must nonetheless notify PBGC that an ERISA section 4062(e) event has occurred within 60 days of the cessation by identifying the affected plan and employer, including a statement that there has been a cessation of operations under ERISA section 4062(e), and requesting that PBGC determine the resulting liability.
New Staff Guidance Q&A Webpage
PBGC developed a new webpage to compile PBGC staff responses to questions received from practitioners about ERISA Title IV requirements, including issues relating to bankruptcy claims, liens arising from large missed contributions, guaranteed benefits, and reportable events. PBGC intends to update this webpage periodically.
The webpage includes a response to the question on whether a two-step transaction (i.e., a reverse spinoff) is an acceptable strategy for avoiding variable-rate premium (VRP) payments under two special rules found in PBGC’s premiums regulations (29 C.F.R. Part 4006). To avoid paying a significant portion of the statutory VRP, some plans engage in a two-step transaction under which (1) most plan participants are spun off late in the year into a new plan that is almost identical to the old plan exception in name, EIN, and plan number and only a small group of retirees are left in the old plan and (2) annuities are purchased for the remaining retirees, thereby terminating what is left of the old plan. Two special rules under PBGC’s premiums regulations provide that (1) a single-employer plan exiting the defined benefit system under a standard termination is exempt from the VRP in its final year and (2) premiums are pro-rated for new plans created as a result of a spinoff from another plan if the new plan’s initial plan year is less than 12 months (i.e., a short plan year).
According to the guidance, ERISA section 4006 does not provide for a reduction in VRP payments in either of the situations described in the two special rules under PBGC’s premiums regulations. The two-step transaction and similar types of transactions therefore should be disregarded and premiums should be assessed as if the transaction had not occurred.
Status of PBGC Pilot Mediation Program
On October 16, 2017, PBGC announced the launch of its new Plan Sponsor Pilot Mediation Project to offer mediation to ongoing plan sponsors as part of its Early Warning and Risk Mitigation Program and to former plan sponsors in resolving their pension liabilities following the termination of underfunded pension plans. Although the project has reached the end of its one-year pilot, the project is still available. Many practitioners are not aware that the project exists or that it is still available. PBGC encourages practitioners to visit the PBGC webpage on the Plan Sponsor Pilot Mediation Project to learn more about the project. PBGC is taking comments from practitioners and internally with respect to how to continue to evaluate the project and whether to extend the project.
Expansion of PBGC Missing Participants Program
On December 22, 2017, PBGC published a final rule, effective January 22, 2018, expanding and updating its existing Missing Participants Program to cover terminated defined contribution plans, multiemployer pension plans, and small professional service employer plans not covered by title IV of ERISA. Previously, the program was only available to single-employer defined benefit pension plans. Among other things, the final rule modifies the criteria under the proposed rule for what constitutes being “missing”. It also requires that certain search steps be completed before a defined contribution plan sponsor can transfer accounts to the PBGC. Visit PBGC’s webpage for more information about PBGC’s Expanded Missing Participants Program.