As we previously noted (http://www.erisapracticecenter.com/2013/04/28/pbgc-seeks-involuntary-plan-termination-before-plan-sponsors-proposed-share-sale/), the PBGC filed a complaint (E.D. Pa. Case No. 13-02069) to involuntarily terminate a defined benefit plan prior to a corporate transaction that would change the plan sponsor’s controlled group. The PBGC claimed that the plan sponsor, Saint-Gobain Containers, Inc., would join a financially weaker controlled group after it is acquired by the Ardagh Group, S.A. through a share purchase. On October 4, 2013, the Court ruled that it will determine de novo whether to involuntarily terminate the plan, without any administrative deference for the PBGC’s determination. As a result, the Court will consider evidence outside of the PBGC’s administrative record.
Section 4042 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) generally allows the PBGC to seek an involuntary plan termination through court order when the PBGC determines that at least one of the following conditions are met:
the plan has not met minimum funding standards;
the plan will be unable to pay benefits when due;
the plan has made a large distribution to a substantial owner under certain circumstances; or
the possible long-run loss of the PBGC with respect to the plan may unreasonably increase without a termination of the plan.
In this case, the PBGC argued that the Court should defer to the PBGC’s determination to involuntary terminate the plan based on the “arbitrary and capricious standard” of the Administrative Procedure Act (“APA”) because the determination was the end result of an “informal adjudication” and therefore “agency action” under the APA. The Court disagreed, noting that ERISA section 4042(c) requires the Court to determine whether to involuntarily terminate the plan. Indeed, the Court noted that the PBGC’s determination has no legal or binding effect without a court order. As a result, the Court ruled that it will determine de novo whether to involuntarily terminate the plan.
This decision is significant to note because the PBGC often uses the prospect of an involuntary plan termination in conjunction with its Early Warning Program to negotiate additional contributions or other security for underfunded defined benefit plans within the context of corporate transactions. Due to this precedent that the PBGC is not entitled to administrative deference with respect to involuntary plan terminations, the PBGC may lose some bargaining power in Early Warning Program negotiations.