Third Circuit Upholds Arbitrator’s Imposition of Parent Company Liability for Pension Withdrawal Liability

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Genova Burns LLC

[co-author: Christopher Manley]

On August 26, 2021, the Third Circuit confirmed that a corporation remained on the hook for the pension withdrawal liability of its bankrupt subsidiary despite diluting its ownership interest in the subsidiary below 80%, to avoid controlled group liability. The decision is an example of a court’s power under ERISA Section 4212(c) to disregard a transaction when it finds that the transaction’s principal purpose is avoiding pension withdrawal liability. Steelworkers Pension Trust v. The Renco Group (3rd Cir. Aug. 26, 2021).

Facts

In 2011, Renco formed RG Steel as a wholly owned subsidiary. Some of RG Steel’s businesses contributed to the Steelworkers Pension Trust (SPT), a multi-employer pension plan. Soon RG Steel was in financial distress and losing approximately $1 million per day. To remedy the financial situation, Renco reached agreement with Cerberus Capital Management to transfer a 24.5% ownership stake in RG Steel, and in return Cerberus would infuse capital into RG Steel. Shortly afterwards, RG Steel entered bankruptcy and withdrew from the SPT, causing the SPT to assess RG Steel and Renco with withdrawal liability in 2015. Renco defaulted, paid the SPT nothing, and the District Court and later the Third Circuit both directed the parties to arbitrate the claims for withdrawal liability. At arbitration, the arbitrator ruled that Renco was liable for $78 million in withdrawal liability, plus $18 million in attorneys’ fees, costs, and interest. Renco entered into a consent order to pay the $78 million principal amount of the assessment, but contested the award of statutory damages for Renco’s failure to make interim payments of withdrawal liability while it fought the assessment. The District Court affirmed the arbitrator’s award and granted the SPT’s demand for interest, attorneys’ fees and costs. For the second time, Renco appealed to the Third Circuit.

The Third Circuit’s Decision

Renco argued that because of its sale of over 20% of its ownership of RG Steel to Cerberus, Renco owned less than 80% of RG Steel’s stock and was therefore not part of RG Steel’s “controlled group” and therefore not liable for RG Steel’s pension withdrawal liability. Renco also argued that the principal purpose of the Cerberus transaction was providing operating capital to RG Steel, not avoiding pension obligations.

Relying on Section 4212(c) of ERISA, both the arbitrator and the Third Circuit rejected Renco’s arguments and held Renco liable for withdrawal liability. Section 4212(c) provides that if a “principal purpose of any transaction is to avoid” pension withdrawal liability, then withdrawal liability will be imposed without regard for the transaction. The arbitrator found that a principal purpose of the transaction between Renco and Cerberus was avoiding Renco’s pension liability and it was immaterial that Renco’s ownership of RG Steel fell below 80%. As for Renco’s argument that the transaction was intended to finance RG Steel with more operating capital, the court agreed with the arbitrator that only one principal purpose of the transaction needs to be avoidance of withdrawal liability to trigger ERISA Section 4212(c). In the court’s opinion, it did not matter that Renco may have had a second and legitimate purpose for entering into the Cerberus transaction, so long as one principal purpose of the transaction was illegitimate, that is, avoiding withdrawal liability.

Takeaways

A company cannot avoid the pension withdrawal liability of a wholly-owned member of its controlled group simply by spinning off enough equity to dilute its interest in its sister company below the 80% threshold for controlled group liability. When a transaction is motivated by avoidance of withdrawal liability, the affected pension fund, the arbitrator and a reviewing court are likely to scrutinize the transaction under ERISA Section 4212(c) to determine if it has a legitimate principal business purpose and is not motivated by avoiding pension withdrawal liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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