By: Meg Troy and Mark Casciari

Seyfarth Synopsis: The Seventh Circuit has now applied a clear error standard of review to a withdrawal liability arbitrator’s interpretation of a collective bargaining agreement, thus enhancing the role of the arbitrator in resolving withdrawal liability disputes.

On January 8, 2018, in Laborers’ Pension Fund v. W.R. Weis Company, Inc., — F.3d —, 2018 WL 316555 (7th Cir. Jan. 8, 2018), the Seventh Circuit applied the clear error standard of review to a withdrawal liability arbitrator’s interpretation of the parties’ underlying collective bargaining agreement (CBA) that required contributions to a multiemployer pension fund.

The Court enforced the arbitrator’s findings, a victory for the employer whose withdrawal liability was consequently reduced from over $600,000 to $0.

W.R. Weis Company, a stonework firm, was required by a CBA to contribute to the Laborers’ Pension Fund for work performed by members of the Laborers’ Union. In 2012, after several years of laborers performing no work for Weis and Weis remitting no contributions to the Fund, Weis formally terminated the CBA and the Fund issued a complete withdrawal assessment. Weis argued that it fell under the withdrawal liability building and construction industry exception, 29 U.S.C. § 1383(b).

Section 1383(b) states, in pertinent part:

In the case of an employer that has an obligation to contribute under a plan for work performed in the building and construction industry . . . .

A withdrawal occurs if (A) an employer ceases to have an obligation to contribute under the plan, and (B) the employer continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required. (Emphasis added.)

An arbitrator found that the language of the Weis Laborers’ CBA was ambiguous as to whether Weis continued to perform Laborers’ CBA work after ceasing Laborers’ Fund contributions. The arbitrator looked to past practice to resolve a CBA ambiguity. She focused on the fact that two previous audits and Fund business manager testimony showing Weis did not owe the Laborers’ Fund delinquent contributions for discontinued work.

The Seventh Circuit said that the arbitrator’s findings of fact may be set aside only if clearly erroneous, while the arbitrator’s legal conclusions are subject to de novo review.

The Laborers’ Fund sought de novo review. Weis argued that the clear error standard applied because the arbitrator’s review during the arbitration was limited to applying the facts to the language of the CBA rather than interpreting the statute itself. The Seventh Circuit agreed, and found no clear error.

This decision is significant because many withdrawal liability disputes turn on the meaning of a CBA. For example, 29 U.S.C. § 1385, in part, defines a partial withdrawal as a permanent cessation of an obligation to contribute “under one or more but fewer than all collective bargaining agreement[s].”

By Ron Kramer

Seyfarth Synopsis:  The PBGC is seeking more information on hybrid  or two-pool withdrawal liability calculation methods.  This is a sign that the PBGC may be re-evaluating its role in approving hybrid proposals, although it may be too early to tell which way it will dive, especially under a Trump administration.

The Pension Benefit Guaranty Corporation (PBGC) issued a Request For Information (RFI) , to be published January 5, 2017, asking 24 questions about hybrid or two-pool alternative arrangements for multiemployer pension plans.  Under a hybrid plan arrangement, a plan creates two pools for withdrawal liability purposes: The old pool for the “old employers,” and a new pool for “new employers” (and those old employers who “withdraw” from the old pool and move to the new pool).  New employers are generally assessed withdrawal liability under a direct attribution method, and are not subject to the unfunded vested benefit liability of the old pool.  Old pool members who agree to withdraw, pay their old pool liability, and move to the new pool often receive special considerations such as discounted withdrawal liability, lower contribution increases, and waivers of some or all potential old pool mass withdrawal liability risk. Funds began seeking PBGC approval for hybrid plans as a way to generate revenue, entice new employers to participate, and provide old employers concerned about their withdrawal liability risk a way to pay their current liability and continue to participate at a reduced risk.

Since 2011 the PBGC has received approximately 20 requests for approval of hybrid withdrawal liability arrangements.  Notable plans that have had their requests approved include the Central States and New England Teamsters Pension Funds.  When the first plans submitted their requests, the PBGC had not been asked to — nor did it — take into consideration the benefits offered existing employers to move to the new pool.  Some plans offered considerable deals in terms of discounted assessments, frozen contribution rates, and mass withdrawal relief.  In its RFI, the PBGC admits that, had it known of the terms of the settlements offered employers to move to the new pools, that “could have affected PBGC’s analysis of whether the statutory criteria [for adopting an alternative assessment method] had been satisfied.”  The PBGC has since begun to analyze proposed withdrawal liability settlement terms to see how that impacts any potential risk of loss and the overall validity of a proposed hybrid arrangement.

The PBGC in its RFI is particularly interested in learning about the terms and conditions that apply to new and existing employers that enter into hybrid arrangements, including alternative benefit schedules, special withdrawal and mass withdrawal payment terms, alternative withdrawal liability arrangements, and the pros and cons of such hybrid arrangements for participants and the PBGC as the insurer of multiemployer plans.  Some of the more interesting queries include:

l  How the PBGC should factor in discounted withdrawal liability settlements and changes to plan mass withdrawal liability rules in its determination of whether to approve a hybrid plan arrangement, and whether the PBGC should approve proposed withdrawal liability payment terms and conditions.

l  Whether plans that have adopted a hybrid model have increased their contribution base (i.e., did they add employers or at least more participating employees as intended) or retain employers that otherwise would have withdrawn.

l  Whether there have been legal challenges to the hybrid model, and what role collective bargaining played in creating and implementing such models.

l  Whether plans are considering other alternative arrangements for withdrawal liability that would address the concerns addressed by the hybrid arrangement.

The PBGC also has asked what information and resources it can provide to interested parties about the innovative means plans are using in alternative withdrawal liability arrangements and what it can provide regarding the PBGC’s process for considering hybrid models.

What is unclear is where the responses to an Obama PBGC RFI may take the Trump PBGC.  Will it assume more oversight of such arrangements, or less?  Will it support alternatives or oppose them?  As for current pending proposals, the PBGC claims the RFI is independent of and without prejudice to its ongoing review of those requests.  Yet some of those requests have been pending for a very long time.

Interested parties have 45 days to submit their comments.

By: Ron Kramer and Nick Clements

The Ninth Circuit, in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., Case No. 12-17675 (9th Cir. Sept. 11, 2015), joined the Seventh Circuit in finding that an asset purchaser, if a successor, can be liable for withdrawal liability triggered as a result of the sale. Moreover, the Ninth Circuit went a step further by setting forth how it would determine whether the buyer was a successor.

Studer’s Floor Stops, Michael’s Starts

It started innocuously enough.  In November 2009, Studer’s Floor Covering, Inc. (“Studer’s Floor”) announced it would be shutting down the business at the end of the year.  As Studer’s Floor wound down, one of the company’s longtime salesmen, Michael Haasl, incorporated his own company, calling it Michael’s Floor Covering, Inc. (“Michael’s”) and began bidding on his own projects.  Haasl negotiated with Studer’s Floor’s landlord so as to take out a lease on the Studer Floor’s storefront and warehouse the day after it ceased operations.  Haasl even obtained, with Studer Floor’s help, Studer Floor’s business phone number and hired five of Studer’s Floor’s former employees.  Haasl, however, did not technically buy Studer’s Floor.  The majority of Studer’s Floor’s equipment was sold off at auction and Haasl did not obtain or use Studer’s Floor’s business name or contact/customer lists — although Haasl knew many of its customers and suppliers given his years as a salesman.

Studer’s Floor and the Multiemployer Pension Plan Amendments Act

At the time of its closing, Studer’s Floor was a party to a CBA and made contributions to a multiemployer pension plan covered by the Multiemployer Pension Plan Amendments Act (MPPAA) amendments to ERISA.  Studer’s Floor stopped making contributions to the fund after it ceased operations.  Michael’s never made any contributions to the fund because it was not a party to the CBA.

Under the MPPAA, if an employer withdraws from a multiemployer pension plan, it is liable to the plan for withdrawal liability. There is an exception to this general rule, however, for construction companies that close and do not resume operations within the jurisdiction of the CBA for at least five years.  The reason for the exception is that if a company permanently closes, then there is presumably no harm to the fund because that company’s customers will patronize other companies that contribute to the fund, thus keeping contributions to the fund steady.  The dispute in this case — brought by the Resilient Floor Covering Pension Trust Fund — concerned whether (1) a successor employer can be subject to MPPAA withdrawal liability; and (2) if so, whether and how successorship liability might apply to employers for whom the construction industry exception might apply; and (3) whether Michael’s was a successor.

The Fund Sues Michael’s

A Federal District Court in the Western District of Washington held that Michael’s was not liable for withdrawal from the pension plan under the common-law doctrine of successorship liability. The common law test asks whether, under the totality of the circumstances, there was substantial continuity between the old enterprise and the new enterprise.

On appeal, the Ninth Circuit Court of Appeals reversed. The Ninth Circuit, in agreement with the Seventh Circuit (recent ruling reported here), held for the first time that a successor employer can be subject to MPPAA withdrawal liability. The Court rejected arguments that applying successorship principles was somehow contrary to the MPPAA given its provisions for: (i) a sale of assets exception to liability; (ii) the ability of a fund to ignore transactions with a principal purpose to evade or avoid liability; and (iii) the construction industry exception itself. As to the latter, the Court found that just as a fund is harmed when a construction industry employer which ceased operations resumes operations without participating in the fund, it is harmed when a successor operates without participating in the fund. Thus, the Court considered the successorship doctrine to be fully consistent with the construction industry exception.

The Court then examined how established successorship factors are to be weighed in the context of withdrawal liability involving a construction industry employer. For purposes of determining whether there was “substantial continuity” between the successor and predecessor employers, which the Court considered to be the primary and “most important” successorship consideration, the Court found that it should give special significance to whether the successor has “the same body of customers.” In particular, where objective factors indicate that the new employer made a conscious decision to take over the predecessor’s customer base, the equitable origins of the successor liability doctrine support the conclusions that the successor must pay withdrawal liability.

The Ninth Circuit found that the District Court did not properly identify or weigh the successorship factors as applicable to the MPPAA context. First, the District Court did not give prime consideration to whether the Michael’s had the same body of customers (so-called market share capture). In that regard the Circuit Court agreed with the fund’s position that the spotlight should be on the relative amount of revenue generation by Studer’s former customers, versus Michael’s suggested simple headcount comparison. Second, while the factor was not of special relevance in this situation, the District court erred in its method of analyzing workforce continuity. The District Court assessed whether Michael’s employed a majority of Studer’s Floor’s former workforce.  The question should have been whether “a majority of the new workforce once worked for the old employer” and that only those “employees as to whom pension fund contributions would be due, should be included in the workforce continuity test,” not based on a majority of all the new company’s employees.  Last but not least, the District Court errantly considered whether there was a continuity of ownership between the old and new companies, something that is not a consideration in a traditional successorship analysis.

Had the District Court asked these questions, the Ninth Circuit opined, it may have found the requisite successorship factors to also find successorship liability under the MPPAA.  As such, the case was remanded.

Upshot For Companies

Two circuits now agree that asset purchasers can be liable for withdrawal liability as successors. No circuit court has taken the opposite position. And the Ninth Circuit has set forth how it would focus on where a new company’s customer base is derived for purposes of determining successorship. In light of this, employers need to assume that if they are a successor they will be subject to the predecessor employer’s withdrawal liability.

By Ron Kramer and Mark Casciari

Many asset buyers believe that, as long as they do not agree to ERISA Section 4204’s sale of assets exception to withdrawal liability, they will acquire the seller’s assets free and clear of any prior contribution history and from any withdrawal liability that may trigger as a result of the sale.  In a startling new decision, the Court of Appeals for the Seventh Circuit disagrees.

In Tsareff v. Manweb Services, Inc., 2015 U.S. App. LEXIS 12924 (7th Cir. July 27, 2015), the Seventh Circuit found that, under a successor liability theory, an asset purchaser could be liable for the seller’s withdrawal liability that triggered as a result of the asset sale, provided that the buyer had been aware of the seller’s “contingent” withdrawal liability that had yet to trigger prior to the sale.  The Seventh Circuit found that imposing successor liability was appropriate, as a matter of equity, to effectuate the congressional goal of the Multiemployer Pension Plan Amendments Act to relieve the financial burden on employers left in the fund and avoid creating a disincentive for new employers to join the fund.  Here, as the asset buyer was aware of the concept of withdrawal liability, engaged in due diligence, and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement, so it was considered on notice of the possibility of seller withdrawal liability.  The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be considered a “successor” and hence liable.

Tsareff thus states that mere knowledge that a seller’s withdrawal liability may be triggered and assessed upon or after the sale imposes joint and several liability on the buyer, provided there is a continuity of operations.  The Seventh Circuit ignores (i) ERISA Section 4204, which limits asset buyer liability, and (ii) the statute’s limitation of withdrawal liability to the contributing employer and its controlled group members as of the withdrawal date.  The Seventh Circuit also dismisses the consequence of its decision that the asset buyer is charged with notice of the seller’s withdrawal liability assessment, even if it received no such notice.  This means that the asset buyer that is a successor after Tsareff cannot challenge the merits of the fund’s assessment if the seller did not timely request review of the assessment.

So, a potential asset purchaser that becomes aware that the seller participates in a multiemployer pension fund and might be assessed withdrawal liability should factor the risk of successor liability into the purchase price, or require the seller to place some of the sale price in escrow to insure there are funds to pay for any withdrawal liability triggered as a result of the sale.  Note that ERISA requires multiemployer funds to furnish upon request estimates of the amount of withdrawal liability each participating employer would incur upon a withdrawal.  Potential asset purchasers also should pay attention to whether and to what extent the Tsareff decision is adopted by the other Courts of Appeal.

By: Ron Kramer

Don’t look now, but pension reform is back in play.  The proposed “Multiemployer Pension Reform Act of 2014” (“MPRA”), 161 pages long (click here), was recently introduced in the House Rules Committee by Representatives George Miller (D-CA) and Rep. John Kline (R-MN), and may be adopted before the end of the lame duck session this week as part of the spending deal to keep the government running.  The House Rules Committee claims the bill would permit trustees of severely underfunded plans to adjust vested benefits, enabling deeply troubled plans to survive without a federal bailout while protecting the most vulnerable employees and adjusting the premium structure to improve the health of the PBGC.

Much of the draft legislation is based on recommendations previously issued by the National Coordinating Committee for Multiemployer Plans.  The bill is designed to make it easier for multiemployer pension plans to take steps to improve their health without necessarily placing significant additional financial burdens on participating employers or taxpayers.  Below are three key highlights of interest for employers:

1.  Ability of deeply troubled plans to reduce benefits before insolvency:  Key to the MPRA is the ability of critical and declining plans to reduce employee benefits now to avoid insolvency.  Currently, vested benefits can only be reduced under certain limited circumstances:  e.g., with “critical status” plans or when a plan is insolvent (and then they are reduced to PBGC guarantee minimums).  The MPRA provides for an extensive process for “critical and declining” plans — i.e., critical plans which are projected to become insolvent within 14 plan years (19 plan years if the plan has a ratio of inactive participants to active participants that exceeds 2 to 1 or if the unfunded percentage of the plan is less than 80 percent) — to seek approval to “suspend” benefits to no less than 110% of PBGC minimums (subject to certain exceptions to protect the most vulnerable retirees) to the extent needed to avoid insolvency.  The process for obtaining approval for reducing benefits is extensive (including the appointment of a retiree representative for larger plans to advocate for the retirees), and includes a mandated vote in favor by the participants.  That vote can be overridden, however, in the event the government determines that the plan is “systemically important,” i.e., the present value of projected financial assistance payments by the PBGC would exceed one billion dollars (indexed going forward) if suspensions are not implemented.

The ability to suspend benefits now, while painful for participants, may help many critical and declining funds in the long run to avoid insolvency or outright plan termination.  To the extent this will permit a fund to avoid insolvency, fund employers may be less likely to withdraw.  This change does not necessarily help employers interested in withdrawing from such plans, however, or employers that may experience a withdrawal for business reasons beyond their control.  Benefit suspensions are disregarded in withdrawal liability calculations unless the withdrawal occurs more than ten years after the effective date of a benefit suspension.

2.  Changes to mergers and partitions:  The MPRA significantly revises existing merger and partition rules.  The PBGC will be authorized to promote and facilitate plan mergers and may provide financial assistance (provided it has sufficient funds) in certain situations where one of the plans to be merged is in critical and declining status.  The PBGC’s ability to approve partitions to carve out the bad parts of a plan from the good parts also has been expanded.  Under the MPRA, in order for a partition to be approved:  (i) the plan must be in critical and declining status; (ii) all reasonable measures to avoid insolvency (including the imposition of the maximum allowable benefit suspensions) must have been taken; (iii) a partition would reduce the PBGC’s expected losses, and would be necessary to keep the plan solvent; (iv)  the PBGC can do it financially without hurting its ability to meet its other financial obligations; and (v) the PBGC’s costs are paid for exclusively from the fund for basic benefits guaranteed for multiemployer plans.  Only the minimum amount of the plan’s liabilities necessary for the plan to remain solvent will be permitted to be partitioned.

These changes also will help save critical and declining funds.  Employers seeking to withdraw within ten years after a partition will have their liability calculated with respect to both plans, thus ensuring exiting employers will not monetarily benefit from the partition.

3.  Employer relief on withdrawal liability payments:  Under current law, an employer’s withdrawal liability payment schedule is directly tied to its highest contribution rate in the past ten years.  The MPRA clarifies that surcharges imposed pursuant to the Pension Protection Act do not count towards that rate — an issue reported on earlier (click here) that is currently pending before the Third Circuit Court of Appeals.  Moreover, under the MPRA, contribution increases mandated by a rehabilitation or funding improvement plan also will be disregarded in certain circumstances.  These changes, at least for employers who withdraw after they take effect, will considerably reduce an employer’s annual withdrawal liability payments — and hence total spend when subject to the 20-year cap on payments.

Other changes include, but are not limited to:  giving plans the right to impose rehabilitation and funding improvement plan contribution increases based on the schedule option (preferred or default) previously adopted if the parties have not negotiated the increases within 180 days of the contract termination date; giving plans the ability to elect to be in critical status under certain conditions; expanding the rights of participants and employers to certain plan information; amending certain rules governing certain charity and nonprofit pension plans; adjusting premium payments to the PBGC, etc.

Will it pass both houses of Congress?  What will remain in the bill if passed?  What surprises lurk within the 161 pages?  How much will it help multiemployer plans?  Will it make employers reconsider entering or exiting multiemployer plans, especially those that are in endangered or critical plans?  Stay tuned.

By: Ron Kramer

On August 14, 2014, in DiGeronimo Aggregates, LLC, Case No. 13-4389 (6th Cir. August 14, 2014), the Sixth Circuit Court of Appeals held that employers have no cause of action  against multiemployer fund trustees for their negligent management of plan assets.  Right or wrong, the decision is bad for employers and for the oversight of multiemployer funds generally.

DiGeronimo Aggregates was one of several employers impacted when the defendant Trustees terminated the Teamsters Local Union No. 293 Pension Plan (“Plan”) after substantially all of the participating employers had withdrawn.  This triggered a mass withdrawal, subjecting DiGeronimo to $1.7 million in liability.  DiGeronimo filed suit against the Trustees alleging their negligent management of Plan assets caused DiGeronimo harm in the form of increased withdrawal liability.  Under ERISA Section 4301(a), 29 U.S.C. § 1451(a), DiGeronimo as an employer is entitled to bring an action for appropriate legal or equitable relief if it is adversely affected by the act or omission of any party under Subtitle E of ERISA (the multiemployer plan provision subtitle) with respect to a multiemployer plan.  DiGeronimo and the Trustees agreed that Section 4301 was simply a “standing” provision, and that it conferred no substantive rights.  DiGeronimo, however, asked the court to recognize a common law right of employers to bring negligence claims against trustees.  The district court dismissed the claim, and DiGeronimo appealed.

The Sixth Circuit made short work of the claim, holding that DiGeronimo had no cause of action under the common law of ERISA for harm caused by the Trustees’ alleged negligent plan management.  The Court first recognized that the parties agreed that Section 4301(a) “confers no substantive rights but simply identifies who can pursue a civil action to enforce the sections governing multiemployer plans.”

Turning to federal common law, the Court acknowledged that it has recognized common law claims in limited instances where:  (1) ERISA is silent or ambiguous; (2) there is an awkward gap in the statutory scheme; or (3) federal common law is essential to the promotion of fundamental ERISA policies.  Here the Court did not consider ERISA to be silent or ambiguous since ERISA  provisions expressly address who can bring claims against trustees for what is basically a breach of fiduciary duties, and employers were not included.  The Court did not see any awkward gap in the statute given trustees could still be held accountable for any mismanagement, it was just that participants and beneficiaries would make the claims — not employers.  The Court presumed Congress deliberately omitted an employer remedy for mismanagement from the statutory scheme because the trustees’ plan management duties flow to participants and beneficiaries, not contributing employers.

Third, the Court found that imposing for the benefit of employers an enforceable duty of care upon trustees regarding plan management is not essential to the promotion of fundamental ERISA policies.  The fundamental policy of ERISA (and according to the Court the Multiemployer Pension Plan Amendments Act (MPPAA)) is ensuring that private sector workers would receive pensions that employers promised them.  The Court ended by noting it could find no case where a court has ever recognized the existence of a negligence claim in favor of contributing employers under the federal common law of pension plans.

DiGeronimo Aggregates is a disappointing decision for employers who participate in multiemployer plans and who are concerned as to how they are managed.  In the Sixth Circuit,  they have the option to withdraw from funds if they do not believe they are well-managed.  Withdrawing employers then may challenge the assessment in arbitration.  Even though the DiGeronimo Aggregates says nothing about the scope of withdrawal liability arbitration, the decision may lead to even more employers exiting multiemployer funds, further damaging the financial stability of those funds and further depriving employees of the opportunity to participate in defined benefit pension plans.

Was the Sixth Circuit right?  An argument certainly can be made that employers should have a right to bring court actions against trustees.  Congress’s civil enforcement provision, ERISA Section 502, which address the right of participants, fiduciaries, beneficiaries and the DOL to bring claims for breaches of fiduciary duties, was adopted long before the MPPAA and its withdrawal liability scheme was imposed.  While Congress in theory could have amended Section 502, Congress likely never recognized or considered how negatively impacted participating employers would be by trustee negligence, or how that may impact the long term viability of the plans themselves.

There is a gap in the statutory scheme, and recognizing the right of employers — who have both a vested interest in well-run plans and the financial wherewithal to take legal action — to bring suit in court would help achieve one of the key goals of the MPPAA.  As the Court recognized in another part of its decision, a key issue that led to the MPPAA was the problem of employer withdrawals, and how rising costs as a result of the diminished contribution base caused by withdrawals forced further withdrawals that could lead to the demise of pension plans.  Granting employers the ability — as any other interested party — to sue in court to ensure plans are well-managed will improve the stability of those plans and eliminate the need for employers to withdraw.

Lastly, both parties agreed Section 4301(a) was only a standing provision and conferred no rights, but is that correct?  The Court cited Bay Area Laundry and Dry Cleaning Pension Trust Fund v. Ferbar Corp., 522 U.S. 192, 202-03 (1997), but there the Supreme Court rejected an employer’s attempted use of Section 4301(a) to argue that the statute of limitations for collecting on withdrawal liability ran from the date the employer withdrew since a withdrawal “adversely affected” the Plan.  The Supreme Court noted Section 4301(a) sets forth who may sue for a violation of the obligations established Subtitle E, and that it did not make an “adverse effect“ unlawful per se.  Here, DiGeronimo basically was arguing the Trustees breached their fiduciary duties in managing plan assets.  While DiGeronimo was impacted by that in the sense its withdrawal liability assessed under ERISA Subtitle E would be higher, the purported malfeasance was indirect and involved ERISA violations outside of Subtitle E.  Employers who truly are more directly impacted by a plan’s actions or omissions over substantive provisions of Subtitle E, especially violations of those substantive provisions, may nonetheless have a cause of action to sue in court under Section 4301(a).

In the meantime, until a court rules otherwise, employers who are not satisfied with the management of their funds are left with withdrawing and arbitrating if they cannot convince the trustees  to see the error of their ways.

By: Ronald Kramer

Since the passage of the Pension Protection Act in 2006, there has been an ongoing debate as to whether a surcharge imposed by a multiemployer pension plan in critical status is part of the employer’s “contribution rate” such that that extra amount — which can be 10% of an employer’s contribution — counts when a fund determines what a withdrawn employer’s “highest contribution rate” is for purposes of calculating the employer’s withdrawal liability payment schedule.  Under ERISA, an employer assessed withdrawal liability has the right to pay that off over time plus interest, with its annual payment equal to no more than its highest three year annual  average of contribution base units in the ten plan years prior to the withdrawal times “the highest contribution rate at which the employer had an obligation to contribute under the plan” in the past ten plan years.  ERISA Section 4219(c)(1)(C)(i)(II).  With many highly underfunded funds assessing so much withdrawal liability that the 20-year cap on annual payments applies, inclusion of a surcharge as part of the contribution rate can significantly increase an employer’s withdrawal liability.

While not all withdrawal liability arbitration decisions are published, at least two arbitrators have found that the surcharge should be considered when determining the highest contribution rate:  American B.D. Company and Local 863 IBT Fund (Taldone, 2013); and IBT Local 863 Pension Fund and C&C Groceries, Inc. (Irvings, 2012) (“C&S”).  In what appears to be the first published court decision, however, the District Court for the District of New Jersey reversed C&S, finding that a surcharge is not part of the contribution rate for purposes of setting an employer’s payment schedule.  Board of Trustees of the IBT Local 863 Pension Fund v. C&S Wholesale Grocers/Woodbridge Logistics LLC, Case No. 12-7823 (D.N.J. March 19, 2014).

The court in C&S looked to ERISA to determine what was meant by the “highest contribution rate at which the employer had an obligation to contribute under the plan.”  While “contribution rate” is undefined, ERISA defines “obligation to contribute” as an obligation to contribute arising “under one of more collective bargaining (or related) agreements,” or “as a result of a duty under applicable labor-management relations law.”  ERISA Section 4212(a).  Given this, the court found that a surcharge required by the PPA arises under ERISA, not a collective bargaining agreement or labor-management relations law.  Thus, the surcharge could not be considered part of the contribution rate.

The court then proceeded to reject the fund’s four arguments for considering the surcharge part of the contribution rate.  First, the court rejected claims that ERISA Section 305(e)(7)(B) somehow established that surcharges are the same as contributions when it provided that they are due and payable the same as the contributions upon which they are based, and if delinquent shall be treated as delinquent contributions.  The court determined that “contribution rates” provided for in a contract, while they might help determine the total value of contributions made by an employer, are distinct from contributions.  Thus, even if surcharges and contributions were the same, the underlying contribution rates were different.

Second, the court dismissed claims that ERISA Section 305(e)(9)(B), which requires that surcharges generally be disregarded in determining the allocation of unfunded vested benefits to a withdrawing employer, did not by implication mean that the surcharge should be included in the contribution rate for the payment schedule.  The court determined that Congress needed to address the application of the surcharge to the allocation of unfunded vested benefits specifically because withdrawal liability determinations are calculated based upon “the total amount required to be contributed” under the plan, with no reference to the contribution rate required under a contract, as provided for with regard to the payment schedule calculation.

Third, the court rejected fund claims that the 2008 amendment to ERISA Section 305(c)(9)(B), which replaced broader language that surcharges should be disregarded in determining “an employer’s withdrawal liability” under Section 4211 with the aforementioned mentioned “allocation of unfunded vested benefits” under Section 4211, meant that Congress deliberately chose not to exclude the surcharge from the contribution rate calculation.  The court found that the more likely explanation for the amendment was that Congress wanted to match the language in this section with the specific terminology utilized in ERISA Section 4211.

Last, but not least, the court rejected fund claims that plan provisions requiring employers to make payments to the plan “to the full extent of the law” somehow required the inclusion of the surcharge in the highest contribution rate.  The plan defined “Employer Payments,” however, as payments owed or made by employers in accordance with a contract or the fund’s trust document.  The court found nothing in the plan requiring the incorporation of the surcharge into the contribution rate, or equating “Employer Payments” under the contract or trust agreement with a statutory surcharge.

C&S is one opinion as to an issue that admittedly has become rarer as fewer and fewer employers remain subject to the surcharge.  For an employer that has withdrawn or will be  at a time when its contribution rate plus the applicable surcharge would in theory be its highest contribution rate, however, this remains a significant issue.  Sooner or later an appellate court will weigh in — perhaps in C&S.  Stay tuned.

By: Mark Casciari and Meg Troy

There are roughly 1,500 multiemployer pension plans covering more than 10 million American workers and retirees.  A March report by the U.S. Government Accountability Office revealed chronic underfunding and potential insolvency of these plans, noting that in 2011, about 40% of plans remain in critical or endangered status. 

The underfunding and insolvency issues will not be soon resolved.  The PBGC estimates that its insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years.  By 2017, the PBGC predicts the number of insolvencies to double.

As this instability continues, the effect on contributing employers is alarming.  Contributing employers are faced with large liabilities from increased contribution obligations and dramatically increased “withdrawal liability” that is imposed on withdrawing employers and is intended to reduce underfundedness.  And, the concern is not limited to contributing employers.  Under the Multiemployer Pension Plan Amendments Act (MPPAA) that amended ERISA, all “trade or businesses” under “common control” with the withdrawing employer are jointly and severally liable along with the contributing employer for withdrawal liability. 

What the courts consider to be a trade or business under common control continues to evolve.

On July 24, 2013, the Court of Appeals for the First Circuit held that even private equity funds may be responsible for withdrawal liability.  In Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 12-2312, the Court of Appeals for the First Circuit, overturning a decision from the district court, found that at least one private equity fund qualified as a trade or business.  The Court then remanded the case to  the district court to determine whether another fund was a trade or business, and whether common control existed.

In 2008, contributing employer Scott Brass Inc. entered into bankruptcy and withdrew from the New England Teamsters and Trucking Industry Pension Fund.  Two private equity funds owned by Sun Capital Advisors Inc. — Sun Fund III and Sun Fund IV (the “Sun Funds”) — held a 100% interest in the company.  The Plan held the Sun Funds jointly and severally liable for the withdrawal liability assessment.

The Sun Funds filed a declaratory judgment action asserting that they were not trades or businesses under common control with the company because they were mere passive.  They argued that they had no employees, no office space, and no products, and that they each made a single investment in Scott Bass.  

The First Circuit concluded that the Sun Funds invested in the company “with the principal purpose of making profit” and became “actively involved in [its] management and operation.”  It also noted that the Sun Funds’ general partners had authority to make decisions about hiring, terminating, and compensating the company’s employees.  As a result, the Court concluded that at least one of the Sun Funds was a “trade or business.”

The Court also focused on the fact that one of the Sun Funds received a direct economic benefit that an ordinary, passive investor would not derive.  Scott Bass made payments of more than $186,000 to the fund’s general partner, which were offset against the fees the fund had to pay the partner for managing the investment in the company.    

What can we learn from this decision?  The dire financial straits facing multiemployer pension funds will cause many funds to extend the scope of liability, leading to more litigation and uncertainty in this important area of the law.

By: Ronald Kramer and Chris Busey,

“Mom and Pop” learned the hard way that the Seventh Circuit will not hesitate to find business owners who own rental real estate and other commonly controlled businesses jointly and severally liable for withdrawal liability.   

In Central States Southeast and Southwest Areas Pension Fund v. Messina Products, LLC, Nos. 11-3513 & 12-1333 (7th Cir. Feb. 8, 2013), the Central States Pension Fund sought to hold Stephen and Florence Messina personally, and Messina Products, another company they had that rented property, jointly and severally liable for withdrawal liability assessed against their trucking company, Messina Trucking.  The Multiemployer Pension Plan Amendments Act of ERISA holds  “trades or businesses” under “common control” with the exiting entity jointly and severally liable to the Pension Fund for withdrawal liability.  There was no dispute that the Messinas, who personally owned commercial and residential rental property, Messina Products and Messina Trucking were under “common control.” The court was asked only whether the rental property owned by the Messinas and Messina Products were “trades or businesses” under the Act

The Messinas personally owned commercial property they had leased to their trucking company. They also owned adjacent property that had been acquired for trucking company use, but which had homes they leased as well.  No written lease agreement existed between the Messinas and their trucking company, the company had stopped paying rent when it ran into financial trouble, and repairs and maintenance on both the commercial and residential properties were completed by company employees free of charge.

To determine whether the Messinas operated a trade or business as commercial and residential landlords, the court applied the “Groetzinger test,” which requires that the activity be performed with (1) “continuity and regularity” (2) “for the primary purpose of income or profit.”  Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1980).  The test distinguishes trades or businesses that are jointly and severally liable under the Act from passive investments, which cannot form a basis for imputing withdrawal liability.

In holding that the real estate owned by the Messinas personally did qualify as a trade or business, the court emphasized that the couple owned real estate that it rented to their trucking company that triggered the withdrawal liability.  The ownership of real estate leased to the withdrawing employer “categorically” constitutes a trade or business and not mere “passive investment.”  This arrangement could only be for profit or income, even if the activity is used to reduce taxes or does not result in a net gain.  To support a finding that the activities were continuous and regular, the court imputed to the Messinas the more frequent activities of Messina Trucking employees in maintaining the real estate.  The court reasoned that, without a formal agreement between the Messinas and their trucking company under which the trucking company was obligated to perform such services, the employees must have acted for the Messinas’ benefit.  The court distinguished the couple from owners in other cases that were not found to be trades or business simply because they leased residential apartments above their home’s garage, or leased commercial property to an unrelated entity via a “triple net” lease in which the owner only collected rent and paid the mortgage.

Turning to Messina Products, the court first noted that it was “highly unlikely” that a formal for-profit business would not qualify as a trade or business.  Although the company had no employees or real estate and its sole asset was a partnership interest in a property rental company, the court had no trouble finding that it satisfied the Groetzinger test.  In particular, the court highlighted Messina Products’ operating agreement, which it found “highly relevant” in that it expressed that the company had been created for business purposes (as opposed to being a passive investment vehicle).  Messina Products also filed tax returns for “trade or business income” that listed the entity’s principal business activity as real estate rental.    

Although the real estate owned by the Messinas was leased to the trucking company that incurred the withdrawal liability, ownership of any type of rental real estate may be found to constitute a “trade or business” if the owner engages in a sufficient level of activity.  Furthermore, if rental property that is owned directly, rather than through a limited liability company or similar entity, is found to constitute a “trade or business”, the owner’s home and other personal assets may also be subject to the withdrawal liability

Many business owners wrongly assume that commercial or rental real estate they hold  personally or in a separate corporate entity is insulated from withdrawal liability.  They similarly believe that other separately but commonly owned businesses may evade liability.  As the Messinas unfortunately learned, it is not that simple.  Personal liability may lurk just around the corner from a multiemployer pension fund withdrawal.  Business owners who participate in multiemployer pension funds need to think strategically if they plan to expand into other enterprises, whether personally or via a corporate vehicle, and understand fully their risks and potential liabilities if the additional enterprises are considered commonly controlled trades or businesses.


 By Kathleen Cahill Slaught and Sheryl Skibbe

On August 20, 2012, in the case of Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc., No. 11-3034, the Court of Appeals for the Seventh Circuit affirmed an arbitrator’s decision that the pension plan trustees over-assessed an employer’s withdrawal liability by $1,093,000. 

 In February 2005, CPC Logistics Inc. completely withdrew from the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund, an ERISA-governed multiemployer defined benefit pension plan.  Despite the withdrawal, the plan remained liable to the employees who have vested pension rights, though CPC and other completely withdrawing employers no longer contribute additional funds to the plan.  ERISA contains  provisions, 29 U.S.C. § 1381 et seq., that assess the employer with an exit liability equal to its pro rata share of any pension plan funding shortfall.  The shortfall (“unfunded vested benefits”) is the difference between the present value of the plan’s assets and the present value of its future obligations to employees covered by the plan.  29 U.S .C. §§ 1381, 1391.

 In this case, the plan actuary computed CPC’s withdrawal liability because the plan was underfunded at the time of the withdrawal.  The actuary also had the separate task of making the annual determination of the plan’s minimum funding obligations.  Both calculations depended on the interest rate used to compute the present value of the plan’s future obligations.  In making these calculations, however, the actuary used different formulas.  One formula was based upon a blended interest rate, while the other formula took into consideration different assumptions.

 CPC contested the plan’s determination that it owed $3.4 million in withdrawal liability.  CPC and the plan arbitrated the withdrawal liability dispute under ERISA section 4221(a)(1).  According to the Seventh Circuit on review of the arbitrator’s decision in favor of CPC, the effect of the actuary’s two formulas fluctuated from time to time, with each producing a higher interest rate depending on economic conditions at different times. 

 The Court questioned the trustees’ decision directing the actuary to use a formula that produced the higher interest rate for purposes of determining the withdrawal liability, because ERISA requires that the computation of withdrawal liability be based on the actuary’s best estimate and reasonable assumptions.  The Court also found it significant that the plan trustees directed the actuary to use the lower interest rate (producing higher withdrawal liability), beginning in 2004, in an apparent attempt to “extract[] higher exit prices from employers who withdrew” from the plan.  According to the Court, the lower interest rate “caus[ed] the plan’s unfunded vested benefits to leap from $67 million to $117.2 million that year, which “increased CPC’s withdrawal liability by $1,093,000 from the amount it would have owed if the plan used same rate throughout the period for CPC’s withdrawal liability calculation.

 Affirming the arbitrator’s decision, the Court determined that the “arbitrator therefore sensibly concluded” that the plan overstated the CPC withdrawal liability.  The Court stated:  “An actuarial determination that violates ERISA by not being based on the actuary’s best estimate is unreasonable, hence reversible by the arbitrator.”