The Pension Benefit Guaranty Corporation (PBGC) filed an objection on June 14, 2012, in the Delaware bankruptcy court proceedings of RG Steel ("Debtor"), challenging a recent sale by RG Steel's parent entity ("Parent") of a 25-percent ownership stake in the Debtor. If the sale is respected, Parent would fall outside of the Debtor's "controlled group" under the Employee Retirement Income Security Act (ERISA), with the result that Parent may cease to have joint liability for the Debtor's unfunded pension obligations. According to the PBGC, the sale transaction should be disregarded, such that Parent remains jointly responsible for the Debtor's pension obligations. The basis of the PBGC claims is that the sale violated ERISA Section 4069 ("Section 4069"), which prohibits transactions entered into with a principal purpose of evading pension liability under ERISA.
Historically, not much case law has involved the anti-evasion rules of Section 4069. Those rules can apply both within and outside of a bankruptcy context, so it may be worthwhile to monitor the outcome of the current PBGC challenge and its potential implications for sale transactions generally.
Joint Pension Liability Under ERISA
Under ERISA, each entity that is part of a "controlled group" of corporations is potentially jointly liable for the pension obligations of other entities within that controlled group. These rules are not elective, and they apply even if an entity within the controlled group has no employees who are covered by a pension plan maintained by another member of the group. In addition, ERISA provides that if an underfunded pension plan terminates, the entity sponsoring that plan, as well as the other entities within the ERISA controlled group, are jointly responsible for the funding shortfall. Thus, an entity's status as an ERISA controlled group member is of vital significance, particularly in bankruptcy proceedings where there is a high risk of pension plan termination.
Generally, entities are considered to constitute a controlled group for these purposes if they are related through 80-percent common ownership. Thus, when a parent sells a 25-percent interest in its wholly-owned subsidiary, thereby bringing its ownership interest down to 75 percent, the parent and subsidiary cease to be part of the same ERISA controlled group.
Section 4069 provides the PBGC with a means to challenge transactions where the principal purpose of one or more of the parties is evasion of liability for ERISA pension obligations. Pursuant to these rules, if an entity has such a motive for entering a transaction, and the transaction occurs within five years of the termination of a pension plan maintained within the controlled group, that entity can be held liable for the unfunded obligations on plan termination. Essentially, Section 4069 allows the PBGC to bring a departing controlled group member back into the controlled group fold if the transaction that resulted in the exit had a principal purpose of evading pension obligations of the group.
Case Involving RG Steel
RG Steel, as the Debtor, commenced Chapter 11 bankruptcy proceedings on May 31, 2012, and filed a related debtor-in-possession financing motion ("DIP Financing Motion"). As part of the DIP Financing Motion, the Debtor sought approval of the grant of certain releases of claims against the Parent. The PBGC objected to the proposed releases to the extent the releases would impair or prejudice the PBGC's statutory rights, including its rights under ERISA that relate to unfunded pension obligations under Section 4069. In its objection, the PBGC noted the sale transaction in January 2012 pursuant to which Parent transferred a 25-percent ownership interest in the Debtor to a third party. That transaction resulted in Parent (with only a 75-percent remaining ownership interest) falling outside of the Debtor's controlled group of corporations. According to the PBGC, the sale transaction was undertaken to evade ERISA pension liabilities in violation of Section 4069 (i.e., presumably to break the controlled group). Therefore, notwithstanding the break-up of the ERISA controlled group, Parent should remain liable for pension obligations of the Debtors to the extent provided in Section 4069.
Implications of PBGC Claim
The RG Steel transaction apparently involved a bona fide third-party purchaser, and the PBGC did not otherwise present specific facts that would support a finding that the principal purpose of the transaction was evasion of ERISA pension liability. Thus, it is unknown whether it was the timing of the sale transaction itself in close proximity to the bankruptcy filing, or some other aspect of the transaction, which the PBGC believes raises an issue under Section 4069. Duane Morris will monitor this case as it progresses to see what additional facts come to light that are considered relevant by the PBGC, and what implications the outcome may hold for parties to a sale transaction (within or outside of bankruptcy proceedings) where one or more of the parties maintains an ERISA pension plan.