Long arm of ERISA tags non-US parent company with pension liabilities of its US subsidiary

A non-US entity seeking to acquire a United States entity should be aware that the acquisition may expose the non-US entity to any pension plan termination and withdrawal liabilities of the US target entity in perhaps unexpected ways. A recent Federal District Court case demonstrates circumstances in which a non-US entity that acquires a US company with an underfunded pension plan can subject itself to personal jurisdiction in the US and become directly liable for 100% of the pension underfunding when the plan is terminated. These concerns are heightened in the current economic environment, and in particular where a solvent non-US parent company’s US subsidiary files for bankruptcy protection with unsatisfied pension liabilities, and the US pension regulator or the plan is eager to find solvent entities to satisfy its claims.

Asahi Tec Corporation, a Japanese automotive parts manufacturer headquartered in Japan, acquired Metaldyne Corporation, located in the US, in January 2007 in a merger that resulted in Metaldyne becoming an indirect wholly owned subsidiary of Asahi Tec. Metaldyne sponsored a defined benefit pension plan covered by Title IV of ERISA. Following Asahi Tec’s acquisition, Metaldyne filed for Chapter 11 bankruptcy in May 2009. The Metaldyne pension plan was later terminated by the PBGC effective July 31, 2009. On the plan termination date, Asahi Tec was a member of Metaldyne’s controlled group, and, as such, the PBGC sought to impose liability on Asahi Tec for the unfunded liabilities arising from the terminated plan. Asahi Tec refused to pay the PBGC any amount in connection with the terminated plan, and the PBGC filed this action in November 2010.

While there was no question that Asahi Tec was a member of Metaldyne’s controlled group, the interesting issue presented by this case is whether the US courts had personal jurisdiction over Asahi Tec, a non-US defendant, to enforce the PBGC’s plan termination liability claim. Unless a non-US defendant has sufficient minimum contacts with the US, a US court’s exercise of jurisdiction over the defendant would violate due process under the US Constitution. According to the Supreme Court in Burger King Corp. v. Rudzewicz, 471 US 462 (1984), specific jurisdiction over a non-US defendant in a litigation requires that (1) the defendant has purposefully directed its activities at residents of the US, and (2) the litigation results from alleged injuries that arise out of or relate to those activities.

Regarding the first jurisdictional requirement, purposeful contacts, the court found as a factual matter that, in connection its acquisition of Metaldyne, Asahi Tec knew (1) about Metaldyne’s underfunded pension plan and, more importantly, that (2) the plan was governed by ERISA, and (3) ERISA’s controlled group liability rules meant that Asahi Tec could become directly liable for Metaldyne’s unfunded pension liabilities.

Having determined that Asahi Tec did purposefully direct some activities at the US by acquiring Metaldyne with knowledge of the associated ERISA liabilities, the court considered whether the PBGC’s claims arose out of either (a) these activities and Asahi Tec’s resulting status as a controlled group member (PBGC’s argument), or (b) termination of the pension plan by the PBGC (Asahi Tec’s argument). The court discussed this difficult question extensively in a prior opinion in this case and held that the PBGC’s claims arose out of Asahi Tec’s purposeful activities in the US because “it was [Asahi Tec]’s status as a controlled group member and not the act of plan termination, that is the driving force behind this lawsuit.” This status pre-existed the termination of the plan, so it was immaterial whether Asahi Tec had any involvement in the termination of the plan, according to the court.

Based on the foregoing, the court granted the PBGC’s motion for summary judgment, concluding that the court had specific jurisdiction over Asahi Tec and that Asahi Tec was liable for the Metaldyne pension plan’s unfunded benefit liabilities upon termination of the plan.

Any non-US entity seeking to acquire a US company that has underfunded single-employer pension plan liabilities or potential multiemployer plan withdrawal liabilities should be aware that the acquisition could, depending on the circumstances, expose the non-US acquirer to direct liability for these pension obligations on a joint and several basis with all other members of the US company’s controlled group. Such a non-US acquirer may want to, among other things, (a) perform due diligence to ascertain the extent of any such pension liabilities, (b) consult with counsel to determine the possibility of being subject to personal jurisdiction of the US courts, recognizing that different courts may apply different standards, and the application of the ERISA controlled group liability rules and (c) if the acquirer were to be subject to US court jurisdiction, evaluate what assets in which it has an interest could be subject to collection claims by the PBGC or a multi-employer plan.