When a single-employer defined benefit plan is terminated with insufficient assets to pay its benefit obligations, the plan sponsor and members of the sponsor’s controlled group are held jointly and severally liable to the Pension Benefit Guaranty Corporation (“PBGC”) for the difference between the fair market value of plan assets and the value of the plan’s liabilities on the date of termination. For purposes of this termination liability, the controlled group includes “trades or businesses” that are under “common control” with the sponsor.
On December 29, 2016, in PBGC v. Findlay Indus., Inc., the United States District Court for the Northern District of Ohio clarified the definition of “trade or business,” and distinguished the statutory schemes for withdrawal liability for multiemployer plans and termination liability for single-employer plans. The court held that PBGC could not collect single-employer termination liabilities from (i) an irrevocable trust established by the founder of Findlay Industries, Inc. (“Findlay”) because the trust was not a “trade or business,” or (ii) companies that purchased assets from Findlay.
This case contrasts with several recent cases suggesting a looser interpretation of “trade or business” in the context of multiemployer plan liability. (See, e.g.,“Private Equity Funds Liable for Withdrawal Liability Although Each Had Less Than 80% Ownership”.)
Findlay established a defined benefit pension plan (the “Plan”) and remained the sponsor and administrator of the Plan until its termination in July 2009. The Plan terminated underfunded, and Findlay dissolved with insufficient assets to pay PBGC; accordingly, PBGC claimed that a trust established by Findlay’s founder (Trust 1987) and two separate companies that acquired some of Findlay’s assets after its dissolution should be jointly and severally liable for the Plan’s termination liabilities.
Prior to the Plan’s termination, Findlay’s founder established “Trust 1987,” an irrevocable trust, and donated two parcels of property to it to provide for the care, support, maintenance, and welfare of his two sisters. After the passing of his two sisters, the trust specified that any remaining assets should be split between the founder’s two sons. From no later than July 1, 1993 to at least November 2009, Trust 1987 leased a parcel of real property to Findlay. Because of this leasing activity, PBGC claimed that Trust 1987 should be included in Findlay’s controlled group and held jointly liable for the Plan’s underfunding.
PBGC also claimed federal common law successor liability against two companies, September Ends and Back in Black, which acquired equipment, inventory, and receivables associated with two of Findlay’s plants after Findlay’s dissolution. September Ends and Back in Black each operate one of the plants acquired.
Trade or Business under Common Control
In identifying the controlled group for termination liability, it is important to understand which “trades or businesses” are under “common control” with the plan sponsor. Unfortunately, “trade or business” is not defined by ERISA or the relevant regulations.
PBGC claimed that the leasing activity of Trust 1987 made it a “trade or business” that should be jointly liable for the Plan’s obligations to PBGC.
The District Court’s Holding
Neither the Supreme Court nor the Sixth Circuit has defined the term “trade or business” in the context of ERISA termination liability. Therefore, the court looked to the dictionary definition of “trade” as “the business or work in which one engages regularly,” and “business” as “a usually commercial or mercantile activity engaged in as a means of livelihood.” The court stated that the Supreme Court’s definition of a trade or business in Commissioner v. Groetzinger, requiring a person to engage in an activity for the purpose of income or profit and with continuity and regularity, also reflects the dictionary definition.
The court held that Trust 1987’s leasing activity did not rise to the level of a “trade or business” under the plain meaning of the phrase or under the Groetzinger definition. The court also declined to adopt a categorical rule that leasing property constitutes a “trade or business,” noting that Circuits that have adopted this rule have done so in the context of the Multiemployer Pension Plan Amendments Act (“MPPAA”), which applies to multiemployer plans, with a goal of preventing employers from avoiding liability by fractionalizing into separate entities. The court declined to use the cases applying MPPAA to single-employer plan liability, noting that Trust 1987 leasing property to Findlay was in furtherance of the trust’s purpose of generating money for the care of the founder’s sisters, rather than to dissipate Findlay’s assets or profit the founder.
For the claims against September Ends and Back in Black, the court held that ERISA does not provide successor liability for asset purchasers with regard to single-employer plan termination liability. The court was unwilling to extend the common law Federal Successor Doctrine from withdrawal liability for multiemployer plans to termination liability for single-employer plans. The purpose of the MPPAA was to create special provisions for multiemployer plans and to treat them differently. The statutory provisions governing multiemployer plans do not define successor liability, but the statutory provisions governing single-employer plans are explicit and therefore do not require common law to fill the gaps.
Implications of the Decision
This case is important for companies that sponsor a single-employer defined benefit plan or that are part of a controlled group with the plan sponsor. It stands for the proposition that the common meaning of “trade or business” should be used to determine termination liability. Additionally, common law doctrines applicable to multiemployer plan withdrawal liability do not necessarily extend to termination liability for single-employer plans. Although many had thought that multiemployer plan guidance would be relied upon by analogy in the context of single-employer termination liability, this court, at least, has declined to do so.