The surprising thing about a boomerang is that just when you
think you have tossed it away, it suddenly comes back to you.
The same result can happen under Section 4069 of ERISA, a rarely
applied provision that holds a seller liable for underfunding and
other Title IV liability when a buyer terminates an assumed plan
within 5 years following the sale. The key is that a principal
purpose of the transaction must be to evade liability.
Such a transaction can be ignored and the seller pursued as if the
transaction had not occurred.
The Pension Benefit Guaranty Corporation (PBGC) has just cleared
a big hurdle in its attempt to hold The Renco Group liable under
Section 4069 and possibly make new law on when Section 4069 can
In 2012, Renco sold 24% of its affiliate, RG Steel LLP, to
Cerberus Capital Partners. This put Renco's interest
below the 80% necessary to include RG Steel in Renco's
controlled group, which would usually mean that Renco was not
liable for RG Plan underfunding. Renco claimed that the
sale was necessary to raise capital, but after RG's bankruptcy,
the PBGC terminated RG's plans and proceeded against Renco
under Section 4069.
There are some facts alleged that don't help Renco.
Renco had just acquired the two plans in March of 2011,
at which time it told the PBGC that the plans would benefit
by being transferred from the seller to Renco. However, in
December 2011, Renco notified the PBGC that it might break up the
controlled group. The PBGC expressed concerns and requested a
guarantee, which Renco never provided. The PBGC intended to
terminate the plans on January 17, 2012, but on January 13, Renco
requested that the PBGC not initiate termination proceedings,
stating that no transaction was imminent. The PBGC wanted a
standstill agreement, but was notified on January 17 that the
Cerberus transaction had been completed over the Martin Luther King
The PBGC terminated the RG plans after the Cerberus
transaction. At that time, the plans had $87.2 million in
unfunded benefit liabilities, unpaid plan contributions of
$4.9 million, and owed $5.1 million for insurance premiums.
The PBGC sought to hold Renco liable for these amounts under
Section 4069 of ERISA, and also filed state law claims for fraud,
fraudulent concealment and negligent misrepresentation. The
court held that the state law claims were not pre-empted.
This case seems on course to give us some rules about when a
transaction's principal purpose is to evade
liability. We have already had some guidance in another
circuit on how that phrase is applied in the multi-employer plan
context, as the
Sun Capital Partners court found that simply taking less
than an 80% ownership interest wasn't an attempt to evade
liability. However, this case involves an interest that was
originally higher than 80% and was reduced. Further, this court
seems to be willing to entertain the idea that a transaction can
have more than one principal purpose. So, even if the Cerberus
investment provided needed capital, that doesn't necessarily
mean that Renco will win.
What to Do Now
Section 4069 liability comes up in purchase, sale and merger
agreements. Buyer's counsel should always make sure that
the ERISA reps cover seller's actual or potential Section 4069
liability, and may seek to negotiate appropriate indemnification
provisions. But this is also an important item for due
diligence, which should identify any exposure based on prior
transactions in seller's controlled group and try to quantify
it. And those considering lowering their investment in
businesses to avoid Title IV exposure need to evaluate the
There is also a lesson here, if the facts alleged by the PBGC
are true, about the dangers of not being forthcoming with the PBGC
when you file a reportable event notice or respond to early warning
inquiries. It will probably not help your case if you appear
to have been less than straightforward with the PBGC.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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