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Appeals court rules PBGC can target personal trust, successors to cover pension liabilities

The 6th U.S. Circuit Court of Appeals in Cincinnati reversed a federal District Court's decision on Tuesday opening the door for the Pension Benefit Guaranty Corp. to recoup more than $30 million in underfunded pension liabilities from Findlay Industries.

Findlay Industries, a private automotive parts manufacturer based in Findlay, Ohio, ceased operations in July 2009 and was liquidated that year, at which time the Findlay Industries Inc. Pension Plan was terminated.

When Findlay could not meet its obligations, PBGC took over the plan and looked to hold a trust started by Findlay's founder, Philip D. Gardner (the Gardner Trust), liable, treating it as a "trade or business" under common control by Findlay, according to Circuit Judge Martha Craig Daughtrey, who wrote for the panel.

The PBGC also asked the court to apply the federal common law doctrine of successor liability to hold Michael J. Gardner, Philip's son and former CEO of Findlay, liable for some of Findlay's debt. Michael, a 45% shareholder of Findlay, had purchased Findlay's assets and started his own companies using the same land and hiring many of the same employees, according to Ms. Daughtrey's written opinion.

Findlay owes more than $30 million in pension liability, according to the PBGC's complaint.

In forming its opinion on whether the Gardner Trust was a "trade or business" under Findlay's common control, the District Court decided against applying a "categorical test," which treats any entity leasing to a commonly controlled entity as a trade or business under ERISA, according to that court's ruling.

The District Court also declined to apply successor liability in the case because it said the standards outlined in the Multiemployer Pension Plan Amendments Act of 1980 do not apply to single-employer plans. The PGBC had alleged that the defendants had notice of Findlay's pension plan liabilities, knew that Findlay was unable to pay its liabilities and that Michael Gardner's new companies had substantially continued Findlay's operations.

The appellate court disagreed with both lower court decisions.

"Refusing to apply successor liability here would allow Findlay to make promises to employees, fail to uphold those promises and then engage in clever financial transactions that leave PBGC to pay millions in pension liabilities," Ms. Daughtrey wrote. "Holding Findlay responsible, on the other hand, is a commonsense answer that fulfills ERISA's goals."

The 6th Circuit reversed the previous rulings and remanded the case to the District Court.

The PBGC said in a statement it was gratified that the 6th Circuit accepted its arguments. "As the court recognized, we try to avoid unnecessarily shifting the costs of pension insurance onto our premium payers," the statement said. "To accomplish this, when we trustee a plan, we seek to collect what is appropriate from responsible parties. The court agreed with PBGC that controlled group liability and successor liability are proper avenues for PBGC to pursue within its statutory function."

A lawyer representing Findlay could not immediately be reached for comment.