The Pension Benefit Guaranty Corp. might have an easier time enforcing corporate responsibility for funding pension plans because of a recent U.S. Appeals Court ruling, Executive Director Martin Slate said in a statement.
In PBGC vs. East Dayton Tool & Die Co., the 6th U.S. Circuit Court of Appeals ruled a corporate group's responsibility for an underfunded pension plan is based on stock ownership, rather than on actual control of the company.
In the decision, Roscommon Financial Corp., Dayton, Ohio, a holding company with several affiliates, was held jointly and severally liable for the unfunded benefits of East Dayton Tool & Die, a corporation that designed, manufactured and sold tools and dies.
In 1973, Roscommon Financial formed Roscommon Group with its affiliates, which purchased East Dayton for $150,000 in cash and a $1.2 million promissory note, which was secured by East Dayton stock. If Roscommon Financial defaulted on the loan, East Dayton's former owner, Dorothy Darrow, could either elect two directors to East Dayton's board or sell the stock.
In January 1976, Roscommon defaulted on the loan and Ms. Darrow appointed two directors to East Dayton's board. That spring, the new board decided to liquidate the company to repay Ms. Darrow, and to terminate the pension plan.
When the plan terminated, Roscommon owned 100% of East Dayton's stock, along with the stock of several affiliates, which led the PBGC to state the affiliates formed a controlled group. Under pension law, companies that share at least 80% common ownership are responsible for pension underfunding at any of the individual companies and constitute a controlled group.
Roscommon argued the company lost control of East Dayton when it defaulted on the loan. Therefore, Roscommon couldn't be responsible for the pension plan. The district court agreed, but the appellate court reversed the decision. In the appellate court decision, the court said pension law defines control in terms of stock ownership and not actual control.