A recent court decision could make it harder for corporations to walk away from pension liabilities of their financially shaky subsidiaries if they unload them on buyers that fail to fulfill those obligations.
The ruling, by the 7th U.S. Circuit Court of Appeals in Santa Fe Pacific Corp. vs. Central States, Southeast & Southwest Areas Pension Fund, strengthens efforts by union pension plans to collect vested but unfunded liabilities from former corporate parents long after they have sold failing subsidiaries, observers say.
While liquidating a business and selling its assets typically triggers withdrawal liability, the court said that selling stock in a money-losing subsidiary also can trip up the parent company if one of its key reasons for so doing is to avoid pension liabilities.
"It could impact on pending or recent cases in the sense a multiemployer plan might amend its demand for withdrawal liability," said Henry Rose, partner at Epstein Becker & Greens, Washington, who represents multiemployer pension plans. "There have been some cases allowing multiemployer plans to modify and make increased demands (for withdrawal liability) after they have made an original demand."
Typically, the Employee Retirement Income Security Act does not hold plan sponsors responsible for the failure of buyers of their businesses to pay promised pension benefits unless a "principal purpose" of the divestiture was to "evade or avoid" pension liabilities.
But, by literally interpreting the law to mean that withdrawal liability need not be the main reason for the sale, Judge Richard A. Posner's decision could force corporations to rethink sales of their financially troubled businesses with outstanding pension obligations.
"I was disturbed by it," said Susan Katz Hoffman, a partner at Pepper Hamilton & Scheetz, Philadelphia. "It's hard because a seller can never tell whether they will have liability triggered by the failure of the buyer."
What's more, because the wording governing multiemployer pension plans in ERISA is similar to that covering single-employer pension plans, A. Richard "Brick" Susko, partner at Cleary Gottleib, Steen & Hamilton, New York, suggests the decision by Judge Posner, a respected authority on pension matters, also could boost efforts by single-employer pension plans to collect "withdrawal liabilities" from companies that once owned the businesses.
"You just wonder if the dicta of that decision is going to be picked up and applied in that context" he said.
The law allows "the employer off the hook even if one of its purposes of the sale is to beat withdrawal liability, provided however that it was a minor, subordinate purpose," Judge Posner wrote. "To let the employer off even if avoiding such liability was a major purpose would ill serve the statute's goal of preventing one employer from unloading his pension obligations onto the other employers in a multiemployer plan."
But union pension plan lawyers are quick to suggest the decision will affect only a few cases, those involving companies that dump money-losing subsidiaries to wriggle out of payments to pension funds.
"Where you have got a strong subsidiary, it won't be an issue," said Terence G. Craig, attorney for the $12 billion plus Central States pension fund in Rosemont, Ill., which was owed the bulk of an estimated $7.6 million from Santa Fe for pension liabilities of its trucking subsidiary.
Santa Fe sold its Santa Fe Trails Transportation Co. in a leveraged buy-out in 1984, but the buyer went broke a year later. Santa Fe then contested the Teamsters' claim against it.
Although a district court upheld arbitrators who found in favor of the company three times, the federal appeals court noted the evidence was overwhelmingly against Santa Fe. The court dismissed the company's claims that it sold stock in the subsidiary, rather than dispose off its assets piecemeal or lump sum - even though it could have received a lot more money by the latter route - because of concerns over employee morale.
"Obviously people don't embark on courses of action that cost them more, but the fund's position was they did it to avoid the greater cost of withdrawal liability and the court found that persuasive," explained Peter Schmidt, partner at Arnold & Porter, Washington, who represents the International Ladies Garment Workers pension fund, a large multiemployer plan.
For one thing, the court noted the company already had begun disposing of a large part of the company, selling off more than half of its trucks and firing nearly half of the workforce, thereby risking at least partial withdrawal liability. The court noted, too, that the company later rehired some of the laid-off workers to avoid triggering the pension liability. Then too, the appeals court noted a company consultant had unequivocally stated an estimated $10.5 million withdrawal liability represented " a major stumbling block" to liquidation of the business.
What's more, company documents make it clear officials realized selling the entire business could avoid "the specter of the MEPPA." The court referred to a note by the Santa Fe president to the chairman of the board in 1983 that "If a purchaser for SFTT can be located, there is a good possibility of transferring part or all of the rather substantial liability."
