Affiliates of an undead corporation can be liable for the pension deficiency of their seemingly deceased cousin. In the eyes of the Eleventh Circuit, the dissolved company “still existed . . . sufficiently” to result in pension liability thrust on affiliates 20 years later under the federal Employee Retirement Income Security Act, or ERISA.
An individual was the sole owner of a corporation that was liquidated in bankruptcy in 1992 and was subsequently dissolved under state law. The company was the sponsor and administrator of a pension plan. Evidently, the plan had sufficient assets at the time and was not taken over by the PBGC. The owner himself went bankrupt in 1993 and received a discharge after surrendering his ownership of the company to his trustee.
After bankruptcy, the owner continued signing papers on behalf of the pension plan allowing distributions to pensioners. He used the liquidated company’s letterhead.
Assets running law, the PBGC took over the pension plan in 2012. Six years later, the PGBC sued 19 companies owned by the same individual, contending that common ownership made them part of the control group and therefore liable for the pension plan’s $6.2 million funding deficiency.
The PBGC filed a motion for summary judgment. The 19 affiliates opposed, contending they could not be affiliates of the liquidated plan sponsor which ceased to exist 20 years earlier. The district court granted summary judgment in favor of the PBGC.
The affiliates appealed but lost in a November 24 opinion by Ninth Circuit Judge Richard C. Tallman, sitting by designation in the Eleventh Circuit.
The affiliates contended that dissolution was the governing factor, because the sponsor corporation could no longer sue or be sued under state law. Judge Tallman disagreed. For him, the question was whether the dissolved corporation “had the capacity to serve as the Plan’s ERISA sponsor up until 2012. That is a question of federal law, and one to which Illinois corporations law provides no answer.”
As it turned out, neither ERISA nor federal common law had an answer either. Judge Tallman therefore followed instructions from the Supreme Court “to fill in ERISA’s gaps with common-law rules” that will “ ‘further ERISA’s scheme and goals.’ ”
Where “the sponsor of an ERISA plan dissolves under state law but continues to authorize payments to beneficiaries and is not supplanted as the plan’s sponsor by another entity,” Judge Tallman held that the dissolved company “remains the constructive sponsor such that other members of its controlled group may be held liable for the plan’s termination liabilities.”
Applying the rule to the facts of the case, Judge Tallman noted that that dissolved company “continued to serve as the Plan’s sponsor de facto, whatever its technical status under Illinois law. For years after its dissolution, [the dissolved company] — through [the owner] — continued to authorize payments out of the Plan . . . . [M]ost notably, [the owner] filed with the government and the bank that held the assets in 2002 and 2004 ERISA forms that identified [the dissolved company] as the Plan’s sponsor.”
Judge Tallman found nothing in ERISA suggesting that a pension plan could operate without a sponsor. Upholding summary judgment in favor of the PBGC and ruling that the affiliates were liable for the funding deficiency, he noted how the affiliates had not identified a “possible alternative sponsor.”
Observation
Fortunately, pension plans of bankrupt companies are typically underfunded and immediately taken over by the PGBC. In those rare cases where the plan continues under its own power, debtor’s counsel should be aware of the Eleventh Circuit’s ruling and identify a plan sponsor whose affiliates are not afraid of liability.
The sage advice of a bankruptcy veteran comes to mind. “Bankruptcy attorneys need to consult others when treading in areas outside of their expertise so as to avoid unforeseen consequences of their ignorance,” said Charles Tatelbaum, a partner with Tripp Scott PA in Fort Lauderdale, Fla.
Affiliates of an undead corporation can be liable for the pension deficiency of their seemingly deceased cousin. In the eyes of the Eleventh Circuit, the dissolved company “still existed . . . sufficiently” to result in pension liability thrust on affiliates 20 years later under the federal Employee Retirement Income Security Act, or ERISA.
An individual was the sole owner of a corporation that was liquidated in bankruptcy in 1992 and was subsequently dissolved under state law. The company was the sponsor and administrator of a pension plan. Evidently, the plan had sufficient assets at the time and was not taken over by the PBGC. The owner himself went bankrupt in 1993 and received a discharge after surrendering his ownership of the company to his trustee.
After bankruptcy, the owner continued signing papers on behalf of the pension plan allowing distributions to pensioners. He used the liquidated company’s letterhead.
Assets running law, the PBGC took over the pension plan in 2012. Six years later, the PGBC sued 19 companies owned by the same individual, contending that common ownership made them part of the control group and therefore liable for the pension plan’s $6.2 million funding deficiency.