PBGC Asks Bankruptcy Court To Treat Prior Sale Of Interest In Debtor As Prohibited Attempt To Evade ERISA Pension Liability

Author:Mr Mitchel Pahl
Profession:Duane Morris LLP

The Pension Benefit Guaranty Corporation (PBGC) filed an objection on June 14, 2012, in the Delaware bankruptcy court proceedings of RG Steel ("Debtor"), challenging a recent sale by RG Steel's parent entity ("Parent") of a 25-percent ownership stake in the Debtor. If the sale is respected, Parent would fall outside of the Debtor's "controlled group" under the Employee Retirement Income Security Act (ERISA), with the result that Parent may cease to have joint liability for the Debtor's unfunded pension obligations. According to the PBGC, the sale transaction should be disregarded, such that Parent remains jointly responsible for the Debtor's pension obligations. The basis of the PBGC claims is that the sale violated ERISA Section 4069 ("Section 4069"), which prohibits transactions entered into with a principal purpose of evading pension liability under ERISA.

Historically, not much case law has involved the anti-evasion rules of Section 4069. Those rules can apply both within and outside of a bankruptcy context, so it may be worthwhile to monitor the outcome of the current PBGC challenge and its potential implications for sale transactions generally.

Joint Pension Liability Under ERISA

Under ERISA, each entity that is part of a "controlled group" of corporations is potentially jointly liable for the pension obligations of other entities within that controlled group. These rules are not elective, and they apply even if an entity within the controlled group has no employees who are covered by a pension plan maintained by another member of the group. In addition, ERISA provides that if an underfunded pension plan terminates, the entity sponsoring that plan, as well as the other entities within the ERISA controlled group, are jointly responsible for the funding shortfall. Thus, an entity's status as an ERISA controlled group member is of vital significance, particularly in bankruptcy proceedings where there is a high risk of pension plan termination.

Generally, entities are considered to constitute a controlled group for these purposes if they are related through 80-percent common ownership. Thus, when a parent sells a 25-percent interest in its wholly-owned subsidiary, thereby bringing its ownership interest down to 75 percent, the parent and subsidiary cease to be part of the same ERISA controlled group.

Section 4069 provides the PBGC with a means to challenge transactions where the principal purpose of one or more of the parties is evasion...

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