Financial transaction

Third Circuit Confirms Arbitrator’s Imposition of Parent Company Liability for Pension Withdrawal Liability | Genova Burns LLC

[co-author: Christopher Manley]

On August 26, 2021, the third circuit confirmed that a company remained liable for the pension withdrawal liabilities of its bankrupt subsidiary despite the dilution of its stake in the subsidiary below 80%, in order to avoid the group’s liability. control. The decision is an example of the power of a court under ERISA Section 4212 (c) to disregard a transaction when it finds that the primary purpose of the transaction is to avoid the obligation to withdraw a pension. Steelworkers Pension Trust v. The Renco Group (3rd Cir. 26 Aug 2021).

Facts

In 2011, Renco formed RG Steel as a wholly owned subsidiary. Some of RG Steel’s companies have contributed to the Steelworkers Pension Trust (SPT), a multi-employer pension scheme. Soon RG Steel was in financial trouble and was losing about $ 1 million a day. To remedy the financial situation, Renco entered into an agreement with Cerberus Capital Management to transfer a 24.5% stake in RG Steel, and in return Cerberus would inject capital into RG Steel. Shortly thereafter, RG Steel went bankrupt and withdrew from the SPT, causing the SPT to assess RG Steel and Renco with a liability for withdrawal in 2015. Renco defaulted, paid nothing to the SPT , and the district court and later the Third Circuit both ordered the parties to arbitrate the claims of liability for withdrawal. In arbitration, the arbitrator ruled that Renco was liable for $ 78 million in withdrawal liability, plus $ 18 million in attorney fees, expenses and interest. Renco issued a consent order to pay the $ 78 million principal of the appraisal, but challenged the award of statutory damages for Renco’s failure to make interim payments of withdrawal liability while ‘she disputed the assessment. The district court upheld the arbitrator’s decision and granted the SPT’s claim for interest, legal fees and costs. For the second time, Renco appealed to the Third Circuit.

The decision of the third circuit

Renco argued that due to its sale of more than 20% of its ownership of RG Steel to Cerberus, Renco owned less than 80% of the shares of RG Steel and therefore was not part of the “controlled group” of RG Steel and therefore was not responsible for RG Steel’s pension. responsibility for withdrawal. Renco also argued that the primary purpose of the Cerberus transaction was to provide working capital to RG Steel, not to avoid pension obligations.

Relying on Article 4212 (c) of ERISA, the Arbitrator and the Third Circuit rejected Renco’s arguments and held Renco liable for the takedown liability. Section 4212 (c) provides that if a “primary objective of a transaction is to avoid” the obligation to withdraw a pension, then the obligation to withdraw will be imposed regardless of the transaction. The arbitrator concluded that one of the main objectives of the transaction between Renco and Cerberus was to avoid Renco’s retirement liabilities and that it was irrelevant that Renco’s ownership in RG Steel fell below 80 %. As to Renco’s argument that the transaction was intended to fund RG Steel with more working capital, the tribunal agreed with the arbitrator that a single primary purpose of the transaction must be to avoid liability of removal to trigger the ERISA 4212 (c) section. In the court’s view, it did not matter whether Renco might have had a secondary and legitimate objective to complete the Cerberus transaction, as long as one of the primary objectives of the transaction was illegitimate, i.e. to avoid liability. withdrawal.

Take away food

A company cannot avoid the obligation to withdraw a pension from a wholly-owned member of its controlled group simply by ceding enough equity to dilute its stake in its sister company below the 80% threshold for the liability of the company. controlled group. Where a transaction is motivated by the avoidance of withdrawal liability, the relevant pension fund, the arbitrator and a review tribunal are likely to review the transaction under section 4212 (c) of ERISA. to determine whether it has a legitimate primary business purpose and is not motivated by avoiding the obligation to withdraw a pension.


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