Court Discredits Intent for Pension Claim

A recent court decision reinforces the Employee Retirement Income Security Act’s (ERISA) requirement that plan sponsors act in the best interest of participants.

The 11th U.S. Circuit Court of Appeals ruled a corporate employer undergoing bankruptcy reorganization cannot pursue an action for the benefit of its bankruptcy estate, and thus its unsecured creditors, against the employer’s former owner for liabilities arising from the termination of a pension plan.

The appellate court accepted as true the bankruptcy trustee’s contention that the former owner of a paper company sold the firm for “a principal purpose . . . to evade” its liability in the event the Pension Benefit Guaranty Corporation (PBGC) terminated the pension plan, and noted that this means the owner and the other members of the former controlled group would be treated as if they were members of the controlled group at the time of the plan’s termination on March 1, 2004.

However, ERISA’s provisions state that the duty of a current or former controlled group to pay unfunded benefit liabilities is a duty owed to the plan’s beneficiaries. The court found the new company owner was trying to secure those liabilities to be split among the PBGC and other unsecured creditors.

According to the trustee’s complaint, the former owner breached a duty owed to the paper company and the trustee brought suit on behalf of the paper company’s bankruptcy estate and its unsecured creditors. The complaint represents that if the trustee fails to recover on its $55 million claim against the former controlled group, the bankruptcy estate, lacking the $55 million, will amount to not more than $15 million from the sale of the debtors’ assets, of which the trustee would distribute to the PBGC approximately $8.25 million, or 55% of the sale proceeds. The court interpreted the complaint to mean any money the trustee recovers will go to the bankruptcy estate to be allocated among all of the general unsecured creditors, including the PBGC.

The court said it was the duty of the PBGC to pursue payment of those unfunded benefit liabilities. “Congress anticipated that, as part of the involuntary termination procedure, the PBGC will ‘carefully scrutinize transfers of unfunded pension liabilities from stronger to weaker companies’ to determine if pursuing an action under is appropriate in a given situation. In this case, the PBGC could have brought an action against members of the former controlled group for termination liability. It declined to do so.”

H.G. Estate, LLC, the Howard Gilman Foundation, Gilman Converting Corporation, and Gilman Converting, LLC were a controlled group liable for funding the Gilman Paper Company pension plan and for paying insurance premiums to the PBGC. In December 1999, H.G. Estate, LLC sold all of its shares of the paper company to Durango Paper Company, and it became liable for funding the pension plan and for paying insurance premiums to the PBGC.

In 2002, the Gilman Paper Company filed for bankruptcy. In June 2005, while the Chapter 11 case was pending, the PBGC brought an action against the company to terminate the pension plan. A court entered an order terminating the plan as of March 1, 2004. As a result, Gilman Paper Company and members of its controlled group as of March 1, 2004, became liable to the PBGC for unpaid benefit liabilities. The PBGC thereafter filed a claim in the Chapter 11 case for termination liability in the amount of $55 million—the amount it estimated the paper company would need if it were to fund the pension plan sufficiently to satisfy all of the beneficiaries’ claims in full.

On August 18, 2010, the liquidating trustee of the paper company’s bankruptcy estate sued H.G. Estate, LLC, in an effort to recover for the bankruptcy estate the amount of the claim that the PBGC filed against the estate in the Chapter 11 case. H.G. Estate, LLC moved the district court to dismiss the trustee’s complaint for failure to state a claim for relief, and the the court granted its motion on the ground that the relief sought did not constitute equitable relief—rather, it was for a money judgment. The 11th Circuit affirmed that decision.

The 11th Circuit’s opinion is here.