Bankruptcy trustee could not sue bankrupt company’s former owner for terminated plan liabilities since suit was not for PBGC and plan beneficiaries

In a case of first impression, the U.S. Court of Appeals in Atlanta (CA-11) held that the trustee of a corporation that was a contributing sponsor of a defined benefit plan and in bankruptcy could not maintain an action under ERISA §4069 for the benefit of the bankruptcy estate and the estate’s unsecured creditors against the corporation’s former owner (as a former member of a controlled group that included the corporation) for liabilities arising from the termination of the pension plan. The joint and several liability under ERISA §4069 is intended for the benefit of the Pension Benefit Guaranty Corporation (PBGC) and the plan beneficiaries.

In January 1999, a limited liability company organized a paper company and became its sole shareholder. The paper company acquired a paper mill and the paper mill’s defined benefit plan. The paper company was part of a controlled group that included the limited liability company, a foundation that owned the limited liability company, and two other companies. These controlled group entities were liable for funding the plan and for paying premiums to the PBGC. In December 1999, the limited liability company sold all of its shares of the paper company and the two other companies to a purchasing paper company, which was a wholly owned subsidiary of a corporation. The purchasing paper company and its parent corporation assumed the controlled group positions previously occupied by the limited liability company and the foundation and, thus, became liable for funding the pension plan and paying premiums to the PBGC.

In July 2002, the paper company decided to close its mill. By the end of October 2002, the paper company had closed its mill and fired nearly all of the mill’s employees. On October 29, 2002, the paper company’s creditors sued for relief under Chapter 7 of the Bankruptcy Code. The next month, the paper company successfully moved to transform the Chapter 7 case into a Chapter 11 proceeding in order to reorganize the company. In 2005, while the Chapter 11 case was pending, the PBGC brought suit in district court against the paper company to terminate the pension plan—an involuntary termination. Later, the district court entered an order terminating the plan as of March 1, 2004 and appointing the PBGC as trustee of the terminated plan. The paper company and the members of its controlled group as of March 1, 2004 became liable to the PBGC for unpaid benefit liabilities. Subsequently, the PBGC filed a claim in the Chapter 11 case for termination liability in the amount of $55 million.

On August 18, 2010, the liquidating trustee of the paper company’s bankruptcy estate brought suit in district court against the limited liability company, the foundation, and the corporation that was, according to the trustee’s complaint, the “holder and administrator” of the pension plan before the sale of the paper company to the purchasing paper company to recover for the bankruptcy estate the $55 million the PBGC sought from the bankruptcy estate. The bankruptcy trustee alleged that the limited liability company, the foundation, and the pre-sale plan administrator were jointly and severally liable with the paper company as members of the former controlled group. Specifically, the bankruptcy trustee contended that the limited liability company sold the paper company with the principal purpose of evading the liability that would have been imposed on it and the members of the former controlled group under ERISA if the PBGC had terminated the plan while the limited liability company still owned the paper company. The limited liability company moved to dismiss the bankruptcy trustee’s complaint for failure to state a claim for relief. The district court granted the motion to dismiss because the relief sought did not constitute equitable relief as allowed in ERISA §4070, but was for a money judgment, and entered final judgment for the limited liability company and the two other entities the bankruptcy trustee sued. The bankruptcy trustee appealed the district court’s decision.

No cause of action under ERISA §4069

On appeal, the appellate court addressed an issue that the district court did not decide—whether the bankruptcy trustee had a cause of action under ERISA §4069. The appellate court concluded that the bankruptcy trustee did not. Under ERISA §4069, if “any person” sells the shares of its corporation to evade termination liability under ERISA §4062, “then such person and the members of such person’s controlled group … shall be subject to liability” under ERISA §4062 “as if such person were a contributing sponsor of the terminated plan as of the termination date.” The appellate court stated that the question was whether the joint and several liability under ERISA §4069 ran to the paper company or to the plan beneficiaries and the PBGC (as the plan’s insurer and trustee). The appellate court read the bankruptcy trustee’s complaint as alleging that the limited liability company and two other former members of the paper company’s controlled group breached a duty to the paper company and that the trustee brought the suit on behalf of the paper company’s bankruptcy estate and the paper company’s unsecured creditors. The complaint, as the court read it, provided that any money recovered by the bankruptcy trustee would go to the bankruptcy estate to be allocated among all of the general unsecured creditors, including the PBGC.

The court found nothing in ERISA’s provisions or its legislative history suggesting, or stating, that the duty of a current or former controlled group to pay unfunded benefit liabilities is a duty owed to the employer as contributing sponsor, rather than to the plan’s beneficiaries. The court decided that the legislative history suggests the exact opposite. The House Report talks about ensuring that the plan beneficiaries receive what they are entitled to. The Report makes it plain that ERISA §4069 applies to transactions designed to evade liability to the PBGC, and to participants and beneficiaries for benefit entitlements. The court stated that the bankruptcy trustee could not now seek a money judgment against the former controlled group for the bankruptcy estate and its unsecured creditors for liability that the paper company owed as the contributing sponsor to the PBGC and the terminated plan’s beneficiaries. The bankruptcy trustee’s complaint, because it was brought for the benefit of the bankruptcy estate’s unsecured creditors, failed to state a claim for relief. Therefore, the district court’s judgment was affirmed.

Source: Durango-Georgia Paper Co. v. H.G. Estate, LLC (CA-11).

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