ERISA Controlled Group Evade or Avoid Rules (ERISA 4069)

Applicable Law
ERISA 4069, providing in clause (a) as follows:

  • "If a principal purpose of any person in entering into any transaction is to evade liability to which such person would be subject under this subtitle and the transaction becomes effective within five years before the termination date of the termination on which such liability would be based, then such person and the members of such person’s controlled group (determined as of the termination date) shall be subject to liability under this subtitle in connection with such termination as if such person were a contributing sponsor of the terminated plan as of the termination date. This subsection shall not cause any person to be liable under this subtitle in connection with such plan termination for any increases or improvements in the benefits provided under the plan which are adopted after the date on which the transaction referred to in the preceding sentence becomes effective."

4069's Legislative History 

-- suggests that "the focus of the statute was on 'essentially fraudulent maneuvers lacking in economic substance' by employer-sellers, and not by outside investors" (quoting from Sun Capital, 2012 D.MA, aff'd on other grounds 2013):

  • We intend that employers not be able to evade or avoid withdrawal liability through changes in identity, form, or control, or through transactions which are less than bona fide and arm's length. Hence, for example, a building and construction industry employer—or for that matter any employer contributing to a plan—will not be able to evade withdrawal liability by going out of business and resuming business under a different identity.

Cuyamaca Meats, Inc. v. San Diego & Imperial Counties Butchers' & Food Employers' Pension Trust Fund, 827 F.2d 491, 499 (9th Cir. 1987) (quoting 126 Cong. Reg. 23038 (1980) (statement of Rep. Frank Thompson)).

Structuring to Stay Below 80%

2013.July.24  1st Circuit's Sun Capital Decision approves Advance Planning.  The 1st Circuit’s decision held that Sun Capital’s PE funds could not be held liable for withdrawal liability under ERISA’s “evade or avoid” provision, but see decision on remand for the careful planning needed. See Sun Capital Case.

2012.Oct.18  MA District Court Rejects Evade or Avoid Liability for Fund Structuring.  Here are insightful points from the lower court's Sun Capital decision:

  • Cf. Dorn's Transp., Inc., 787 F.2d at 902 ("[W]hen the seller enters a transaction to escape liability, but the buyer had no intention of taking subsequent actions that will reduce the payments owing to the Plan, it does not appear that a `principal purpose of the transaction' as a whole is to escape liability.").
  • This case is distinguishable from SUPERVALU, Inc. In that case, the sole purpose of the new collective bargaining agreement was to avoid withdrawal liability. The illicit transaction took place when withdrawal was pre-determined, and the parties were negotiating with the knowledge and anticipation that withdrawal would occur. Here, however, the allegedly illicit transaction took place in a very different context. The Sun Funds decided to split their investments in Sun Scott Brass, LLC, 70%/30% at the beginning of their investment in the company, two years before it went bankrupt, with the hope that the company would have future success and return a profit on their investment. While the record does contain evidence that the Sun Funds considered potential withdrawal liability when structuring their initial investments, that consideration was not a principal purpose of the investment in any way approximating the transaction in SUPERVALU Inc. Here, there was no expectation of withdrawal, only the ever present future risk of it. Thus, the decision to invest less-than-controlling proportions (that is, less than 80% ownership by any one entity) was aimed not at avoiding or evading a known or impending withdrawal liability, but rather at minimizing the risk of an uncertain, unplanned future withdrawal, among other considerations.
  • A transaction that "evades or avoids" withdrawal liability when withdrawal is a pre-determined certainty is readily distinguishable from a transaction that reduces a prospective, uncertain future risk of withdrawal liability.

Disposition Transactions to get below 80%

  • 2012 forward  PBGC Litigation v Renco Group re RG Steel. Five months after Renco sold a 24.5% interest (getting its ownership level below 80%), RG Steel filed for bankruptcy.
    • 2013.Jan.28: PBGC Complaint, claiming $97 million and alleging "A principal purpose of this proposed transaction was to dilute Renco's ownership in RG Steel below the 80% threshold set forth in ERISA in order to break up the controlled group, thereby allowing Renco to evade liabilities owed to PBGC if the plans were to terminate." Quoted from PBGC Press Release.
  • Pre-2011 Settlement Reported re Union Steel.  From its 2012 Litigation Outline, this is what PBGC describes: 
    • "PBGC v. Union Steel Products, Inc., No. 01-828 (W.D. Mich.) – PBGC filed suit under section 4069(a) of ERISA against the plan sponsor of a terminated underfunded plan, its individual owner, and former brother-sister controlled group members. Before the plan terminated, the individual owned 100 percent of the stock of the plan sponsor and other businesses. Shortly before the plan sponsor’s business failed and ceased operations, the individual owner transferred 22 percent of his stock in the plan sponsor to officers of the company, thus severing the 80-percent ownership connection needed to keep the other businesses he owned in a brother-sister controlled group with the plan sponsor. Evidence indicated that the transfer of stock was a sham transaction for no consideration. The action settled on the eve of trial and the court dismissed the suit with prejudice." 
  • 1994  Evasion Need Not be Only Purpose.  Santa Fe Pacific Corporation v. Central States S.E. & S.W. Area Pension Fund, 22 F.3d 725, 727 (7th Cir. 1994) (“It needn’t be the only purpose; it need only have been one of the factors that weighed heavily in the Seller’s thinking”). Held, sale of stock disregarded because the principal purpose was to avoid withdrawal liability.Quoting further from the court's decision:
    • Obviously a purpose for the sale of stock is "principal" if, were it absent, the sale would not have taken place. It follows that a principal purpose of the sale of SFTT's stock must have been to avoid withdrawal liability unless, somehow, the other considerations favoring a sale of stock over a sale of assets were so compelling that they reduced the avoidance of withdrawal liability to a minor consideration because the sale of stock would have taken place even if the MPPAA had never been passed.