Third Circuit Confirms Withdrawal Responsibility Arbitral Award
Under the provisions of the Employees Retirement Income Security Act (“ERISA”) as amended by the 1980 Act amending the Multi-Employer Pension Plans Act (“MPPAA“), an employer who withdraws from a multi-employer pension plan is liable for its attributable share of any underfunding. With respect to this withdrawal obligation, the pension fund has a potential recourse both against the relinquishing employer (usually the entity that signed the collective agreement under which contributions to the fund were required) as well as against all other mutual funds (usually 80% or more) trades or businesses. All of these “control group” members are considered a single employer, and all are jointly and severally liable for any withdrawal liability incurred by another control group member.
In addition to expanding the universality of responsible parties, the law also endows pension funds with another powerful fundraising tool, section 4212 (c), the “escape or avoid” provision of the MPPAA. Article 4212 (c) provides that “[i]F a main objective of any transaction is to escape or avoid liability under this part, that part must be applied (and liability must be determined and collected) regardless of such transaction. “The Third Circuit recently explored the nuances of the evasion or avoidance provision; at issue was a $ 78 million withdrawal liability award by an arbitrator. Steelworkers Pension Trust v. The Renco Group, Inc., US application 2021. LEXIS 25748 (3rd Cir. August 26, 2021) (“Renco“).
Renco involved the acquisition of a syndicated steel company (“RG Steel”) by a large private investment holding company in March 2011. In doing so, the investment holding company assumed the obligation to contribute to the Trust Steelworkers Retirement System (“SPT”). At the end of 2011, RG Steel was in dire need of funding. After speaking with several potential lenders, the company finally entered into a transaction with Cerebrus Capital Management, LP (“Cerebrus”) in January 2012. As part of the Cerebrus transaction, Cerebrus loaned RG Steel $ 125 million in exchange. with a potential of 49% equity. The equity component was originally structured in the form of warrants (a security that gives the warrant holder the option to purchase the property directly at a fixed price). However, at the last minute (and at Renco’s insistence), half of the equity component (or 24.5%) was changed to direct ownership in the form of member units (the equivalent of one action in a company). Less than 5 months later (May 31, 2012), RG Steel filed for bankruptcy under Chapter 11 of the Bankruptcy Code, ceased operations permanently and withdrew from SPT. As this resulted in the acquittal of SPT’s claim of withdrawal liability against RG Steel, SPT sued Renco and other members of the control group.
Renco’s defense was based on the fact that it held less than the required 80% as of the withdrawal date of May 31, 2012 and that it was therefore not liable as a member of the controlling group of RG Steel. SPT responded by relying on 4212 (c), arguing that a primary objective of the Cerebrus transaction (which resulted in the transfer of a 24.5% stake in RG Steel) was to evade or prevent Renco n ‘incurs the responsibility of removal and therefore should be ignored.
The arbitrator, the United States District Court for the Western District of Pennsylvania, and ultimately the United States Court of Appeals for the Third Circuit all agreed with the SPT. All of these forums found the last-minute change resulting in a direct transfer of 24.5% of equity at Renco’s insistence highly indicative of a pattern of evasion or avoidance. This was accompanied by a statement from Renco’s attorney that the sole purpose of the direct transfer of shares was the desire for Renco to leave the controlling group of RG Steel cleanly. As this would allow Renco to potentially avoid a very large projected amount of withdrawal liability to the Fund, the arbitrator determined (and both courts agreed) that one of the primary objectives of the Cerebrus transaction was for Renco to escape. or avoids the responsibility of withdrawal.
What are the takeaways from Renco? First of all, he reiterates the maxim that “timing is everything”. Although not explicitly stated, the timing of the Cerebrus transaction (which preceded the bankruptcy / withdrawal of RG Steel less than 5 months) was very revealing of the required motive to “evade or avoid”. Most pension funds are already very suspicious of activities (such as transfers of stakes and assets that purport to change control group membership) that closely precede a withdrawal. Renco should encourage and expand this scrutiny. Renco also reminds us that a transaction can (and often does) have more than one primary objective, and that only one of those objectives must have an elusive motive to trigger the application of section 4212 (c).
Jackson Lewis PC © 2021Revue nationale de droit, volume XI, number 251