The Eleventh Circuit Clarifies The Liability For A Bankrupt Company’s Pension Benefits

In Durango-Georgia Paper Co. v. H. G. Estate, LLC, Case No. 11-15079 (decided January 7, 2014), the Eleventh Circuit addressed what it defined as a question of first impression: “whether under ERISA the trustee of a corporation that is a contributing sponsor and is in bankruptcy can maintain an action for the benefit of the bankruptcy estate and the estate’s unsecured creditors against the corporation’s former owner … for liabilities arising from the termination of a pension plan.” Opinion, p. 5. The Court held that the answer is “no.”

The Employment Retirement Income Security Act of 1974 (“ERISA”), among other things, governs defined benefit pension plans established by employers. An employer that maintains such a plan, known as the “contributing sponsor” is responsible for funding the plan. In addition, any persons or entities who along with the contributing sponsor are under the “common control” of an organization or individual can be jointly and severally liable for unpaid contributions. These entities are collectively defined as the “controlled group.” If a contributing sponsor stops funding the benefits under the plan, the Pension Benefit Guaranty Corporation (“PBGC”) is authorized to terminate the plan and demand that the contributing sponsor and the other members of the controlled group provide funds to cover the unfunded benefits.

In the Durango-Georgia Paper Co. case, the bankrupt corporation at the center of the case had been formed in 1999. The owners had sold that company in 2002; however, the company slipped into bankruptcy later that year. In the bankruptcy case the PBGC brought an action to terminate the debtor company’s pension plan. It then sought to recover the sums for unfunded benefits from the bankrupt company. The liquidating trustee of the bankrupt then brought an action against the former owners claiming that they had been members of the bankrupt’s “controlled group” and were obligated to share in the liability for unfunded benefits under a provision of ERISA that imposes liability upon a person who engages in a transaction for the principal purpose of evading liability under ERISA. The liquidating trustee claimed that the former owners sold the company to evade the company’s pension liability.

The Eleventh Circuit ruled that the liquidating trustee was not the proper party to make such a claim. The Court ruled that the only parties that can make such a claim were the PBGC and the plan beneficiaries who had not received their full benefits. The holding in this case clarifies that the tools available to hold parties liable for unpaid pension plan contributions. The ruling ensures that those tools are to be used to provide benefits to pensioners and not merely to provide additional resources to the bankrupt’s unsecured creditors.

For more information on the Employment Retirement Income Security Act of 1974 contact your ERISA Counsel at Smith, Gambrell & Russell.

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