Apparently, the obligations of a plan sponsor can live on (long) after the existence of the organization itself—at least if you continue to act as one.
In a case just decided in the Eleventh Circuit (Pension Benefit Guaranty Corp. v. 50509 Marine LLC, No. 19-14968 (11th Cir. 2020)), the court found that an Illinois corporation that went bankrupt and dissolved under state law in the 1990s—was still liable for pension obligations a decade later.
You know you’re in some uncharted waters when an appellate court ruling opens by explaining that “from the confluence of bankruptcy, employee benefits, and corporations law comes this most unusual case.”
What Happened
Joseph Wortley owned Liberty Lighting Co., Inc., a unionized electrical supply manufacturing company based near Chicago in the late 1980s. Liberty, in turn, was the plan sponsor and administrator of the Liberty Lighting Co., Inc. Pension Plan for IBEW Employees. Liberty ran into financial trouble in the early ’90s, entered bankruptcy, surrendered its assets to a creditor in 1992, and was thereafter administratively dissolved under state law.
Meanwhile, Wortley (Liberty’s sole owner with 100% of the company’s stock) followed Liberty into bankruptcy with his own in 1993 (from which he was discharged in 1998). That process moved all of his assets to a trustee, including his stock in Liberty. However, Wortley continued to act as the plan’s administrator, signing papers on behalf of the Plan at the request of the plan’s actuary for years after Liberty’s purported dissolution—which he needed to do in order to effect continuing payments to pensioners under the multi-employer plan arrangement.
In 2012, the plan was running low on assets, and the bank administering the plan notified the Pension Benefit Guaranty Corporation (PBGC) which acts as an insurer of these plans. The PBGC then reached out to Worley to settle the unfunded remaining liability of the plan. They eventually agreed to a settlement that represented Liberty as having dissolved in the ’90s. The agreement contained language that Wortley believed established a final cutoff date for his remaining liability by conveying “any and all powers, authority, et cetera, to the PBGC” on July 31, 2012.
Case History
But then, six years later, the PBGC brought suit against these 19 appellants in the U.S. District Court for the Southern District of Florida, alleging that they, as other companies owned by Wortley, were nonetheless part of a “controlled group” with Liberty, and therefore were still liable for Liberty’s unpaid pension benefits, premiums, interest and penalties.
The district court denied the companies’ motion to dismiss, and then granted summary judgment to the PBGC on Nov. 22, 2019, based on several alternate grounds:
1. ERISA makes Liberty the contributing sponsor of the plan, and no operation of state law can change that;
2. courts are authorized to make “federal common law” in pursuit of ERISA’s scheme and goals, and finding that Liberty was the sponsor would further ERISA’s central goal of protecting the interests of pension beneficiaries; and
3. Illinois law allows a dissolved company “to carry on in a manner necessary to wind up its affairs,” so Liberty was able to continue in existence after ceasing business operations in order to meet its obligations under the Plan.”
Eleventh Circuit Appeal
On appeal, considering the decision of that court, the Eleventh Circuit noted the reasoning that under the companies’ view of ERISA, “nobody was responsible for the pension plan,” a result that “cannot be squared with ERISA as a whole,” which “does not allow pension plans to exist in a state of limbo, devoid of any caretaker.”
In what the district court acknowledged (and the Eleventh Circuit judges agreed) was a “difficult” case, “It comes down to what seems on the surface an easy question: On July 31, 2012, was Liberty the ‘contributing sponsor’ of the ‘Liberty Lighting Co., Inc. Pension Plan for IBEW
Employees’ under Title IV of ERISA?”
However, that “easy” question triggered several others for the court: “What was the effect of Liberty’s 1992 bankruptcy on its status as the Plan’s sponsor? Does it matter that Wortley—sometimes using Liberty letterhead—continued to sign the forms authorizing payment to the pensioners? If Liberty wasn’t the Plan’s sponsor, who was?” Additionally, according to the Eleventh Circuit, an “important omission” made answering those questions more difficult: There was no record as to whether Liberty reported its bankruptcy, liquidation, and dissolution to PBGC, as it was required to do under ERISA[1].
Ultimately that meant that two decades passed between Liberty’s filing for bankruptcy and the agreement that terminated the plan. “That delay, and the unfortunate destruction of the old bankruptcy court files under the judiciary’s records retention policies, looms large as we search for answers and grapple with this case’s unique circumstances,” the Eleventh Circuit wrote.
State Versus Federal Law
The Eleventh Circuit turned to Illinois law for guidance on a corporation’s “existence” after bankruptcy, and noted that, while there is no “after” following dissolution under common law, Illinois had modified that assumption by statute, “allowing a corporation to live on for another five years beyond its dissolution.” But then, the judges said that the true issue here wasn’t whether Illinois law would permit Liberty to be sued, but rather whether Liberty “had the capacity to serve as the Plan’s ERISA sponsor up until 2012”—a question the court said was of federal, not state, law.
Well, since, according to the Eleventh Circuit judges, “Neither ERISA nor Illinois law tells us what to do with pension liabilities when the sponsor of a plan has dissolved but the plan has continued to operate,” and “Where ERISA is silent, we are required to develop a ‘federal common law of rights and obligations under ERISA-regulated plans.’”
In order to do so, the court said it must decide “whether the rule, if adopted, would further ERISA’s scheme and goals,” which are “(1) protection of the interests of employees and their beneficiaries in employee benefit plans … and (2) uniformity in the administration of employee benefit plans.”
And then, “Mindful that this power to create rules that fit ERISA’s purposes is to be wielded carefully and narrowly,” the court did so here, citing 29 U.S.C. §1307(e)(2), and noting that its provisions on the matter were plain: “the sponsor of a defunct pension plan cannot be allowed to funnel its assets into other entities it owns, and then leave PBGC holding the bag for the plan’s continuing liabilities. If a sponsor is on the hook for unfunded pension liabilities, then every other entity sharing a specified percentage ownership interest in common (here through Wortley) is also on the hook, jointly and severally.”
Beyond that, the court noted that “Wortley’s actions on behalf of Liberty after its purported dissolution constitute strong evidence that Liberty continued to serve as the Plan’s sponsor de facto, whatever its technical status under Illinois law. For years after its dissolution, Liberty—through Wortley—continued to authorize payments out of the Plan. Liberty played an active role in the Plan years after its bankruptcy; most notably, Wortley filed with the government and the bank that held the assets in 2002 and 2004 ERISA forms that identified Liberty as the Plan’s sponsor. And Wortley sent a letter to the Plan’s actuary on Liberty letterhead inquiring about benefit entitlements. These steps—necessary to the Plan’s continuing maintenance—can only have been undertaken by the Plan’s sponsor.”
The Eleventh Circuit followed what it saw as the Supreme Court’s instruction to fill in ERISA’s gaps with common-law rules, and held that where the sponsor of an ERISA plan dissolves under state law but continues to authorize payments to beneficiaries and is not supplanted as the plan’s sponsor by another entity, it remains the constructive sponsor such that other members of its controlled group may be held liable for the plan’s termination liabilities. Under this narrow rule, the court held that “the Companies are liable to PBGC for the Plan’s termination liabilities for the simple reason that Liberty persisted as the Plan's sponsor even as it dissolved as an Illinois corporation.”
Concluding that in the unusual circumstances of this case, Liberty still existed in 2012 sufficiently to act as the plan sponsor under ERISA, the Eleventh Circuit panel affirmed the decision of the district court.
Footnote
[1] This was an important factor, as it turned out. The Eleventh Circuit noted, “PBGC insists that it was never notified at the time of Liberty’s bankruptcy in 1992 that the company was dissolving so that it could lodge an appropriate claim as a creditor to the bankrupt corporate estate and make provision for protecting retirees’ future benefit payments. The government agency has no record of any such communications and the bankruptcy court file that might contain the answer no longer exists.”
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