Boomerangs and the PBGC, or When a Sale is Not a Sale

In 2012, Renco sold 24% of its affiliate, RG Steel LLP, to Cerberus Capital Partners.  This put Renco’s interest below the 80% necessary to include RG Steel in Renco’s controlled group, which would usually mean that Renco  was not liable for  RG Plan underfunding.  Renco claimed that the sale was necessary to raise capital, but after RG’s bankruptcy, the PBGC terminated RG’s plans and proceeded against Renco under Section 4069.

There are some facts alleged that don’t help Renco. Renco had just acquired the two plans in March of 2011, at which time it  told the PBGC that the plans would benefit by being transferred from the seller to Renco.  However, in December 2011, Renco notified the PBGC that it might break up the controlled group.  The PBGC expressed concerns and requested a guarantee, which Renco never provided.  The PBGC intended to terminate the plans on January 17, 2012, but on January 13, Renco requested that the PBGC not initiate termination proceedings, stating that no transaction was imminent.  The PBGC wanted a standstill agreement, but was notified on January 17 that the Cerberus transaction had been completed over the Martin Luther King holiday weekend.

PBGC’s Response

The PBGC terminated the RG plans after the Cerberus transaction.  At that time, the plans had $87.2 million in unfunded benefit liabilities,  unpaid plan contributions of $4.9 million, and owed $5.1 million for insurance premiums.  The PBGC sought to hold Renco liable for these amounts under Section 4069 of ERISA, and also filed state law claims for fraud, fraudulent concealment and negligent misrepresentation.  The court held that the state law claims were not pre-empted.

What’s Ahead

This case seems on course to give us some rules about when a transaction’s principal purpose is to evade  liability.  We have already had some guidance in another circuit on how that phrase is applied in the multi-employer plan context, as the Sun Capital Partners court found that simply taking less than an 80% ownership interest wasn’t an attempt to evade liability.  However, this case involves an interest that was originally higher than 80% and was reduced. Further, this court seems to be willing to entertain the idea that a transaction can have more than one principal purpose. So, even if the Cerberus investment provided needed capital, that doesn’t necessarily mean that Renco will win.

What to Do Now

Section 4069 liability comes up in purchase, sale and merger agreements.  Buyer’s counsel should always make sure that the ERISA reps cover seller’s actual or potential Section 4069 liability, and may seek to negotiate appropriate indemnification provisions.  But this is also an important item for due diligence, which should identify any exposure based on prior transactions in seller’s controlled group and try to quantify it.  And those considering lowering their investment in businesses to avoid Title IV exposure need to evaluate the risks.

There is also a lesson here, if the facts alleged by the PBGC are true, about the dangers of not being forthcoming with the PBGC when you file a reportable event notice or respond to early warning inquiries.  It will probably not help your case if you appear to have been less than straightforward with the PBGC.