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1 Presenting a live 90-minute webinar with interactive Q&A Controlled Group Liability and Successor Employer Rules After PBGC v. Findlay Industries Inc. ERISA and Internal Revenue Code Provisions; Limiting Claims and Reducing Risk of Seller's Liability TUESDAY, MARCH 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Carol I. Buckmann, Partner, Cohen & Buckmann, New York Sandra W. Cohen, Partner, Cohen & Buckmann, New York Leonard S. Hirsh, Partner, Cohen & Buckmann, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 Controlled Group Liability and Successor Employer Rules After PBGC v. Findlay Carol Buckmann Sandra Cohen Leonard Hirsh

6 Topics for Today Who Is a Controlled Group Member? Understanding Potential Controlled Group Liabilities Sun Capital Partners and the Definition of Trade or Business Leasing as a Trade or Business after PBGC v. Findlay When Controlled Group Status is Determined Successor Liability after PBGC v. Findlay and Heavenly Hana Hotels The Alter Ego Theory of Recovery Claims Against Non-U.S. Controlled Group Members. 6

7 Who is a Controlled Group Member? Parent-Subsidiary Groups 80% ownership test Direct and indirect ownership Brother-Sister Groups Five or fewer individuals, estates, or trusts control 80% in one or more trades of businesses Same group has 50% ownership in each entity Combined Parent-Subsidiary and Brother-Sister Group Parent is a common member Requirements satisfied 7

8 Affiliated Service Groups Objective Kiddie and Garland cases Stem avoidance of controlled group rules Source IRC Sections 414(m),(n) and (o) 8

9 Parent-Subsidiary Groups One or more chains of organizations controlled by ownership with a common parent organization. An 80% controlling interest in each organization is owned directly by one or more organizations in the group Parent owns 80% of one other organization Ownership based on either voting power or stock value 9

10 Example Note: Corporate ownership can be based on voting power or stock value The parent and subs 1, 2, 3, 4, 5, and 8 are part of a controlled group of organizations 10

11 Controlled Group Members Need Not Be Corporations Partnerships, sole proprietorships, joint ventures, and trusts may be part of a parent-subsidiary and brother-sister groups For partnerships, the test is an 80% or more interest in capital or profits For trusts or estates, the test is an 80% or more ownership of an actuarial interest. A beneficiary s actuarial interest is ascertained by reference to factors and methods prescribed under the estate tax regulations. Attribution rules apply 11

12 Brother-Sister Group A group of two or more organizations consisting of five or fewer owners who Own directly or indirectly an 80% controlling interest of an organization and Based only on identical interests of each member in the group that has a controlling interest, effectively control each organization with more than a 50% interest. 12

13 Example Individuals A Sole Proprietorship GHI Partnership M Corp W Corp X Corp Y Corp Z Corp A 100% 50% 100% 60% 40% 20% 60% B - 40% - 15% 40% 50% 30% C % 10% 10% D % - 20% - E - 10% % - - The following four brother-sister groups exist: GHI, X, and Z X, Y, Z W and Y A and M A s identical ownership in GHI, X, and Z is 40% B s identical ownership in GHI, X, and Z is 30% A and B together own a controlling interest of at least 80% of each organization 13

14 Combined Groups Exists when three or more organizations are each a member of either a parent-subsidiary group or a brother-sister group, and one of the organizations is a common parent of the parent-subsidiary organizations and is included in the brother-sister group as well Example X owns 100% of partnership XYZ X owns 80% of Corporation ABC ABC owns 90% of partnership LMN XYZ, ABC, and LMN are members of the same combined group under common control ABC is the common parent in the parent-subsidiary group of ABC and LMN ABC is also a member of the brother-sister group consisting of ABC and XYZ US subsidiaries can be part of a controlled group through a common foreign parent 14

15 Attribution Rules Attribution treats a person or entity as owning an interest that is not actually owned by that person but by someone else and are attributed to this person to satisfy the ownership percentages of the controlled group rules Ownership of options is treated as if exercised Trust ownership interests are attributed proportionally to beneficiaries owning at least a 5% actuarial interest (no 5% threshold for parent-subsidiary group) Corporate ownership interests are attributed proportionally to shareholders owning at least 5% of stock Partnership interests are attributed proportionally to partners owning a 5% or more capital or profits interest 15

16 Attribution Rules cont. Under certain restrictions, a spouse s ownership interest in a business is attributed to the other spouse Minor children s ownership interests are attributed to their parents and vice versa An individual who owns 50% of a business, then the interest owned by his adult children, parents, grandparents, and grandchildren who have attained age 21 are attributed to the individual. 16

17 Excluded Interests The following types of interests are excluded for purposes of the controlled group rules: Treasury stock. Nonvoting stock that is limited and preferred as to dividends. Interests owned by trusts of deferred compensation plans. For purposes of determining control, an exclusionary rule also ignores interests owned by the principal owner, officer, partner, or fiduciary of the parent company. For example: Company A owns 70% of Partnership B. The president of Company A owns 20% of Partnership B and the chief financial officer (CFO) owns 10% of Partnership B. Even though Company A owns less than 80% of Partnership B, Company A and Partnership B are in a parent-subsidiary controlled group. Because the combined 30% interest owned by the President and CFO is ignored, Company A is treated as owning 100% of Partnership B. 17

18 Kiddie and Garland In the 1970s, several professional businesses were structured to avoid application of the controlled group rules 18

19 Kiddie and Garland cont. No parent-subsidiary controlled group neither medical corp 1 or medical corp 2 owns 80% of ABC Medical Practice, LLP. Neither doctor owns more than 50% of the partnership so there was no cross-ownership for purposes of the brother-sister controlled group requirements. Each doctor would set up a separate retirement plan for himself and exclude all of the employees of the ABC Medical Practice, LLP. The IRS challenged the structures and lost in both the Garland and Kiddie Tax Court cases. Congress responded with the addition of the affiliated service rules. 19

20 Affiliated Service Groups Objective to require the aggregation of multiple companies when they are affiliated with each other because they either provide services to each other or join together to provide services to third parties. There are three types of affiliated services groups: 1. A-ORG that is a shareholder or partner or has any minimal level of common ownership of another service organization called an FSO (first service organization) The A-ORG either regularly performs services for the FSO, or is regularly associated with the FSO in performing services for third parties This structure encompasses the situation described in the Garland and Kiddie cases. An FSO must be a professional service corporation (PSC) engaged in such areas as health, law, accounting, engineering, insurance, consulting, architecture, actuarial science, or performing arts. 20

21 Affiliated Service Groups cont. 2. B-ORG that is a least 10 percent owned by individuals who are officers, highly compensated employees, or shareholders of an FSO, and a significant portion of the B-ORG is the performance of services for the FSO or A-ORG of a type historically performed by employees in the FSO or A-ORG service field. The B-ORG or FSO need not be a PSC 21

22 Affiliated Service Groups cont. 3. Management organizations whose principal business is performing on a regular and continuing basis for one other organization (or that organization and other related organizations). Objective is to avoid: CEO, Inc. provides management services to Giant Co. No ownership between CEO, Inc. and Giant Co. CEO, Inc. provides maximum benefits in its retirement benefits to the CEO and no similar benefits provided to employees of Giant Co. 22

23 Statutory Provisions Imposing Controlled Group Liability Controlled Group Liability Applies for: Required minimum funding for defined benefit and money purchase pension plans. (Code Section 412) PBGC insurance premiums for ongoing plans (ERISA Section 4007) Termination liability for Unfunded Benefit Liabilities in Distress or Involuntary Terminations and Plant Closing Liability (ERISA Sections 4062, 4063 and 4064) Multiemployer Plan Withdrawal Liability (ERISA Section 4201) Post- Termination Premiums (for 3 years following Distress or Involuntary Termination-see ERISA Section 4006(a)(7)) 23

24 Statutory Provisions (cont.) ERISA Section 4001(a)(14)(A) defines controlled group for these purposes. Rules similar to IRS rules are to be applied. Termination liability lien is limited to 30% of the controlled group s aggregate net worth (ERISA Section 4068) Count only entities with net worth greater than zero (ERISA Section 4062(d)) Liability is joint and several-entire liability may be asserted against any member of the group (ERISA Section 4062(a)) PBGC s claim has the priority of a federal tax lien in bankruptcy (ERISA Section 4068(c)(2)) Also note: ERISA Section 515 authorizes trustees to collect from signatories delinquent multiemployer plan contributions required by collective bargaining agreements. While there is no explicit controlled group liability provision, courts can apply alter ego and successor employer analysis 24

25 Threshold Issue-What Is a Trade or Business?-Sun Capital Partners Catches Private Equity Funds Members of a controlled group must be trades or businesses. Private equity funds did not worry about controlled group liability because they took the position they were passive investors and not operating a trade or business. Looked to IRS guidance, including Groetzinger case. In 2007, a decision by the PBGC Appeals Board disagreed, finding that a private equity fund could be liable for its portfolio company s Title IV liability. In Sun Capital Partners, the First Circuit followed PBGC and then the district court on remand found that two private equity funds, neither of which owned at least 80% of the portfolio company, could be jointly liable for withdrawal liability because they formed a partnership in fact. 25

26 Sun Capital Partners cont. The First Circuit applied an investment plus standard that required activities beyond passive investment The private equity funds met that test because they were involved in the management of the portfolio company and offset their fees from the portfolio company against their fund management fees. Courts have not hesitated to depart from strict reliance on tax law guidance. Private equity fund Trilantic Capital Partners has filed a declaratory judgment action in New York asking the court to declare that it is not a trade or business to bar a multiemployer plan from proceeding against it. 26

27 Responses to Sun Capital Partners Keep ownership of portfolio companies at less than 80%, even if it requires bringing in outside investors Monitor parallel fund investments to keep combined investment below 80% Curb management activities with respect to portfolio company Do not offset portfolio company fees Thoroughly investigate pension obligations of portfolio company and their affiliates Note that one portfolio company could be liable for another portfolio company s liability and that portfolio companies may have liability for plans of the private equity fund or its affiliates. 27

28 Leasing as a Trade or Business In PBGC v. Findlay, the owner of a defunct business transferred its assets to a trust His family members were trustees The trust leased the assets back to the former business owner. The court found that on these facts, even passive leasing could be a trade or business. Recent district court decision in Ohio in Toledo Area UAW Retirement Plan v. OBZ, Inc. also found that even passive leasing was a trade or business. 28

29 Other Trades or Businesses In addition to leasing, courts have also found other minimal real estate activities to be a trade or business. In Central States SE and SW Areas Pension Fund v. Hughes, a multiemployer plan proceeded against three vehicles owned by family members and a trust and the district court found minimal activities of estate planning vehicles satisfied the for profit requirement. One vehicle just held securities, notes and one parcel of real estate. In McDougall v. Pioneer Ranch Ltd. Partnership, the district court found that a partnership that owned a family vacation property called a working farm for tax purposes was a trade or business. 29

30 When Is Liability Determined? General rule is look to members of controlled group on the date of the transaction, e.g., plan termination or withdrawal Exceptions: ERISA Section 4069 makes seller potentially liable if transaction is to evade liability and buyer terminates the plan after closing PBGC v. Renco settlement under 4069 shows how this worksseller sold enough of business to keep ownership under 80% and then tried to terminate plan PBGC sued under 4069 and Renco agreed with PBGC to restore plans ERISA Section 4212(c) also authorizes ignoring transactions to evade multiemployer plan liability and holding seller liable 30

31 Successor Pension Liability Labor law concept imported under Title IV of ERISA and a major exception to determining who is liable on date of transaction. Applied in asset sales where the buyer is viewed as continuing the business without interruption or substantial change In PBGC v. Findlay, the court referred to a federal common law of successor liability. Earlier cases also developed theory. Artistic Furniture (delinquent multiemployer plan contributions), ManWeb Artistic Furniture court said there could be a presumption of successor liability if buyer knew of liability and seller s financial condition. ManWeb decision said buyer continued the business even though buyer had other businesses and acquisition was a small part of operations 31

32 Successor Liability/Constructive Notice Notice of the liability is a traditional element of the claim, but two courts, including the Ninth Circuit in Heavenly Hana Hotels, found that constructive notice was sufficient You are on constructive notice if a diligent investigation would have alerted you to the liability. In Heavenly Hana Hotels, buyer was a private equity fund that had experience with multiemployer plans and had investigated other liabilities In Members of the Bd. Of Admin. of Toledo Area UAW Retirement Plan v. OBZ, Inc., a district court in Ohio also held that constructive notice was sufficient. Client there was represented by a firm with ERISA counsel. In PBGC v. Findlay, buyer was son of business founder and operated business in the same location with many employees and management of the original business. Also took over major client. 32

33 What Factors Will Courts Review? Using same physical assets and real estate Taking over customers Continuity of management Taking on same employees (may be a portion of the workforce) Good will Trademarks Describing the buyer as operating the same business (in Man Web, the court noted press release describing a merger with buyer s business) Would buyer have discovered liability with investigation (constructive notice) 33

34 Does it matter if buyer has other businesses? Did not prevent Man Web court from finding successor liability Toledo/OBZ court will be considering this issue as one of the factors indicating whether there was continuity in operations. To hold otherwise would penalize small buyers 34

35 Alter Ego Entities Another labor law concept imported into ERISA An entity can be an alter ego of another if it has substantially identical management, ownership, business purpose, and customers. Has been applied under Title IV where the same owner has multiple businesses and intent is to evade liability through a change in operations. Courts have not agreed on whether ERISA Section 4212 (c) is the sole way to assert these claims. In Ret. Plan of UNITE HERE National Retirement Fund v. Kombassan Holdings, the Second Circuit found alter ego liability without common ownership. Said test is flexible and looked to actual control. 35

36 Steps for Buyers and Their Counsel Ignorance is not bliss. Do thorough due diligence Have an actuary assist in evaluation Investigate seller s financial situation. Consider special agreement provisions and postclosing escrow account Should there be a purchase price adjustment? Explore availability of insurance protection If potential liability is large enough, may affect whether deal makes sense. 36

37 Foreign Claims-Plans and PBGC Seek Deep Pockets PBGC asserts that it can pursue controlled group members located outside the United States for unpaid termination liability, but obtaining jurisdiction in U.S. courts or convincing a foreign court to apply U.S. law are threshold problems. PBGC has had mixed results in pursuing claims against controlled group members located outside the United States. Note that PBGC lien for unpaid termination liability under ERISA Section 4068 must be enforced in United States courts. 37

38 Deep Pockets (cont.) However, PBGC won a major victory in the District of Columbia in a case against Asahi, a Japanese company that bought a subsidiary whose single employer defined benefit plan was terminated by PBGC. Asahi claimed that it never funded the plan and had nothing to do with its operations, and that it could not adequately defend a suit in D.C., but the court found jurisdiction anyway and found Asahi responsible for the termination liability. Asahi had hired Mercer to advise and was aware of liability. 38

39 PBGC Litigation (cont.) PBGC attempted to collect from UK entities in PBGC v. Satrolloy. Suit against one subsidiary was dismissed because mere ownership doesn t confer jurisdiction. However, while it didn t find jurisdiction, the court indicated that there could be jurisdiction if subsidiary was alter ego or agent of parent. In re: Ivaco litigation in Canada, PBGC attempted to collect liability from Ivaco and Canadian subsidiaries, who were in the Canadian equivalent of Chapter 11 proceedings. Case was settled, so no legal decision. Threshold litigation issue in U.S. courts has been showing that defendant has ties to the jurisdiction and requiring it to litigate in the forum doesn t violate fairness principles. For example, does foreign parent have property in the U.S.? 39

40 Multiemployer Plan Claims Multiemployer plans have tried to pursue their claims against controlled group members in U.S. and in Canadian courts. In GCIU-Employer Retirement Fund v. Goldfarb, the Seventh Circuit found that mere ownership of a subsidiary was not enough to confer U.S. jurisdiction. Defendant had no place of business, employees or customers in the U.S. More recently, in Walter Energy, a British Columbia court refused to apply ERISA under its conflicts of law analysis and concluded that Canadian corporate law did not permit collecting unpaid withdrawal liability from a Canadian company. (U.S. entities who contributed to the plan were in bankruptcy proceedings.) 40

41 Cases Cited Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, No DPW, 2016 WL (D. Mass. 2016) Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129 (1st Cir. 2013) Pension Benefit Guaranty Corporation v. Findlay Industries, Inc. et al., No (6th Cir. Sept. 4, 2018) Heavenly Hana LLC v. Hotel Union & Hotel Indus. of Hawaii Pension Plan, 891 F.3d 839 (9th Cir. 2018) Heavenly Hana LLC v. Hotel Union & Hotel Indus. of Hawaii Pension Plan, No. 14-cv JCS, 2018 WL (N.D. Cal. Dec. 3, 2018) Thomas Kiddie, M.D., Inc. v. Commissioner, 69 T.C (1978) Garland v. Commissioner, 73 T.C. 5 (1979) Commissioner v. Groetzinger, 480 U.S. 23 (1987) 41

42 Cases Cited (cont.) Members of Bd. of Admin. of Toledo Area Indus. UAW Retirement Income Plan v. OBZ, Inc., F.Supp.3d, No. 3:15CV756, 2018 WL (N.D. Ohio Dec. 26, 2018) Central States, Southeast & Southwest Areas Pension Fund v. SCOFBP, LLC, 668 F.3d 873 (7th Cir. 2011) McDougall v. Pioneer Ranch Ltd. P'ship, 494 F.3d 571 (7th Cir. 2007) Upholsterers' International Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323 (7th Cir. 1990) Indiana Electrical Workers Pension Benefit Fund v. ManWeb Services, Inc., No (7th Cir. Mar. 12, 2018) Ret. Plan of UNITE HERE National Retirement Fund v. Kombassan Holdings, 629 F.2d 281 (2d Cir. 2010) Pension Benefit Guaranty Corp v. Asahi Tec Corp., 979 F. Supp. 2d 46 (D.D.C. 2013) 42

43 Cases Cited (cont.) PBGC v. Satralloy, Inc., 12 No. 90-CV-630 (S.D. Ohio Aug. 6, 1993) Approval Order, In re Ivaco, No. 03-CL-4932 (Aug. 4, 2005) GCIU-Employer Retirement Fund v. Goldfarb Corporation, 565 F. 3d 1018 (7th Cir. 2009) Walter Energy Canada Holdings, Inc. (Re), 2017 BCSC

44 Carol Buckmann Carol is the co-founding partner of our firm. She is one of the top rated employee benefits and ERISA attorneys in the United States, and is widely known as an outstanding and innovative benefits lawyer, who deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation. Clients and other attorneys seek her advice due to her phenomenal depth of experience on to complex pension law and fiduciary problems. She regularly shares her thoughts about new developments in the benefits industry on our Cohen & Buckmann Benefits Blog. Carol has been recognized: Martindale Hubble AV** Preeminent Lawyer 2018 New York Metro Super Lawyer (Employee Benefits) Board member, Worldwide Employee Benefits, New York Chapter Member, Employee Benefits Committee, New York City Bar Association Contact her at 44

45 Sandra Cohen Sandra is the co-founding partner of our firm. She is one of the leading executive compensation attorneys in North America. Clients and other attorneys seek her advice due to her practical and business oriented approach to complex compensation tax problems. She has developed a wide range of industry expertise, from compensation of financial professionals, University presidents, to entertainment industry production for t.v. and film, and especially, globally mobile executives with international assignments. Sometimes known as the "Section 409A Whisperer", she is a popular speaker and author. Sandra has been recognized: Super Lawyers Magazine , annually: Employee Benefits/Mergers & Acquisitions 2019 Edition of Best Lawyers in America Super Lawyers spotlights The Top Women Attorneys in the New York Metro Area in the December 2015, 2016, 2017 issue of The New York Times Magazine. American Bar Association, Co-Chair (Emeritus), International Subcommittee, Employee Benefits Committee Who's Who Legal: Labor, Employment and Benefits 2016, 2017, 2018 ; Who's Who Legal Compendium 2017 Contact her at sandra@cohenbuckmann.com 45

46 Leonard Hirsh Len is a partner of our firm and is a well-known employee benefits and compensation attorney. He advises clients on a variety of complex legal issues regarding ERISA fiduciary responsibly, 401(k) compliance, multiple employer plan qualification, multiemployer pension plan withdrawal liability, ESOPs, equity-based compensation, and nonqualified deferred compensation. As a result of his varied professional work experience, Len provides practical and unique insights which are helpful to expeditiously resolving legal issues. Len has been associated with the following organizations: American Bar Association, Chairman (Emeritus), Defined Contribution Subcommittee (previously known as the Qualified Cash or Deferred Arrangements Subcommittee), Employee Benefits Committee BNA Tax Management Advisory Board on Compensation Planning, Member American College of Employee Benefits Counsel, Charter Fellow Contact him at len@cohenbuckmann.com 46

47 Cohen & Buckmann p.c. 200 Park Avenue, Suite 1700, New York, N.Y Also contact us at (212) We specialize in executive compensation, pensions and employee benefits, and investment adviser law. 47