Can a foreign owner of a U.S. business be liable for a subsidiary’s unpaid pension liabilities? A recent decision by the Court of Appeals for the 10th Circuit, GCIU Employees’ Retirement Fund v. Coleridge Fine Arts/Jelinki Ltd., (No. 19-3161, 4/6/2020) indicates that collecting from an entity located outside the United States may be an uphill battle.
Title IV of ERISA provides that both multiemployer plan withdrawal liability and PBGC’s claims when underfunded single employer plans are terminated can be assessed against all members of a controlled group, generally determined by looking at whether there is at least 80% ownership. Liability is joint and several, meaning that all of it can be assessed against any member of the controlled group. On their face, these provisions apply regardless of where the controlled group member is located, and the PBGC has long claimed that it can assert its claims for unfunded termination liability against foreign entities. Multiemployer plans and the PBGC view these foreign entities as deep pockets when a plan sponsor or contributing employer in their controlled group goes out of business, but in order to collect, they must get jurisdiction over the foreign entity. Mere stock ownership does not appear to be enough to support their claims.
GCIU and Asahi.
In the GCIU decision, involving a company called Greystone Graphics, the Court of Appeals found that the Irish owner entities did not have sufficient ties to the U.S. and therefore the multiemployer plan could not proceed to collect unpaid withdrawal liability from them. On the other hand, there is a D.C. court decision, PBGC v. Asahi Tec Corp. (979 F. Supp,2d 246, D.D.C. 2013) finding that the PBGC could pursue claims for underfunding against Asahi Tec, the Japanese parent of a bankrupt U.S. subsidiary that had maintained a defined benefit plan. These decisions applied different standards to determine whether there were ties to the U.S. sufficient to confer jurisdiction and the relative importance of understanding whether pension liabilities were a concern at the time the ownership interest in the U.S. entity was acquired.
Are U.S. Contacts Sufficient?
In GCIU, the facts indicated that there were numerous U. S. contacts. A director of the foreign entities was also President and director of the U.S. subsidiary and there were individuals who were directors of all three companies. A $250 million loan was made to the U.S. entity and nonresident directors made visits to the U.S. several times a year to discuss U.S. operations. However, the 10th Circuit stated that mere supervision of a U.S. subsidiary was not sufficient for jurisdiction and required that there be day-to-day involvement in the U.S. operations or proof that the claim arose from the U.S. contacts in order for the case to proceed. If the claim does not arise from U.S. contacts, these standards appear to require that the subsidiary be an “alter ego” of its parent before there will be U.S. jurisdiction of Title IV liability claims. The GCIU court did not find that the claim arose from specific U.S. contacts regarding pensions because the foreign entities were not meaningfully involved in the collective bargaining agreement negotiations.
This heightened standard for involvement of the foreign entities was not applied to Asahi. Asahi maintained that it had no involvement with the termination of the underfunded plan. The D.C. court did not require the PBGC to show that the parent directed the U.S. subsidiary’s day-to-day activities before asserting its claims against Asahi.
The GCIU court stressed that there was no evidence that there was any withdrawal liability when the ownership interests in the U.S. entity were acquired, and the decision does not discuss the provisions of the acquisition agreements. By contrast, the D.C. circuit found that there was jurisdiction and liability not based on the stock ownership alone, but because Asahi had investigated outstanding withdrawal liability when it purchased the U.S. business, knew about ERISA liability, and considered how it affected the purchase price.
The Asahi analysis favors plaintiffs trying to collect unpaid liability more than the rules applied by other courts. In another case involving GCIU and a defendant named Goldfarb, for example, the Court of Appeals for the 7th Circuit found some years ago that withdrawal liability could not be asserted against a foreign entity that had no place of business, employees or customers in the United States.
What About Suits Filed Outside the U.S.?
An alternative to filing suit against the foreign entities in U.S. courts is to proceed in courts where the foreign entity is located. In that case, the courts must be persuaded to apply ERISA’s controlled group rules to the claims.
A recent Canadian decision in Walter Energy illustrates the difficulties with that approach. In that decision, the Supreme Court of British Columbia refused to apply ERISA to allow a multiemployer plan to collect withdrawal liability from a Canadian company. The court applied Canadian law, which recognized the separate corporate identities of the businesses and did not permit the claim to be asserted against the Canadian company. Since ERISA’s controlled group rules appear to be unique to the United States, it is not likely that a court applying the law of the local jurisdiction rather than ERISA would uphold ERISA claims against a controlled group member of the plan sponsor or contributing employer. A further barrier that applies to the PBGC is that ERISA specifically provides that the PBGC’s lien for unfunded termination liability ( up to 30% of the controlled group’s net worth) is enforceable only in United States district courts.
Don’t Ask, Don’t Tell?
Jurisdictional requirements establish barriers for multiemployer plans and the PBGC when they are seeking to collect unpaid Title IV liability from a foreign entity. In fact, the existing standards seem to reward the foreign buyer that keeps its head in the sand about ERISA liability. Asahi got caught in the net because it did the kind of due diligence that any benefits professional would have recommended to properly value the target and avoid unpleasant surprises. Further, foreign buyers can consult their counsel to find out how to limit their involvement with operations of U.S. subsidiaries based on the prevailing case law so that the buyers can avoid becoming subject to the controlled group rules.
Whether or not GCIU is a correct interpretation of federal law, an inability to establish jurisdiction over non-U.S. entities in U.S. courts under the rules established in that and similar decisions may contribute to the current financial problems of the multiemployer pension system and affect the financial status of the PBGC.