Your client, the ABC Bolt and Washer Company, for decades has manufactured widgets from a plant in New Jersey owned by a real estate limited liability company (LLC) under common ownership. Each and every month, ABC dutifully contributes to a multiemployer defined benefit pension plan (the “MEPP Fund”) for its unionized workforce.
Times are tough, though, and ABC’s sole shareholders Messrs. Abbott and Costello have decided to shut its doors and lay off its three remaining union member employees.
Rather than bolting and washing their hands of its employees, ABC notifies the union of its intentions and negotiates a close-down agreement.
The close-down agreement requires ABC to pay a small amount of severance to each employee and to make contributions for them for three months to the multiemployer health fund in exchange for a complete release of all claims from the union and affiliated locals.
Three months later, Abbott and Costello, who also are the only members of the real estate LLC, sell the closed plant for $2.6 million, pay ABC’s remaining creditors a million dollars, distribute the remaining sale proceeds to themselves, and dissolve both ABC and the LLC.
A few months later, your clients, now retired in Florida, call you. Frantic, they inform you that they received a letter from the MEPP Fund notifying them that ABC owes the MEPP Fund $2 million for withdrawal liability.
They ask, “How is this possible? We settled all claims months earlier in the close-down agreement.” They also inform you that, a few years earlier, the MEPP Fund had advised them that ABC’s withdrawal liability was only about $50,000, and although “we requested updated information each year, the MEPP Fund never informed us it had changed.”
You immediately contact the MEPP Fund and request backup for its claim and calculations. The MEPP Fund is slow to respond.
Months go by, and while you and the MEPP Fund are in discussions, out-of-the-blue your clients, as ABC’s former owners, are served with a complaint filed in federal court in New York. The complaint names ABC, the LLC, as well as Abbott and Costello, as defendants.
In the complaint, the MEPP demands the entire $2 million in alleged withdrawal liability, plus liquidated damages (of up to 20 percent), interest and attorney fees. See, 29 U.S.C. §§1132(g)(2)(B)-(D), 1399(c)(6) and 1451(b).
“Don’t worry,” you assure your clients, “ABC complied with the close-down agreement, both ABC and the LLC are dissolved, the MEPP Fund waived any claims it may have had, is guilty of laches, and any withdrawal liability resulted solely from the gross mismanagement of the MEPP Fund by its trustees.”
Well, you are not even close because you don’t know “who’s on first and what’s on second” concerning withdrawal liability.
Withdrawal liability litigation is like no other lawsuit. The playing field is skewed and tips decidedly in favor of a multiemployer fund regardless of your client’s compliance over the years.
Many argue this makes sense because the law protect workers’ vested pension benefits. However, reach your own conclusion about fairness after considering the following:
1. The Employee Retirement Income Security Act of 1974 (ERISA) and the special rules added to ERISA by the Multiemployer Pension Plan Amendments of 1980 (MPPAA) govern withdrawal liability disputes. Withdrawal liability is a company’s proportional share of a fund’s unfunded, vested pension benefits. 29 USC §1381(b)(1). If other employers participating in the fund fail to contribute, withdraw from the fund or go bankrupt, the remaining employers’ allocation increases, leaving them to bear the lion’s share of the unfunded liability even though a company like ABC made all of the required contributions for its workforce. To offset this imbalance, the MPPAA imposes an exit cost (withdrawal liability) at the time an employer withdraws from an underfunded plan.
2. Withdrawal liability may be triggered by several circumstances. These include the following:
- a. A significant reduction in an employer’s participating union workforce (a “partial withdrawal”) or a complete reduction (a “complete withdrawal”);
- b. Or a sale of assets to an unrelated party that causes the employer either to cease operations or no longer have to contribute to the fund (unless the buyer agrees to assume the contribution obligations, posts a bond, etc.).
3. The fund can sue in its backyard where the fund is administered, even though ABC never set foot in that jurisdiction. 29 U.S.C. §§1132(e)(2) (“an action may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found …”).
4. Virtually any challenge relating to the assessment of withdrawal liability must be by arbitration. See, 29 U.S.C. §1401(a)(1) (“Any dispute between an employer and the plan sponsor of a multiemployer plan concerning a determination made under sections 1381 through 1399 of this title shall be resolved through arbitration.”) Congress intended the arbitration provision to promote “judicial economy and judicial restraint.” Flying Tiger Line v. Teamsters Pension Trust Fund, 830 F.2d 1241, 1248 (3d Cir.1987) (internal quotation omitted).
5. An employer like ABC cannot challenge liability or the amount allegedly owed without first paying the fund in full for the amount the fund claims is due (with very narrow and circuit-specific exceptions). See, e.g., 29 U.S.C. §1399(c)(2) (“Withdrawal liability shall be payable in accordance with the schedule set forth … notwithstanding any request for review or appeal of determinations of the amount of such liability or of the schedule”) and 29 U.S.C. §1401(d) (“Payments shall be made by an employer in accordance with the determinations made under this part until the arbitrator issues a final decision …”). The congressional intent behind “pay now, dispute later” is to alleviate the risk that during the course of arbitration, an employer will become insolvent, and the fund will not be able to collect in the event of a favorable award. Trustees of the Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Central Transport, Inc., 935 F.2d 114, 118–19 (7th Cir.1991).
6. By not timely demanding arbitration, a company like ABC cannot challenge the amount of the withdrawal liability the fund claims is due. 29 U.S.C. §1401(b)(1) (“If no arbitration proceeding has been initiated pursuant [within the time prescribed in] … subsection (a), the amounts demanded … shall be due and owing …”).
7. Even if a company timely demands arbitration, the hearing likely will be conducted pursuant to the AAA’s Multiemployer Pension Plan Arbitration Rules for Withdrawal Liability Disputes, which tend to favor funds.
8. A company like ABC cannot sue the trustees of the fund for breach of fiduciary duty relating to their mismanagement of the fund because the trustees’ duty is to the plan participants, such as ABC’s employees, and not employers who joined the fund. Moreover, unbeknownst to Abbott and Costello, the close-down agreement only was with the union and not the MEPP Fund even though the union requested contributions to the health fund.
9. A property owner, like the real estate LLC, is liable to the fund because it is a “trade or business” under common ownership with or control of ABC even if the LLC simply was a vehicle to own the property and was not a profit-seeking venture, since all trades or businesses “under common control” are treated as a single employer for purposes of determining whether a withdrawal has occurred. 29 USC §1301(b)(1). It does not matter whether they are separate legal entities.
10. Shareholders or members of the entity owning the property from which the employer conducted business, like Abbott and Costello, the former members of the LLC, have personal liability if the proceeds from the sale of the real estate were distributed to them by the LLC to “evade or avoid” withdrawal liability. Considering they knew years earlier that ABC likely had some withdrawal liability, all of the money they distributed to themselves from the sale of the real estate potentially is recoverable even though the trustees of the MEPP Fund for years failed to provide them with the requested back-up information.
What are the lessons to be learned?
It is not enough for an employer in a multiemployer pension plan to abide by its contractual obligations. It must closely monitor potential withdrawal liability from year-to-year.
If an employer with limited financial resources decides to shut down, it should only negotiate its financial obligations to its union employees in conjunction with a settlement of its liability to the pension fund.
Finally, do not be lulled into inaction. If a fund sends you notice of withdrawal liability due, timely pay the disputed amount and timely demand arbitration, although the deck might be stacked in that forum as well.
Steven I. Adler is the co-chair of the Labor & Employment Department and a member of the Litigation Department at Mandelbaum Salsburg in Roseland. Lauren X. Topelsohn, a partner in the firm, is a member of the Employment and Litigation Departments.