Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.


United States District Court, Northern District of Illinois, E.D

April 27, 1982


The opinion of the court was delivered by: Shadur, District Judge.


Pension Benefit Guaranty Corporation ("PBGC") sues Anthony Company ("Anthony") and its parent company M.S. Kaplan Company ("Kaplan") under Section 4062 of the Employee Retirement Security Act of 1974 ("ERISA"), 29 U.S.C. § 1362,*fn1 to recover the vested but unfunded benefits*fn2 under Anthony's pension plan (the "Plan") as of the time of its termination. Kaplan has moved that it be dismissed from the Complaint, and PBGC has cross-filed a motion for partial summary judgment. For the reasons stated in this memorandum opinion and order Kaplan's motion is denied and PBGC's is not ruled upon.


Anthony adopted the Plan May 1, 1955 to cover its union employees pursuant to its collective bargaining agreement with the UAW. On February 21, 1978 Anthony filed a petition under Chapter XI of the Bankruptcy Act. Then, finding itself unable to develop a viable plan of reorganization, Anthony sold its principal assets to a purchaser unwilling to adopt the Plan. Anthony terminated the Plan December 29, 1978 and ultimately shifted its Chapter XI petition into a straight bankruptcy proceeding June 20, 1979.

At the time of the Plan's termination there was a large disparity (PBGC claims some $1.4 million) between the current value of the Plan assets and the employees' vested benefits. Under ERISA PBGC is obligated to make good that deficiency. Section 1362 gives PBGC the right in turn to recover from the "employer" the lesser of (1) the deficiency itself and (2) 30% of the employer's net worth.

PBGC filed this action in part to collect what it could from Anthony, and that aspect of its claim is not now in dispute. What is at issue is whether Kaplan is also embraced within the term "employer" (both for liability purposes and for the 30%-of-net-worth calculation).

Kaplan has been Anthony's majority shareholder since April 1957. As the result of minor stock purchases over the intervening years, by September 1976 Kaplan owned 5,550 of Anthony's 10,000 outstanding shares. At that point Anthony itself contracted to purchase the 4,450 shares owned by shareholders other than Kaplan. That transaction was consummated October 21, 1976, leaving Anthony a wholly-owned Kaplan subsidiary through the date of Plan termination.

Kaplan as "Employer" for Section 1362 Purposes

PBGC seeks recovery under Section 1362(b), which "applies to any employer who maintained a single employer plan at the time it was terminated. . . ." Section 1362 is part of ERISA's Subchapter III, whose definitional section includes the following provision (Section 1301(b)(1)):

  For purposes of this subchapter, under
  regulations prescribed by the corporation, all
  employees of trades or businesses (whether or not
  incorporated) which are under common control
  shall be treated as employed by a single employer
  and all such trades and businesses as a single
  employer. The regulations prescribed under the
  preceding sentence shall be consistent and
  coextensive with regulations prescribed for
  similar purposes by the Secretary of the Treasury
  under Section 414(c) of Title 26.

Temporary income tax regulations were promulgated by the Secretary of the Treasury November 5, 1975 and adopted by PBGC March 24, 1976. 29 C.F.R. § 2612 (the Regulations).

Those Regulations define three "common control" situations:*fn3

    (1) "Parent-subsidiary groups" involve
  relationships essentially equivalent to those
  required for filing consolidated returns under
  the Code: The parent must own a "controlling
  interest," defined (for a subsidiary having only
  one class of stock) as ownership of at least 80%
  of the outstanding stock.

    (2) "Brother-sister groups" depend on
  "effective control," defined to cover
  closely-held situations in which the same five
  (or fewer) shareholders own at least 50% of the
  stock in each member of the group.

    (3) "Combined groups" involve at least three
  entities, each of which is a member of either a
  parent-subsidiary group or a brother-sister
  group, and at least one of which is both a parent
  in a parent-subsidiary group and a member of a
  brother-sister group.

At least from October 1976 Kaplan and Anthony unquestionably formed a "parent-subsidiary group of trades or businesses under common control," so that by its terms Section 1301 requires them to be treated as a "single employer" for ERISA Subchapter III purposes.*fn4

Kaplan however disputes the applicability of the Section 1301 definition, pointing instead to a portion of Section 1362 itself:

  (d) For purposes of this section the following
    rules apply in the case of certain corporate

    (1) If an employer ceases to exist by reason of
    a reorganization which involves a mere change
    in identity, form, or place of organization,
    however effected, a successor corporation
    resulting from such reorganization shall be
    treated as the employer to whom this section

    (2) If an employer ceases to exist by reason of
    a liquidation into a parent corporation, the
    parent corporation shall be treated as the
    employer to whom this section applies.

    (3) If an employer ceases to exist by reason of
    a merger, consolidation, or division, the
    successor corporation or corporations shall be
    treated as the employer to whom this section

Because Anthony has always remained a separate corporate entity (it has not "ceased to exist"), none of the subsections of Section 1362(d) is literally applicable. Kaplan urges that such inapplicability (with particular emphasis on Section 1362(d)(2)) means that Kaplan is not part of the "employer" for any purposes under Section 1362. That argument is untenable for the reasons next discussed.*fn5

By the unambiguous language of Section 1301(b)(1), its treatment of a "common control" group as a "single employer" applies for the "purposes of this subchapter [III]" — and thus to Section 1362. Under the Regulations Kaplan and Anthony are thus a "single employer" for Section 1362 purposes as a matter of straightforward reading.

Kaplan attacks that conclusion on several grounds. It first contends that Section 1362(d) would be superfluous if the broad definition of "employer" stated in the Regulations and incorporated in Section 1301 were applied. But Ouimet, 630 F.2d at 11, pointed out that although there were similarities, Section 1362 might apply to certain cases not covered by Section 1301:

  On this point, we agree with the district court's
  observation; since the definition of "parent" in
  the regulations under 26 U.S.C. § 1414(c) is not
  incorporated into Section 1362, there may be
  situations in which an employer is liquidated into
  a parent corporation which does not meet the
  definition of "parent" that is used to define a
  group under common control. In such a situation,
  Section 1301(b) would not apply, and Section
  1362(d)(2) would be necessary to impose liability
  on the parent.

Essentially that analysis assumes that a "parent" can be a more than 50% and less than 80% shareholder (as Kaplan was from 1957 to 1976), giving Section 1362(d)(2) some independent room for operation. Kaplan disputes the Ouimet analysis, stating that in the hypothesized situation the two corporations would constitute a multi-employer unit exempted from Section 1362(a) and subject to the alternative provisions of Section 1364(a). Thus Section 1362(d)(2) could never apply to any situation.

But Kaplan's contention misreads the statute. Section 1364(a) applies to:

  all employers who maintain a plan under which
  more than one employer makes contributions at the
  time such plan is terminated. . . .

Where the "parent" owner of between 50% and 80% of its subsidiary's stock does not itself contribute to the pension fund, the situation described in Ouimet would not come within Section 1364. In turn Section 1362(d)(2) would not be superfluous under those circumstances.

But in this Court's view there is an even simpler explanation than straining to find discrete coverage for Section 1362(d)(2). Section 1362(d) was of course enacted contemporaneously with the rest of Section 1362, and it purported to deal only with corporate reorganizations and their effect on the statutory concept of "employer." Section 1301(b)(1) on the other hand looked to the future adoption of regulations to do double duty for ERISA and Code purposes, defining "single employer" concepts to apply whether or not a reorganization had taken place.

Even if those new Regulations established a broad-purpose definition of "single employer under common control" that would sweep up all of the Section 1362(d) coverage and more, that is no reason to reject such definition. Indeed Kaplan's argument (which is essentially that the Section 1362(d)(2) treatment of reorganizations invalidates any extension of the "single employer" concept beyond reorganizations) proves too much. Of course the parent and its wholly-owned subsidiary constitute the paradigmatic "common control" situation. Yet Kaplan's argument would bar the contemplated Section 1301(b)(1) regulations from covering that very situation at all — eviscerating the most logical and normal aspect of such regulatory coverage.*fn6

In sum, the Regulations' plain meaning treats Kaplan and Anthony as a "single employer." And there is no reason to ascribe to Congress less than a full delegation of authority to adopt those Regulations and their plain meaning. With this approach, the remainder of the Kaplan assertions are readily dispelled.

Thus Kaplan tries to invoke ERISA's legislative history — one of the strongest factors in favor of PBGC's position. H.R.Conf.Rep.No. 93-1280, 93d Cong. 2d Sess. 376, reprinted in [1974] U.S.Code Cong. & Ad. News 4639, 5038, 5155, spoke of Sections 1301 and 1362 in these terms:

  In determining the employer who may be liable for
  insurance coverage losses of the corporation, all
  trades or businesses (whether or not
  incorporated) under common control are to be
  treated as a single employer. Trades or
  businesses under common control may, for this
  purpose, include partnerships and proprietorships
  as well as corporations.

Given that language, Kaplan can draw no comfort from a later section of the same report dealing with termination of a multi-employer plan:

  In this regard, it should be noted that the
  affiliated employer rules are to apply in this
  area. That is, if one member of an affiliated
  group has employer liability, then that liability
  is to extend to the entire affiliated group.
  Also, the 30-percent-of-net-assets limit is to
  apply with respect to the net assets of the
  entire group.

There is simply no room to imply from that language that a "single employer" in the "common control" context is to have a different meaning for liability purposes than for the 30% of net worth calculation.

Kaplan's policy arguments in opposition to the Regulations merit equally short shrift:

    (1) Kaplan says that to expose to Section 1362
  liability all of the various common control
  relationships — parent-subsidiary, brother-sister
  and combined group — would be an "unheard of"
  broad sweep. That assertion neither constitutes nor

  and cannot substitute for, legal analysis.

    (2) To negate the universality of the Section
  1301-authorized definitions, Kaplan points to
  some ERISA sections in which it says "employer"
  could apply only to the direct employer that
  established the pension plan. For example Section
  1304(e)(4) permits PBGC to reduce or waive
  Section 1362 liability where an employer is
  unable to continue a plan. Kaplan says only a
  direct employer can continue or discontinue a
  plan. Yet Congress could very logically have
  authorized PBGC to take into account the
  financial condition of closely-related corporate
  entities in exercising its discretion whether one
  of them truly "is unable to continue" a plan.
  Thus Kaplan's own example fails to prove the
  point. But more fundamentally, even if a broad
  definition at the beginning of a statute may have
  limited application to some of the following
  sections, that does not imply the definitional
  section should not be broadly applied where it

    (3) Kaplan also contends Section 1362(d)(2)
  cannot have been designed to address the problem
  of a 50-79% owned subsidiary being liquidated
  into its parent, because nothing in the statute
  or its legislative history indicates such a
  congressional intent. Once again, in view of the
  literal language of the two statutes and the
  Regulations, it is Kaplan's burden to find
  legislative history specifically
  rejecting such application. Further, the Kaplan
  argument addresses only the Ouimet analysis and
  does not at all meet the more basic point stated in
  the text of this opinion.

    (4) Kaplan next points out that when a
  multi-employer plan terminates, Section 1364
  makes each employer liable only for its
  proportionate share of required contributions.
  Kaplan finds it anomalous that a member of a
  multi-employer group could have a lesser
  liability than a company that did not itself
  contribute to the plan. Not so, for it is
  entirely reasonable to conclude that a
  corporation owning and controlling a direct
  employer should bear full ERISA responsibility,
  while entirely separate employers should incur
  only proportionate liability.

Finally this Court's conclusions are buttressed by post-Regulations congressional history (at the time of the 1980 amendment to ERISA). Senator Williams, one of the principal sponsors of both ERISA and the 1980 amendment, made the following statement as to the latter (126 Cong. Rec. S 11672 (daily ed. Aug. 26, 1980)):

  Under current law, a group of trades or
  businesses under common control, whether or not
  incorporated, is treated as a single employer for
  purposes of employer liability under Title IV.
  Thus, if a terminating single employer plan is
  maintained by one or more members of a controlled
  group, the entire group is the "employer" and is
  responsible for any employer liability. The
  leading case in this area is Pension Benefit
  Guaranty Corporation v. Ouimet Corporation,
  470 F. Supp. 945 (D.Mass. 1979), in which the court
  correctly held that all members of a controlled
  group are jointly and severally liable for employer
  liability imposed under Section 4062 of ERISA. The
  bill does not modify the definition of "employer"
  in any way, and the Ouimet decision remains good

In short none of the policy or legislative history arguments advanced by Kaplan is sufficient to overcome the strong presumption in favor of following the plain language of the statute and authorized Regulations. Kaplan and Anthony are a "single employer" for all Section 1362 liability purposes.

       Constitutionality of Section 1362(d) As Applied to

Kaplan challenges the retroactive application of Section 1362 (construed in accordance with the preceding section) to a parent corporation like Kaplan, which acquired its interest in a subsidiary before ERISA's effective date. It complains that requiring it to fund Anthony's pension plan deficiencies takes Kaplan's property in violation of the Due Process Clause.

Any due process inquiry must determine whether such an application of Section 1362 is a rational means for achieving a legitimate end. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15, 96 S.Ct. 2882, 2892, 49 L.Ed.2d 752 (1976). Several cases have upheld the constitutionality of Section 1362's retroactive application to direct employers. Nachman Corp. v. PBGC, 592 F.2d 947, 958-63 (7th Cir. 1979) and, following the Nachman lead, Ouimet, 630 P.2d at 12-13, and A-T-O, Inc. v. PBGC, 634 F.2d 1013, 1024-26 (6th Cir. 1980). That due process analysis, however, changes when PBGC looks to a parent corporation that purchased its controlling interest before ERISA.*fn8

In Nachman our Court of Appeals outlined what it termed the means-end test, 592 F.2d at 958-60 (citations omitted):

  The Supreme Court has confirmed that Congress has
  broad latitude to readjust the economic burdens
  of the private sector in furtherance of a public
  purpose. Only if Congress legislates to achieve
  its purpose in an "arbitrary and irrational way"
  is due process violated.

  Rationality must be determined by a comparison of
  the problem to be remedied with the nature and
  scope of the burden imposed to remedy that
  problem. In evaluating the nature and scope of
  the burden, it is appropriate to consider the
  reliance interest of the parties affected . . .;
  whether the impairment of the private interest is
  affected in an area previously subjected to
  regulatory control . . .; the equities of
  imposing the legislative burdens . . .; and the
  inclusion of statutory provisions designed to
  limit and moderate the impact of the
  burdens. . . . It must be emphasized that although
  these factors might improperly be used to express
  merely judicial approval or disapproval of the
  balance struck by congress, they must only be
  used to determine whether the legislation
  represents a rational means to a legitimate end.

In those terms the equities favoring a parent corporation can be very different from those of the direct employer subsidiary.

When an established company sets up a pension plan providing past service credits, it has an economic choice. It can fund all past service liability at the inception. If it were to do so (and assuming continued soundness of the plan's actuarial assumptions) no Section 1362 problem would ever arise — for whenever plan termination occurred the vested benefits would be fully funded.

But employers have not been forced thus to immobilize large blocks of capital. Instead the IRS minimum funding regulations have permitted amortization of past service liability over many years. Exercise of that choice, though proper and lawful, leaves the plan underfunded if it is terminated before amortization is complete. In the meantime the employer enjoys the economic benefit of the current use of funds, substituting a contingent contractual liability to the pension fund for the up-front payment of funds.*fn9

Section 1362, as applied to the direct employer that established a pension plan, simply neutralizes the effect of that initial economic choice. It gives the expectations of employees in vested plan benefits a higher social priority than the employer's expectation that its commitment to make future contributions covering previously accrued (in actuarial terms) benefit rights was not contractually binding.

Nachman recognized the constitutional significance of the prior vesting of rights under a plan. It distinguished Allied Structural Steel Co. v. Spannus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) in these terms, 592 F.2d at 961:

  First, the Minnesota statute imposed liability
  for payment of benefits to employees who, since
  they had not fulfilled service requirements, had
  no vested rights under the plan. Thus the
  Minnesota employer had a far greater reliance
  interest displaced than the only reliance
  displaced by Title IV — the belief that the
  company would not be liable for funding
  deficiencies in the event of a plan termination.
  The Minnesota employer had not funded the plan to
  ever accommodate payment of benefits upon
  completion of only ten years service, as the Act
  now required. This is the only reliance element
  emphasized by the Supreme Court in Allied
  Structural Steel Co.— an element not present in
  this case.

It is thus wholly rational — in due process terms — retroactively to require the direct employer to provide complete funding of vested pension plan benefits.*fn10

Analysis for a parent corporation is entirely different — at least where (like Kaplan) it has acquired its subsidiary after the latter's establishment of its pension plan.*fn11 So long as the subsidiary remains a "closed container" in economic terms, the parent has derived no direct economic benefit from pension plan underfunding*fn12 — and of course it never promised the pension benefits. In such a situation there is no rational link between the congressional end of insuring pension benefits and the means of assessing the acquiring parent corporation to pay those benefits.

In Ouimet the District Court said, 470 F. Supp. at 955-56:

  Application of the controlled group liability
  theory fosters that purpose by preventing
  employers from using corporate segmentation as a
  shield from termination liability. The statute
  reflects Congress' judgment that, without
  controlled group liability, businesses could
  juggle their activity to eviscerate the
  termination liability provisions of ERISA.

But that argument logically applies only to a parent that purchases its controlling interest after ERISA's enactment. It distorts history to speak of "juggling" corporate structures to "eviscerate" ERISA's provisions before ERISA created a wholly new concept of liability.*fn13

But the foregoing analysis indicates the rationality, in due process terms, of holding the acquiring parent accountable for under-funding to the extent of any direct financial benefits it derived from the subsidiary during its affiliation.*fn14 Where funds have been siphoned off from the subsidiary,*fn15 it has been disabled pro tanto from meeting the responsibilities ERISA imposes. It is not irrational to call on the parent to make good on those liabilities to that extent (effectively restoring the subsidiary to where it would have been economically but for the transfers to the parent). In due process terms, ERISA could assess liability to the extent of those direct financial benefits, because they have a rational link with the public policy of insuring vested pension benefits through the direct employer's responsibility for past underfunding. Thus a parent might reasonably be held liable for such items as:

    (1) dividends paid by the subsidiary, or the
  net effect of other intragroup transfers;

    (2) the parent's lessened income tax payments
  resulting from deductions attributable to the
  direct employer's operating losses, plan
  contributions or other items; and

    (3) any profits in excess of arms' length
  amounts derived from intragroup

Application of such a concept would satisfy the Nachman means-end test, in a way that the full-scale imposition of liability on a parent solely because of its stock ownership could never do.*fn17


Section 1362 treats Kaplan and Anthony as a "single employer" for purposes of imposing liability and making the 30%-of-net-worth calculation. In so creating potential liability for parent corporation Kaplan, they are not constitutionally infirm on their face. They may however be unconstitutional as applied to Kaplan, for the treatment they mandate is constitutionally permissible only to the limited extent identified in the text. Because the parties have not provided enough facts to evaluate the validity or invalidity as to Kaplan, Kaplan's motion is denied and Kaplan is ordered to respond to PBGC's partial summary judgment motion by May 14, 1982.

Appendix A

    (b) Parent-subsidiary group of trades or
  businesses under common control — (1) General. The
  term "parent-subsidiary group of trades or
  businesses under common control" means one or more
  chains of organizations conducting trades or
  businesses connected through ownership of a
  controlling interest with a common parent
  organization if —

    (i) A controlling interest in each of the
  organizations, except the common parent
  organization, is owned (directly and with the
  application of § 11.414(c)-4(b)(1), relating to
  options) by one or more of the other organizations;

    (ii) The common parent organization owns
  (directly and with the application of §
  11.414(c)-4(b)(1), relating to options) a
  controlling interest in at least one of the other
  organizations, excluding, in computing such
  controlling interest, any direct ownership interest
  by such other organizations.

    (2) Controlling interest defined — (i)
  Controlling interest. For purposes of paragraphs
  (b) and (c) of this section, the phrase
  "controlling interest" means:

    (A) In the case of an organization which is a
  corporation, ownership of stock possessing at
  least 80 percent of the total combined voting
  power of all classes of stock entitled to vote of
  such corporation or at least 80 percent of the
  total value of shares of all classes of stock of
  such corporation.

    (c) Brother-sister group of trades or
  businesses under common control — (1) General. The
  term "brother-sister group of trades or businesses
  under common control" means two or more
  organizations conducting trades or businesses if
  (i) the same five or fewer persons who are
  individuals, estates, or trusts own (directly and
  with the application of § 11.414(c)-4), singly or
  in combination, a controlling interest of each
  organization, and (ii) taking into account the
  ownership of each such person only to the extent
  such ownership is identical with respect to each
  such organization, such persons are in effective
  control of each organization.

    (2) Effective control defined. For purposes of
  this paragraph, persons are in "effective
  control" of an organization if —

    (i) In the case of an organization which is a
  corporation, such persons own stock possessing
  more than 50 percent of the total combined voting
  power of all classes of stock entitled to vote of
  such corporation or more than 50 percent of the
  total value of shares of all classes of stock of
  such corporation.

    (d) Combined group of trades or businesses
  under common control. The term "combined group of
  trades or businesses under common control" means
  any group of three or more organizations, if (1)
  each such organization is a member of either a
  parent-subsidiary group of trades or businesses
  under common control or a brother-sister group of
  trades or businesses under common control, and
  (2) at least one such organization is the common
  parent organization of a parent-subsidiary group
  of trades or businesses under common control and
  is also a member of a brother-sister group of
  trades or businesses under common control.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.