Pension Benefit Guar. Corp. v. White Consol. Ind. Inc ( 2000 )

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
6-15-2000
Pension Benefit Guar. Corp. vs. White Consol. Ind.
Inc
Precedential or Non-Precedential:
Docket 99-3668
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2000
Recommended Citation
"Pension Benefit Guar. Corp. vs. White Consol. Ind. Inc" (2000). 2000 Decisions. Paper 132.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/132
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2000 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
Filed June 15, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 99-3668
PENSION BENEFIT GUARANTY CORPORATION
v.
WHITE CONSOLIDATED INDUSTRIES, INC.,
c/o CT Corporation Systems Registered Agent,
Appellant
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil No. 91-cv-01630)
District Judge: Honorable Robert J. Cindrich
Argued March 13, 2000
Before: McKEE, RENDELL and ROSENN, Circuit Judges
(Filed June 15, 2000)
William G. McGuinness, Esq.
Fried, Frank, Harris, Shriver &
Jacobson
One New York Plaza
New York, NY 10004
and
David H. Marion, Esq. [ARGUED]
Howard J. Bashman, Esq.
Montgomery, McCracken, Walker &
Rhoads, LLP
123 South Broad Street
Philadelphia, PA 19109
Counsel for Appellant
Nancy S. Heermans, Esq. [ARGUED]
Pension Benefit Guaranty
Corporation
1200 K Street, NW
Washington, DC 20005
Counsel for Appellee
OPINION OF THE COURT
RENDELL, Circuit Judge.
White Consolidated Industries, Inc. ("WCI") appeals from
an order entered by the District Court after a ten-day bench
trial granting judgment in favor of Pension Benefit
Guaranty Corporation ("PBGC") on counts one and four of
its complaint and, accordingly, holding WCI liable for
certain unfunded pension obligations pursuant to 29 U.S.C.
SS 1362 and 1369.1 We conclude that the District Court did
not err in determining that WCI was liable under
section 1369 and will affirm on that basis.
We have jurisdiction to hear this appeal under 28 U.S.C.
S 1291. We exercise plenary review over the District Court's
_________________________________________________________________
1. PBGC's complaint sought only declaratory relief as to WCI's liability.
JA 30. The amount of WCI's liability to PBGC is being resolved in a
separate administrative proceeding.
2
conclusions of law. Express Services, Inc. v. Careers
Express Staffing Services, 176 F.3d 183, 185 (3d Cir. 1999).
We review findings of fact for clear error, and"due regard
shall be given to the opportunity of the trial court to judge
the credibility of the witnesses." Fed. R. Civ. P. 52(a);
Anderson v. City of Bessemer City, North Carolina , 470 U.S.
564, 573 - 574 (1985). Likewise, we reviewfindings of
ultimate fact for clear error. See ACM Partnership v.
Commissioner of Internal Revenue, 157 F.3d 231, 245, n25
(3d Cir. 1998).
Facts
WCI, a home appliance manufacturer, became concerned
in the early 1980s about the profitability and viability of a
group of its divisions engaged in the steel business, the
Blaw Knox companies ("BK businesses"). Based on the
recommendations of an outside consulting firm, WCI
unsuccessfully sought to sell or liquidate the BK
businesses with the intent of retaining the grossly
underfunded pension liabilities associated with those
businesses. Efforts to market and sell the BK businesses
initially were unavailing. By early 1985, WCI had identified
a potential buyer, Joseph Cvengros. Cvengros proposed
that, instead of offering cash, his company would assume
the unfunded pension plans of the BK businesses with the
intent of terminating the pension plans either immediately
before or after the deal closed. This transaction was never
consummated. Ultimately, WCI commenced negotiations
with and found a buyer in Robert Tomsich, a long-time
acquaintance of a WCI executive, and, in September 1985,
WCI closed a deal with Blaw Knox Corp. ("BKC"), a thinly
capitalized corporation established by Tomsich for the
purpose of acquiring the BK businesses. The parties and
their lawyers engaged in extensive negotiations leading up
to the consummation of this transaction, and WCI
internally considered several acquisition scenarios involving
assumptions of differing amounts of pension obligations.
The history of the negotiations discloses that WCI was
aware that legislation then pending in Congress could
render it liable for the unfunded pension benefits if the
plans terminated within five years after the closing of the
deal, while, at the same time, projections for the steel
3
industry generally, and BKC's future specifically, looked
bleak.
The purchase and sale agreement ultimately provided,
inter alia, that BKC would pay nothing for the businesses,
but would assume the BK business pension liabilities. JA
1306, 1340.2 Yet, the agreement as crafted by WCI took
steps to ensure that the pension plans would not falter
before 1990, five years after the deal closed. WCI was
required to contribute $20 million to the BK pension trusts
in five equal annual installments, through September of
1990. JA 1328-1329. The agreement also required that
BKC satisfy the minimum pension funding obligations
"through and including the plan year beginning in 1990."
JA 1344. WCI took a security interest in BKC's assets to
secure BKC's obligation to assume the underfunded
liabilities. BKC also was required to obtain a letter of credit
in favor of WCI, on which WCI could draw in the event a
claim or demand was brought against WCI with respect to
the assumed BK plans. JA 1356-1359. WCI would reduce
the letter of credit for the benefit of BKC over a period of
five and a half years if there were no demands asserted
against WCI with respect to the BK plans. BKC agreed to
indemnify and hold WCI harmless for all benefits under the
assumed plans, the minimum funding obligations of the
plans, and termination of the assumed plans. JA 1343.
WCI required that BKC submit financial information over
the following five-year period as well.
In February 1992, after the five-year period ended, BKC
failed and the largest of the BK pension plans was
_________________________________________________________________
2. The parties disagree on the estimated unfunded pension liabilities of
the BK businesses at the time of the WCI-BKC transaction. The District
Court credited the $74.6 million estimate of PBGC's expert. Slip. Op. at
24. The District Court found that this estimate was consistent with
WCI's estimate from the fourth quarter of 1984, $71.5 million, which
was calculated for purposes of establishing a discontinued operations
reserve. Slip. Op. at 25. The District Court essentially discredited WCI's
later and lower estimates of the unfunded liability, which were calculated
using different assumptions, e.g., $46.8 million as of January 1, 1985,
and $40.2 million as of July 31, 1985. Slip. Op. at 27-29. Resolving this
appeal does not require that we reconcile thesefigures.
4
terminated, pursuant to 29 U.S.C. S 4042(a), with
substantial underfunded obligations.3
Procedural History
PBGC filed a complaint to recover the unfunded
obligations from WCI under two theories: predecessor
liability under 29 U.S.C. S 1369 and as a sham transaction
under 29 U.S.C. S 1362. On September 11, 1992, the
District Court dismissed all five counts of PBGC's amended
complaint. JA 54.4 On appeal, we reversed in part, stating:
We hold that the PBGC has stated a legally sufficient
claim under 29 U.S.C. S 1369 (1988). Section 1369's
requirement that a transaction "become [ ] effective"
within five years of the plan termination is met because
a transaction does not take effect until the previous
plan sponsor stops making substantial payments to
the pension plans. On the other hand, because section
1369 specifically addresses predecessor liability and
applies to this transaction, we will not read an
_________________________________________________________________
3. In its amended complaint, PBGC estimated this unfunded liability to
be $81,600,000. JA 30, 46.
4. The District Court found that PBGC failed to state a claim that WCI
was a contributing sponsor under the sham transaction theory in count
one because the Court saw "no reason why ridding oneself of an
unprofitable operation serves no legitimate business purpose." JA 62
(Slip. Op. at 9). The District Court dismissed count two, which sought to
hold WCI liable under section 1362 based on the fact that that BKC
defaulted on its security agreement with WCI, because "[f]or WCI to have
the right to possession of BKC's assets, a [p]lan termination must exist,
a condition over which WCI had no control" prior to 1992. JA 64 (Slip.
Op. at 11). The District Court dismissed count three, based on an
implied termination/predecessor liability theory, because even if it
accepted the validity of that theory, the Court did not believe it
extended
to circumstances in which the buyer remains in business and the plans
are not terminated within five years after the sale. JA 68 (Slip. Op. at
15). Count four, a section 1369 count, was also rejected based on the
District Court's view that WCI was neither an employer nor a plan
sponsor after September of 1985. JA 71 (Slip. Op. at 18). Because the
District Court found that WCI's individual payments to the BK plans
were not separate transactions to evade liability within the meaning of
section 1369, the District Court dismissed countfive as well. JA 71-72
(Slip. Op. at 18-19).
5
unexpressed predecessor liability rule into 29 U.S.C.
S 1362 (1988). Additionally, the PBGC's claim that the
transaction at issue is a sham also survives the motion
to dismiss. We therefore will affirm in part and reverse
in part the order of the district court, and remand for
further proceedings consistent with this opinion.
Pension Benefit Guaranty Corp. v. White Consolidated
Industries, Inc., 998 F.2d 1192, 1194 (3d Cir. 1993)
("WCI 1").
On remand, and after a ten-day bench trial, PBGC
prevailed on counts one and four of its complaint. 5 In a
comprehensive ninety-page opinion, the District Court
found that WCI was liable under section 1369, the express
predecessor liability provision. The District Court also
determined that the WCI-BKC sale transaction should be
disregarded as a sham for purposes of holding WCI liable
as a contributing sponsor under section 1362.
WCI challenges several aspects of the District Court's
decision. WCI contends that it is not subject to liability
under section 1369 because the WCI-BKC transaction
closed prior to section 1369's effective date. And, even if
section 1369 were applicable, WCI argues, the District
Court misapplied that provision. WCI also urges that the
District Court erred in finding that the WCI-BKC
transaction was a sham and thus WCI is liable as a
contributing sponsor under section 1362. Because we base
our holding on section 1369, we first turn to that issue.
Section 1369; Treatment of Transactions to Evade
Liability
Section 1369(a), "Treatment of transactions to evade
liability," provides in pertinent part:
If a principal purpose of any person in entering into any
_________________________________________________________________
5. Count one asserts that the transfer was a"sham" designed to allow
WCI to avoid pension liabilities, and thus WCI should retain liability as
a contributing sponsor under 29 U.S.C. S 1362. JA 47. Count four
asserts that a principal purpose of WCI's transaction with BKC was to
evade underfunded pension obligations, making WCI liable under 29
U.S.C. S 1369, as well as under section 1362. JA 49.
6
transaction is to evade liability to which such person
would be subject under this subtitle [29 U.S.C. S 1361
et seq.] and the transaction becomes effective within
five years before the termination date of the termination
on which such liability would be based, then such
person . . . shall be subject to liability under this
subtitle [29 U.S.C. S 1361 et seq.] in connection with
such termination as if such person were a contributing
sponsor of the terminated plan as of the termination
date.
29 U.S.C. S 1369(a) (emphasis added). Congress expressly
provided that section 1369, which was enacted in April of
1986, "shall apply with respect to transactions becoming
effective on or after January 1, 1986." Pub. L. No. 99-272,
S 11013(b), 100 Stat. 261 (1986) (emphasis added).
Applicability of Section 1369 to WCI-BKC Transaction
In WCI 1, we considered whether section 1369 applied to
WCI in view of the fact that the BK plan termination
occurred more than five years after the closing of the WCI-
BKC transaction. Noting that the statute speaks in terms of
when a transaction "becomes effective," not when a
transaction closes, we rejected the notion that the
transaction necessarily became effective on the closing
date. Instead, we determined that a "transaction does not
become effective for purposes of section 1369 until the
company that transferred a pension plan no longer makes
substantial pension contributions." WCI 1, 998 F.2d at
1199. Thus, we concluded that the WCI-BKC transaction
did not become effective until 1990, when WCI ceased
making annual contributions to the BK pension plans, and
the termination fell within the requisite five-year period.
Given our holding that the WCI-BKC transaction became
effective in 1990, we correspondingly held that section 1369
applies to the WCI-BKC transaction, which became effective
after the effective date of the statute. Id. at 1199, n. 2.6 In
light of our conclusion, the District Court held that it was
_________________________________________________________________
6. We applied this holding in a companion opinion issued on the same
day that WCI 1 was decided, Blaw Knox Retirement Income Plan v. White
Consolidated Indus., Inc., 998 F.2d 1185 (3d Cir. 1993). In this case, the
BK pension plans had sued WCI alleging, inter alia, section 1362 and
1369 liability, and the District Court had dismissed the complaint. Citing
and adopting the rationale of WCI 1, we held that the BK plans stated
a legally sufficient claim for relief in Count V of their complaint under
section 1369 and, accordingly, reversed the dismissal of that Count. Id.
at 1187.
7
bound by WCI 1 to apply section 1369 to the WCI-BKC
transaction. Slip. Op. at 80.
WCI argues on appeal that the District Court was not
bound by our previous ruling, that it adopted an overbroad
reading of the WCI 1 holding, and that it erred by
"retroactively" applying section 1369 to the WCI-BKC
transaction, which closed on September 27, 1985. WCI
contends that WCI 1 did not actually determine that section
1369 is applicable here because our statement on this
issue was relegated to a short footnote, was devoid of legal
analysis, and ran afoul of the Supreme Court's dictates
with respect to when a statute has retroactive effect. Even
if WCI 1 is law of the case on this issue, WCI contends, we
should re-examine the application of section 1369 to this
transaction in light of the supervening change in the law of
retroactive application of statutes effected by the Supreme
Court's decision in Landgraf v. USI Film Prods. , 511 U.S.
244 (1994). See generally Mathews v. Kidder Peabody &
Co., 161 F.3d 156, 161 (3d Cir. 1998) (setting forth steps to
determine whether statute should be applied retroactively).7
We are persuaded that our statement in WCI 1 regarding
the applicability of section 1369 to the WCI-BKC
transaction is the law of the case. Likewise, we hold that
the District Court correctly recognized that our ruling in
WCI 1, footnote and all, dictated the application of section
1369 to the WCI-BKC transaction. We reject WCI's
contention that the Supreme Court's decision in Landgraf
requires that we re-examine the law of the case. This
argument might have merit if, in WCI 1, we had analyzed
the statute's retroactivity in a way now forbidden by
_________________________________________________________________
7. Mathews summarized the framework for retrospective application of
statutes, synthesized from Landgraf and Lindh v. Murphy, 521 U.S. 320(1997), as follows:
(1) look for an express command in either direction; (2) discern
whether there is congressional intent to only apply a statute
prospectively; (3) analyze the statute for retroactive effect; and
(4)
look for clear intent to apply the statute retrospectively (if it
has
retroactive effect) or simply use normal rules of construction to
determine the statute's temporal reach.
Mathews, 161 F.3d at 161.
8
Landgraf, making Landgraf a supervening change in the
law with respect to this issue. See In re Minarik, 166 F.3d
591, 595 (3d Cir. 1999) (describing Landgraf as "the
landmark case which establishes the analytical framework
governing retroactivity issues"); Public Interest Research
Group of New Jersey, Inc. v. Magnesium Electron, Inc., 123
F.3d 111, 116-117 (3d Cir. 1997) (explaining that a
supervening change of law is a type of extraordinary
circumstance that would justify reconsideration of an issue
previously decided). However, that is not the situation. In
WCI 1, we applied section 1369 prospectively, not
retroactively, because, based on our interpretation of the
phrases "becomes effective" and "becoming effective" we
held that the event triggering the application of the statute
did not occur until 1990, well after the statute's effective
date. Accordingly, we have no occasion to re-examine the
law of the case based on principles of retroactivity.
Section 1369, by its terms as we have construed them,
applies to the WCI-BKC transaction.
A Principal Purpose to Evade
Turning to the merits, WCI challenges the District Court's
substantive application of section 1369 to the WCI-BKC
transaction. In particular, WCI contends that, in assessing
whether a principal purpose of the transaction was to evade
pension liability, the District Court erroneously focused on
after-the-fact assessments of BKC's economic viability and
value, rather than relying on evidence of WCI's purpose,
including its beliefs about the amount of pension liabilities
and BKC's ability to pay them at the time of closing. As will
be explained below, we agree with WCI, albeit for different
reasons, that the District Court's reliance on after-the-fact
objective assessments of BKC's economic health did not
comport with the requirements of section 1369. However,
this conclusion does not in any way compel reversal
because we find adequate evidence, as did the District
Court, that a principal purpose of WCI's sale was to evade
these obligations.
Relying on statements in WCI 1, the District Court noted
that section 1369 was a codification of the implicit
predecessor liability theory of section 1362, which was
enunciated for the first and only time in one district court
9
opinion, In re Consol. Lit. Concerning International
Harvester's Disposition of Wisconsin Steel, 681 F. Supp. 512(N.D. Ill. 1988) ("International Harvester "). Adopting the test
used in International Harvester to assess implied
termination/predecessor liability under section 1362, the
District Court proposed that the finding of liability under
section 1369 should proceed as follows:
The first step is an objective analysis which requires
the court to make an initial determination of whether
a transferred plan remained viable for five years under
a new sponsor, beginning from the time that the
predecessor sponsor no longer makes substantial
pension contributions. If the answer is yes, the
analysis ends here and no liability may be imposed
upon the predecessor sponsor. If the plans do
terminate within a five year period, the court must
determine on an objective basis whether the new
sponsor lacked a reasonable chance of meeting the
pension obligations. The court must then examine the
predecessor sponsor's subjective intent at the time of
entering into the transaction and determine whether a
principal purpose of entering into the transaction was
to evade pension obligations. . . . If a principal purpose
of entering into the transaction was to evade pension
obligations and the new sponsor lacked a reasonable
chance of survival, then the predecessor sponsor is
liable for the terminated plans.
Slip. Op. at 85-86 (emphasis added). We submit that the
portion of the District Court's test that focuses on the
economic health of the transferee lacks support in the
language of section 1369. Furthermore, in WCI 1 , we read
the five-year provision as having replaced the"reasonable
chance of success" inquiry:
The second prong of the Harvester test required the
plaintiff to prove that the new employer had no
reasonable chance of fulfilling the pension obligations
it assumed. In its place, Congress substituted the
requirement that the plan terminate within five years of
the date the transaction became effective . . . .
Congress apparently believed that if a plan terminated
within five years of being transferred, it was fair to
10
assume that the new employer did not have a
reasonable chance of succeeding at the time of the
transfer. Congress also believed that if a plan remained
viable for five years under a new sponsor, the previous
employer should have the benefit of an irrebuttable
presumption that the new sponsor had a reasonable
chance of fulfilling the pension obligations it assumed.
It is reasonable to assume that Congress viewed the
amount of time a pension plan survived after a change
of sponsorship as reflective of the economic condition
of the new sponsor at the time of the transfer. Using
this easily quantifiable surrogate, Congress fashioned a
bright line rule.
WCI 1, 998 F.2d at 1199. Based on the plain language of
section 1369, we hold that section 1369 does not require,
as an independent element, proof that the new sponsor
lacked a reasonable chance of succeeding. In reaching this
conclusion, we do not mean to suggest that evidence of the
transferee's viability cannot be considered in ascertaining a
transferor's primary purposes of entering into the
transaction, but only that it is not an independent
predicate for section 1369 liability. Accordingly, we need
not address WCI's specific challenges to the evidence of
BKC's viability or the District Court's treatment of that
issue.
The key section 1369 inquiry is whether WCI had"a
principal purpose" of evading its pension liabilities. We
conclude that both documentary and testimonial evidence
amply support the District Court's findings of fact regarding
WCI's intentions to evade pension liability, and we uphold
the District Court's legal conclusion that WCI is liable
under section 1369. As outlined below (and as described in
WCI 1 in the context of the motion to dismiss), the chain of
events documented in the record illustrate that evasion of
WCI's unfunded BK pension liabilities was a principal
purpose of entering into the WCI-BKC transaction, and
played a major role in shaping the terms of that
transaction.
Although WCI had designs on disposing of its
unprofitable non-core steel industry divisions in 1984, WCI
started to specifically consider the ramifications of
11
transferring the BK businesses' unfunded pension liabilities
in early 1985. See, e.g., JA 3437 (February 26, 1985
memorandum to Ware from Morse regarding the sale of
certain BK businesses) ("The question as to whether [WCI]
could have some liability for unfunded pension benefits if
the new owners were to terminate the plans or end up in
bankruptcy, is unclear").
WCI's lawyers researched various theories that PBGC
could assert to hold WCI accountable for unfunded pension
liabilities of the BK businesses, including pending
legislation that imposed contingent liability on a seller for
at least five years. JA 3458 (April 1, 1985 memorandum to
WCI - Blaw-Knox file from Draucker); JA 3486 (April 18,
1985 memorandum to WCI - Blaw-Knox file from Draucker
re: "Underfunded defined benefit plan - liability of seller")
(providing more detailed explanation of pending predecessor
liability legislation with five-year contingent liability period);
JA 3493 (April 23, 1985 memorandum to Ransom from
Draucker) (reporting on PBGC's efforts to impose
predecessor liability for unfunded pension obligations in the
International Harvester case). These memoranda noted that
a seller might wish to account for the possibility of
predecessor liability when structuring a deal with the buyer
to ensure that these liabilities fall on the buyer. WCI's
lawyers sent WCI executives information regarding the
International Harvester litigation. JA 3497 (April 24, 1985
letter to Ware and Elliot from Draucker). WCI executives
were aware that PBGC might seek to hold WCI responsible
under several theories, including some that might have a
five-year contingent liability period. See, e.g., JA 5315,
5289 (Hunt deposition).
In a memorandum from April 24, 1985, the day before a
meeting with Cvengros, WCI's general counsel listed as the
first subject for discussion regarding the sale as"[D]oes
purchaser agree generally with Wyatt [WCI's actuary]
analysis of the unfunded pension liability and retiree
pension costs," and described that issue as one of the key
matters for discussion. JA 1151, 1152 (April 24, 1985
memorandum to Ware, Hunt & Jacobs from Elliot). Also
listed for discussion was "[W]hat is significance of
Wisconsin Steel-Harvester litigation on [lawyers']
conclusions on residual WCI pension liability?" JA 1151.
12
Consideration of Cvengros' proposal to terminate the BK
plans directly before or after purchasing the BK businesses
brought WCI's risk of underfunded pension liability
exposure sharply into focus. Ransom's file notes from the
April 25, 1985 Cvengros meeting describe the proposal for
immediate post-closing termination as a "two-edged sword,"
leaving "very little room for WCI to avoid an International
Harvester/Wisconsin Steel situation or other possible
theories of [s]eller liability." JA 1175 (April 28, 1985
memorandum to file from Ransom, enclosed with April 29,
1985 letter to Hunt from Ransom). Ransom's handwritten
notes from the meeting listed as a problem "PBGC-- must
still get over dumping initially - not necessarilyfive years."
JA 1165. See also JA 746 - 747 (trial transcript, March 11,
1997, Ransom).
Alternatively, Cvengros had proposed to terminate the
plans before the parties consummated the sale, about
which Ransom's notes state:
Needless to say, terminating the plans prior to the
closing would put WCI squarely on the hook as the
employer that maintained the plans at the time of
termination and the PBGC would not even have to use
International Harvester/Wisconsin Steel principles or
any other theory of seller liability. At least if the plans
terminate after the closing, WCI has a plausible basis
for asserting that it is not responsible for the liabilities.
JA 1176. This deal was abandoned.
The structure of the transaction negotiated with Tomsich
was different, and to WCI's liking. WCI was to transfer
most, if not all, of the BK pension liabilities to BKC, and it
was agreed that the BK plans would not be terminated
during the following five years, during which time it was
most likely that WCI would be held contingently liable as a
predecessor.
Even absent the Cvengros proposal to terminate the BK
pension plans, WCI was aware that early termination of the
BK plans was more than a remote possibility. See, e.g., JA
1208 (June 12, 1985 letter to Hunt from Reynolds of Wyatt,
WCI's actuary); JA 3580 (June 12, 1985 memorandum to
WCI file from Reynolds re: meeting with attorney); JA 1165
13
(Ransom's notes from April 25, 1985 meeting) ("still run
risk of terminating -- at least in first 5 years"); JA 1211
(Ransom's notes from June 19, 1985 meeting with WCI
executives) (noting disadvantages of certain deal structures
in the event that the buyer terminated pension plans early).
Given this state of affairs, WCI's lawyers were clearly
working on how to structure the deal so as to minimize
WCI's unfunded pension liability exposure. See, e.g., JA
1035 (June 18, 1985 memorandum to Holdt, Smith and
Ware from Hunt and Elliot re: Disposition of the Blaw Knox
Companies) ("We will be counseled throughout by Squire,
Sanders & Dempsey on this matter to minimize our
exposure . . . . The overall economic benefit of this
transaction, in our judgment, far outweighs this remote
risk.").
In the context of discussing pension liabilities, WCI
executives expressed significant concern "about getting the
five year period behind them" and "wanted the prior service
liability to be as low as possible." JA 1205 (June 10, 1985
memorandum to Tomsich from Nehrig, reporting on
meeting with Hunt and Ware). WCI's executives understood
that the "principal economic benefit to WCI" of the
disposition of the BK businesses was the buyer's
assumption of unfunded pension liabilities and the
obligation to provide insurance to certain retirees. JA 1034
(June 18, 1985 memorandum to Holdt, Smith, and Ware
from Hunt and Elliot).
Even after WCI had signed a letter of intent with Tomsich
setting forth the basic parameters of the deal, WCI
continued to shape the transaction in a way that it believed
would provide maximum protection from being held
responsible for the unfunded pension liabilities. 8 When WCI
commenced its negotiations with Tomsich, it had intended
to retain at least some of the dedicated pension assets and
liabilities. WCI consulted with its actuary and counsel on
_________________________________________________________________
8. WCI's Board of Directors reserved its right to approve the WCI-BKC
deal in the event that the agreement reflected"more than a $10 million
adverse variance from the projected $67 million savings from the
originally booked pre-tax loss relative to the divisions" at issue. JA
1248
(Minutes of Special Meeting of Board of Directors, July 30, 1985).
14
the extent to which the buyer -- and not WCI -- would be
required under the possible scenarios to provide for all
unfunded pension liabilities in the event that the BK plans
terminated. See JA 1207-1208 (June 12, 1985 letter to
Hunt from Reynolds, WCI's actuary re: Blaw Knox pension
plans - Treatment of the Dedicated Bond Fund). WCI
ultimately rejected the option that its actuary identified as
potentially leaving WCI directly liable for certain unfunded
pension liabilities, and instead required that the
transaction be structured so that BKC assumed all assets
and liabilities, including dedicated liabilities, the option
identified by WCI's actuary as increasing the buyer's
exposure.9 WCI's executives remained concerned about
whether the transaction was "outside of sham." JA 166
(Joint statement of uncontested facts); JA 5287 (Hunt
deposition). See also JA 1034 (June 18, 1985 memorandum
to Holdt, Smith, and Ware from Hunt and Elliot)
(discussing PBGC's assertion of sham against other
predecessors).
Ransom's notes for a June 19, 1985 meeting indicate the
advantages of structuring the deal in this fashion, all of
which relate to the possibility of WCI's evading liability for
its unfunded pension obligations:
What do we want Buyer to do with plans?
A. Maintain plans for at least 5 years? (i.e. until
1/1/90?)
Advantages
(1) In some ways may look better to PBGC (xc 5 year
limit could look like evasion) - Certainly it doesn't look
as much like a dumping.
(2) If Buyer does it, it should take WCI off statutory
hook (xc for new legislation).
_________________________________________________________________
9. Although the record generally reflects arms-length bargaining for the
most part, Tomsich apparently was willing to accept less favorable terms
for BKC because he had limited his own unfunded pension liability
exposure by owning less than 80% of the acquiring corporation. See,
e.g., JA 929 (trial transcript, March 14, 1997, Elliot).
15
. . .
(5) . . . would not invite PBGC in. . .
JA 1214.10 To maximize its bargaining leverage, WCI was
discouraged by its attorney from disclosing the deal to
PBGC ahead of time:
Any discussions with the PBGC, although they would
seem to be desirable, would have to be entered into
with the understanding that they could turn out to be
so unsatisfactory as to kill the deal. If the deal went
forward without discussions with PBGC, any problems
with PBGC would then have to be worked out in the
context of actual termination of the plan. At that point
the situation might be sufficiently cloudy as far as the
PBGC is concerned (i.e. they might have to use
International Harvester/Wisconsin Steel theories in
litigation to recover on its own terms from WCI), that
the parties might actually have more leverage in
dealing with the PBGC.
JA 1178. See also JA 148 (Joint statement of uncontested
facts); JA 740 (trial transcript, March 11, 1997, Ransom).
WCI's intent to avoid its unfunded pension obligations
was hardly lost on other parties and professionals. The
Minutes of the Metropolitan Credit Committee, BKC's
lender, describe the situation as follows:
Another major problem is an unfunded pension health
and life liabilities of approximately $61 mm. WCI wants
relieved [sic.] from this liability . . . . While the laws are
somewhat unclear, WCI feels it could be obligated on
the past unfunded pension obligation and health and
life liability for up to five years (the PBGC can go after
them) if BKC does not fund the required payments
annually.
JA 1272, 1274.
Tomsich likewise testified that he was aware WCI was
concerned about keeping the BK pension plans alive for five
_________________________________________________________________
10. A noted disadvantage was that "PBGC might step in anyway and
initiate terminations." JA 1215.
16
years. JA 573 (trial transcript, March 6, 1997). Although
WCI did not explain its reasoning to Tomsich directly,
Tomsich's counsel told him that the concern about the five-
year period had "something to do with some kind of
requirement that the liability would disappear afterfive
years from the seller." Id.
WCI therefore determined that the buyer of the BK
business should be required to maintain and meet the
minimum funding obligations for the pension plans until
1990. JA 1217 - 1218 (Notes from June 19, 1985 meeting
at WCI); JA 1224 (June 21, 1985 notes to file from
Reynolds re: meeting with client).11 The deal that WCI
designed and ultimately consummated, the details of which
we have already described, infra, was clearly structured to
keep the underfunded BK pension plans from terminating
for five years after the deal closed, and to shift as much of
the unfunded pension responsibility as possible to BKC in
the event of termination.12
The evidence clearly supports the District Court's
determination that WCI had a principal purpose of evading
pension liabilities. WCI was aware of the ways in which it
might be held liable for its past unfunded pension liabilities
and took steps to transfer those liabilities and prevent the
plans from terminating while it still might be held partially
or fully responsible. Moreover, WCI rejected any deal that
_________________________________________________________________
11. Although WCI offered evidence to provide an alternative explanation
for their interest in the five-year period, the District Court discredited
that testimony and found it to be wholly undermined by other
documentary evidence. See Slip. Op. at 50. We apply a deferential
standard of review to the District Court's credibility determinations and
do not overturn the Court's determinations here.
12. The resolution of a post-sale dispute, in which BKC alleged that WCI
had made misrepresentations about the BK pension liabilities, also is
telling. In resolving this dispute, Hunt (now working for BKC) noted that
WCI sought to avoid unwanted PBGC attention. JA 1451-1453 (Hunt's
handwritten notes from conference call, referring to dispute as "smoking
gun" that could cause damage to WCI). The formal agreement settling
the dispute conditioned the settlement on BKC and WCI refraining from
suggesting that either party had engaged or acquiesced in any action,
policy, or practice that would constitute a violation of law or policy. JA
4415, 4417.
17
did not include the transfer of pension liabilities to the
buyer. This is simply not a case in which a corporation
sought to transfer pension liabilities as part of a legitimate
divestiture of unprofitable subsidiaries. Rather, this is a
case in which the transferor, WCI, sought to use the
transfer of a group of failing businesses as a means of
evading the pension liabilities associated with those
businesses. Had WCI 1 started the five-year clock in 1985
when the deal closed, rather than in 1990 when WCI
ceased propping up the pension plans, WCI's plan to evade
its liability may very well have been successful. We will
affirm the District Court's judgment that WCI is liable
under section 1369.
Amount of Liability under Section 1369
WCI raises an additional challenge to the District Court's
ruling on section 1369, contending, somewhat cryptically,
that PBGC failed to establish the amount of underfunding
WCI was liable to pay on the date of the transaction. WCI
argues, therefore, that the District Court used an erroneous
and "non-statutory" measure of liability to gauge WCI's
intent. Brief for Appellant at 51. WCI's argument is based
on the language of section 1369(a), which states that a
person is responsible for "the liability to which such person
would be subject under this subtitle." 29 U.S.C. S 1369(a)
(emphasis added). In addition to challenging this argument
on the merits, and asserting that WCI would be liable
under section 1369 even using WCI's own estimates, PBGC
alleges that WCI waived this argument by failing to raise it
at trial or in its proposed conclusions of law after the
evidence was presented.
In its reply brief, WCI argues that it "contended
repeatedly in the [D]istrict [C]ourt that the PBGC had failed
to establish that WCI acted with a principal purpose to
evade its statutory liability to the PBGC," citing to a portion
of its proposed findings of facts and conclusions of law that
it filed May 14, 1997. Reply Brief for Appellant at 28. WCI
does not refer to, nor can we discern, a proposedfinding
that asserted or preserved the specific argument that WCI
now makes regarding proof of the actual amount of liability
as an element of section 1369. See SA-213 - SA-223.13 If
_________________________________________________________________
13. Citing Rule 52(b) of the Federal Rules of Civil Procedure, WCI also
argues that the losing party in a non-jury trial is not required to argue
18
this issue was not specifically presented to the District
Court, we need not address it on appeal.14
Curiously, the District Court did address the need for
proof of the amount of WCI's liability, although its opinion
does not frame the question as being dependent on the
language of section 1369 as WCI now urges. We are left
with uncertainty as to whether WCI's argument was raised,
but merely not documented adequately in the record before
us. Whether WCI waived this issue does not affect our
holding because we conclude that proof of the actual
amount of liability is not necessary in this proceeding. As
WCI essentially recognizes, see Brief for Appellant at 54,
once it is determined that a person is subject to section
1369 liability "as if such person were a contributing
sponsor," the amount of liability should be calculated in
_________________________________________________________________
that insufficient evidence exists to support the District Court's findings
in order to advance that argument on appeal. Reply Brief for Appellant
at 28. Rule 52(b) provides in pertinent part that"[w]hen findings of fact
are made in actions tried without a jury, the sufficiency of the evidence
supporting the findings may be later questioned whether or not in the
district court the party raising the question objected to the findings,
moved to amend them, or moved for partial findings." FED. R. CIV. P.
52(b). However, we do not read WCI's assertion to be an attack on the
sufficiency of the evidence, but rather to be an argument that the
District Court erred by ignoring a specific requirement embedded in
section 1369.
14. See, e.g., The Medical Protective Co. v. Watkins, 198 F.3d 100, 105 n3
(3d Cir. 1999) (finding that one of defendants' arguments was waived for
failure to raise issue in district court); Arnold M. Diamond, Inc. v. Gulf
Coast Trailing Co., 180 F.3d 518, 524 n6 (3d Cir. 1999) (holding that
Diamond waived its equitable subrogation argument on appeal because,
"[a]lthough Diamond claims that it made this argument in its brief
opposing Gulf Coast's motion for summary judgment . . . our review of
that brief convinces us that this argument was not fairly raised") (citing
United States v. Anthony Dell'Aquilla Enters., 150 F.3d 329, 335 (3d Cir.
1998) (rejecting argument that government did not present prima facie
case for certain violations because, absent exceptional circumstances, an
issue not raised in district court will not be heard on appeal)); Keenan
v. City of Philadelphia, 983 F.2d 459, 471 (3d Cir. 1992) (holding that
defendants waived argument that evidence of theirfinancial status is a
prerequisite to punitive damages because they failed to present the
argument "with sufficient specificity to alert the district court").
19
accordance with the procedures for determining liability
under section 1362. Establishing the amount of liability
under section 1362 in the first instance, as the District
Court explained, begins with an administrative -- not
judicial -- procedure. See Slip. Op. at 88 -91 (citing 19
C.F.R. 4068.3). Thus, whether or not WCI waived this
argument, we conclude that the District Court did not err
when it declined to fix the amount of WCI's liability.
As an alternate ground for liability, the District Court
also held that the transaction ran afoul of 29 U.S.C. S 1362
based on the sham transfer doctrine. Having affirmed the
District Court's finding of WCI's liability under the express
provision for predecessor liability set forth in section 1369,
it is unnecessary for us to review its conclusion that
liability could alternatively be based on 29 U.S.C.S 1362
using the sham transfer doctrine. Accordingly, we do not
rule on the merits of the District Court's application of the
sham transfer doctrine to impose section 1362 liability.15
For the foregoing reasons, we will AFFIRM the District
_________________________________________________________________
15. Although section 1362 does not apply on its face to WCI because
WCI was not a contributing sponsor when the BK plan was terminated,
PBGC alleges, and the District Court held, that WCI should be held
liable as a contributing sponsor under section 1362 because its transfer
of the BK businesses to BKC should be disregarded as an economic
"sham." WCI has not specifically challenged the application of the sham
transfer doctrine to ERISA liability, but we note that there is a dearth
of
authority for extending the sham transfer doctrine to the ERISA context.
In WCI 1, we discussed the sham transfer theory as if it could apply
without specifically analyzing its applicability. We are not certain that
the tax policy considerations at the heart of the sham transfer doctrine
translate neatly when used to disregard a sale transaction for purposes
of imposing pension liability. In addition, if we assume this doctrine
does
apply, we have some concern about the District Court's finding that the
WCI-BKC transaction was a sham insofar as this ruling was based on
the Court's assessment of WCI's subjective intent, notwithstanding its
finding that the transaction had economic substance. Because we have
affirmed the District Court's finding of WCI's liability on other grounds,
however, we will refrain from delving into a full-fledged analysis and
critique, leaving for another day the next step to be taken into the
muddy waters of sham transfer jurisprudence.
20
Court's grant of judgment in favor of PBGC and against
WCI on Count IV of PBGC's amended complaint.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
21