Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. ( 2018 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 18a0196p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
PENSION BENEFIT GUARANTY CORPORATION, ┐
Plaintiff-Appellant, │
│
v. │
│
FINDLAY INDUSTRIES, INC., et al., > No. 17-3520
│
Defendants, │
PHILIP D. GARDNER INTER VIVOS TRUST AGREEMENT │
DATED JANUARY 20, 1987; SEPTEMBER ENDS CO.; │
BACK IN BLACK CO.; ROBIN L. GARDNER, Executor of │
Estate of Michael J. Gardner, │
│
Defendants-Appellees.
│
┘
Appeal from the United States District Court
for the Northern District of Ohio at Toledo.
No. 3:15-cv-01421—Jack Zouhary, District Judge.
Argued: November 28, 2017
Decided and Filed: September 4, 2018
Before: DAUGHTREY, McKEAGUE, and DONALD, Circuit Judges.
_________________
COUNSEL
ARGUED: Merrill D. Boone, PENSION BENEFIT GUARANTY CORPORATION,
Washington, D.C., for Appellant. Caroline H. Gentry, PORTER WRIGHT MORRIS &
ARTHUR, LLP, Dayton, Ohio, for Appellees. ON BRIEF: Merrill D. Boone, Lori A. Butler,
PENSION BENEFIT GUARANTY CORPORATION, Washington, D.C., for Appellant.
Caroline H. Gentry, PORTER WRIGHT MORRIS & ARTHUR, LLP, Dayton, Ohio, James D.
Curphey, PORTER WRIGHT MORRIS & ARTHUR, LLP, Columbus, Ohio, for Appellees.
DAUGHTREY, J., delivered the opinion of the court in which DONALD, J., joined, and
McKEAGUE, J., joined in part. McKEAGUE, J. (pp. 23–35), delivered a separate opinion
concurring in part and dissenting in part.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 2
_________________
OPINION
_________________
MARTHA CRAIG DAUGHTREY, Circuit Judge. Following the financial collapse of
the Studebaker Company in 1963, more than 11,000 autoworkers lost 85 percent of their vested
pension interest when the company’s retirement plan was terminated. The resulting political
pressure culminated in passage of the Employee Retirement Income Security Act of 1974,
29 U.S.C. §§ 1001–1461 (ERISA), which regulates private-sector pension and health funds. In
addition to setting up requirements for defined pension-benefit plans, as part of ERISA Congress
also created the Pension Benefit Guaranty Corporation (PBGC), which insures uninterrupted
payment of benefits under those plans upon their termination. The program is designed to be
self-financed, funded primarily by insurance premiums paid by sponsoring companies and also
from assets acquired from terminated plans and recovered from underfunded plan sponsors when
bankruptcy occurs. To keep premiums as low as possible, ERISA provides that the sponsor of a
terminated plan and the “trades or businesses” related to the sponsor through ties of common
ownership (known as “control group members”) are jointly and severally liable to PBGC for
underfunded benefit liabilities.
It was against this background that PBGC sued to collect more than $30 million in
underfunded pension liabilities from Findlay Industries following the shutdown of its operation
in 2009, apparently a casualty of the worsening economy at the time. When Findlay could not
meet its obligations, PBGC looked to hold liable a trust started by Findlay’s founder, Philip D.
Gardner (the Gardner Trust), treating it as a “trade or business” under common control by
Findlay. PBGC also asked the court to apply the federal-common-law doctrine of successor
liability to hold Michael J. Gardner, Philip’s son, liable for some of Findlay’s debt. Michael, a
45 percent shareholder of Findlay and its former-CEO, had purchased Findlay’s assets and
started his own companies using the same land, hiring many of the same employees, and selling
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 3
to Findlay’s largest customer.1 The district court refused to hold either the trust or Michael and
his companies liable.
In determining whether the Gardner Trust was a “trade or business” under Findlay’s
common control, the district court rejected the approach of our sister circuits that apply a
“categorical test” to determine liability. The categorical test treats any entity leasing to a
commonly controlled entity as a trade or business under ERISA. Instead of the categorical test,
the district court applied a fact-intensive test cribbed from Commissioner v. Groetzinger,
480 U.S. 23, 24 (1987), a case interpreting the term “trade or business” as used in the tax code,
26 U.S.C. §§ 162(a), 62(a)(1). The court held, under the so-called “Groetzinger test,” that the
trust was not liable. Next, after analyzing the requirements for creating and invoking federal
common-law principles of successor liability, the district court declined to apply successor
liability in this case. We conclude that the district court erred on both fronts.
First, an entity that owns land and leases it to an entity under common control should be
considered, categorically, a “trade or business” under ERISA. As noted below, this
interpretation recognizes the differences between ERISA and the tax code, satisfies the purposes
of ERISA, and brings this court into agreement with its sister circuits. In addition, under the
facts of this case, successor liability is necessary to implement the fundamental ERISA policy of
protecting employees, in part by guaranteeing that employers who have promised pensions
uphold their part of the deal. Refusing to apply successor liability here would allow Findlay to
make promises to employees, fail to uphold those promises, and then engage in clever financial
transactions that leave PBGC to pay millions in pension liabilities. Holding Findlay responsible,
on the other hand, is a commonsense answer that fulfills ERISA’s goals.
We therefore find it necessary to reverse the rulings below and remand the case to the
district court.
1Although there were originally ten defendants, several of them were dismissed with prejudice and are not
involved in this appeal. The remaining appellees include the Gardner Trust, Robin L. Gardner (executor of the
estate of Michael J. Garner, who died during the proceedings), and Michael Gardner’s two companies, Back in
Black Co. and September Ends Co.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 4
BACKGROUND
Statutory Background
Private employers are not required to offer pension plans, but if they do, ERISA requires
that the pension plans meet certain standards and retain certain protections. That way, “if a
worker has been promised a defined pension benefit upon retirement—and if he has fulfilled
whatever conditions are required to obtain a vested benefit—he actually will receive it.”
Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 375 (1980). Before ERISA, lack
of oversight and legal standards often left pension plans without enough money, and employees
who counted on those funds with nothing for retirement. Id. at 374–75.
As a “major part of Congress’[s] response to [that] problem,” ERISA instituted a
termination-insurance program, PBGC. Id. at 375. Although ERISA’s funding, disclosure, and
other standards made it more likely that pension plans would have the money that they had
promised their beneficiaries, Congress built in the extra protection of PBGC-operated insurance.
Subchapter III of ERISA requires PBGC to charge participating companies premiums so that if a
pension plan fails, PBGC can “provide for the timely and uninterrupted payment of pension
benefits to participants and beneficiaries.” 29 U.S.C. § 1302(a).
Despite the significant increases in coverage ushered in by ERISA, a few years after its
introduction, PBGC warned Congress “that ERISA did not adequately protect plans from the
adverse consequences that resulted when individual employers terminate their participation in, or
withdraw from, multiemployer plans” set up under collective bargaining agreements. Pension
Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 722 (1984). In other words, the statute
provided the necessary protection for when a company ended its own pension plan, but when
multiple companies pooled assets into a single pension plan, a withdrawing employer risked
saddling the remaining companies with all of the plan’s liabilities. In response, Congress passed
the Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1381–1461 (MPPAA),
amending ERISA to ensure that multiemployer plans also served the statute’s goals.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 5
Under the MPPAA, multiemployer plans are subject to many of the same standards as
single-employer plans. For example, the MPPAA requires multiemployer plans to pay premiums
for PBGC insurance, just as single-employer plans are required to do. 29 U.S.C. §§ 1321–1322a.
And PBGC holds employers directly liable for underfunded—but promised—benefits, interest,
and penalties, whether the liable employer is part of a single-employer pension plan or a
multiple-employer pension plan. 29 U.S.C. §§ 1362, 1381.
Factual and Procedural Background
Findlay Industries was a company that produced auto parts before going out of business
in 2009. Since 1964 it had offered pension benefits to some of its employees, and by the time
production was stopped, its pension obligation was underfunded by millions of dollars. To
satisfy that liability, PBGC looked to assets that might be treated as Findlay’s—specifically, a
trust started by Findlay’s founder and assets purchased from the company by the founder’s son in
2009.
The Trust: At the end of 1986, Findlay transferred two pieces of property to the
company’s founder and owner, Philip D. Gardner. Less than a month later, Gardner transferred
the property to an irrevocable trust. The trust was to provide for Gardner’s sisters through the
end of their lives, at which point the trust was to be distributed equally to Gardner’s two sons—
Philip J. and Michael Gardner. In addition, son Philip J. was the trustee and Michael was his
successor.
From at least 1993 until 2009, when Findlay folded, the trust leased the two plots of land
back to Findlay. Thus, for the majority of the time that the trust existed, it was leasing back to
Findlay the very land that Findlay, through Gardner, had donated to the trust. Gardner’s last
sister died in early 2014, and a month later the entire trust was split between his sons, who ran
and owned a majority of Findlay in its final years.
The Assets: In May 2009, after Findlay failed, a company named F I Asset Acquisition
LLC purchased all of the equipment, inventory, and receivables from two of Findlay’s plants.
The two plants contained all of Findlay’s equipment and machinery of value. The sale had a
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 6
price tag of $2.2 million in cash and $1.2 million in assumed trade debt. It appears that Findlay’s
former assets then were transferred from F I Asset Acquisition to Michael Gardner and another
company owned entirely by Michael. Shortly after, Michael Gardner transferred the assets
again, this time to two other of his recently formed companies—Back in Black and September
Ends.
Every step of the sale went through the hands of Michael Gardner. For the relevant time
leading up to the sale, until just two months before the sale in May 2009, Michael was Findlay’s
CEO and a director. And at all times, he was an owner of almost 45 percent of Findlay’s stock.
At the end of 2008, an outside company offered to purchase Findlay’s assets. Weeks later,
Michael—who was still at Findlay—made Findlay an offer on behalf of F I Asset Acquisition, a
company of which he was also a member (and, at some point, its managing member). As a
Findlay director, Michael did recuse himself from considering other companies’ bids for
Findlay’s assets. But he still had access to information that Findlay received about the potential
sale, including a letter from PBGC and a request from a potential purchaser for indemnification
for pension-plan liabilities. A month after the potential purchaser requested indemnification,
F I Asset Acquisition made an offer that did not assume the underfunded-pension liabilities.
That offer clinched the sale, and the assets were transferred from Findlay to F I Asset
Acquisition, then to another company owned by Michael (MJG Inc.), and finally to September
Ends and Back in Black—the two companies that ended up with the Findlay assets. September
Ends and Back in Black were owned and controlled by Michael Gardner—he owned 52 percent
of the stock and his minor children owned the other 48 percent.
More than mere ownership passed from father’s company to son’s companies, however.
Michael Gardner’s new businesses were duplicates of Findlay in many ways. The two
businesses—September Ends and Back in Black—each established a plant on one of the old
Findlay lots. One of those companies rehired substantially all of the former Findlay employees,
and the other rehired six of nine salaried employees and 15 of 25 hourly employees. The two
new companies also started selling to Findlay’s largest customer.
According to PBGC, Michael’s gambit paid off. When he purchased Findlay’s assets,
Michael knew or should have known that Findlay was responsible for over $18 million in
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 7
pension liabilities. But without accepting any responsibility for those liabilities, Michael paid
only $3.4 million for the company. Strikingly, between May 2009 and December 2013, the net
income—or bottom line—of Back in Black and September Ends was $11.9 million, more than
triple the amount Michael had paid. A cynic might observe that Michael was, indeed, “back in
the black.”
Although the former Findlay assets were being used to turn a profit, Findlay’s pension
remained drastically underfunded; taking into account interest and fines, PBGC claimed that
Findlay’s liability was more than $30 million. To collect on that liability, PBGC brought this
suit and, in 15 counts, alleged that ten defendants, all connected to Findlay, engaged in a number
of internal structures, set-ups, and sales to avoid liability for the pensions formerly promised to
Findlay employees. This appeal addresses three of those counts, III, IX, and XV—each of which
was dismissed by the district court on a motion to dismiss brought under Rule 12(b)(6) of the
Federal Rules of Civil Procedure. Because Count IX depends completely on Count III, we will
not address it separately; thus, only two of the three dismissed counts are at issue here.
First, the PBGC complaint alleged that the trust Philip D. Gardner started in 1987 was
jointly and severally liable for Findlay’s pension liabilities. Specifically, the complaint alleged
that the trust was under the control of Philip D. Gardner’s sons, Michael and Philip J., who also
controlled Findlay. And under the control of the Gardners, the trust leased land to Findlay for at
least 16 years. Because the trust shared a “substantial economic nexus” with Findlay, the
complaint alleged that Findlay and the trust were under common control. The complaint also
alleged that the trust was a trade or business for ERISA purposes. Thus, as a trade or business,
commonly controlled, the trust was jointly and severally liable for Findlay’s liabilities.
In its motion to dismiss, the Gardner Trust argued that PBGC had relied on the wrong
legal standard to determine liability. Specifically, the trust argued that PBGC’s “substantial
economic nexus” theory had been rejected as a test to show that an entity was a trade or business
for ERISA’s purposes. Instead, the trust argued, the proper standard was the fact-intensive
analysis of Groetzinger, 480 U.S. 23, the tax case. Therefore, because PBGC had not provided
an analysis under Groetzinger, the trust contended that the complaint must be dismissed.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 8
In response, PBGC argued that Groetzinger’s application was limited to the tax code and
did not provide the correct standard in this circumstance. Instead, PBGC explained, the court
should apply the “categorical test,” concluding that an entity is categorically a trade or business
when that entity leases to a commonly controlled entity
The district court agreed with the trust. Recognizing that neither this court nor the
Supreme Court has defined “trade or business” under ERISA, the district court started with the
dictionary definition of each word. The court explained that the dictionary “defines ‘trade’ as
‘the business or work in which one engages regularly’ and ‘business’ as ‘a usually commercial or
mercantile activity engaged in as a means of livelihood.’”2 The court held that Groetzinger’s
test—that a person must regularly engage in the activity in question primarily for profit or
income—embodies the “ordinary, common-sense meaning of the words at issue.” Because the
trust was created “with the express purpose of providing for the care and eventual funeral
expenses of [Gardner’s] sisters,” the court concluded that neither the plain meaning of the words
nor the Groetzinger test supported a conclusion that the trust was a trade or business under
ERISA.
Rejecting PBGC’s argument that the categorical test was appropriate, the court reasoned
that the case law from other circuits adopting the categorical test arose under the MPPAA, and
not under single-employer pension plans. Aside from describing the MPPAA as “a separate
statutory scheme with its own legislative history and purpose,” the court did not explain why
MPPAA case law should not apply to single-employer cases. In any event, the court concluded
that because “the purpose of the [trust’s] rental activity was not to dissipate Findlay’s assets or to
profit Gardner” and because “there is no possibility the rental activity was used to dissipate or
fractionalize the employer’s assets, there can be no controlled group liability.”
Next, the court addressed PBGC’s contention that Michael and his companies should be
held liable under the federal common law of successor liability. Specifically, PBGC had alleged
that these defendants had notice of Findlay’s pension-plan liabilities, knew that Findlay was
2The district court cited Merriam-Webster, but did not identify the edition.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 9
unable to pay its liabilities, and that Back in Black and September Ends had substantially
continued Findlay’s operations.
The district court disagreed. Applying the disjunctive three-part test outlined by this
court in DiGeronimo Aggregates, LLC v. Zemla, 763 F.3d 506, 511 (6th Cir. 2014), the court
held that successor liability does not justify the rare exercise of creating common law under
ERISA. The court held that PBGC failed the first part of the test because ERISA is not silent as
to who can be responsible for successor liabilities of single-employer plans. Specifically, the
district court held, because a portion of the statute discusses the effects of corporate
reorganization, Congress did not intend for liability of entities beyond what is listed in the
statute.
The court next concluded that the second part of DiGeronimo’s test was not satisfied
because there is no “awkward gap” to fill in the statute. In doing so, the court rejected PBGC’s
argument relying on cases from other circuits that found successor liability under ERISA. The
court distinguished those cases, pointing out that they all arose under the MPPAA and thus
applied only to multiemployer plans. The court reasoned that because the MPPAA did not
address corporate reorganizations, common law played a necessary gap-filling role in those other
cases. But, the court said, because the statute does address corporate reorganization of
employers in single-employer plans, there is no awkward gap.
Finally, the court held that successor liability is not essential to carrying out fundamental
ERISA policies. Because the fundamental policy of ERISA is to make sure that employees get
their pensions, and PBGC already has a list of who it can hold accountable, the court observed
that “[a]dding more targets is not necessary to fulfill ERISA’s policy of protecting plan
participants.”
DISCUSSION
Standard of Review
We review a district court’s dismissal under Federal Rule of Civil Procedure 12(b)(6)
under a de novo standard of review. United Food & Commercial Workers Union-Emp’r Pension
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 10
Fund v. Rubber Assocs., Inc., 812 F.3d 521, 524 (6th Cir. 2016). We accept all well-pleaded
allegations as true and “determine whether they plausibly state a claim for relief.” DiGeronimo,
763 F.3d at 509 (quotation marks and citation omitted). The complaint must address all material
elements of the plaintiff’s chosen legal theory. Id. Either direct or inferential allegations will
suffice. Id.
Appropriate Test to Determine Trust’s Liability
When an employer terminates its pension plan, ERISA liability does not end with the
company that actually promised pension payments. Instead, a “trade or business” under
“common control” of the employer is treated as part of the employer and so incurs joint-and-
several liability under ERISA. See 29 U.S.C. §§ 1362(a), 1301(a)(14)(B), 1301(b)(1). This
standard applies to both single-employer and multiemployer plans. See, e.g., 29 U.S.C.
§ 1301(a)(3), (b)(1). The Gardner Trust assumes but does not concede that it and Findlay were
under common control. The trust contends, however, that it is not a trade or business under
ERISA.
ERISA does not define “trades or businesses,” and neither the Supreme Court nor this
court have defined the phrase in the context of ERISA. The Supreme Court, however, has
defined those terms as used in the Internal Revenue Code. In Groetzinger, the Court applied a
fact-intensive test to determine what constitutes a trade or business, examining (1) the primary
purpose of the entity in question and (2) whether the entity’s activity is continuous and regular.
480 U.S. at 35. Despite the Court’s warning that its interpretation of “trade or business” was
confined to “specific sections” of the tax code, id. at 27 n.8, some courts have relied on
Groetzinger to define the same terms under ERISA. See, e.g., UFCW Local One Pension Fund
v. Enivel Props., LLC, 791 F.3d 369, 375 (2d Cir. 2015). But other courts, including some that
have otherwise relied on Groetzinger, have eschewed the Groetzinger test when the entity-in-
question’s activity is leasing property to a company under common control. See, e.g., Cent.
States, Se. & Sw. Areas Pension Fund v. Nagy, 714 F.3d 545, 551 (7th Cir. 2013). Those courts,
instead, have concluded that the entity that leases property to its commonly controlled company
is categorically a trade or business for ERISA purposes.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 11
The first step in statutory construction is to “determine whether the language at issue has
a plain and unambiguous meaning with regard to the particular dispute in the case.” Fullenkamp
v. Veneman, 383 F.3d 478, 481 (6th Cir. 2004) (quoting Barnhart v. Sigmon Coal Co., Inc.,
534 U.S. 438, 450 (2002)). The district court thus turned to a dictionary and reasoned that a
“trade” is “the business or work in which one engages regularly” and that “business” is “a
usually commercial or mercantile activity engaged in as a means of livelihood.” Without any
additional explanation, the court concluded that Groetzinger’s fact-intensive test “embodies this
ordinary, common-sense meaning of the words at issue.” The court then looked to the trust’s
“express purpose of providing for the care and eventual funeral expenses of [Gardner’s] sisters”
and concluded that there was “no possibility [that] the rental activity was used to dissipate or
fractionalize the employer’s assets.” Thus, the court ruled, the trust was not a trade or business.
But, contrary to the district court’s conclusion, the dictionary does not provide us the
“plain and unambiguous meaning” that one might seek. See Fullenkamp, 383 F.3d at 481. Both
“trade” and “business” are broad terms, susceptible to a range of meanings. For example,
“business” is defined as “a commercial or sometimes an industrial enterprise,” MERRIAM-
WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2006), “[c]ommercial, industrial, or professional
dealings,” AMERICAN HERITAGE COLLEGE DICTIONARY (4th ed. 2002), or “[c]ommercial
transactions,” BLACK’S LAW DICTIONARY (10th ed. 2014). “Trade” is defined as “[t]he business
of buying and selling or bartering goods or services,” BLACK’S LAW DICTIONARY (10th ed.
2014), and “[t]he business of buying and selling commodities; commerce,” AMERICAN HERITAGE
COLLEGE DICTIONARY (4th ed. 2002).
In light of the breadth of these definitions, Groetzinger’s test does not, as the district
court held, embody the “ordinary, common-sense meaning” of “trade” or “business.” Quite the
opposite. By reasoning that “not every income-producing and profit-making endeavor
constitutes a trade or business” and that “transactions entered into for profit” are not necessarily
trade or business, Groetzinger highlights the fact that tax law’s treatment of the terms “trade”
and “business” does not, like many of the dictionary definitions, rely on a broad idea of
“commerce” but, rather, is narrow and specific to tax law. 480 U.S. at 35.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 12
What is more, in an application that the Supreme Court recognized was unique not only
to tax law but also to one specific passage of the tax law, Groetzinger requires the court to
determine the primary purpose of an activity. Id. at 27 n.8, 35. The district court did not explain
why the dictionary definitions it cited support a legal test that turns on the primary purpose of the
entity in question. And moreover, reading a primary-purpose requirement into the statutory
language would create dangerous incentives and would not serve ERISA’s purposes.
Under the district court’s decision, as long as the primary reason for dissipating one’s
assets was not to escape liability under ERISA, those assets would be shielded from a plan
sponsor’s liability. But companies can have more than one reason to dissipate assets. For
example, if the owner of a construction business was personally stressed and put the majority of
his company’s assets into opening a bakery because baking was soothing to him, PBGC would
have to pick up the tab when the construction company’s pension was not funded because the
primary purpose behind the bakery was stress relief. Under Groetzinger, it would not matter that
the baker’s secondary purpose could have been to shield his company’s assets from ERISA
liability for the underfunded pension. Or, as could have been the case here, one could want to
stow company assets safely in trust and provide for the well-being of loved ones. There is
nothing in the record that proves that avoiding ERISA liabilities was indeed Philip D. Gardner’s
motivating force. But if Groetzinger controls, entities certainly would be encouraged to try such
reorganization and would not be held liable for it as long as they had a different primary purpose.
Not only would application of Groetzinger create dangerous incentives, it would not
serve ERISA’s purposes. Under ERISA, whether Gardner’s primary motivation was to dissipate
Findlay’s assets is not important. What is important is determining whether those assets were
effectively Findlay’s and thus should be used to help pay what Findlay promised its employees.
The commonsense conclusion is yes: when a business gives land to the business’s sole owner,
who then puts it in a trust—run by his sons—which then leases the land back to his business, that
land never stopped being a part of the company’s functional assets.
For all of these reasons, there is no plain and unambiguous reading of ERISA that
supports adopting Groetzinger. But our analysis does not stop there. When, as here, the
meanings of the words at issue are not plain and unambiguous, we turn to the purpose and the
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 13
structure of a statute to determine the meaning of the terms at issue. See Fullenkamp, 383 F.3d
at 483.
Structurally, ERISA holds employers liable for the promises of pensions that they make
to employees. After a PBGC determination that a pension plan has insufficient assets to meet its
liabilities, 29 U.S.C. § 1341(c), ERISA holds the plan sponsor liable, 29 U.S.C. § 1362(a). The
statute then guarantees that a liable sponsor cannot evade its responsibility through tactics such
as corporate reorganization, see 29 U.S.C. § 1369(b), or sales to avoid liability for an impending
plan termination, see 29 U.S.C. § 1369(a). And although PBGC exists to ensure that employees
receive the pensions that they were promised, ERISA holds the employers primarily accountable
and relies on PBGC to pay only as a last resort. To that end, ERISA enforces employers’
promises by extending liability for those promises to commonly controlled entities. 29 U.S.C.
§ 1362(a). Indeed, “the primary purpose of the common control provision is to ensure that
employers will not circumvent their ERISA and MPPAA obligations by operating through
separate entities.” Mason & Dixon Tank Lines, Inc. v. Cent. States, Se. & Sw. Areas Pension
Fund, 852 F.2d 156, 159 (6th Cir. 1988). Put another way, ERISA generally seeks to hold
employers liable for their promises to employees; the common-control rules stop employers from
escaping that liability by spreading their assets.
In light of the purpose and the structure of the ERISA provisions at issue, we hold that
the categorical test applies. That test concludes simply that any entity that leases property to a
commonly controlled company is categorically a trade or business for ERISA purposes. Cent.
States Se. & Sw. Areas Pension Fund v. Messina Prods., LLC, 706 F.3d 874, 882 (7th Cir. 2013).
In doing so, the categorical test stops leases between commonly controlled entities as a way of
offering those entities protection from ERISA liability at very little risk. The facts here highlight
how. By giving the land to a commonly controlled entity, Findlay guaranteed that it still had the
benefit of use (and likely control) of the land, just the same as if it had never given the land away
at all. But now, the land did not technically belong to Findlay, so it did not count among
Findlay’s assets. Thus, Findlay had all of the meaningful benefit of the land, but none of the risk
or responsibility that came with outright ownership. And the Gardner Trust did not have to put
in any of the effort or face any of the risk of an arms-length leasing arrangement with a lessee
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 14
that was not under common control. This situation is precisely the type that the common-control
rules exist to prevent.
Applying the categorical test also aligns us with other courts around the country. Indeed,
the defendants here were unable to present a single case in which leasing between commonly
controlled entities did not result in an entity being a trade or business for ERISA purposes. And
we have found none. PBGC, on the other hand, cites cases of other circuits and of district courts
in and outside of this circuit that support its conclusion. The Seventh Circuit, for example,
adopted the categorical test, concluding that “the likelihood that a true purpose and effect of the
‘lease’ is to split up the withdrawing employer’s assets is self-evident.” Messina Prods. LLC,
706 F.3d at 882. The Eighth Circuit noted that the business-or-trade inquiry is a factual inquiry
but then upheld the district court’s categorical conclusion that leasing between commonly
controlled entities “established the existence of a trade or business for ERISA purposes.”
Vaughn v. Sexton, 975 F.2d 498, 503 (8th Cir. 1992). The Ninth Circuit has gone even further,
concluding that leasing for profit “is plainly sufficient” to be a trade or business—regardless of
whether the investments are active or passive and regardless of whether the lease was to a
commonly controlled entity. Bd. of Trustees of W. Conf. of Teamsters Pension Trust Fund v.
Lafrenz, 837 F.2d 892, 894–95 (9th Cir. 1988).
Rejecting this case law, the district court reasoned that the cases relied on by PBGC
arose under the MPPAA and did not address single-employer plans. But the goal of stopping
employers from splitting their assets to escape liability is equally as important for single-
employer plans as it is for multiemployer plans. Neither the district court nor defendants
provided any reason why multiemployer plans should be treated any differently; thus, neither
provided any grounds for limiting the extensive case law outlined above to cases arising under
the specific portions of ERISA that address multiemployer plans. And upon reflection, we
cannot think of any. After all, the rules against dissipating assets are meant to protect both
“ERISA and MPPAA obligations.” Mason & Dixon Tank Lines, Inc., 852 F.2d at 159 (emphasis
added).
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 15
Defendants argue that we should follow three other circuits to adopt Groetzinger.3 But
only one of those cases involved a lease to a commonly controlled entity, and that case does not
help defendants’ argument: The Seventh Circuit reasoned that Groetzinger is the general
standard to apply, but that the categorical test is appropriate for leases between commonly
controlled entities. Messina Prods., LLC, 706 F.3d at 882–83. Hence, we do not need to decide
whether Groetzinger applies to leases made outside of a commonly controlled group—as the
Seventh and Second Circuits have done—or whether any leasing activity is a trade or business—
as the Ninth Circuit has done. It is sufficient here—and does not conflict with any sister
circuits—to join the courts that have held that leasing to a commonly controlled entity is
categorically a trade or business for ERISA purposes.
Defendants’ remaining arguments fare no better. First, defendants make a single-
paragraph argument that the ordinary meaning of trade or business does not include leasing, but
they do not provide any support for that counterintuitive conclusion. Next, relying on ERISA’s
purpose of stopping employers from avoiding liability by dissipating assets, defendants contend
that the facts prove that Philip D. Gardner did not intend to use the trust to avoid ERISA
liabilities. But beyond asking this court to repeat the district court’s error and draw factual
conclusions in the defendants’ favor,4 that argument is an attempt to get Groetzinger’s fact-
intensive analysis in through the back door. As explained above, such a fact-intensive test does
not serve ERISA’s purposes and, instead, would create significant problems with its
administration.
On that note, Judge McKeague’s concurring opinion, concerned that the categorical test
will lead to unfair results, asks us to tread carefully and adopt a less-than-categorical version of
the test. He urges us to imagine an alternative set of facts in which the trust vested in the heirs of
3Enivel Props., LLC, 791 F.3d at 373 (Second Circuit); Messina Prods., LLC, 706 F.3d at 883 (Seventh
Circuit); Connors v. Incoal, Inc., 995 F.2d 245, 251 (D.C. Cir. 1993).
4The district court concluded that “the purpose of the rental activity was not to dissipate Findlay’s assets or
to profit Gardner”; that “the timing, form, and scope of the trust” proved that the motivation was “personal not
commercial”; and that there was “no possibility” that the arrangement here was “used to dissipate or fractionalize”
Findlay’s assets. Thus, even if Groetzinger were the correct test to apply, the district court improperly viewed
PBGC’s direct and inferential allegations in a light favorable to defendants and not PBGC. See DiGeronimo, 763
F.3d at 509.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 16
the sisters, as opposed to the Gardners. How would it be fair, he aptly inquires, to take the trust
assets from the sisters’ heirs, who have nothing to do with Findlay? However, the legitimate
concern raised in the concurrence is already contemplated by the common-control rules.
The rules for common control apply complex regulations to determine who has an
actuarial interest in the trust, and thus how much of the trust the ultimate beneficiary is
considered to own at any given time. See 26 C.F.R. §§ 1.414(c)-4(b)(3), 1.414(c)-2. One look at
PBGC’s complaint shows that PBGC has applied those rules to allege properly that the Gardners
were in common control of both Findlay and the trust. If instead of the Gardners, the sisters’
heirs were the ultimate beneficiaries—as Judge McKeague hypothesizes—there would be no
common control between Findlay and the trust. And because both entities being under common
control is a prerequisite for the categorical test, the categorical test would not apply. Judge
McKeague’s concern over a possible inequitable result for “an ‘innocent’ third party,” should be
allayed by taking the common-control regulations into account.
Successor Liability
According to PBGC’s complaint, Findlay owes more than $30 million in pension
liability. Yet Michael Gardner purchased all of Findlay’s valuable assets for only $3.4 million
and within four-and-a-half years had turned a nearly $12 million profit using Findlay assets,
employing former Findlay employees, making former Findlay products, and selling to Findlay’s
biggest customer. PBGC does not contend that the transfer of Findlay assets to Michael and his
companies made Michael or his companies liable under 29 U.S.C. § 1369(b), the section of
ERISA that asserts liability for certain corporate reorganizations. Instead, PBGC asked the
district court to rely on federal common law’s treatment of successor liability to hold Michael
and his companies accountable for Findlay’s liability. The district court declined to do so.
The district court was correct to reason that the creation of common law under ERISA is
something to be done in narrow circumstances. But because the federal-common-law doctrine of
successor liability serves fundamental ERISA policies, we conclude that the creation and
application of federal common law is appropriate in this case.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 17
“At the time of ERISA’s enactment, Congress in general encouraged the courts to
develop a federal common law of employee benefits because many issues relating to employee
benefits would arise where there would be no specific rule to govern the question.”
DiGeronimo, 763 F.3d at 510–11. But “where Congress has established an extensive regulatory
network . . . courts do not lightly create additional rights under the rubric of federal common
law.” Id. at 511.
To satisfy those competing interests, we have developed a three-part standard to
determine whether and when it is appropriate to create federal common law under ERISA. We
undertake such a step if (1) ERISA is silent or ambiguous on the issue before the court, (2) there
is an awkward gap in the statutory scheme, or (3) “federal common law is essential to the
promotion of fundamental ERISA policies.” Local 6-0682 Int’l Union of Paper v. Nat’l Indus.
Grp. Pension Plan, 342 F.3d 606, 609 (6th Cir. 2003) (quotation marks and citation omitted).
The standard is phrased in the disjunctive so that if any one of the three circumstances is present,
creation of federal common law is appropriate.
PBGC contends that all three circumstances are present here. The defendants,
unsurprisingly, agree with the district court that none of the three are. We must resolve that
precise dispute, because we conclude that the federal common law of successor liability is
necessary to promote fundamental ERISA policies in this case. Hence, we need not address the
other prongs of the standard.
ERISA’s fundamental protections of employment benefits function in two ways:
guaranteeing that employees receive the benefits they were promised and making sure that
employers keep up their end of the deal. To that end, the official policy of ERISA is to protect
“the interests of participants in employee-benefit plans and their beneficiaries” while
“establishing standards of conduct, responsibility, and obligation for fiduciaries of employee
benefit plans.” 29 U.S.C. § 1001(b).
Additionally, 29 U.S.C. § 1302(a) creates PBGC and explains the purpose of Subchapter
III of ERISA—Plan Termination Insurance. The purposes of Subchapter III—which gives
PBGC the power to sue and lists the liabilities for which it can sue—include that PBGC
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 18
“encourage the continuation and maintenance of voluntary private pension plans for the benefit
of their participants” and “provide for timely and uninterrupted payment of pension benefits to
participants and beneficiaries.” 29 U.S.C. § 1302(a). But most important, one of PBGC’s
purposes is to maintain the lowest possible PBGC insurance premiums. Id. The way that PBGC
maintains low premiums is to pay out the lowest possible amount by holding employers liable
for their promises to employees.
Thus, when 29 U.S.C. § 1001(b) and § 1302(a) are viewed together, it is clear that PBGC
enforcing employers’ own promises to their employees is a fundamental premise of ERISA. The
district court was correct to acknowledge that a fundamental policy of ERISA is to protect
employees but wrong, however, to ignore the fundamental policy of PBGC’s enforcement
powers and instead treat successor liability as a desire to go after “more targets.”
Successor liability promotes fundamental ERISA policies by guaranteeing that substance
matters over form. Taking the complaint in this case as true, it appears that Michael Gardner had
extensive information about Findlay’s debts and pension funding. As Findlay’s CEO, board
member, and 45 percent shareholder, Michael offered to purchase Findlay’s assets but refused to
take on any pension liability. The assets that his company purchased for $3.4 million netted his
two companies nearly $12 million in four-and-a-half years. And the companies operated from
two former Findlay sites, with former Findlay employees, making the same products, and selling
to Findlay’s principal customer.
Because Michael purchased the assets—although he did so in a way that does not
represent an arms-length sale—none of the provisions of § 1369(b) apply to him. But this result
is certainly the kind of transaction that frustrates the fundamental policies of ERISA: Findlay
did not keep its promises to its employees, and instead of using its assets to meet its obligations,
it sold the assets to its CEO, who then left the government to pay millions of dollars in pension
liabilities.
Not only does successor liability promote fundamental policies of ERISA, refusal to
apply the principles of successor liability here would frustrate ERISA policies. If there is no
successor liability here, this case will provide an incentive to find new, clever financial
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 19
transactions to evade the technical requirements of ERISA and, thus, escape any liability—a
result that flies in the face of § 1001(b). And if employers can so easily escape millions of
dollars in liabilities, PBGC will be left to pay the underfunded pension benefits. That situation
will force PBGC to raise its rates, which will strain still-existing plans further, and which risks
forcing them to be underfunded and possibly fail. Such a result plainly would frustrate the
purpose of Subchapter III.5
In choosing the form of successor liability to apply in this case, we opt for the test
developed under different provisions of federal labor and employment law. As PBGC points out,
“ERISA’s broad preemption provision makes it clear that Congress intended to establish
employee benefit plan regulation as an exclusive federal concern, with federal law to apply
exclusively, even where ERISA itself furnishes no answer.” In re White Farm Equip. Co.,
788 F.2d 1186, 1191 (6th Cir. 1986). In certain circumstances, such as in contract interpretation,
“the federal court may take direction from the law of the state in which it sits” so long as “the
rule used [is] the one that best comports with the interests served by ERISA’s regulatory
scheme.” Regents of Univ. of Mich. v. Emps. of Agency Rent-A-Car Hosp. Ass’n, 122 F.3d 336,
339 (6th Cir. 1997) (internal quotation marks and citation omitted). But, as a general matter, the
court must look to the federal common law and should draw guidance from state common law
only when federal common law does not provide an established standard. See Tinsley v. Gen.
Motors Corp. 227 F.3d 700, 704 (6th Cir. 2000).
5In dissent, Judge McKeague concludes that even if it is fundamental for PBGC to recoup money that it
paid employees for their employers’ broken promises, creation of common law is not essential because PBGC can
always lobby Congress. Relying on PBGC’s reports to Congress that led to the passage of the MPPAA, Judge
McKeague concludes that the PBGC can do it again. Judge McKeague reads into the past more than the history can
support. When it was enacted, ERISA delayed PBGC’s coverage of multiemployer plans for four years. R.A. Gray
& Co., 467 U.S. at 720. And “[a]s the date for mandatory coverage of multiemployer pension plans approached,
Congress became concerned that a significant number of plans were experiencing extreme financial hardship.” Id.
at 721. Congress then extended the date, and ordered PBGC to prepare a report on problems caused by ERISA’s
treatment of multiemployer plans. Id. PBGC’s report highlighted the potentially disastrous effects of withdrawal
from multiemployer plans and contributed to the passage of the MPPAA. Id. at 722–24.
The history of PBGC lobbying Congress is actually a history of Congress ordering PBGC to provide
information and PBGC doing so. At Congress’s behest, PBGC prepared a report to provide a fix for a potential
impending, structural crisis of which Congress was aware. That background is far from the situation we face today
and is an insufficient reason to avoid holding successors in less-than-arms-length deals liable.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 20
Because there is a body of federal common law applying successor liability in
employment and labor cases, it is appropriate to apply that law here, too. Successor liability is
an equitable doctrine that requires the court to balance (1) the interests of the defendant, (2) the
interests of the plaintiff, and (3) “the goals of federal policy, in light of the particular facts of a
case and the particular legal obligation at issue.” Cobb v. Contract Trans., Inc., 452 F.3d 543,
554 (6th Cir. 2006) (applying successor liability to the Family and Medical Leave Act).
Furthermore, adopting the federal common law of successor liability would best serve
ERISA’s purposes. “ERISA’s goal, [the Supreme] Court has emphasized, is uniform national
treatment of pension benefits.” Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon,
541 U.S. 1, 17 (2004) (internal quotation marks and citation omitted). By applying the federal
common law of successor liability, this court also will align itself with the Seventh and the Ninth
Circuits, both of which have done so in MPPAA cases. See Resilient Floor Covering Pension
Trust Fund Bd. of Trustees v. Michael’s Floor Covering, 801 F.3d 1079, 1095 (9th Cir. 2015);
Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture, 920 F.2d 1323, 1327 (7th Cir.
1990).
The defendants argue that if the court applies the common law of successor liability, it
should apply Ohio common law and not federal common law. Instead of explaining why that
rule would best serve ERISA’s purposes, the defendants contend that the doctrine of federal
successor liability is too broad and will “disrupt[] the settled commercial expectations of parties
who purchase assets . . . under state law.” But this generic appeal to settled commercial
expectations fails for two reasons. First, the defendants do not explain what their settled
commercial expectations were and why this court should protect them. Perhaps for good reason:
The complaint alleges that Michael Gardner underpaid for the profitable parts of Findlay—the
company he ran—turned a hefty profit using those assets, and knowingly left the government to
pay millions of dollars in Findlay’s unkept pension promises. If true, those actions do not reflect
commercial expectations that this court should ever protect, certainly not under ERISA. Second,
the fear that applying successor liability will upset settled commercial expectations more
generally is unfounded. Finding successor liability here does not mean that successor liability
applies in every instance. All that we decide today is that when there is a sale that is not
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 21
conducted at arm’s length, successor liability can apply. And although we are reluctant to
impose successor liability to reorganizations of failing businesses, that principle cannot be
stretched so far as to demand judicial approval of deals that are not above board.
In a similar vein, instead of justifying the reliance on Ohio law, the defendants repeat
their factual assertions, totally outside of the record, that Michael’s companies would have failed
had Michael not “taken the risk of purchasing these plants’ assets . . . and then succeeded in
turning a profit and keeping employees in their jobs.” The defendants then conclude—again,
without any support in the record—that applying federal successor liability “would effectively
bankrupt the Companies, put its employees out of work, and discourage the purchase and
reorganization of failing businesses.”
Although it is improper to consider the defendants’ statement that the two companies will
go out of business, the argument brings up a point that is worth acknowledging. It is true that
this court is “reluctant to impose successor liability when it might inhibit the reorganization of
failing businesses.” Peters v. N.L.R.B., 153 F.3d 289, 301 (6th Cir. 1998). But as noted above,
successor liability is an equitable doctrine. Cobb, 452 F.3d at 554. As such, its application will
balance the interests of both parties—protecting asset purchasers from being blindsided by
massive liabilities, and guaranteeing that employers cannot easily avoid their ERISA obligations
through clever financial transactions.
CONCLUSION
We conclude that the district court’s decision is flawed in two respects. First, an entity
that leases property to an entity under common control should be considered a “trade or
business,” categorically. This reading of the statute recognizes the differences between ERISA
and the tax code, satisfies the purposes of ERISA, and brings this court in line with its sister
circuits. Next, in this specific instance, successor liability is required to promote fundamental
ERISA policies. Refusing to apply successor liability would allow employers to fail to uphold
promises made to employees and then engage in clever financial transactions to leave PBGC
paying out millions in pension liabilities. Holding the employers responsible, on the other hand,
is a commonsense answer that fulfills ERISA’s goals.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 22
We therefore VACATE the district court’s order of dismissal and REMAND the case for
further proceedings.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 23
___________________________________________________________
CONCURRING IN PART AND DISSENTING IN PART
___________________________________________________________
DAVID W. McKEAGUE, Circuit Judge, concurring in part and dissenting in part.
Findlay Industries (“Findlay”) went out of business in 2009 with over $30 million in unfunded
pension liabilities. The Pension Benefit Guaranty Corporation (“PBGC”) picked up the tab and
filed this lawsuit to recoup those losses. The issues raised by this interlocutory appeal involve
two defendants: (1) A trust that obtained property from Findlay’s founder but then leased it right
back to Findlay (“the Trust”); and (2) the companies that eventually acquired all of Findlay’s
assets after it went under (“the Successors”). Neither the Trust nor the Successors expressly
assumed—or believe they must assume—Findlay’s pension liabilities. The district court agreed
with the defendants and dismissed the PBGC’s claims against them.
The majority concludes that the PBGC may sue both defendants. I agree with the
majority that the claims against the Trust were improperly dismissed. However, since Congress
deliberately chose not to impose liability on entities like the Successors in this case, I
respectfully dissent from the majority’s decision to revisit that policy judgment through the
federal common law.
I
I agree that the Trust is a trade or business subject to common-control liability. However,
I am hesitant to adopt the Categorical Test advocated by the PBGC as the rule for all future
cases. Instead, I would follow a more circumscribed approach.
A
There are two kinds of ERISA liability relevant to this case. The first is “Termination
Liability,” which attaches when any plan terminates without enough funds to satisfy its
obligations. 29 U.S.C. §§ 1307(e)(2), 1362(a)(1). The second is “Withdrawal Liability,” which
attaches when one employer in a multiemployer pension plan leaves the group. Id. § 1381(a).
Congress created Withdrawal Liability after the PBGC informed it that some employers were
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 24
sending group pension plans into a death spiral by withdrawing their contributions. Mason &
Dixon Tank Lines, Inc. v. Central States, 852 F.2d 156, 158 (6th Cir. 1988) (discussing the
Multiemployer Pension Plan Amendments Act, or “MPPAA”). Congress also empowered the
PBGC—a government guarantor of pension payments—to sue any “employer” to which either
form of liability attaches to recoup its losses. Id. at 158–60.
Further, all “trades or businesses” under the common control of the ERISA plan sponsor
are deemed to be one employer for liability purposes. Id. at 159 (quoting 29 U.S.C. § 1301(b)(1)
(“[A]ll 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 or
businesses as a single employer.”)). This doctrine is colloquially known as “common-control
liability.” The point of common-control liability is to “ensure that employers will not
circumvent their ERISA and MPPAA obligations by operating through separate entities.” Id.This statute and its accompanying regulations should not be applied in a wooden,
formalistic manner. In re Challenge Stamping Co., 719 F.2d 146, 151 (6th Cir. 1983). Thus,
we’ve previously held that when the bankruptcy laws deny the defendant actual control over the
relevant entity, the PBGC cannot hold them liable, even if the defendant meets all the statutory
and regulatory requirements for control. Id. We justified this rule by asserting that “Congress
sought to determine the plain fact of control, rather than any subjective motives or reasons for
control . . . There is no support for a view that Congress’s chief intent in employing [the
common-control test] was to invade the deepest pocket in a business failure. . . . The purpose of
[the regulation] is obviously to find the party in control.” Id.B
Not all entities under common control with the plan sponsor are subject to ERISA’s
common-control doctrine. Central States v. Messina Prods., LLC, 706 F.3d 874, 880 (7th Cir.
2013). Only those entities that can fairly be said to be part of the common owner’s trade or
business (as opposed to mere investments) are governed by § 1301(b)(1), because ERISA does
not abrogate the ordinary rule that shareholders are not personally liable for the obligations of a
corporation. Id.
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 25
The issue here is whether a commonly controlled family trust qualifies under this rule.
Specifically, the trust in this case obtained property from the plan sponsor—through its CEO—
and then immediately leased it back to the plan sponsor in exchange for rent. Although the
primary purpose of the trust was to provide for the well-being of the CEO’s sisters during their
life, the property reverted back to the CEO’s sons upon the sisters’ death. The sons, in turn, were
the sole trustees and assumed control of the plan sponsor when their father retired. The parties
have stipulated to the issue of common control for the purposes of this interlocutory appeal.
This is an issue of first impression for the Sixth Circuit. All the other circuits to have
considered the issue hold that these leaseback arrangements are categorically a trade or business
under ERISA, and the PBGC urges us to follow that rule (“the Categorical Test”). The Trust
asks us to adopt a narrower, fact-intensive test originating from the Supreme Court’s
interpretation of the tax code (“the Groetzinger Test”). But I agree with the majority that the
Groetzinger Test is a bad fit for these questions, and so I would apply a modified Categorical
Test to cases like this one.
1
The Trust offers the Groetzinger Test as an alternative to the Categorical Test. But it
makes no sense to apply Groetzinger here.
First, Groetzinger was about income taxes, and the Court expressly limited its holding to
the sections of the Internal Revenue Code (“IRC”) examined in that case. Commissioner v.
Groetzinger, 480 U.S. 23, 27 n.8 (1987). As a matter of common sense, the Trust’s invitation for
us to disobey the Court’s characterization of its own holding is ill-advised. The IRC uses the
phrase “trade or business” about fifty times. If the Court was wary about defining the term
throughout the IRC in one fell swoop, we should be even more skeptical when asked to export
the meaning to a different statute entirely. And, of course, the same words can sometimes mean
different things in different parts of the U.S. Code. See Nat’l Fed’n of Indep. Business v.
Sebelius, 567 U.S. 519, 544–45 (2012).
Second, the context of ERISA differs significantly from the sections interpreted by
Groetzinger. That case involved the IRC’s deduction for expenses “attributable to a trade or
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 26
business carried on by the taxpayer.” 26 U.S.C. §§ 62(1), 162(a). These provisions are
exculpatory; they reduce a person’s tax liability. And the Court has held that tax exemptions and
deductions must be construed strictly against the taxpayer. United States v. Burke, 504 U.S. 229(1992) (Souter, J., concurring in the judgment); United States v. Wells Fargo Bank, 485 U.S. 351(1988).
In contrast, the common-control provisions of ERISA are inculpatory and remedial.
They exist to “fence in” employers who fragment their ownership to try and avoid contractual
obligations. Mason & Dixon, 852 F.2d at 159. As remedial sections,1 they should therefore be
construed broadly when their meaning is unclear. See A-T-O, Inc. v. PBGC, 634 F.2d 1013,
1020 (6th Cir. 1980); Rettig v. PBGC, 744 F.2d 133, 155 n.54 (D.C. Cir. 1984); see also
Nachman Corp. v. PBGC, 446 U.S. 359, 374 (1980) (cataloguing the remedial goal of ERISA).
The cases that the Trust cites do not alter the analysis. Indeed, in every published case
where the Trust says a Circuit has applied the Groetzinger Test, the facts are starkly different.
As explained in more detail below, the courts draw a sharp distinction between (1) cases where a
common owner leases property back to the plan sponsor, and (2) cases where the common owner
leases property to an unrelated third party. The Groetzinger Test has only been applied in the
latter cases. See UFCW Local One Pension Fund v. Enviel Props., LLC, 791 F.3d 369, 371 (2d
Cir. 2015); Central States v. Fulkerson, 328 F.3d 891, 895 (7th Cir. 2001); Central States v.
White, 258 F.3d 636, 644 (7th Cir. 2001); Connors v. Incoal, Inc., 995 F.2d 245, 246 (D.C. Cir.
1993). Since this case fits in the former category, the latter cases are not helpful. The
Categorical Test, however, presents other problems.
2
The PBGC insists that all commonly controlled entities that lease property back to the
plan sponsor are “categorically” trades or businesses under ERISA. It cites a litany of Circuit
1This is distinct from the ERISA plans themselves, which must be construed narrowly. Health Cost
Controls v. Isbell, 139 F.3d 1070 (6th Cir. 1997).
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 27
Court2 and District Court cases in support of its conclusion. While the test’s pedigree is
impressive, I think we should apply it with care.
The most helpful case for the PBGC is Vaughn v. Sexton, 975 F.2d 489, 502–03 (8th Cir.
1992). In Vaughn, the Eighth Circuit held that a family trust, by leasing to the plan sponsor, was
categorically a “trade or business” under ERISA. Id. at 503. However, the court offered little
support for its conclusion, and it made no attempt to fend off the trust’s argument that “its
primary purpose was not to generate income or profit but instead to assist in . . . estate planning
arrangements.” Id. Instead, the court cited a list of cases involving business leases and
concluded that they were persuasive.
Every other Circuit Court case cited by the PBGC involved business leases where the
lessor was either an individual or a commonly controlled, for-profit business. Messina Prods.,
706 F.3d at 882–83 (personal leases to the plan sponsor); Central States v. Nagy, 714 F.3d 545,
546 (7th Cir. 2013) (same); Central States v. Slotky, 956 F.2d 1369, 1371 (7th Cir. 1992)
(individual leasing buildings to plan sponsor); Bd. of Trustees of the Western Conf. of Teamsters
Pension Fund v. Lafrenz, 837 F.2d 892, 893 (9th Cir. 1988) (single proprietorship leasing
equipment to the plan sponsor). The categorical logic of these cases therefore does not fit
perfectly with a case like this one, where the lessor is an irrevocable family trust for the primary
benefit of the settlor’s sisters. However, the test deserves serious consideration because of the
universal acceptance it has received in other Circuits.
The PBGC and the Trust engage in a dizzying battle of citations and counter-citations,
each attempting to prove that these other Circuits have adopted its preferred test and rejected the
other side’s. The PBGC wins this battle. After recognizing the tension in the case law, the
Seventh Circuit recently drew a clear line between two types of leasing behaviors by commonly
owned lessors: (1) cases where the lessee was the plan sponsor (where the Categorical Test
applies); and (2) cases where the lessee was a business enterprise unrelated to the plan sponsor
(where Groetzinger applies). Messina Prods., 706 F.3d at 880–82. Thus, both tests are valid;
2All the Circuit Court cases cited by the PBGC deal with multiemployer pension plans, but I cannot think
of any reason to apply a different rule to single-employer plans. The “trade or business” language comes from the
same statute for both single- and multi-employer plans. 29 U.S.C. § 1301(b)(1).
No. 17-3520 Pension Benefit Guaranty Corp. v. Findlay Indus., Inc. Page 28
they simply apply to different leasing arrangements. The U.S. District Court in Chicago also
recently explained why the Categorical Test is desirable in the latter case. Regardless of intent,
“[i]t is the fact that the economic relationship could be used to dissipate or fractionalize assets
that makes leasing property to a withdrawing employer a ‘trade or business.’” Central States v.
Sidney Truck & Storage, 182 F. Supp. 3d 855, 860 (N.D. Ill. 2016).
This logic fits with our precedent. It has long been the law in this Circuit that Congress
created the common-control provisions to prevent employers from avoiding liability “by
operating through separate entities.” Mason & Dixon, 852 F.2d at 159. Any test we adopt must
adhere to that goal. For those reasons, I agree that we must reverse the district court on this
count, but under the more circumscribed language offered below.
3
On the facts here, the Trust’s argument collapses. Although set up as an irrevocable
family estate-planning device, several facts show that it was part of the defendants’ business
enterprise:
• The settlor (Phillip D. Gardner) received the property as a gift from the plan sponsor,
which he controlled and operated;
• The settlor donated the property to the trust himself;
• The overwhelming majority of the trust’s corpus was the two plots of land on which the
plan sponsor operates;
• The trustees (the settlor’s sons and residual beneficiaries) immediately leased the
property back to the plan sponsor;
• The benefits to the settlor’s sisters were only for life, and on their death, the property
reverted to the settlor’s sons, instead of vesting in the sisters’ heirs; and
• The residual beneficiaries assumed control of the plan sponsor after the settlor’s death.
The Trust complains that “the property that Phillip D. Gardner donated to the Trust could never
revert to him or to Findlay.” Appellee Br. at 28. True, the property would not return to Gardner
himself, but Gardner knew the property would return to his two sons, whom he almost certainly
intended to run Findlay after he died. This sort of a leasing arrangement is exactly the kind of
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“economic relationship [that] could be used to dissipate or fractionalize assets.” Sidney Truck
& Storage, 182 F. Supp. 3d at 860. The common-control rules prevent this sort of maneuvering.
Although we should follow the other Circuits in adopting the Categorical Test in most
cases (including this one), I would leave some issues open for future litigation. Commercial
leases from a common owner to the plan sponsor should categorically be considered “trades or
businesses” within § 1301(b)(1)’s reach. Trusts, however, create problems depending on (1) the
revenue sources of the trust, (2) who controls the trust assets, and (3) who ultimately benefits
from the trust. Here, all three factors militate in favor of ERISA liability. First, the revenue of
the trust was derived almost exclusively from rent paid by the plan sponsor, for land on which it
operated, and on land which it had previously owned. If common control is assumed, the lease
was never truly a liability or an asset on the balance sheet of the common owners: It simply
shifted assets from one commonly controlled entity to another. Second, the same people who
owned and controlled the plan sponsor also controlled the distribution of trust assets and
ultimately received the land on the expiration of the sisters’ life estate. Imposing liability on
these facts fits with both the goals of common-control liability articulated by Mason & Dixon
and the flexible, practical analysis used in Challenge Stamping.
However, where any of these factors are not met, I would leave the issue open for further
litigation. Imagine one tiny change to the facts of this case. Instead of returning the trust
property to the sons, suppose that the trust instrument dictated that title vested in the sisters’ heirs
(or someone else) upon the expiration of the life estate. I find it difficult to believe that Congress
intended to wrench assets away from an “innocent” third party just to satisfy a company’s
pension obligations. Again, this logic flows from Challenge Stamping, where we stated that
“[t]here is no support for a view that Congress’s chief intent in employing [common-control
liability] was to invade the deepest pocket” no matter who it belongs to. 719 F.2d at 151. In
such cases—like in cases where creditors seek to levy on a business venture with no connection
to the plan sponsor—a more flexible, pragmatic inquiry may be appropriate from the start. Cf.
Messina Prods., 706 F.3d at 880–82.
The majority suggests that I am proposing a “less-than-categorical version” of the
Categorical Test. Maj. Op. at 18. I have done no such thing. Commercial leases from a
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common owner to the plan sponsor are categorically covered by § 1301(b)(1). That holding is
coextensive with the judgments of our sister Circuits. I write separately only to note that our
decision today should not be understood to go beyond the facts it presents, and that future panels
should be free to consider creating narrow exceptions if a family trust arrangement presents it
with more challenging facts and a potentially inequitable result.
II
However, I disagree completely with the majority on the next issue. The majority creates
federal common law to hold the successors liable for Findlay’s pension obligations. The
Successors argue that 29 U.S.C. § 1369 enumerates the only circumstances where the PBGC can
impose Termination Liability on the successor to a plan sponsor. The Successors are right.
ERISA is one of the few areas where the federal courts are empowered to create federal
common law. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110 (1989); DiGeronimo
Aggregates, LLC v. Zemla, 763 F.3d 506, 510–11 (6th Cir. 2014). However, we exercise that
power with care and only create ERISA common law “in a few and restricted instances.”
DiGeronimo, 763 F.3d at 511. If “Congress has established an extensive regulatory network and
has expressly announced its intention to occupy the field, courts do not lightly create additional
rights under the rubric of federal common law.” Id. Further, the Supreme Court’s instructions in
Firestone were directed primarily at the administration of ERISA plans and only have secondary
application to other parts of the statute. See Firestone, 489 U.S. at 110; Erwin Chemerinsky,
Federal Jurisdiction § 6.3.2, p. 415 (7th ed 2016).
We have restricted our common-law authority under ERISA to circumstances in which:
(1) ERISA is silent or ambiguous, (2) ERISA leaves an awkward gap in the statutory scheme, or
(3) federal common law is “essential” to promote “fundamental ERISA policies.” DiGeronimo,
763 F.3d at 511. Using these principles, we have created common law to address restitution
claims, some estoppel claims, and undue influence claims. Whitworth Bros. Storage v. Central
States, 794 F.2d 221, 233–36 (6th Cir. 1986) (restitution allowed when employer paid too much
into the fund); Bloemaker v. Laborers Local 265 Pension Fund, 605 F.3d 436, 440 (6th Cir.
2010) (beneficiaries can bring equitable estoppel claim against fund based on reasonable reliance
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on written benefit statement); Sprague v. Gen. Motors Corp., 133 F.3d 388, 403–04 (6th Cir.
1998) (en banc) (beneficiaries may bring promissory estoppel claim against plan sponsor when
sponsor promised to provide coverage for life); Tinsley v. Gen. Motors Corp., 227 F.3d 700,
704–05 (6th Cir. 2000) (creating common-law standard for undue influence exerted by
beneficiaries of life insurance policy). Notice, again, that each of these cases addressed ERISA
plans—i.e., disputes between the plan and its beneficiaries—not disputes between the plan and
third parties.
In the few cases where parties have asked us to create common-law doctrines in the latter
circumstance, we have declined to do so. United Food & Commercial Workers Union v. Rubber
Assocs., Inc., 812 F.3d 521 (6th Cir. 2016) (refusing to create equitable reduction in withdrawal
liability imposed by an arbitrator); Central States v. Mahoning Nat’l Bank, 112 F.3d 252 (6th
Cir. 1997) (rejecting plaintiffs’ common-law withdrawal liability claim because they could
have—but did not—pursue their claim in a timely manner under ERISA’s withdrawal-liability
statute). This background creates an even stronger presumption against creating federal common
law in this case, and the PBGC’s arguments do not overcome it. With this background in place,
I turn to the three factors identified by DiGeronimo: (1) whether ERISA is silent on the issue,
(2) whether the statute leaves an awkward gap, or (3) whether common law is necessary to
promote fundamental ERISA policies.
A
If ERISA speaks to an issue, a party cannot complain because it does not like what the
statute says. Girl Scouts of Middle Tenn. v. Girl Scouts of the U.S.A., 770 F.3d 414, 420–21 (6th
Cir. 2015). Relevant to this case, “[w]here ERISA allows for recovery on an issue under some
but not all circumstances, ERISA is not silent on that issue.” Id. at 421. Thus, in Girl Scouts, the
court noted that “ERISA is far from silent on the contractual claims [plaintiff] alleges. ERISA
simply fails to afford [plaintiff] an avenue for recovery in this context.” Id. Here, the Successors
point out that § 1369 addresses certain “transactions to evade liability” and “corporate
reorganization[s],” indicating a Congressional intent to limit successor liability. The PBGC
contends that Congress did not intend this section to be the sole vehicle for successor liability
under ERISA. The legislative history refutes the PBGC’s conclusion.
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The Congress that passed ERISA considered two versions of the language that eventually
became § 1369(b). The first version, drafted by the Labor Committees of both chambers,
imposed liability on the employer “or any successor in interest to such employer . . .” S. 4, 93rd
Cong. § 405(a) (1973), reprinted in ERISA Legis. Hist. 143, 538, 1240–41 (1976); H.R. 2, 93rd
Cong. § 405(a) (1973), reprinted in ERISA Legis. Hist. 2326. Both Committees included this
language because they were concerned about “acquiring companies . . . [that] failed to take over
the liability for vested benefits owed to the employees of the predecessor company.” The
committees therefore felt that it was necessary for “successors in interest to be liable for
[obligations] owed by predecessor companies.” S. Rep. No. 93-127, at 26 (1973), reprinted in
ERISA Legis. Hist. 612; H.R. Rep. 93-533 (1973), reprinted in ERISA Legis. Hist. 2363.
The second version, proposed by the Senate Finance Committee, contained the language
now codified in § 1369(b). S. 1179, 93rd Cong. § 462(e) (1973), reprinted in ERISA Legis.
Hist. 933–34. After a long, drawn-out fight between the Labor and Finance Committees, both
chambers agreed to the Finance Committee’s language, and it remained in that form until final
passage. 119 Cong. Rec. 1579 (1973), reprinted in ERISA Legis. Hist. 1590–91; H.B. 2, 93rd
Cong. § 462(e) (“Successor Liability”) (as passed by the Senate), reprinted in ERISA Legis.
Hist. 3727–28; Conference Bill on H.B. 2, 93rd Cong. § 4062(d) (recodified without substantive
change by Conference Committee, “Successor Liability” header deleted), reprinted in ERISA
Legis. Hist. 4509–10; Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406
§ 4062(d), 88 Stat. 829 (93rd Cong., Sept. 2, 1974) (same as Conference Bill). It was not until
1986 that Congress added the title “Effect of Corporate Reorganization,” and even then, it did so
in an Omnibus budget bill with no explanation whatsoever. Consolidated Omnibus Budget
Reconciliation Act of 1985, Pub. L. No. 99-272, § 11013(a), 100 Stat. 82, 260–61 (99th Cong.,
April 7, 1986); H.R. Rep. 99-300, at 318.
This history convinces me that Congress intentionally restricted successor liability to
those circumstances indicated in § 1369(b). Where Congress considered and rejected “the very
language that would have achieved the result [a party] urges,” that fact “weighs heavily against”
the party’s interpretation. Hamdan v. Rumsfeld, 548 U.S. 557, 578–80 (2006). This fact
disposes of both the silence inquiry and the “awkward gap” question under DiGeronimo. It is
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true that several Circuits have imposed common-law successor liability in cases dealing with
multiemployer plans—in contrast to the single-employer plan here—and the lack of a uniform
rule would be somewhat awkward. See Resilient Floor Covering Pension Tr. Fund v. Michael’s
Floor Covering, Inc., 801 F.3d 1079, 1093–95 (9th Cir. 2015); Tsareff v. Manweb Servs., Inc.,
794 F.3d 841, 844–47 (7th Cir. 2015). But Congress created this awkward situation; it should be
the one to fix it. Girl Scouts, 770 F.3d at 420–21. Thus, the PBGC’s only viable remaining
argument is that federal common law is essential to further ERISA’s fundamental purposes.
B
Not every ERISA policy justifies creating common law. Similarly, the fact that a
plaintiff’s claim is based on a “fundamental” ERISA policy does not itself mandate the creation
of common law. DiGeronimo, 763 F.3d at 511. Only when the interest is “fundamental” and the
creation of common law is “essential” to protect that interest should the courts exercise their
lawmaking authority. Although this factor is independent of the silence and awkward-gap
question, it does not ignore the facts discovered in those inquiries. See Local 6-0682 Int’l Union
of Paper v. Nat’l Indus. Grp. Pension Plan, 342 F.3d 606, 610 (6th Cir. 2003); Tassinare v. Am.
Nat’l Ins. Co., 32 F.3d 220, 225 (6th Cir. 1994)).
Here, we must ask whether the asserted policy is “fundamental.” If it is, then we must
examine whether the creation of federal common law—not merely the creation of a new federal
remedy—is “essential” to accomplish that policy. Previous panels of this Court have suggested
that ERISA established a fundamental policy of “ensuring that . . . participants and beneficiaries
obtain the benefits to which they are entitled.” Tassinare, 32 F.3d at 225 (quoting Diduck v.
Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 281 (2d Cir. 1992)). But the court has not
expressly created federal common law on this ground, or anything close to it. The only other
cases relying on the fundamental-ERISA-policy rationale asserted interests in protecting the
integrity of written ERISA plans, Bloemker, 605 F.3d at 440–41; Sprague, 133 F.3d at 403–04,
or in fulfilling Congress’s desire to fully preempt state law, Whitworth Bros., 794 F.2d at 235–
36. Further, the interest in ensuring payment to beneficiaries is distinct from the PBGC’s interest
in recouping those payments, which is the real issue here. Admittedly, the PBGC’s recoupment
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claims are an important cog in ERISA’s enforcement mechanism. But even if this policy is
fundamental, common law is not essential to protect it here.
Something is essential if it is “basic and necessary.” Black’s Law Dictionary, Essential
(10th ed. 2014). In our federal system, common law is only necessary as a last resort—if no one
else has done something about the problem, and if it’s unlikely that anyone else will. Individual
beneficiaries who find themselves left out in the cold by a gap in ERISA will usually not be able
to muster the political clout to work clarifications in the law. Thus, at least when it comes to
rules governing specific ERISA plans, the equitable powers of a court are crucial to filling these
gaps. See Firestone, 489 U.S. at 110; Bloemker, 605 F.3d at 440–41.
The PBGC, however, is not so powerless to instigate legislative change. Indeed, the
MPPAA was enacted, in part, because the PBGC notified Congress of a loophole in ERISA’s
original language. See 29 U.S.C. § 1001a; PBGC v. R.A. Gray & Co., 467 U.S. 717, 722 (1984).
The problem identified here is similar: someone exploited a loophole in § 1369’s reorganization
language. However, the legislative history indicates that the narrow scope of this section was at
least somewhat intentional. It is possible, even likely, that the Senate Finance Committee was
“reluctant to impose successor liability when it might inhibit the reorganization of failing
businesses.” Peters v. NLRB, 153 F.3d 289, 301 (6th Cir. 1998). But it compromised—
acknowledging the Labor Committee’s concerns about evasive corporate transactions. Thus, if
the problem at bar is truly so serious that it upsets the legislative balance set in 1974, the PBGC
is certainly capable of convincing Congress to right the ship.
The majority is absolutely correct that, ultimately, the PBGC might not be able to
persuade Congress to change the law, even though it has more clout than the ordinary citizen.
Maj. Op. at 22 n.5. But that is precisely the point. Congress deliberately selected the narrow
kind of successor liability we have before us, and it may decide (over the PBGC’s objection) to
choose that narrow road again. The outcome of this policy battle is not our concern—Congress’s
current intent is clear, and we are obligated to honor it. Miller v. French, 530 U.S. 327, 336
(2000). The majority, however, veers around Congress’s intent without even discussing it by
declaring that the outcome advocated by the Successors “plainly would frustrate the purpose of
Subchapter III.” Maj. Op. at 22. I find it unlikely that Congress “shot itself in the foot,” so to
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speak, by deliberately adopting language in such fundamental conflict with the purpose of the
statute it was enacting. And I find it even more difficult to believe that we should find such
“frustration” when the legislative history resolves any tension between the statute’s text and its
purpose.
Our power to create federal common law is the authority to fill gaps created or neglected
by Congress. DiGeronimo, 763 F.3d at 511. But it is emphatically not the authority to sit as a
“superlegislature” to rewrite laws we think are unfair or to alter policy judgments we think are
unwise. Cf. Exxon Corp. v. Maryland, 437 U.S. 117, 124 (1978); Hodel v. Indiana, 452 U.S.
314, 333 (1981). I would welcome a discussion of common-law successor liability if Congress
had forgotten about it when passing ERISA. But Congress didn’t forget about successor
liability—it deliberately adopted a narrow form of the concept. I therefore cannot agree that
expanding successor liability is essential to the promotion of fundamental ERISA policies when
the policymaker has already considered and rejected that argument. I therefore respectfully
dissent from the opinion of the court on this issue.