ERISA-Sixth Circuit Vacates District Court’s Dismissal of PBGC Claims Based On Theories Of Trade Or Business Under Common Control and Successor Liability

In Pension Benefit Guaranty Corporation v. Findlay Industries, Inc., No. 17-3520 (6th Cir. 2018), the Pension Benefit Guaranty Corporation (“PBGC”) had 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 to Findlay’s largest customer. The district court refused to hold either the trust or Michael and his companies liable and dismissed the case.  PBGC appeals.

Upon reviewing the case, the Sixth Circuit Court of Appeals (the “Court”) concluded that the district court’s decision is flawed in two respects.  First, an entity like the Gardner Trust that leases property to an entity under common control like Findlay 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.

As such, the Court vacated the district court’s order of dismissal and remanded the case for further proceedings.

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