Does ERISA controlled group liability extend beyond the U.S. border? The Pension Benefit Guaranty Corporation (PBGC) and multiemployer pension plans think it does. They sometimes try to collect a U.S. company’s unpaid termination or withdrawal liability from a foreign parent or affiliate. This is important because Title IV liability is joint and several, and all of the liability may be collected from any one member of a controlled group. If the U.S. employer is in bankruptcy or financial distress, the foreign controlled group member may look like a deep pocket. However, collecting is easier said than done. This is especially the case where the foreign company has not been involved in operations of the plan sponsor or contributing employer..
Controlled Group Liability. The ERISA definition of a controlled group doesn’t exclude entities organized and located outside the United States, and controlled group members can include a foreign parent and its 80% owned businesses. The PBGC takes the position that it may collect unpaid plan termination liability from foreign entities. Multiemployer plans facing financial deficits have eagerly adopted that position.
The Problem. Despite ERISA’s statutory language, no court has found that ownership alone is sufficient to result in liability. In order to collect, plaintiffs must either establish jurisdiction in a United States court or convince a foreign court to apply ERISA. In both situations, collecting from foreign entities is an uphill battle.
The difficulties are illustrated by Michael H. Holland v. Cardem Insurance Company Ltd (Civ. No. 19-02362, Sept. 11, 2023) a recent decision in which a U.S. federal court refused to entertain a suit by a multiemployer plan to collect withdrawal liability from a foreign entity.
It All Boils Down to Contacts.
Cardem is a Bermuda company and a subsidiary of Walter Energy, a U.S-based company and the plan’s contributing employer. Bermuda is its principal place of business. 100% of Cardem’s operational revenue comes from the U.S. All of the insured property is owned by Walter Energy and Cardem is a conduit for passing on reinsurance proceeds from non-U.S. entities If the name Walter Energy seems familiar, it is because the same multiemployer plan tried unsuccessfully to collect withdrawal liability from Walter Canada in British Columbia. The Supreme Court of British Columbia refused to apply ERISA, stating that Canadian law requires separate legal entities to be respected.
When determining whether a U.S. court has jurisdiction over a foreign entity, the court looks at fundamental fairness and due process. The plaintiff has the burden to prove that it is not unfair to require the defendant to litigate here. Citing U.S. Supreme Court decisions, the Cardem court determined that it was required to compare Cardem’s contacts in the forum to its activities across the U.S. and the world. The decision states that “[t]heir affiliations must be so continuous and systematic as to render [Cardem} essentially at home in the forum state. ”
Standards Cited by the United Mine Workers Plan.
The multiemployer plan argued that there was no need to compare Cardem’s activities because all of its revenue came from the U.S. Plsintiffs also argued that Cardem systematically and continuously subjected itself to U.S. law because it was a U.S. taxpayer, paid all of its profits into the U.S., held a U.S. loan to Walter Energy as its principal asset and was under the control of U.S.-based officers and directors.
The Court’s Response.
The court ruled against the multiemployer plan, holding that the reinsurance proceeds were not revenue and that Cardem’s loan of $13 million (92% of the value of defendant’s assets) to Walter Energy was also insufficient to establish jurisdiction. The court was clearly prepared to uphold jurisdiction only in exceptional circumstances.
Compare the Asahi Decision.
Previously, the federal district court in the District of Columbia upheld jurisdiction in a case involving a Japanese purchaser of a U.S. business called Metaldyne. (See 839 F.Supp. 2d 118) An underfunded single employer plan sponsored by Metaldyne had been terminated, and the PBGC tried to collect termination liability from the Japanese parent. That court found that the Japanese parent had reviewed unfunded liabilities at the time of the sale and was aware of them. It had even negotiated for a purchase price adjustment based on the plan’s funding status. The Japanese parent argued unsuccessfully that it had nothing to do with the termination or day-to-day business operations. This is a rare decision in favor of the PBGC in its efforts to collect from a foreign entity.
The Bottom Line.
These determinations will be very fact specific. Foreign buyers of U.S. businesses should be made aware of and investigate actual and contingent pension liabilities. Despite the Asahi case, they would be well advised to do so before the closing when they will be in a position to negotiate purchase price adjustments or indemnification provisions. They can also limit their involvement in operations of the acquired U.S. company if they are concerned about being a deep pocket.