In re Intern. Harvester's Disp. of Wis. Steel Lit.

Decision Date02 March 1988
Docket Number82 C 6895 and 85 C 3521.,No. 81 C 7076,81 C 7076
Citation681 F. Supp. 512
CourtU.S. District Court — Northern District of Illinois


Leonard A. Grossman, Office of the Sol., Dept. of Labor, Chicago, Ill., William O. Bittman, George R. Clark, T. Timothy Ryan, Jr., Richard D. Lerner, Pirerson, Ball & Dowd, Washington, D.C., Gary Ford, Gen. Counsel, Robert L. Furst, Asst. Gen. Counsel, Melinda Tell Lazare, Pension Benefit Guar. Corp. Washington, D.C., for plaintiff.

Arthur C. O'Meara III, Navistar Intern. Corp., Donald G. Kempf, Jr., Philip S. Beck, Chaim T. Kiffel, David J. Zott, Kirkland & Ellis, Chicago, Ill., for defendant.


MORAN, District Judge.

These consolidated cases follow in the wake of the bankruptcy of Wisconsin Steel Corporation and its related companies (WSC), consisting of corporations associated with Envirodyne Industries, Inc. Wisconsin Steel, a steel mill on the south side of Chicago, had been a division of International Harvester Co., today known as Navistar Corp. (IH), until 1977, when it was sold to WSC. Since WSC is insolvent, many persons with claims against it seek to make IH responsible for those claims.

Currently before the court is a motion relating to one of those claimants. The Pension Benefit Guaranty Corporation (PBGC), under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. (ERISA), must step in to pay unfunded vested pension benefits to former Wisconsin Steel employees out of the PBGC insurance program since WSC cannot. The PBGC contends that under 29 U.S.C. § 1362, IH, the solvent employer who first promised most of those benefits to these employees, must reimburse it for those payments, up to 30% of IH's net worth. Specifically, the PBGC asks that this court find two pension plans terminated, fix a date of termination, appoint the PBGC trustee of the plans pursuant to 29 U.S.C. §§ 1342 and 1348, and issue a declaratory judgment that IH is liable to the PBGC under § 1362. For its part IH, after some six years of bitterly-fought discovery, and on virtually the eve of trial, moves to dismiss the PBGC's entire complaint for failure to state a claim upon which relief can be granted. The motion is granted in part and denied in part.


Some of the factual background to these cases may be found in In re Consolidated Litigation Concerning International Harvester's Disposition of Wisconsin Steel, 666 F.Supp. 1148 (N.D.Ill.1987), and In re Wisconsin Steel Corp., 48 B.R. 753 (N.D.Ill.1985). Wisconsin Steel Works was founded in 1875 and became a division of International Harvester Co. in 1902. The mill produced steel bars, including bars in special sizes and shapes not readily available elsewhere, which IH used in its manufacture of trucks, agricultural machinery, and construction and industrial equipment. By the 1970s the Wisconsin Steel Division of IH included not only the mill but also coal mines in Kentucky, iron mines in Michigan, a railroad, and two ore-carrying vessels on the Great Lakes.

By the 1970s the division also was incurring substantial operating losses, probably nearly $40 million between 1972 and 1977. Virtually all of these losses seem to have been traceable to steel-making operations. Apparently the century-old plant had not kept pace with technological developments in the steel industry. By IH's own estimate, it needed many millions in capital improvements to become competitive, an investment IH was unwilling to make. Also, collective bargaining agreements had led to pension obligations. These included an unfunded liability variously estimated at between $45 and $86 million. IH decided to look for a buyer.

The search lasted for several years. During that time IH may have offered the division to as many as 70 different firms, with no takers. Finally, in 1976 serious discussions began with officers of Envirodyne, Inc. (as it was then known), a small environmental engineering consulting firm from California. The division's net worth dwarfed that of Envirodyne, and Envirodyne had no experience in any aspect of the steel industry. The transaction as eventually worked out was a 100% leveraged buy-out. See, e.g., United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1292 (3d Cir.1986) (explaining leveraged buyout), cert. denied, ___ U.S. ___, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987). Envirodyne created a number of wholly-owned subsidiaries (collectively called WSC here) to hold title to assets of the division. IH loaned them $50 million of the total sale price of $65 million. In return IH got notes from the subsidiaries secured by most of the division's assets, including the coal and iron mines. The remaining $15 million came from a loan from Chase Manhattan Bank secured by the mill's inventory and accounts receivable. The newly formed WSC agreed to take over all the pension obligations of the division. The sale was effective July 31, 1977.

During the next three years, however, IH continued to control the pension trust funds. Indeed, though WSC filed for bankruptcy on March 31, 1980, IH did not turn over the pension funds to WSC until August 25, 1980. The PBGC alleges that IH also controlled other significant aspects of WSC. Its position, loosely, is that WSC from August 1977 to March 1980 should be deemed still a division of IH, despite the sale. The PBGC contends that IH still needed the specialty steel bars which only WSC made, and so could not afford to shut the plant down. The sale, however, gave IH an opportunity to evade some or all of the division's liabilities. Then a long strike at IH's manufacturing facilities gave it a further opportunity, namely to stockpile WSC steel bars. During the strike IH accumulated enough of the specialty steel to give it sufficient lead time to find an alternate supplier. Shortly after the strike ended IH foreclosed on its mortgages and security interests.

IH finds this PBGC scenario ridiculous. It says that it merely exercised good business judgment in all the transactions. The sale was the best deal it could find, and the new WSC stood a reasonable chance of success. During WSC's brief existence IH exercised only that degree of control which any major creditor would exercise. The foreclosures were postponed as long as possible.

Whatever the resolution of these questions, IH's foreclosures triggered the bankruptcy of WSC. WSC could not pay the bulk of the pension obligations and the employees turned to the PBGC. The PBGC turned to IH, which refused to pay on the ground that the sale to WSC had insulated it from all ERISA liability. This lawsuit followed.


Congress passed ERISA in 1974 in order to provide greater pension security for the employees of America. Nachman Corp. v. PBGC, 446 U.S. 359, 362, 100 S.Ct. 1723, 1726, 64 L.Ed.2d 354 (1980). The Act's provisions for pension insurance in effect provide each employee with an insurance policy against his employer's breach of contract on pension matters. The PBGC is the insurer, paying from a fund created from premiums paid by every American employer with a pension plan.

Employer liability, an essential feature of the insurance subtitle, prevents employer abuse of the program. Connolly v. PBGC, 475 U.S. 211, 214, 106 S.Ct. 108, 1020, 89 L.Ed.2d 166 (1986); S.Rep. No. 127, 93d Cong., 1st Sess., reprinted in 1 Legislative History of the Employee Retirement Income Security Act of 1974 hereinafter Leg.Hist. 612 (1976); H.R.Rep. No. 533, 93d Cong., 1st Sess., 1974, U.S.Code Cong. & Admin.News, 4639, 2 Leg.Hist. 2363. As currently constituted, the legislation includes different provisions for single-employer and multi-employer plans. Multi-employer plans have, since 1980, been governed by the Multi-employer Pension Plan Amendments Act (MPPAA), 29 U.S.C. §§ 1381 et seq. Under the MPPAA liability is incurred when an employer withdraws from a pension plan and it runs to the plan itself. See generally Connolly, 475 U.S. at 214-15, 106 S.Ct. at 1020-21; PBGC v. Heppenstall Co., 633 F.2d 293, 295-96 (3d Cir.1980). For single-employer plans, however, liability is incurred at termination of the plan and it runs directly to the PBGC. Nachman, 446 U.S. at 363, 100 S.Ct. at 1727. If the employer has failed to fund any ERISA-insured pension obligations the PBGC has in effect an insurer's claim for subrogation. See Nachman Corp. v. PBGC, 592 F.2d 947, 957 (7th Cir.1979) (liability provisions are in part a subrogation scheme), aff'd, 446 U.S. 359, 100 S.Ct. 1723, 64 L.Ed.2d 354 (1980). If the employee cannot collect from his employer on a pension insured under ERISA, then the PBGC pays the guaranteed amount. But the PBGC is in effect subrogated to the employee's claim against the employer and may pursue the non-paying employer up to 30% of the latter's net worth. Nachman, 592 F.2d at 957, 963.

Wisconsin Steel had a single-employer plan. Thus all the PBGC's claims which attempt to assert employer liability against IH turn on construction of the employer liability provision of ERISA which governed single-employer plans until 1986, the former 29 U.S.C. § 1362 (1982). There is no question that one of the statute's prerequisites to a claim has been met. The value of the benefits in the Wisconsin Steel plans guaranteed by ERISA exceeds the value of the plan's assets allocable to those benefits. Rather, this dispute centers around § 1362(a), which reads in pertinent part: "This section applies to any employer who maintained a single-employer plan at the time it was terminated...." Its resolution requires statutory interpretation in light of the legislative purpose but without much guidance from the statutory language and with little specific guidance from the legislative history. The developing judicial gloss is also of limited assistance and we are, therefore, left with the task of choosing a legal standard,...

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