Pension Ben. Guar. Corp. v. East Dayton Tool and Die Co., 93-3185
| Decision Date | 09 March 1994 |
| Docket Number | No. 93-3185,93-3185 |
| Parties | -811, 62 USLW 2516, 17 Employee Benefits Cas. 1929, 1994 Fed.App. 17P PENSION BENEFIT GUARANTY, CORPORATION, Plaintiff-Appellant, v. EAST DAYTON TOOL AND DIE COMPANY, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Deborah West (argued), Jeffrey B. Cohen, Lois Bruckner Parks, Anna Y. Chytl (briefed), Carol Connor Flowe, Pension Ben. Guar. Corp., Office of Gen. Counsel, Washington, DC, for plaintiff-appellant.
Charles J. Faruki, D. Jeffrey Ireland, Paul Leonard Horstman (argued and briefed), Faruki, Gilliam & Ireland, Dayton, OH, for defendants-appellees.
Before: KEITH and NORRIS, Circuit Judges; and ZATKOFF, District Judge. *
Plaintiff/Appellant Pension Benefit Guaranty, Corp. ("PBGC") appeals the district court's judgment finding the Defendants/Appellees East Dayton Tool and Die Co., Inc. ("East Dayton"), et al., did not control East Dayton's pension plan on its termination date and therefore, were not liable for the pension plan's unfunded benefit liabilities, and its subsequent grant of individual Appellees' 12(b)(6) motion. For the reasons stated below, we REVERSE and REMAND.
In 1959, East Dayton, an Ohio corporation that designed, manufactured and sold tools and dies, established the East Dayton Tool & Die Restated Retirement Plan for Salaried Employees (the "Plan") which qualified for coverage under Title IV of the Employee Retirement Income Security Act ("ERISA"). Dorothy Darrow ("Darrow"), the daughter of East Dayton's founder, eventually inherited 100% of East Dayton stock.
On August 23, 1973, Darrow sold East Dayton's common shares for $1.35 million to Paul H. Granzow ("Granzow"), Charles F. Sherman ("Sherman"), Robert M. Tormey ("Tormey"), individual Appellees, and Clifton C. Hawkins, Jr. ("Hawkins"). 1 The individual Appellees each purchased 30% of the stock and Hawkins purchased the remaining 10%. In return for the stock, individual Appellees gave Darrow $150,000 in cash and a $1.2 million promissory note secured by the voting rights of East Dayton stock and the right to compel the sale of East Dayton stock upon default. The shares of stock, although pledged to Darrow, were held in escrow by Third National. The loan documents provided upon default, Darrow could either compel the sale the stock or elect at least two directors to East Dayton's Board of Directors. 2
At the time of stock acquisition, each individual Appellee owned one-third of the holding company Roscommon Financial Corporation ("Roscommon Financial"). In February 1974, the individual Appellees transferred their East Dayton stock to Roscommon Financial. Shortly thereafter, Roscommon Financial acquired Hawkins' stock and became East Dayton's sole shareholder.
On January 26, 1976, after operating East Dayton for two and half years, Roscommon Financial defaulted on Darrow's loan. Darrow refused to consent to a loan which would have allowed Roscommon Financial to continue business, and instead, pursuant to the options provided in the loan documents, appointed two directors to East Dayton's Board. On February 7, 1976, the newly elected East Dayton Board decided to liquidate East Dayton and to repay Darrow with the proceeds. The individual Appellees did not approve of or participate in the decision to liquidate. At that time, because Darrow had control of the voting rights of the stock, Granzow offered to formally transfer the East Dayton stock from the escrow agent to Darrow. Darrow refused.
On April 26, 1976, East Dayton filed a Notice of Intent to Terminate the Plan with PBGC. After an investigation, PBGC notified East Dayton its Plan assets were insufficient by $326,362 to satisfy the benefits guaranteed by ERISA under Title IV. On April 27, 1976, East Dayton, with Granzow acting as President, and PBGC agreed to terminate the Plan, effective May 15, 1976, and to appoint PBGC the statutory trustee of the Plan. The parties agreed on the plan termination date, May 15, 1976, Roscommon Financial owned: (1) 100% of the East Dayton stock; (2) 88% of Dayton Casting Company stock; and (3) 90% of Advance Foundry Company stock. The parties also acknowledged the individual Appellees each owned 1/3 interest in the partnership Roscommon Realty. 3 PBGC, therefore, determined East Dayton, Roscommon Financial, Dayton Casting, Advance, Roscommon Realty and two other entities (later found not liable by PBGC) were members of the same control group as defined by 29 U.S.C. Sec. 1301(b), and therefore, were jointly liable for the amount of $326,362.
On May 6, 1981, the Roscommon Group appealed PBGC's initial liability determination to PBGC's Appeals Board. On appeal, Roscommon Group argued they were not a control group for liability purposes because Roscommon Financial did not control East Dayton on the plan termination date. The Roscommon Group noted the loan documents, upon default, divested them of all authority and vested control in Darrow.
On April 28, 1982, the Appeals Board issued the agency's final determination finding the Roscommon Group was a member of a commonly controlled group on the plan termination date under Sec. 4001(b) of ERISA. As such, the Roscommon Group qualified as an "employer" which maintained the Plan and was liable for the guaranteed benefits. The Appeals Board noted the Roscommon Group's tax returns indicated 100% ownership of East Dayton. This ownership entitled the Roscommon Group to $2 million in tax deductions. PBGC imposed liability upon the Roscommon Group but not upon the individual Appellees.
On May 13, 1982, PBGC sought enforcement of the agency's determination in the United States District Court for the Southern District of Ohio. On June 22, 1982, the Roscommon Group filed an Answer, Counterclaim and a Motion for Judgment on the Pleadings. Simultaneously, the individual Appellees filed a Motion to Dismiss PBGC's complaint. Because both motions relied on the evidence in the administrative record, both were treated as summary judgment motions and were denied.
On January 23, 1985, the district court referred the case to a magistrate. The magistrate, relying on the reasoning in In re Challenge Stamping & Porcelain Co., 719 F.2d 146 (6th Cir.1983) ("Challenge Stamping "), concluded once Roscommon Financial defaulted, the loan documents effectively transferred control to Darrow prior to the termination date. The Roscommon Group was not an employer controlling East Dayton on the Plan's termination date, and therefore, was not liable for East Dayton's unfunded benefit liabilities. The district court adopted the magistrate's recommendation and entered judgment for the Appellees. The district court also granted individual Appellees' Rule 12(b)(6) Motion to Dismiss because PBGC failed to state a cause of action with respect to them. This timely appeal followed.
On appeal, PBGC argues the district court incorrectly utilized a subjective test in blatant disregard for Congress' express intent that an objective test be used to identify trades or businesses under "common control" for purposes of 29 U.S.C. Sec. 1301(b). Additionally, PBGC argues the district court erroneously granted the individual Appellees' Motion to Dismiss. Each allegation of error will be discussed below.
PBGC argues Congress expressly defined an employer for Title IV liability purposes as trades or businesses under common control with the pension plan sponsor. Further, Congress explicitly authorized PBGC to define trades and businesses under "common control" for the imposition of liability for the termination of underfunded pension plans. PBGC clearly defined "common control" as an ownership interest of 80% of the total combined voting classes or of the total value of all shares of all classes of stock connecting a group of trades and businesses ("80% control test"). Therefore, according to PBGC, the judiciary must apply PBGC's test unless the regulation is arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law. Thus, PBGC argues the district court erred in holding that Challenge Stamping was controlling precedent for this case. We agree.
In January 1981, PBGC issued its initial determination advising Roscommon Financial that under 29 U.S.C. Sec. 1362, (1) the plan sponsor and all members of its control group were liable for pension plan underfunding upon plan termination; (2) on the date of plan termination, the Roscommon Group constituted a controlled group with East Dayton as defined under Title IV; and (3) that each company in the Roscommon Group was jointly and severally liable to PBGC for $326,362.00.
On appeal, disregarding arguments of actual control, PBGC's Appeals Board applied PBGC's 80% control test to the uncontested facts regarding ownership and concluded:
East Dayton, Roscommon, Dayton, Casting, Advance Foundry, ... and Roscommon Realty were, on the date the Plan terminated, members of a commonly controlled group under ERISA Sec. 4001(b) and therefore constitute the 'employer' that maintained the Plan.
Additionally, the Appeals Board noted Roscommon Financial filed federal income tax returns on its own behalf and on behalf of the members of the Roscommon Group. In the tax returns Roscommon Financial stated it owned 100% of East Dayton's stock. The tax returns also indicated Roscommon Financial and East Dayton constituted a controlled group under the Federal Tax Code, and therefore, was entitled to approximately $2 million in tax deductions.
The district court, however, decided as a matter of law, Challenge Stamping was the controlling law in this case. In Challenge Stamping, this court reasoned that:
There is no support for a view that Congress' chief intent in employing this test in ERISA was to invade the deepest pocket in a business failure, regardless of...
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