Shortly after the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued its cybersecurity guidance for employee retirement plans and updated its audit inquiries to include compliance with these guidelines, a federal court in Chicago ruled an employee benefit services provider must comply with a subpoena requesting, among other things, documents and communications relating to the provider’s information security and cybersecurity plans and controls.

In Walsh v. Alight Solutions, LLC, No. 20-cv-2138 (N.D. Ill. Oct. 28, 2021), the DOL sought enforcement of an administrative subpoena against Alight Solutions (the Company) — a recordkeeping, administrative, and consulting services provider to ERISA plan clients. The agency’s investigation was prompted, in part, by the alleged discovery that the Company had processed unauthorized distributions due to cybersecurity breaches relating to its ERISA plan clients’ accounts, which it had not corrected.

The subpoena called for “all documents” in the Company’s “possession, custody, [or] control” in response to 32 inquiries. These inquiries included specific requests for, among other things, all documents and/or communications relating to the Company’s:

  • communications, event logs, and reports of any incident involving information security and/or cybersecurity relating to any ERISA plan clients;
  • system penetration testing or other ethical hack reports from the Company, the Company’s service providers, or the Company’s ERISA plan clients (eventually narrowed by the DOL to such testing or reports that relate to any ERISA plan clients);
  • information security or cybersecurity controls (including internal cybersecurity procedures and policies, patch management reports, and cybersecurity assessment reports);
  • crises management plans and corporate continuity plans relating to information security and/or cybersecurity;
  • cybersecurity awareness training; and
  • physical access controls, including key cards, biometric controls, and video cameras relating to information security and/or cybersecurity (narrowed by the DOL to controls that relate to any ERISA plan clients).

In determining whether the subpoena should be enforced, the court recognized the Secretary of Labor must demonstrate: (1) the subpoena is within the authority of the agency; (2) the demand is not too indefinite, and (3) the information sought is reasonably relevant to the DOL’s investigation. The court also acknowledged its duty to consider the potential burden of compliance on the Company.

The court squarely rejected the Company’s arguments that the DOL’s subpoena power only extends to ERISA fiduciaries, finding the DOL has broad subpoena power and may investigate “merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.” The court also found that the requests were not too indefinite because the Secretary outlined in 32 paragraphs its specific requests, which it further clarified during litigation. Lastly, the court recognized the requests were relevant to the investigation, as the requests permissibly sought information that may be relevant to whether ERISA violations had occurred.

With respect to the potential burden of compliance, the Company argued that compliance “would require thousands of hours of work just to identify potentially responsive documents” in addition to “the time and expenses outside counsel would incur reviewing, de-identifying, and producing those materials.” Although the court recognized the burden of compliance may potentially be significant, the court ruled the Company must comply with the subpoena and found the burden did not outweigh the potential relevance of the requests, citing EEOC v. Quad/Graphics, Inc., 63 F.3d 642, 648 (7th Cir. 1995) (upholding district court’s enforcement of subpoena in case in which the responding party estimated that compliance would require more than 200,000 hours).

The court also rejected the Company’s request to “de-identify” the data produced so that it did not disclose the ERISA plan involved. The court noted federal law would protect this information from disclosure by the DOL to outside parties.

What are the takeaways from Walsh v. Alight Solutions? First and foremost, it demonstrates that information security and cybersecurity are clearly a new and important area of interest for the DOL. Although not explicitly stated, the inquiries listed in the subpoena suggest the DOL is looking into what providers are doing to safeguard their own systems to address privacy and security, specific documents that describe those safeguards and controls, as well as whether the provider has had any incidents involving cybersecurity relating to its ERISA plan clients. Moreover, Walsh v. Alight Solutions also reminds us that the DOL has broad subpoena power and authority to investigate compliance with the laws enforced by the department, including compliance by ERISA plan service providers. Accordingly, providers (and by extension, ERISA plans) will want to think carefully about their current practices, including their communications and procedures, to address cybersecurity threats.

 

 

In McIntyre v. Reliance Standard Life Insurance Company, 972 F.3d 955 (8th Cir. 2020), the United States Court of Appeals for the Eighth Circuit clarified the standard of review to apply where there has been a denial of benefits challenged under ERISA Section 502(a)(1)(B).

Generally, a court reviews a denial of benefits under a de novo standard, unless the benefit plan gives the administrator or fiduciary the discretionary authority to determine eligibility for benefits or to construe the terms of the plan. Where the benefit plan gives the administrator such discretionary authority, then a court should review the administrator’s decision for an abuse of discretion.

In this case, an employee who suffered from a degenerative neurological condition was denied disability benefits. She filed an appeal, challenging her administrator’s eligibility determination. After delays from both parties, she underwent an independent medical examination. The doctor performing the independent medical examination concluded she was capable of working full time with an accommodation. The plan administrator upheld its original determination that she was not eligible for disability benefits. She sued for wrongfully denied benefits.

It was undisputed that the benefit plan granted the administrator discretionary authority—thereby triggering an abuse of discretion review. But the district court nevertheless decided that a de novo standard applied, based on purported procedural irregularities in the administrative review process.

In Woo, the Eighth Circuit recognized a court could apply a “less deferential review” if: (1) either the administrator faces a “palpable conflict of interest” or a “serious procedural irregularity” arose in the review process, and (2) either the conflict or the procedural irregularity “caused a serious breach of the plan administrator’s fiduciary duty” to the claimant. Woo v. Deluxe Corp., 144 F.3d 1157 (8th Cir. 1998), abrogated in part by Metro. Life Ins. V. Glenn, 554 U.S. 105, 115-16 (2008).

Based on the district court’s understanding of Woo, it found both a palpable conflict of interest—insofar as the administrator “both determines and pays claims” and ostensibly has a “history of biased claims administration”—and a serious procedural irregularity—namely, the “long delay in deciding [the] appeal.” The district court then applied a de novo standard to its review, determining that the plaintiff was entitled to benefits.

The Eighth Circuit vacated and remanded to the district court for review under the abuse of discretion standard, clarifying that the United States Supreme Court in Glenn abrogated the conflict-of-interest component of Woo. The Eighth Circuit also clarified that it did not intend its holding in Woo to be read as providing a “gateway” to de novo review.  Rather, in Woo, the Eighth  Circuit adopted a “sliding scale approach” to abuse of discretion review. Applying this standard, in some cases an administrator might have to support its decision with “substantial evidence bordering on a preponderance,” while in other cases, an administrator might have to support its decision with mere “substantial evidence.”

Therefore, it was error for the district to treat the ostensibly serious procedural irregularity as a trigger for de novo review. Rather, the irregularity was just another factor for the district court to consider when reviewing the administrator’s decision for an abuse of discretion.

On remand, in McIntyre v. Reliance Standard Life Insurance Company, 2021 U.S. Dist. LEXIS 157848 (D. Minn. Aug. 20, 2021), the district court found that the denial of benefits was an abuse of discretion.  That decision has been appealed to the Eighth Circuit.

 

In an order issued on October 15, 2021, United States District Judge Thomas W. Thrash from the Northern District of Georgia granted an employer’s Motion for Summary Judgment and ruled that plaintiff’s separation agreement with a release and covenant not to sue precluded him from bringing an ERISA class action for breach of fiduciary duties on behalf of the company’s 401(k) plan.

Prior to initiating his ERISA lawsuit in Dan Alfonso v. Cumulus Media, Inc., et al., plaintiff had worked as an engineer for a wholly owned subsidiary of Cumulus Media, Inc., a national media and entertainment conglomerate, from August 2014 to May 2019. On May 31, 2019, plaintiff executed a separation agreement that contained a general release of claims provision in which plaintiff effectively released Cumulus Media from all current and future claims, including any arising under ERISA. The separation agreement also included a covenant not to sue “by reason of or related to” the released ERISA claims.

Less than a year after executing the separation agreement, plaintiff, who had participated in the company’s 401(k) retirement plan during his employment at Cumulus Media, initiated a class action on behalf of the plan against the 401(k) plan fiduciaries, which included Cumulus Media, for alleged breaches of fiduciary duties in their administration of the plan.

Cumulus Media moved for summary judgment, arguing that plaintiff was precluded from bringing an ERISA action against the company because of his separation agreement.  In response, plaintiff argued that the language of the agreement only precluded him from bringing ERISA claims in his individual capacity and it in no way affected his ability to bring derivative claims, such as a breach of fiduciary duty claim under § 502(a)(2), on behalf of the company’s 401(k) plan. Plaintiff therefore argued that derivative actions, like his, brought on behalf of the plan, could not be waived under the release language of the separation agreement.

The court disagreed, reasoning that the appropriate question was not whether derivative actions could be  waived under the separation agreement.  Instead, the court found that even if the agreement had not waived plaintiff’s ability to bring an action on behalf of the plan, he had executed a covenant not to sue Cumulus Media in any capacity, whether individual or derivative, and was thus precluded from bringing any legal action “of or related to” claims he had released in the agreement, including ERISA claims.

The court also dismissed plaintiff’s alternative argument that Cumulus Media had failed to show that he had made a knowing and voluntary waiver of his ERISA claims. The court found that not only was plaintiff’s education level sufficient, but that plaintiff was barred from arguing that he had failed to read the agreement because he represented when he executed it that he had read the agreement carefully. In addition, he had been given forty-five days to review it and consult with an attorney. Finally, the plaintiff had received valuable consideration as part of the agreement.

The case is Alfonso v. Cumulus Media, Inc., No. 1:20-cv-847-TWT (N.D. Georgia Oct. 15, 2021).

On October 12, 2021, Aon Hewitt Investment Consulting, Inc. (“Aon”) defeated a class action in the Western District of North Carolina brought by nearly 250,000 current and former Lowe’s Companies, Inc. (“Lowe’s”) employees who were participants in Lowe’s 401(k) retirement plan (the “Plan”). Plaintiffs alleged that Aon and Lowe’s breached their fiduciary duties of loyalty and prudence under ERISA to the Plan by directing substantial Plan assets to Aon’s proprietary investment products. Specifically, Plaintiffs asserted that Aon violated ERISA by limiting the menu of investment options available to the participants and by transferring more than $1 billion of Plan assets to its own proprietary fund, the Aon Growth Fund, which allegedly resulted in a substantial loss of investment gains. In April 2021, Lowe’s reached a $12.5 million settlement with the Plan participants, leaving only Aon to stand trial.

Aon managed the Plan from 2009 to 2016 and had selected the Aon Growth Fund as an investment option for Plan participants. In 2015, Aon transferred more than half of the Plan’s total assets to the Aon Growth Fund which ultimately performed poorly, according to the participants. Consequently, Plaintiffs sued both Lowe’s and Aon in 2018, alleging that their imprudent and disloyal actions cost the participants more than $100 million by shifting their investments to the Aon Growth Fund. Plaintiffs further accused Aon of recommending its proprietary fund to Lowe’s for its own financial interests.

Following a five-day bench trial, U.S. District Judge Kenneth Bell ruled in favor of Aon on all claims, concluding that “Aon acted loyally and prudently with respect to its recommendations to change the plan’s investment choices — which were consistent with its industry research and the thinking of other financial consultants — as well as its selection and retention of the Aon Growth Fund in the plan, which was similarly reasonable based on Aon’s investment expertise and legitimate strategic choices.” In so holding, Judge Bell opined that Aon “did not breach its fiduciary duty as an investment advisor to the plan in proposing and encouraging Lowe’s to change the plan’s investment structure and menu of investment options nor did it violate ERISA in its efforts to ‘cross-sell’ its delegated fiduciary services.”

In rejecting Plaintiffs’ argument that Aon breached its fiduciary duty because its proprietary fund did not generate as much growth as other investment options, Judge Bell noted that Plaintiffs’ “hindsight attacks” on Aon’s alleged failure to consider alternative investments based on historical results were “unpersuasive,” acknowledging that the “dynamics of the market could have changed at any time making the Aon Growth Fund not only reasonable but likely more profitable for plan participants.” The court further recognized that the Aon Growth Fund was well-diversified and carried reasonable fees, making it an appropriate choice for the Plan. Based on these findings, the court rendered a bench judgment in Aon’s favor.

The case is Reetz v. Lowe’s Cos., No. 5:18-cv-00075 (W.D.N.C. Oct. 12, 2021).

Can a former employee serve as a class representative for ERISA claims when she has signed a general release agreement and has waived her right to participate in class actions? According to a recent decision by the District Court for the Western District of Oklahoma, the answer may very well be “no.”

That court dealt with this issue in Myers v. Administrative Committee, Seventy Seven Energy, Inc. Retirement & Savings Plan. There, a former employee named Kathleen Myers sought class-wide relief against her retirement plan’s fiduciaries, claiming that the plan’s investments were not sufficiently diversified.

While reviewing Myers’ motion for class certification, the court acknowledged that the numerosity and commonality requirements of Rule 23(a) were satisfied. There was a hitch, however, when evaluating whether Myers’ claims were typical of the proposed class members (the “typicality” requirement of Rule 23(a)) and whether Myers was an adequate class representative (the “adequacy” requirement).

Before filing this lawsuit, Meyers had signed a severance agreement, which released all claims against her former employer and its agents. In that agreement, Myers had also waived her right to participate in any class actions against her former employer or its agents. This included a waiver of serving as a class representative.

Without deciding whether Myers could serve as the class representative, the court concluded that Myers did not satisfy Rule 23’s adequacy or typicality requirements. Critically, Myers’ motion for class certification failed to address how Myers was similarly situated to the putative class members, including whether other plan participants had signed release agreements. The court was troubled by this because, if Myers could not recover for any losses attributable to her individual account in the litigation, she would have little incentive to pursue this alleged fiduciary breach on behalf of a plan in which she was no longer a participant. As Myers failed to show that she was an adequate class representative or that her claims were typical of the putative class members, her motion for class certification was denied.

A second putative class representative fared little better. In apparent anticipation of the court’s ruling, Myers’ attorneys identified a new potential class representative, Christopher Snider, at the conclusion of expert discovery. Instead of moving for Snider’s intervention or joinder, however, Myers’ attorneys filed a second class action case with Snider as the plaintiff, then moved to consolidate the Myers and Snider cases. The court denied the consolidation motion, deeming it an attempt to circumvent the long-standing schedule in the original case.  For the same reasons, when plaintiffs’ counsel sought to add Snider as a co-representative for the class in the Myers case, the court refused.

The case is Myers v. Administrative Committee, Seventy Seven Energy, Inc. Retirement & Savings Plan, No. 17-cv-200 (W.D. Okla. Sept. 29, 2021).

The use of the “Segal Blend” to calculate a company’s withdrawal liability when it withdrew from a multiemployer pension plan violated the Employee Retirement Income Security Act (ERISA), as amended by the Multiemployer Pension Plan Amendments Act (MPPAA), because it was not the actuary’s best estimate, the federal appeals court in Cincinnati has held in a milestone decision for employers with withdrawal liability exposure. Sofco Erectors, Inc. v. Trustees Ohio Operating Eng’r, et al., Nos. 20-3639/3671 (6th Cir. Sept. 28, 2021).

Read more about this significant development here. 

The District Court for the Southern District of Ohio recently dismissed an ERISA putative class action lawsuit asserting fiduciary duty claims based on allegations of unreasonably high administrative fees and relatively higher-cost, underperforming funds offered in TriHealth, Inc.’s 401(k) plan (the “Plan”).

Plaintiffs were TriHealth 401(k) Plan participants and beneficiaries. On behalf of a putative class, they alleged that TriHealth and the Plan’s Retirement Committee breached their duties of prudence and loyalty to Plaintiffs in two ways: (1) permitting the Plan to incur high administrative fees; and (2) offering, and failing to remove, underperforming funds with higher fees when there were other, similar funds that charged lower fees and achieved higher returns. Plaintiffs alleged that for every year between 2013 and 2017, the administrative fees charged to Plan participants were greater than the fees of more than 90 percent of comparable 401(k) plans. Plaintiffs further alleged that the issuers of many of the funds included in the Plan offered alternative share classes that charged lower fees and had materially better rates of return, but were otherwise identical to the funds in the Plan. Plaintiffs alleged that Defendants “failed to employ a prudent and loyal process by failing to critically or objectively evaluate the cost and performance of the Plan’s investments and fees in comparison to other investment options.”

The court found both claims lacking. With respect to administrative fees, the court reasoned that Plaintiffs had “simply not provided the Court with sufficient factual allegations to permit an inference of imprudence.” While Plaintiffs alleged that the administrative fees were higher than 90% of “comparable” plans, they did not describe what services the Plan received in exchange for these administrative fees or what services the “comparable 401(k) plans” received in exchange for their less costly fees. Plaintiffs also did not identify what a reasonable cost would have been based on the services offered to the Plan or how much the Plan actually paid.

With regard to the allegedly underperforming funds with unreasonably high fees, the court found that Plaintiffs failed to adequately describe any meaningful benchmark funds or sufficiently allege actionable underperformance. Although Plaintiffs identified several funds that they characterized as “lower-cost share classes” and stated that the only difference was the fees, they provided no other information to permit an apples-to-apples comparison of the challenged funds against their proffered benchmarks.  Moreover, Plaintiffs alleged that the funds in question underperformed “comparable” funds by 0.5% to just over 2% over a three-year period. The court held that this variance, without more, was too small and the period too short to raise a plausible breach of fiduciary duty.

Finally, addressing the claim for breach of duty of loyalty, the court noted that Plaintiffs’ allegations essentially reincorporated their breach of the duty of prudence allegations. The claim failed because Plaintiffs did not assert any allegations of self-dealing and did not sufficiently allege facts to show that Defendants’ actions were for their own benefit or for the benefit of someone else other than the beneficiaries.

The case is Forman v. TriHealth, Inc., No. 1:19-cv-613 (S.D. Ohio Sep. 24, 2021).

Recently, the United States District Court for the Eastern District of Wisconsin granted a Motion to Dismiss, dismissing ERISA breach of fiduciary duty claims, failure to monitor claims, and prohibited transaction claims in a putative class action involving Oshkosh Corporation’s 401(k) Plan. The plaintiff supported those claims with allegations of excessive recordkeeping fees, excessive share class fees, imprudent high-cost fund options, failure to fully disclose plan fees, and excessive provider fees. The district court relied heavily on Seventh Circuit precedent to dismiss the complaint, with prejudice, holding that it was not possible to plausibly infer violations of ERISA’s duties, under Federal Rule of Civil Procedure 12(b)(6).

Plaintiff alleged that, between 2014 and 2018, the Plan on average paid $87 per participant in recordkeeping fees which reflected a lack of prudence and poor management of the Plan. Throughout Plaintiff’s complaint, he compared the Plan’s average annual recordkeeping fee and other investment and service fees to plans for which Plaintiff alleged were of similar size and with similar amounts of money under management. Specifically, Plaintiff alleged Defendants should have paid around $40 per participant in recordkeeping fees. The Court dismissed the recordkeeping fee claim because “Plaintiff fail[ed] to state why the fee is unreasonable.” Moreover, the Court stated, “[t]he mere existence of purportedly lower fees paid by other plans says nothing about the reasonableness of the Plan’s fee, and it does not make it plausible that another recordkeeper would have offered to provide the Plan with services at a lower cost.”

Plaintiff further alleged that Defendants breached their fiduciary duties when they did not retain the share class for each fund that gives plan participants access to portfolio managers at the “lowest net fee.” Although the court acknowledged that the “net investment expense” theory is a “novel concept,” the court reasoned that Plaintiff’s claims were tantamount to an argument that Defendants were imprudent simply because they did not retain the least costly share class, a claim which the Seventh Circuit had previously rejected in another case.

Next, Plaintiff alleged that Defendants breached their fiduciary duties by retaining higher-cost actively managed investments over the less-expensive passively managed investments. Again relying on Seventh Circuit precedent, the court dismissed the claim when Plaintiff conceded he had no knowledge of Defendants’ investment selection and monitoring process and thus the court was not required to accept “unsupported conclusory factual allegations,” especially in light of the precedent that “plans may generally offer a wide range of investment options and fees without breaching any fiduciary duty.”

The Court quickly shot down Plaintiff’s claims that Defendants failed to fully disclose fees charged or credited to the Plan investments because Seventh Circuit precedent does not require a plan fiduciary to disclose information about revenue-sharing arrangements.

In addition, Plaintiff claimed that the fees paid by the Plan to its service provider were excessive and unreasonable in relation to the services provided and that Defendants did not solicit competitive bids from other service providers. The court dismissed the claim, holding that the existence of a lower-cost alternative service provider “says nothing” about Defendants’ prudence and does not make it plausible that another service provider would offer the same service at a lower cost.

The failure to monitor claims were summarily dismissed as derivative and dependent upon Plaintiff’s breach of fiduciary duty claims, which had already been dismissed. The court also dismissed Plaintiff’s prohibited transaction claims as “circular” and cited other district courts that dismissed similar claims.

The case is Albert v. Oshkosh Corporation, No. 1:20-cv-00901-WCG (E.D. Wis. Sep. 2, 2021).

 

In Sacerdote v. New York University, a class of university employees who participated in Defendant’s 403(b) plans brought ERISA breach of fiduciary duty claims against Defendant, challenging the administration of its retirement plans. The district court dismissed two claims and proceeded to a bench trial on the remainder, and ultimately found in favor of Defendant. On appeal, Plaintiffs raised, among others, questions of whether the trial judge should have been disqualified, whether Plaintiffs actually waived their jury demand, and whether the district court erred in dismissing their share-class claim alleging Defendant breached its duty of prudence by offering retail-class shares of certain mutual funds rather than institutional-class shares of the same funds that had lower costs.

The Second Circuit recently vacated the district court’s dismissal of Plaintiffs’ share-class claim. Sacerdote v. New York Univ., 2021 U.S. App. LEXIS 24252 (2d Cir. Aug. 16, 2021). To begin, the Court observed that the notion that “‘prudent fiduciaries may very well choose to offer retail class shares over institutional class shares’ because retail shares offer greater liquidity provides no basis to dismiss pleadings that otherwise generate plausible inferences of the claimed misconduct.” The Court found “[s]uch an argument ‘goes to the merits [of the case] and is misplaced at th[e] early stage’” of a motion to dismiss. The Court found important that Plaintiffs specifically alleged 63 of the funds included in the 103-fund Faculty Plan and 84-fund Medical Plan charged excessive retail-share fees. The Court observed Plaintiffs’ complaint alleged in detail that the cost differentials of specified basis points for the funds were included in the fund prospectuses and, therefore, available to the fiduciaries when making their decision, and that an adequate investigation would have revealed the readily apparent superior alternative investments. Noting that the district court’s dismissal was partly based on its finding that the fees of those 63 funds were still lower than cost ranges previously permitted by several circuits in other cases, the Court stated cost ranges from other ERISA cases should not be overrelied upon as benchmarks. The Court opined that, due to the context-specific nature of assessing each ERISA complaint, such comparisons had limited utility, and that charging “fees . . . lower than a fee found not imprudent in another case” cannot rule out the possibility of imprudence.

The Court also disagreed with the district court’s focus on whether the percentage of those 63 funds was high enough to taint each plan as a whole, noting that while a holistic assessment of the plans is relevant to a share class claim, “[f]iduciaries cannot shield themselves from liability – much less discovery – simply because the alleged imprudence inheres in fewer than all of the fund options.” Finding that “[i]f prudence of a particular investment offering will become clear only in the context of the portfolio as a whole,” a breach of the duty of prudence claim cannot be resolved on a motion to dismiss. The Court found Plaintiffs plausibly alleged it was imprudent to offer retail-class shares over institutional-class shares.

In further analysis, the Court disapproved the district court’s apparent expectation that Plaintiffs must both prove the loss and the amount of damages from a breach of fiduciary duty. The Court clarified  that, between the fiduciaries and those covered by the employee benefit plans, the burden of proof first lay upon Plaintiffs and then on the fiduciaries: “Although plaintiffs bear the burden of proving a loss, the burden under ERISA shifts to defendants to disprove any portion of potential damages by showing that the loss was not caused by the breach of fiduciary duty.”

As for Plaintiffs’ argument that they were deprived of their Seventh Amendment right to a trial by jury, the Second Circuit affirmed the district court’s decision to strike the jury demand. The Court noted that not only did Plaintiffs fail to timely oppose Defendant’s motion or provide justification for their failure, but they also failed to move for reconsideration or object at the pretrial conference, which showed Plaintiffs waived their right to a jury trial.

The Second Circuit also affirmed the entry of judgment for Defendant on the tried claims, agreeing that Defendant did not breach its fiduciary duty of prudence by failing to consolidate recordkeepers any faster than it did.  The Court further agreed that Defendant did not breach its duty of prudence by failing to remove two funds from the plans, noting they had been retained based on the strength of their performance against appropriate benchmarks.

Finally, the Court affirmed the denial of Plaintiffs’ motion for a new trial, rejecting Plaintiffs’ argument that the trial judge (Judge Forrest) was biased. Among other things, Plaintiffs alleged the chairman of the law firm that Judge Forrest rejoined after resigning from the bench a few weeks after issuing her trial findings in this case was a member of Defendant’s Board of Trustees, and that Judge Forrest would not have wished to strain her relationship with him. The Court denounced Plaintiffs’ theories as “too far-fetched,” as the chairman was but one of 61 voting Board members and more than 80 partners at the law firm, did not have a financial stake in the case, and was not even a member of Defendant’s Retirement Committee. Observing that Plaintiffs failed to raise these arguments before Judge Forrest ruled against them, the Court stated, “parties who dislike court rulings cannot later rely upon first-time assertions of tenuous, preexisting alleged conflicts of interest to avoid those rulings.”

 

Under the provisions of the Employee Retirement Income Security Act (“ERISA”) as modified by the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), an employer who withdraws from a multiemployer pension plan is liable for their allocable share of any underfunding. With respect to this withdrawal liability, the pension fund has potential recourse against both the withdrawing employer (generally the entity that signed the collective bargaining agreement pursuant to which fund contributions were required) as well as all other commonly owned (generally 80% or more) trades or businesses. All such “control group” members are deemed a single employer, and all are jointly and severally liable for any withdrawal liability incurred by a fellow control group member.

In addition to expanding the universal of responsible parties, the statute also endows pension funds with another powerful collection tool, Section 4212(c), MPPAA’s “evade or avoid” provision. Section 4212(c) provides that “[i]f a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability shall be determined and collected) without regard to such transaction.”  The Third Circuit recently explored the nuances of the evade or avoid provision; at issue was a $78 million dollar withdrawal liability award by an arbitrator. Steelworkers Pension Trust v. The Renco Group, Inc., 2021 U.S. App. LEXIS 25748 (3rd Cir. Aug. 26, 2021)(“Renco”).

Renco involved the acquisition of a unionized steel business (“RG Steel”) by a substantial privately held investment holding company in March 2011. In so doing, the investment holding company assumed an obligation to contribute to the Steelworkers Pension Trust (“SPT”). By the end of 2011, RG Steel was in dire straits and desperately in need of financing. After speaking with several potential lenders, the company ultimately entered into a transaction with Cerebrus Capital Management, LP (“Cerebrus”) in January 2012. Under the Cerebrus transaction, Cerebrus loaned RG Steel $125 million in exchange for a potential 49% equity component. The equity component was originally structured as warrants (a security that gives the warrant holder the option to purchase direct ownership at a set price). However, at the last minute (and at Renco’s insistence), one-half of the equity component (or 24.5%) was changed to direct ownership in the form of membership units (the equivalent of a share of stock in a corporation). Less than 5 months later (on May 31, 2012), RG Steel filed for bankruptcy under Chapter 11 of the Bankruptcy Code, permanently ceased operations and withdrew from SPT. Since this resulted in the discharge of SPT’s withdrawal liability claim against RG Steel, SPT sued Renco and other control group members.

The basis of Renco’s defense was that it owned less than the requisite 80% on the May 31, 2012 withdrawal date and therefore was not liable as a member of RG Steel’s control group. SPT countered by invoking 4212(c), arguing that a principal purpose of the Cerebrus transaction (which resulted in the transfer of a 24.5% equity interest in RG Steel) was to evade or avoid Renco incurring withdrawal liability and it should therefore be ignored.

The arbitrator, the United States District Court for the Western District of Pennsylvania, and ultimately the United States Court of Appeals for the Third Circuit all agreed with SPT. All of these forums found the last-minute change resulting in a direct transfer of 24.5% of equity at Renco’s insistence highly indicative of an evade or avoid motive. This was coupled with a statement by Renco’s counsel that the sole purpose for the direct equity transfer was a desire to have Renco cleanly exit the RG Steel control group. As this would result in Renco potentially avoiding a very large projected amount of withdrawal liability to the Fund, the arbitrator determined (and both courts agreed) that a principal purpose of the Cerebrus transaction was for Renco to evade or avoid withdrawal liability.

What are the takeaways from Renco? First and foremost, it reiterates the maxim that “timing is everything.” Although not explicitly stated, the timing of the Cerebrus transaction (which preceded RG Steel’s bankruptcy filing/withdrawal by less than 5 months) was highly indicative of the requisite “evade or avoid” motive. Most pension funds are already highly suspicious of activities (such as transfers of equity interests and assets that purport to alter control group membership) that closely precede a withdrawal.  Renco can be expected to encourage and expand this scrutiny. Renco also reminds us that a transaction can (and often does) have more than one principal purpose, and that only one such purpose need have an evasive motive to trigger the application of Section 4212(c).

Please contact the author if you have any questions regarding withdrawal liability.