Courts Address Legacy Obligations of Bankrupt Sellers Under §363
Distress investors often prefer to acquire a troubled business through an asset purchase styled as a sale of all or substantially all of the company's business under §363 of the Bankruptcy Code "free and clear" of all liabilities, liens, claims and interests against the seller, usually including any legacy obligations. In fact, unfunded pension and retiree health obligations are a frequent driver of the so-called 363 sales. But as demonstrated by the recent ruling against Japanese firm Asahi Tec1 following the 363 sale of its U.S. subsidiary Metaldyne, the Pension Benefit Guaranty Corporation (PBGC) will assert unfunded pension liability against members of the bankrupt seller's control group, even if they are domiciled offshore.
According to the PBGC 2012 Annual Report, as of Sept. 30, 2012, PBGC's single-employer insurance program had a negative net position or "deficit" of $29.1 billion, meaning that for U.S. participants in the single-employer program, there exists $29.1 billion in unfunded liabilities. Similarly, the multi-employer program had a deficit of 5.2 billion.2 Not surprisingly, remediation and active management of this liability is a focus for the PBGC. The PBGC is asserting claims for the termination liability as well as the surcharge or special premium for attempting to discharge pension plan liability through a bankruptcy case.3 The Asahi Tec ruling, when coupled with the earlier Sun Capital4 and Oneida5 rulings, underscores the determination of the PBGC to assert liability against affiliates looking to not only the extent to which affiliates controlled and may have actively managed the bankrupt seller, but also the extent to which offshore affiliates subjected themselves to U.S. jurisdiction during the acquisition and ownership process.
Asahi Tec Corporation (Asahi Tec or the company), a Japanese automotive parts manufacturer, acquired Metaldyne Corporation in September 2005. Metaldyne was an automotive parts manufacturer based in Michigan. At the time, Metaldyne was the contributing sponsor of a single-employer pension plan covered under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA).
Prior to its acquisition of Metaldyne, Asahi Tec conducted due diligence and engaged consultants to review Metaldyne's employee benefit and compensation programs, including analyzing the long-term benefit plan liabilities of Metaldyne and developing strategies to mitigate obligations assumed by Asahi Tec. The resulting due diligence provided Asahi Tec with reports indicating that Metaldyne had significantly underfunded long-term employee benefit obligations, and such obligations were ultimately reflected in the $1.2 billion transaction price.
Subsequently, in May 2009, Metaldyne filed a voluntary petition for relief under Chapter 11 in the Bankruptcy Court for the Southern District of New York. During the pendency of Metaldyne's Chapter 11 case, PBGC approached Asahi Tec to inquire whether Asahi Tec planned to assume sponsorship of the pension plan given that no buyer of Metaldyne's assets was likely to assume it. Asahi Tec indicated it did not plan to assume the pension obligations. After terminating the pension plan, PBGC was appointed as the plan's statutory trustee, and subsequently requested again that Asahi Tec pay the amounts owed pursuant to the pension plans. When Asahi Tec declined, PBGC filed suit in the U.S. District Court for the District of Columbia seeking entry of a judgment against Asahi Tec for the full principal amount of the pension liability from the time Metaldyne entered bankruptcy as well as termination premiums and the cost of litigation. The total amount sought by PBGC was $175 million. In its complaint, PBGC argued that Asahi Tec was liable for such pension obligations due to its status as a "controlled group" member of Metaldyne under ERISA. Because Asahi Tec was a member of the "controlled group," PBGC argued, Asahi Tec was liable for unfunded benefit liabilities and termination premiums arising from the termination of Metaldyne's pension plan.
Motion to Dismiss Denied
In April 2011, Asahi Tec sought to dismiss PBGC's complaint for lack of personal jurisdiction. The company argued that simply acquiring a subsidiary did not expose the parent to personal jurisdiction for claims based on the subsidiary's liabilities. The district court denied Asahi Tec's motion.6 According to the court, the case could not be dismissed for lack of personal jurisdiction because Asahi Tec had sufficient minimum contacts with the United States such that there was specific jurisdiction. The court stated that Asahi Tec had acquired PBGC "with its eyes wide open" and after conducting the due diligence described above was specifically informed of the possibility of controlled group liability under ERISA.7 While Asahi Tec's arguments may have been viable with regard to vicarious liability, the court stated that the claims asserted by PBGC were based on a unique cause of action predicated solely on Asahi Tec's status as a "controlled group" entity of Metaldyne under ERISA.
Thus, the court found that PBGC had made a prima facie showing that Asahi Tec purposefully directed activity towards the United States in connection with its acquisition of Metaldyne, including the potential for assumption of controlled group pension liability. Following the court's decision, Asahi Tec reasserted lack of personal jurisdiction as one of its affirmative defenses in its answer to PBGC's complaint. PBGC then moved for partial summary judgment on Asahi Tec's affirmative defense of lack of personal jurisdiction as well as Asahi Tec's liability for unfunded benefit liabilities and termination premiums.
On summary judgment, the district court again found in PBGC's favor on the question of personal jurisdiction. The court reiterated that it would not offend traditional notions of due process to bring the defendant into court to answer a limited set of allegations arising directly out of the circumstances specifically considered at the time of the purchase of Metaldyne. Not only did Asahi Tec know about the underfunded pension plan, the acquisition agreement specifically mentioned ERISA and the potential for controlled group liability, and the company's statements in connection with stock sold to finance the Metaldyne acquisition included the employee benefit obligations as a risk factor for investors to consider.
With respect to the unfunded pension plan benefit liabilities, the court looked to ERISA §1301(a)(14), to determine whether or not Asahi Tec was considered a "controlled group" member. Under ERISA, a "controlled group" consists of companies that are under "common control," including parent corporations and their subsidiaries.8 The court held that because Metaldyne Holdings, a wholly owned subsidiary of Asahi Tec, owned 100 percent of Metaldyne's stock on the date of termination, Asahi Tec was a member of Metaldyne's controlled group by virtue of this indirect parent-subsidiary relationship.
The 'Chevron' Test
The district court then considered PBGC's claim under ERISA §§1306 and 1307, seeking to hold Asahi Tec liable for unpaid termination premiums. Section 1306 authorizes PBGC to collect premiums on covered plans, and further §1306(a)(7)(A) imposes a termination premium if a covered plan is terminated during a bankruptcy or insolvency proceeding or by PBGC under §1342.
PBGC asserted that Asahi Tec was liable for such premiums due to the fact that Metaldyne's plan was terminated under §1342 and Asahi Tec was liable for such premiums as a member of Metaldyne's controlled group. In opposition, Asahi Tec argued that the language of §1306 explicitly excluded controlled group members from termination premium liability. Asahi Tec argued that §1307's rule governing the "designated payor" of termination premiums did not apply to §1306 due to the prefatory language of §1306 stating, "Notwithstanding section 1307 of this title."
The court stated that, under the two-step process for statutory interpretation set forth in Chevron, PBGC's interpretation of the statute was entitled to deference.9 Under Chevron, the first step asks the court to consider whether the relevant statutory language is ambiguous. The court here held that such was the case. The court then ultimately affirmed PBGC's interpretation of the statute based on the second step of Chevron, which instructs courts to give deference to an agency's interpretation of a statute if such interpretation is based on a permissible construction of the statute. Because PBGC's construction of the statutory language was supported by the statutory text and consistent with the structure and purpose of the statute as a whole, the court found that PBGC's statutory construction prevailed.
Asahi Tec also argued that the purpose of the termination premiums is to deter a plan sponsor from shedding employment plan obligations through bankruptcy and burdening PBGC with the cost of such obligations, while a controlled group member, in contrast, need not be deterred from orchestrating such a strategic bankruptcy since the corporate family would bear responsibility for the entire unfunded pension obligations regardless. Thus, according to Asahi Tec, imposing such liability on controlled group members such as Asahi Tec would serve no deterrent purpose under the statute. The court was not convinced. It stated that deterrence was not the sole purpose of the statute, but rather, Congress intended a broader purpose to help improve the financial status of PBGC, which would ultimately better protect workers and retirees in the future. As such, the court held that imposing controlled group liability for termination premiums would actually further fulfill Congress' intent to deter strategic bankruptcies due to the fact that it would encourage the controlled group members to assume pension liabilities during a bankruptcy rather than terminating the plan in order to escape the additional termination premium penalty.
Court's Treatment of 'Oneida'
Lastly, Asahi Tec argued that PBGC's claim for termination premiums was not ripe, based on the special rule for plan terminations under ERISA that the general rule on termination premiums shall not apply to plans terminated during the pendency of a bankruptcy reorganization proceeding until the date of the discharge or dismissal of such case.
Under ERISA, the "general rule" for termination premiums is that: