Evade or Avoid

[ERISA25]

Can anyone cite any case law other than Supervalu saying that 4212© (evade or avoid) does not apply to only sham or fraudulent transactions?

[Peter Gulia]

ERISA § 4212© [29 U.S.C. § 1392©] provides as follows:

If a principal purpose of any transaction is to evade or avoid liability under this part [the withdrawal-liability rules], this part [Part 1 of Subtitle E of Title IV of ERISA] shall be applied (and liability shall be determined and collected) without regard to such transaction.

The statute doesn’t define “evade”, “avoid”, “transaction”, “principal”, or “purpose”. Likewise, the statute doesn’t define the phrase “a principal purpose”.

The statute doesn’t refer to “the principal purpose” of a transaction, but rather to “a principal purpose”. A court should construe a statute to make meaningful each word that Congress used. Further, some courts reason that Congress is presumed to know the differences between otherwise similar phrases that it has used in different statutes. Many Federal statutes (35 that I found on a quick look) include anti-avoidance rules that refer to “the principal purpose” or “a principal purpose”.

Each of the Pension Benefit Guaranty Corporation and the Labor department has not made a rule to interpret ERISA § 4212©. None of the PBGC’s opinion letters has analyzed whether a particular set of facts shows that a principal purpose of a completed transaction was, or of a proposed transaction would be, to evade or avoid withdrawal liability.

There are hundreds of arbitration and court decisions about this evade-or-avoid rule – some officially published, more commercially published, and many that are available only from practice experience.

Beyond Supervalu, here’s a quick look at a few decisions:

In Santa Fe Pacific Corp., the Court of Appeals for the Seventh Circuit held that “[the] statutory criterion is not whether the transaction is a sham …. It is whether the avoidance of withdrawal liability … is one of the principal purposes of the transaction.” Santa Fe Pacific Corp. v. Central States, Southeast & Southwest Areas Pension Fund, 22 F.3d 725, 729-730, 18 Employee Benefits Cas. (BNA) 1010 (7th Cir. 1994) (emphasis added), rehearing en banc denied, 1994 U.S. App. LEXIS 14476 (7th Cir. 1994), cert. denied, 513 U.S. 987, 18 Employee Benefits Cas. (BNA) 2536 (1994).

In Cuyamaca Meats, the employer had offered to continue contributions to the multiemployer pension plan, but only through August 1983. The Court of Appeals for the Ninth Circuit found that the employer’s “unilateral” implementation, after a bargaining impasse, of the employer’s rejected final offer (with its resulting withdrawal on September 1, 1983, rather than the day after the expiration of the preceding collective-bargaining agreement) was not an ERISA § 4212© evasion. Cuyamaca Meats, Inc. v. Butchers’ and Food Employers’ Pension Trust Fund, 827 F.2d 491, 8 Employee Benefits Cas. (BNA) 2310-2319, 126 Labor Relations Rptr. (BNA) 2193, 107 Labor Cases (CCH) ¶ 10168 (9th Cir. 1987), cert. denied, 485 U.S. 1008, 9 Employee Benefits Cas. (BNA) 1968, 152 Labor Relations Rptr. (BNA) 2640 (1988). The court explicitly found that the after-expiration and after-impasse contributions were lawful. The court’s reasoning concerning why implementing the employer’s final offer was not an evasion is confusing. One interpretation of the court’s reasoning is that the court implicitly found that reducing withdrawal liability was not “a principal purpose” of implementing the employer’s rejected final offer. Rather, the court suggested that the employer’s purpose was to act in a way consistent with its duties under the National Labor Relations Act [NLRA § 8, 29 U.S.C. § 158]. Alternatively, the court implicitly found that there was no “transaction”, perhaps because the bargaining parties never reached an agreement. Cuyamaca Meats, supra, 8 Employee Benefits Cas. (BNA) at 2317 (“Even assuming that this aim [to reduce withdrawal liability] was a principal purpose of the Employers’ last offer to the union, the legislative history [of MPPAA] suggests that [the] offer was not a transaction covered by 29 U.S.C. § 1392©.”).

In Sherwin-Williams, an arbitrator found that avoiding withdrawal liability was a principal purpose of a sale of a business, and rejected the seller’s argument that it didn’t have such a purpose because the business was so obviously unprofitable that it would have sold the business even if there were no possibility of withdrawal liability. In re Sherwin-Williams Co. and N.Y. State Teamsters Conf. Pension and Retirement Fund, 17 Employee Benefits Cas. (BNA) 2725 (1994) (Gertner, Arb.). In his reasoning, the arbitrator expressly found that a transaction can have two or more principal purposes. The Federal district court affirmed the arbitrator’s decision. Sherwin-Williams Co. v. N.Y. State Teamsters Conf. Pension Fund, 21 Employee Benefits Cas. (BNA) 1307 (N.D. Ohio 1997), affirmed, 158 F.3d 387 (6th Cir. 1998), cert. denied 526 U.S. 1017.

In Banner Industries, a company that had a withdrawal-liability exposure established a retirement plan and transferred the majority of the company’s shares to that retirement plan’s trust. The transactions made the company’s former parent a minority owner. The former parent argued that withdrawal liability could not be imposed on it because when the liability became triggered the former parent no longer was a part of the same employer as its former subsidiary. The former parent argued that the transactions – establishing the ESOP retirement plan and contributing shares to that plan’s trust – were not an evasion because the transactions had business purposes other than making the parent no longer responsible for its subsidiary’s withdrawal liability and had economic substance. The arbitrator rejected those arguments, and specifically found that whether a transaction had economic substance is irrelevant. In the Matter of Arbitration Between Banner Industries, Inc. and Central States, Southeast and Southwest Areas Pension Fund, AAA Case No. 51-621-0014-87-V (Jan. 22, 1989), 11 Employee Benefits Cas. (BNA) 1149, 1167 (1989) (Graham, Arb.), vacated and opinion withdrawn on other grounds, 12 Employee Benefits Cas. (BNA) 1992 (1990). The arbitrator interpreted the phrase “a principal purpose” to mean that if any motivation for a transaction was to avoid withdrawal liability, other motivations or purposes should not be considered.

As always, none of this bulletin-board discussion among practitioners is advice, and you’ll want the advice of your lawyer.

Perhaps you’d like to describe the hypothetical situation you’re thinking of so that BenefitsLink readers could discuss it with you?