In Trustees of the Suburban Teamsters of Northern Illinois Pension Fund v. The E Company, the 7th U.S. Circuit Court of Appeals on Jan. 29, 2019, affirmed a district court’s judgment ordering a group of closely held businesses and the group’s owners to pay $640,900 in withdrawal liability, plus interest, liquidated damages, attorneys’ fees and court costs. The defendants were found to have waived all defenses to the assessment because they failed to make interim payments and initiate arbitration over the liability.
The case highlights several important aspects of the strict procedural requirements under the Employee Retirement Income Security Act of 1974 (ERISA) that employers must know when facing a withdrawal liability assessment.
Background
Under ERISA, an employer withdrawing from a multi-employer plan is liable for the employer’s share of the plan’s unfunded vested benefits. Upon that withdrawal, the plan determines the amount of the liability, notifies the employer of that amount and collects it from the employer.
Any significant reduction in the duty to contribute — including layoffs, plant closures, sales or changes in the collective bargaining agreement — can trigger a complete or partial withdrawal from a plan, resulting in the imposition of withdrawal liability to the employer and its controlled group members.
Under ERISA, all employees of “trades or businesses” under common control are treated as if they are employed by a single employer, and any such trades or businesses are treated as a single employer. Based on this provision, courts have long held that each “trade or business” under common control with an employer contributing to a multi-employer plan is jointly and severally liable, along with that employer, for the employer’s withdrawal liability. This is the case even if the various trades and businesses have nothing in common except ownership.
Challenging Withdrawal Liability
ERISA provides a detailed dispute resolution procedure requiring mandatory arbitration of any issues related to a withdrawal liability assessment. Under this procedure, upon receipt of a notice of withdrawal and demand for payment, employers have 90 days to request a review by the plan. Following the plan’s review, any dispute must then be resolved through arbitration, which must be initiated within certain time periods set out in the statute. Importantly, if an employer fails to timely initiate arbitration, the liability is considered due and owing on the schedule determined by the plan, and the plan can file suit in state or federal court to collect the amounts owed. In such an action, the employer is generally foreclosed from disputing the liability.
The E Company Case
In E Company, a multi-employer plan assessed $640,900 in withdrawal liability against a group of closely held businesses and the group’s owners following the complete withdrawal of several contributing affiliates in 2014. Rather than request a review of the assessment, however, the defendants ignored the notice of withdrawal, a past due notice, and a notice of default and acceleration. In addition to ignoring each notice, the defendants failed to make any payments then due, raise any defenses or initiate arbitration. Eventually, the plan determined that the withdrawn employers had defaulted due to the nonpayments, accelerated the liability, and then sued each of the putative controlled group members to collect.
The district court granted the plan’s motion for summary judgment, holding each of the defendants jointly and severally liable for the withdrawal liability. The 7th Circuit easily affirmed, concluding that a “straightforward application” of ERISA’s procedural requirements resulted in the defendants’ forfeiture of all defenses to the liability.
ERISA Procedural Requirements
The E Company case highlights several important aspects of the strict procedural requirements under ERISA that govern withdrawal liability assessments.
Pay Now, Dispute Later
ERISA imposes a “pay now, dispute later” framework for withdrawal liability payments, meaning payments must be made according to the schedule set by the plan, even if a dispute is pending in arbitration. Generally, such payments must commence within 60 days of the demand. If an employer is successful in challenging the plan’s determination, however, the plan must refund any overpayment to the employer, plus interest. As noted above, the E Company defendants failed to make payments when due.
Default and Acceleration of Liability
If an employer fails to make payments according to the plan’s payment schedule, and after the plan gives a notice of default and an opportunity to cure, ERISA allows the plan to accelerate the full amount of the liability. This is significant in part because periodic withdrawal liability payments are based on an employer’s prewithdrawal contribution rates, not the full liability. Thus, what initially was a quarterly payment obligation of approximately $42,000 quickly became $640,900 when the E Company defendants failed to make payments and initiate arbitration. Under Pension Benefit Guaranty Corporation regulations, payments generally cannot be accelerated upon a default due to nonpayment when the employer has timely requested review or initiated arbitration.
In addition to defaults due to nonpayment, multi-employer plans are allowed to adopt rules designating any other event as a default if such event indicates a substantial likelihood that an employer will be unable to pay its withdrawal liability. Upon such an event, plans can then require immediate payment in full, regardless of the employer’s payment history.
Failure to Arbitrate Waives Defenses
As discussed above, disputes over withdrawal liability generally must be resolved through arbitration. Importantly, defenses not raised at this stage may be waived. In E Company, the defendants failed to raise any defenses or request arbitration within the time permitted by ERISA. Thus, the court held that they forfeited all defenses they otherwise could have presented to an arbitrator.
Notice to One Is Notice to All
ERISA requires that a plan notify an employer and demand payment as soon as practicable after a complete or partial withdrawal occurs. For this purpose, courts have routinely held that notice to any controlled group member constitutes notice to all. Thus, a plan can deal entirely with the withdrawing employer known to it at the time, yet pursue legal remedies against all entities in the controlled group at a later date.
In E Company, each defendant was deemed to have been on constructive notice of the potential withdrawal liability even though some did not receive actual copies of the notice. The court rejected defendants’ claim that their due process rights were violated when the plan notified some but not all of them.
Controlled Group Issues
Multi-employer plans aggressively assert withdrawal liability claims against withdrawing employers and their controlled group members. E Company illustrates how these claims are brought in the closely held business context, where the plan was successful at holding not only the affiliated entities jointly and severally liable, but also the individual business owners. In particular, the district court found the individual defendants’ rental activities to have constituted “trades or businesses” for purposes of controlled group liability by applying a rule adopted in the 6th, 7th, 8th and 9th Circuits categorically labeling certain leasing activities as a “trade or business” under ERISA.
Although most issues related to withdrawal liability must be arbitrated, a narrow exception to this requirement exists for parties who “had absolutely no reason to believe that they might be deemed members of a controlled group.” The district court observed that the E Company defendants who did not receive the notices likely failed to satisfy this exception because they lacked the “credible claim of surprise” necessary to deviate from the arbitration requirement. Ultimately, however, the court determined as a factual matter that those defendants were valid controlled group members of the withdrawn employers.
Additional Costs
ERISA permits a court to award interest, liquidated damages, attorneys’ fees and costs of the action on top of the withdrawal liability. By ignoring the plan’s withdrawal liability assessment, the E Company defendants not only waived their legal defenses, but also compounded the amount ultimately owed to the plan.
Lessons From E Company
The E Company case is an important reminder about the significant legal consequences of ignoring a withdrawal liability assessment. When facing such claims, it is critical that employers understand not only how to contest the assessment, but also the time periods within which to do so. Understanding this will help employers avoid the risk of default, preserve statutory rights and available defenses, and, if possible, mitigate the assessed liability.