Corporations reorganize to reduce costs, eliminate liabilities, improve efficiencies or a combination of all three. Rarely, if ever, does a corporate reorganization accelerate a company’s liabilities or impose new ones, but two recent decisions from federal district courts in New York demonstrate careful planning and care is needed to avoid this undesirable and expensive result.
The first case, New York State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, No. 5:16-cv-84 (N.D.N.Y. May 1, 2017), arose out of a corporate reorganization in bankruptcy. Penn Traffic, a food retail and wholesale company, operated two warehouses staffed by employees represented by a Teamsters Local. Penn Traffic participated in the New York State Teamsters Conference Pension Plan, an underfunded multi-employer pension plan. In 2008, C&S began negotiations to purchase Penn Traffic’s wholesale distribution business. Later that same year, the parties signed a limited asset purchase agreement under which C&S purchased Penn Traffic’s “wholesale distribution contracts, customers, equipment, files, records, goodwill, intellectual properly, account receivables” and hired its unrepresented employees. Penn Traffic’s retail business, facilities, leases, cash and employee benefit plans were excluded from the purchase agreement. C&S, moreover, did not hire Penn Traffic’s unionized workforce. Rather, C&S and Penn Traffic entered into an independent contractor relationship under which Penn Traffic staffed its warehouses with its Teamsters-represented employees who handled C&S-owned merchandise and oversaw distribution to C&S customers.
In 2010, after C&S signed the asset purchase agreement, Penn Traffic filed for bankruptcy, shuttered its warehouse and terminated all of its unionized employees, thereby triggering withdrawal liability. The withdrawal liability was in excess of $63 million. In the bankruptcy proceedings, Penn Traffic agreed to pay approximately $5 million toward its withdrawal liability. The remaining $58 million was released. The New York State Teamsters Pension Plan then sued C&S to collect the unpaid $58 million, claiming C&S was a successor employer and as such was liable for the balance of the withdrawal liability. The district court adopted the Funds’ successorship liability theory and denied C&S Grocers’ motion to dismiss. That matter is pending in the district court, but should continue to be monitored.
The second case, The New York Times Co. v. Newspapers & Mail Deliverers’-Publishers’ Pension Fund, No. 1:17-cv-06178-RWS (S.D.N.Y. Mar. 26, 2018), arose out of a corporate downsizing. In 2008, the New York Times reorganized its distribution operation, which was staffed by union-represented employees who participated in the significantly underfunded, multiemployer Newspaper & Mail Deliverers’ Publishers’ Pension Fund. Initially, the Times intended to close its distribution subsidiary entirely and pay the withdrawal liability, but, after bargaining with the union, the Times chose to continue operations on a substantially smaller scale instead.
Five years after the reorganization, the Pension Fund claimed the Times had triggered a partial withdrawal from the Fund and assessed the Times $25.7 million in (partial) withdrawal liability for the 2012 plan year. A partial withdrawal occurs whenever there is a decrease of seventy percent (70%) in the contribution base units over a defined testing period. To up the stakes, the Newspaper Deliverers’ Pension Fund later claimed that the Times had triggered a second partial withdrawal for the following, 2013, plan year, creating an additional $7.8 million in withdrawal liability.
Among various other issues, the parties disagreed over what constituted a “contribution base unit” under the CBA. The relevant contract clause provided a contribution of “8% of each employees’ pay rate per shift for each shift worked” was due and owing to the plan. The Fund claimed the contribution base unit for purposes of calculating withdrawal liability was a shift of work. The Times, on the other hand, claimed the contribution base unit was the amount of wages an employee earned. The Times’ position was based on its “historical” interpretation of the CBA and on the fact that contributions were due on paid but unworked days such as vacations or workers compensation leave days.
The parties proceeded to arbitration (the required procedure under ERISA when parties dispute the amount of withdrawal liability owed). Arbitrator Mark Irvings adopted the Fund’s position as to the contribution base unit and consequently upheld its conclusion that a withdrawal had occurred. He also determined the Fund had properly calculated the amount of the withdrawal liability for the first partial withdrawal. The Times appealed the Arbitrator’s decision to the district court. The court sustained the Arbitrator’s finding that a partial withdrawal had occurred, but vacated the Arbitrator’s award as to the calculation of the withdrawal liability. The district court found the Funds’ interest rate assumption was incorrect, thereby substantially reducing (but not eliminating) the amount of withdrawal liability. The Fund has announced it intends to appeal the judge’s opinion.
There are several key takeaways from these two decisions. First, courts are open to any possible theory to hold a deep pocket responsible for the massive unfunded liabilities in multi-employer plans. Second, employers considering any business relationship with a company whose employees participate in a multi-employee plan should carefully structure that relationship to avoid creating joint liability for the underfunding. Third, when a company undergoes a reorganization, it is critical that the company plan for and address the potential for unfunded pension obligations. Any corporate reorganization involving union represented employees requires an analysis of possible multi-employer pension withdrawal liability (either complete or partial). Pension plan withdrawal is fraught with substantial liability and should be carefully analyzed with the assistance and sound advice from counsel.
Douglas Darch is a partner and Alexis Hawley is an associate with Baker McKenzie in the firm’s Chicago office.