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CCH® PENSION — 11/15/10

Employer's entire withdrawal liability was immediately payable during pendency of arbitration

An employer that was determined by a multiemployer plan to be in default during the pendency of arbitration because of a substantial likelihood that it would not be able to pay its withdrawal liability was immediately liable for the entire amount of the withdrawal payments upon default, according to the U.S. Court of Appeals in Chicago (CA-7) in Central States Southeast and Southwest Areas Pension Fund v. O'Neill Bros. Transfer & Storage Co. (CA-7).

In early 2007, an employer ceased operations and informed a multiemployer pension fund that the company was "preparing for its termination and liquidation." The pension fund deemed this notification to be a withdrawal. Further, the pension fund deemed the employer to be in default and required immediate payment of the entire amount of its withdrawal liability. The pension fund reached this conclusion based on the terms of the plan and because the employer was liquidating. In May 2007, the pension fund sent the employer a letter demanding immediate payment of the entire withdrawal liability amount due.

About four months later, the pension fund filed suit in district court, seeking an interim payment of the entire withdrawal liability amount owed by the employer. The employer moved for a dismissal or a stay of proceedings pending the outcome of mandatory arbitration. Approximately seven months later, the pension fund moved for summary judgment. Eventually, the district court granted summary judgment for the pension fund.

The employer appealed the decision, contending that it had no obligation to pay the entire amount due during the pendency of arbitration. Interim payments required under ERISA §4219(c) were installment payments, and even when there was a default, there could be no acceleration until arbitration was complete. The pension fund claimed that the default provisions of ERISA §4219 were separate from the interim payment provisions and that it was the default provisions that operated to permit immediate acceleration. For a default under ERISA §4219(c)(5)(B), which was relevant in this case, acceleration could occur even while arbitration was pending. Thus, the pension fund contended that it was entitled to the full withdrawal payment amount on an interim basis.

Immediate payment was required

The appellate court explained that, under ERISA §4219(c)(5), when there is a default, a plan sponsor may require the immediate payment of the outstanding amount of an employer's withdrawal liability. A default means a failure to make a payment when due if the failure is not cured within 60 days after the employer has received written notification of the failure from the plan sponsor (ERISA §4219(c)(5)(A)), and any other event defined in the plan which indicates a substantial likelihood that an employer will be unable to pay its withdrawal liability (ERISA §4219(c)(5)(B)). The court noted that this case involved the second kind of default. The plan terms did provide a number of events that would constitute a default. Pursuant to the plan terms, the pension fund, in response to being informed that the employer was preparing for termination and liquidation, determined that the fund was "insecure," which placed the employer in default. The plan concluded that in ceasing operations, the employer showed a substantial likelihood that it would be unable to pay its withdrawal liability.

The appellate court decided that ERISA §4219(c)(5) governed the employer's default. Under that section, the entire amount of withdrawal liability was immediately payable, and the payment was not deferred because of the pendency of arbitration. The court noted that, even when there is no default, withdrawal liability is normally payable during pendency of arbitration. The statutory language requires payment during a review or appeal of the withdrawal liability (ERISA §4219(c)(2)) and during arbitration (ERISA §4221(d)). These statutes make it clear that payment begins immediately and is not suspended during a challenge, according to the court. In addition, the court found that there was nothing to suggest any limitation on when acceleration of payment can occur. There was nothing to indicate that default payments should be treated differently from other withdrawal liability payments.

The court further noted that, although the Pension Benefit Guaranty Corporation (PBGC) has determined that payments because of a default under ERISA §4219(c)(5)(A) can be delayed until after the issuance of an arbitrator's decision, the Agency has interpreted ERISA §4219(c)(5)(B) to allow plans to accelerate the schedule of payments and seek immediate payment of the full liability. According to the court, the PBGC believes that it is important for the protection of plans that they should be able to exercise the power at any time. If there is a substantial likelihood that an employer will be unable to meet its obligations, there is an urgent need for action by the plan. If a plan cannot collect quickly, it will likely never collect, according to the PBGC. This urgency is not present when an employer misses a payment (a default under ERISA §4219(c)(5)(A)). The court decided that it would accord the interpretation deference because the PBGC's interpretation of the default provision was reasonable and compatible with the overall Congressional intent of the statute when read as a whole.

Therefore, the court concluded that the employer's default was governed by ERISA §4219(c)(5)(B) and that the entire withdrawal liability was immediately payable upon default, with no deferral because of the pendency of arbitration. The district court's judgment was affirmed.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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