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Assessing Potential Return – When the PBGC Files a [Huge] Claim in a Bankruptcy Case

What should interested parties in a bankruptcy case monitor when the Pension Benefit Guaranty Corporation (PBGC) files a claim in the case as an unsecured creditor?

When a company that has filed a petition in bankruptcy sponsors the type of pension plan insured by the PBGC, it is more likely than not that the pension plan is not adequately funded to provide all required benefits upon termination of the plan. As a result, the PBGC typically files a claim in the bankruptcy case as an unsecured creditor. To the extent the PBGC can recover any distribution for the underfunded pension plan, its own liability to the plan is reduced.

Since pension plans are costly to maintain and fund, the PBGC’s unsecured claims in bankruptcy cases tend to be quite large. The PBGC is not likely satisfied with recovering pennies on the dollar as an unsecured creditor. Since the PBGC’s mission is to protect private pension plans and their participants and beneficiaries, it will try to reach an available deeper pocket to satisfy the liabilities.

In this connection, constituencies and other interested parties in a bankruptcy case should evaluate to what extent the PBGC’s claim in the case may be satisfied by another party outside the bankruptcy case. The PBGC’s bankruptcy claim being (usually) so large, the recovery the PBGC achieves in any action against a party outside the bankruptcy case may alter the dynamics of the bankruptcy case.

For example, on May 31, 2012, RG Steel filed a chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware, and the PBGC is a significant creditor because RG Steel sponsored underfunded pension plans subject to Title IV of ERISA. As of August 31, 2012, the RG Steel pension plans were estimated to have total unfunded benefit liabilities of approximately $87.2 million. In January of the following year, the PBGC filed a complaint in the United States District Court for the Southern District of New York against the Renco Group, Inc. and its affiliates, alleging that the defendants were members of a “controlled group” under Title IV of ERISA along with RG Steel. Under Title IV of ERISA, members of a controlled group of an entity sponsoring a pension plan are jointly and severally liable for the funding of that pension plan.

The PBGC targeted Renco and its affiliates even though they did not meet the standard for percentage ownership as of the termination date for controlled group liability under Title IV of ERISA. The PBGC invoked ERISA section 4069, which (in brief) empowers a court reviewing controlled group liability of an entity to ignore any transaction entered into within five years before the termination date of a pension plan if the principal purpose of the transaction was to cause the entity to evade liability under Title IV of ERISA. Thus such an entity and members of its controlled group would remain jointly and severally liable for the funding of the pension plans, as if the evading transaction never occurred. The PBGC alleged that on January 17, 2012, defendant Renco closed a deal that reduced its ownership of RG Steel to a level below the 80% ownership level which would have maintained it and its affiliates within the controlled group of RG Steel. The PBGC alleged that intent to evade the liabilities of the pension plans is demonstrated by the fact that, prior to the transaction, Renco falsely stated to the PBGC that any agreement that would break up the controlled group was not imminent. The PBGC alleged that Renco’s misrepresentation was intended to induce the PBGC to refrain from exercising its right to initiate termination of the pension plans, which would have locked in Renco and its affiliates as jointly and severally liable controlled group members of RG Steel. The PBGC alleged also that Renco’s intent to evade liability can be demonstrated by the structure of the transaction, which in some respects was devoid of economic value.

Clearly, a PBGC victory over, or substantial settlement with Renco would diminish its claim in the RG Steel bankruptcy, perhaps substantially changing the potential distributions to unsecured creditors or decisively changing the voting dynamics with respect to any chapter 11 plan of reorganization to be proposed by RG Steel.

The PBGC has sought to ensnare private equity firms that hold an interest in the bankrupt and plan-terminating entity. In a 2007 opinion, the Appeals Board of the PBGC found that under certain circumstances, a private equity fund that owns at least 80% of a portfolio company (or may otherwise satisfy the controlled group tests) would be jointly and severally liable for ERISA Title IV liabilities, such as unfunded pension obligations of the portfolio company. To the contrary, in Sun Capital Partners v. New England Teamsters & Trucking Industry Pension Fund, a district court recently held that the private equity firm’s investment funds should not be aggregated within the controlled group of the entity with the ERISA Title IV liability because the fund was not a “trade or business.” That judicial decision notwithstanding, the PBGC continues to hold to its position in its 2007 Appeals Board opinion. Stakeholders in the bankruptcy case of a company in which the PBGC is a creditor should examine if the bankrupt company is held by a private equity fund and monitor to what extent the PBGC might pursue a claim against the fund, which, if successful, might reduce the PBGC’s claim against the bankruptcy estate.

About Mina Amir-Mokri

Mina Amir-Mokri has deep experience in the areas of employee benefits and executive compensation. She has represented executives, public and private companies, tax exempt organizations and various bankruptcy constituencies in the design and drafting of executive compensation arrangements, stock option and other equity plans, retirement plans, employment agreements, severance plans and agreements, and other benefits provisions.…

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Mina Amir-Mokri

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