Petition — Ouimet Corp. v. Pension Benefit Guaranty Corp.

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Supreme Court, U.&:

no. 8 0.- 860 FILED

NOV 26 1980.

In the

Supreme Court of the United Statesi *00ak. 1, cua

— ree

OcrosBer TERM, 1980.

OUIMET CORPORATION, OUIMET STAY & LEATHER

COMPANY, OUIMET WELTING COMPANY, EMIL 8.

OUIMET WAREHAM TRUST, AVON SOLE COMPANY,

TENN-ERO CORPORATION anp HERBERT KAHN,

TRUSTEE,

PETITIONERS,

PENSION BENEFIT GUARANTY CORPORATION anp

UNITED RUBBER, CORK, LINOLEUM anp PLASTIC

WORKERS OF AMERICA, SOLOMON REDDIX anp

ALEX WILLIAMS,

RESPONDENTS.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT.

Petition for Writ of Certiorari.

RicHarp G. MALONEY, RicHarp M. ZINNER,

MaLoney, WituraMs & Barer, P.C., FRIEDMAN & ATHERTON,

133 Federal Street, 28 State Street,

Boston, Massachusetts 02110. Boston, Massachusetts 02109.

(617) 482-9120 (617) 227-5540

Attorney for Petitioners, Attorney for Petitioners,

Ouimet Corporation, Avon Sole Company,

Ouimet Stay & Leather Tenn-ERO Corporation

Company, Ouimet Welting and Herbert Kahn,

Company and Emil R. Ouimet Trustee in Bankruptcy.

Wareham Trust.

BATEMAN & SLADE, INC. BOSTON , MASSACHUSETTS

Questions Presented.

1. Whether Congress imposed under the provisions of the

Employee Retirement Income Security Act of 1974 (ERISA),

88 Stat. 829, 29 U.S.C. § 1001 et seq., and, if so, did it violate

the Due Process Clause of the Fifth Amendment to the United

States Constitution by imposing, joint and several liability on

members of a controlled group of corporations to fund a law-

fully terminated pension plan contracted for and maintained

by one of its bankrupt members?

2. Whether the decision of the United States Court of Ap-

peals for the First Circuit erroneously imposed liability on two

bankrupt corporations, neither of whom had any positive net

worth, contrary to the wording and intent of ERISA?

3. Assuming arguendo that Congress did have the constitu-

tional power to so impose joint and several liability on mem-

bers of a controlled group of corporations, was Pension Benefit

Guaranty Corporation’s denial of a waiver of such liability as

permitted by § 4004(f)(4) of ERISA, 29 U.S.C. § 1304(f)(4)

“arbitrary, capricious [and an] abuse of discretion”?

Table of Contents.

Opinion below

Statement of jurisdiction

Statutory provisions involved

Statement of the case

Reasons for allowing the writ

I. The decision below conflicts with applicable deci-

sions of this court holding that retroactive imposi-

tion of liability combined with appropriation of

property of one employer for payment of retire-

ment benefits to employees of another is unconsti-

tutional

II. The decision below is erroneous and creates a

conflict of rationale among the circuits

III. The case presents critical issues of federal law

which should be settled by this court

Liability

Bankruptcy

Financial statements

. Waiver of liability

Petitioners’ construction of statute

HOO >

Conclusion

Appendix

Ib Wb

ii TABLE OF AUTHORITIES CITED.

Table of Authorities Cited.

CASES.

Allied Structural Steel Co. v. Spannaus, 438 U.S. 234

(1978) 15, 16, 17

A-T-O, Inc. v. Pension Benefit Guaranty Corporation,

456 F.Supp. 545 (N.D. Ohio 1978); appeal docketed,

No. 78-3269, 6th Cir., May 24, 1980 24, 25

Bendix Home Systems, Inc. v. Hurston Enterprises,

Inc., 566 F.2d 1039 (5th Cir. 1978), rehearing de-

nied February 28, 1978 20n

Environmental Defense Fund, Inc. v. Hardin, 428

F.2d 1093 (D.C. Cir. 1970) 25

Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir.

1970), rev'd on other grounds, 400 U.S. 41 (1970) 17

Gulfco Investment Corporation v. Hogan, 593 F 2d

921 (10th Cir. 1978), rehearing denied April 10, 1979 20n

Howard Johnson Co., Inc. v. Detroit Local Joint Ex-

ecutive Board, Hotel & Restaurant Employees, 417

U.S. 249 (1974) 20n

Nachman Corp. v. Pension Benefit Guaranty Corp.,

__U.S. ___, 100 S.Ct. 1723 (1980) 14

N.L.R.B. v. Burns International Security Services,

Inc., 406 U.S. 272 (1972) 12n, 20n, 21n

Pension Benefit Guaranty Corp. v. Ouimet Corp., 470

F.Supp. 945 (1979) 13, 21n

Railroad Retirement Board v. Alton Railroad Co., 295

U.S. 330 (1935) 12, 13, 14, 15, 17 et seq.

United Paperworkers International Union v. T.P. Prop-

erty Corp., 583 F.2d 33 (1st Cir. 1978) 12, 20n

TABLE OF AUTHORITIES CITED. iii

United States v. Thirty-Seven Photographs, 402 U.S.

363 (1971) 27

Usery v. Turner Alkon Mining Co., 428 U.S. 1(1976) 14,15

York Chrysler-Plymouth, Inc. v. Chrysler Credit Cor-

poration, 447 F.2d 786 (5th Cir. 1971) 20n

CONSTITUTIONAL PROVISIONS.

United States Constitution

Article I, § 10 2

Amendment V 2

Administrative Procedure Act, 5 U.S.C.

§ 706 25

§ 706(1) 6, 25

§ 706(2) 25

§ 706(2) (a) 6, 7, 24

Employee Retirement Income Security Act of 1974

(ERISA)

§ 302 16n

§ 1013 16n

§ 1017 18

§ 4001 19

§ 4001(b) 3, 18, 19, 20, 25 et seq.

§ 4003(e) 10

§ 4004(f) 4

§ 4004(f) (4) 24, 25

§ 4022(a) 14n

§ 4062 4,5, 10, 13, 17 et seq.

§ 4062(a) 19, 20

§ 4062(b) 22

§ 4062(b) (1) 6

§ 4062(b) (2) 6, 21

iv TABLE OF AUTHORITIES CITED.

ERISA (continued)

§ 4062(d) 19

§ 4063 4

§ 4064 6, 21

§ 4068(c) 16

Internal Revenue Code of 1954

§ 401

§ 401(c)(1)

§ 404(a)

§ 404(g)

§ 408(k)

§ 410

§ 411

§ 412

§ 414(b) 3,

§ 414(c) 3, 4, 18,

§ 1563

§ 1563(a) 3, 9, 10, 1

§ 1563(a) (4)

§ 1563(e)(3)(c)

§ 4971

Multiemployer Pension Plan Amendments Act of 1980

(Pub. Law 96-364) — Enacted September 26, 1980,

§ 205 19n

28 U S.C.

§ 1254(1) 2

29 U.S.C.

§ 1301(b) 3

§ 1304(f) 4

§ 1362 5

§ 1364 6

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No.

In the

Supreme Court of the United States.

OcTosBEerR TERM, 1980.

OUIMET CORPORATION, OUIMET STAY & LEATHER

COMPANY, OUIMET WELTING COMPANY, EMIL R.

OUIMET WAREHAM TRUST, AVON SOLE COMPANY,

TENN-ERO CORPORATION anp HERBERT KAHN,

TRUSTEE,

PETITIONERS,

PENSION BENEFIT GUARANTY CORPORATION aAnpb

UNITED RUBBER, CORK, LINOLEUM anp PLASTIC

WORKERS OF AMERICA, SOLOMON REDDIX anp

ALEX WILLIAMS,

RESPONDENTS.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT.

Petition for Writ of Certiorari.

Opinion Below.

The opinion of the Court of Appeals, not yet reported, ap-

pears in the Appendix hereto. The opinion of the United

States District Court for the District of Massachusetts, which

was affirmed by the Court of Appeals, appears at 470 F. Supp.

945. The opinion and order of the Bankruptcy Judge, Bank-

ruptcy Nos. 75-1520-HL, 75-1521-HL (D.C. Mass. May 13,

1977) are unreported but appear in the Appendix hereto.

Statement of Jurisdiction.

The judgment of the United States Court of Appeals for the

First Circuit was delivered and entered on August 29, 1980.

This Court's jurisdiction is invoked under 28 U.S.C. § 1254(1).

Statutory Provisions Involved.

UNITED STATES CONSTITUTION, ARTICLE I, § 10

No State shall ... pass any ... Law impairing the

Obligation of Contracts.

UnitTep STATES CONSTITUTION, AMENDMENT V

No person shall . . . be deprived of life, liberty, or prop-

erty, without due process of law... .

INTERNAL REVENUE Cope oF 1954

Section 414

(b) EMPLOYEES OF CONTROLLED GROUP OF

CORPORATIONS. — For purposes of sections 401,

408(k), 410, 411 and 415, all employees of all cor-

porations which are members of a controlled group of

corporations (within the meaning of section 1563(a),

determined without regard to section 1563(a) (4) and (e)

(3) (C)) shall be treated as employed by a single em-

ployer. With respect to a plan adopted by more than one

such corporation, the minimum funding standard of sec-

tion 412, the tax imposed by section 4971, and the appli-

cable limitations provided by section 404(a) shall be de-

termined as if all such employers were a single employer,

and allocated to each employer in accordance with regu-

lations prescribed by the Secretary.

PRIETORSHIPS, ETC., WHICH ARE UNDER COM-

MON CONTROL. — For purposes of sections 401,

408(k), 410, 411 and 415, under regulations prescribed by

the Secretary, all employees of trades of businesses

(whether or not incorporated) which are under common

control shall be treated as employed by a single employer.

The regulations prescribed under this subsection shall be

based on principles similar to the principles which apply

in the case of subsection (b).

Tite IV or ERISA § 4001(b), 29 U.S.C. § 1301(b)

An individual who owns the entire interest in an unin-

corporated trade or business is treated as his own em-

ployer, and a partnership is treated as the employer of

» a

each partner who is an employee within the meaning of

section 401(c) (1) of the Internal Revenue Code of 1954.

For purposes of this title, under regulations prescribed by

the corporation, all employees of trades or businesses

(whether or not incorporated) which are under common

control shall be treated as employed by a single employer

and all such trades and businesses as a single employer.

The regulations prescribed under the preceding sentence

shall be consistent and coextensive with regulations pre-

scribed for similar purposes by the Secretary of the Treas-

ury under section 414(c) of the Internal Revenue Code of

1954.

Tit.e IV or ERISA § 4004(f), 29 U.S.C. § 1304(f)

In addition to its other powers under this subchapter, for

only the first 270 days after the date of enactment of this

Act [September 2, 1974] the corporation may —

(4) waive the application for the provisions of sections

4062, 4063 and 4064 to, or reduce the liability imposed

under such sections on, any employer with respect to a

plan terminating during that 270 day period if the corpo-

ration determines that such waiver or reduction is neces-

sary to avoid unreasonable hardship in any case in which

the employer was not able, as a practical matter, to con-

tinue the plan.

Tir.e IV or ERISA § 4062, 29 U.S.C. § 1362

(a) This section applies to any employer who maintained

a plan (other than a multiemployer plan) at the time it

was terminated... .

(b) Any employer to which this section applies shall be li-

able to the corporation, in an amount equal to the lesser

of —

(1) the excess of —

(A) the current value of the plan’s benefits guar-

anteed under this title on the date of termination,

over

(B) the current value of the plan’s assets allocable to

such benefits on the date of termination, or

(2) 30 percent of the net worth of the employer de-

termined as of a day, chosen by the corporation but not

more than 120 days prior to the date of termination,

computed without regard to any liability under this

section.

(d) For purposes of this section the following rules apply

in the case of certain corporate reorganizations:

(1) If an employer ceases to exist by reason of a re-

organization which involves a mere change in identity,

form, or place of organization, however effected, a

successor corporation resulting from such reorgani-

zation shall be treated as the employer to whom this

section applies.

(2) If an employer ceases to exist by reason of a liq-

uidation into a parent corporation, the parent cor-

poration shall be treated as the employer to whom

this section applies.

(3) If an employer ceases to exist by reason of a

merger, consolidation, or division, the successor

corporation or corporations shall be treated as the

employer to whom this section applies.

Trr.e IV or ERISA § 4064, 29 U.S.C. § 1364

(a) This section applies to all employers who maintain a

plan under which more than one employer makes con-

tributions at the time such plan is terminated, or who, at

any time within the 5 plan years preceding the date of

termination, made contributions under the plan.

(b) The corporation shall determine the liability of each

such employer in a manner consistent with section 4062

except that the amount of the liability determined under

section 4062(b) (1) with respect to the entire plan shall be

allocated to each employer by multiplying such amounts

by a fraction —

(1) the numerator of which is the amount required

to be contributed to the plan by each employer for

the last 5 plan years ending prior to the termination,

and

(2) the denominator of which is the total amount re-

quired to be contributed to the plan by all such em-

ployers for such last 5 years,

and the limitation described in section 4062(b)(2) shall be

applied separately to each employer. The corporation

may also determine the liability of each such employer on

any other equitable basis prescribed by the corporation in

regulations.

ADMINISTRATIVE ProcepureE Act, 5 U.S.C. § 706(1) anp (2)(A)

To the extent necessary to decision and when presented,

the reviewing court shall decide all relevant questions of

law, interpret constitutional and statutory provisions,

and determine the meaning or applicability of the terms

of an agency action. The reviewing court shall —

(1) compel agency action unlawfully withheld or

unreasonably delayed; and

(2) hold unlawful and set aside agency action, find-

ings, and conclusions found to be —

(A) arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law. . .

Statement of the Case.

In 1959, Avon Soie Company (Avon) entered into a Retire-

ment Plan Agreement as part of its collective bargaining agree-

ment with its union to create the Avon Plan for the benefit of

its union employees. Thereafter, Avon paid the salaries and

benefits to its employees required under its collective bargain-

ing agreement, including contributions under and to the Avon

Plan. Avon's obligations were set forth in its agreement and

the Avon Plan satisfied all requirements of the Internal Rev-

enue Code of 1954 for deductibility of the contributions and

for the tax exemption of trust created thereunder. In ad-

dition, the Avon Plan gave Avon “the right to amend, modify,

suspend or terminate the Plan” and limited the benefits pay-

able on termination of the Plan to “the assets of the Retirement

Fund,” with Avon having “no liability or obligations . . . to

make any contribution or payment to establish or maintain the

Plan, whether in event of termination of the Plan or other-

wise.”

In September 1968 Ouimet Corporation (Ouimet), a Dela-

ware corporation, acquired all of the stock of Avon, some nine

years after the Avon Plan was established. At the time of ac-

quisition the Avor. Plan was in effect, continued to be

qualified under the Int. Rev. Code of 1954, and was under-

funded. Also at the time of acquisition, Ouimet operated a

manufacturing facility in Nashville, Tennessee. In 1973,

Avon formed a wholly-owned subsidiary, Tenn-ERO Cor-

poration (Tenn-ERO), to manufacture its product line in a

new and different plant in Tennessee.

At all times relevant to this case, Ouimet owned 100% of

the stock of Avon which owned 100% of the stock of Tenn-

ERO. Ouimet Stay & Leather Company (Ouimet Stay)

owned 100% of the stock of Ouimet Welting Company

(Welting), a dormant corporation, and 50% of the stock of

Brockton Plastics Company (not a member of the controlled

group). Emil R. Ouimet, an individual, owned in excess of

80% of the outstanding stock of Ouimet and Ouimet Stay, and

owned 100% of Wareham Trust. Such stock ownership is

shown as follows:

Emil R, Ouimet

100% 80% + oe +

Wareham Trust — ates Stay

7 %o | %

Avon Welting

50%

100 %

Brockton

Tenn-ERO Plastics

Following the 1968 acquisition of Avon, Ouimet and Avon

filed consolidated federal income tax returns and, beginning in

1973, Tenn-ERO joined as a member of the affiliated group in

the consolidated return (Ouimet Affiliated Group). The Emil

R. Ouimet Wareham Trust (Wareham Trust), a Massa-

chusetts trust with transferable shares, and Ouimet Stay &

Leather Company (Ouimet Stay) were members of the con-

trolled group of corporations, as defined in § 1563(a) of the

Int. Rev. Code of 1954, which required inter alia the appor-

tionment of the $25,000 surtax exemption among the members

of the controlled group. However, neither Ouimet Stay and

its affiliates nor Wareham Trust were members of the Ouimet

Affiliated Group and therefore could not and did not join with

Ouimet, Avon and Tenn-ERO in the filing of a consolidated

income tax return.’

In 1974 Avon experienced severe financial difficulties with

the result that in 1975 it closed its only plant located in Massa-

chusetts. Also as a result of these financial difficulties, Avon

' The Court of Appeals erroneously stated to the contrary in its Opinion.

ite WE cnt, CD. A

terminated the Avon Plan on March 25, 1975. ERISA became

law on September 2, 1974. Under the ERISA formula, the

Avon Plan was determined to have a deficiency in assets of

some $552,000 to fund the ERISA insured benefits under the

Avon Plan. Thereafter, Avon and Tenn-ERO Corporations,

were adjudicated bankrupt.

Pension Benefit Guaranty Corporation (PBGC) originally

determined that Avon “was the employer -ho maintained the

Plan” and therefore was liable under ERISA § 4062 for the

underfunding. PBGC filed a proof of claim for the alleged

underfunding on February 6, 1976. Thereafter, as a result of

further investigation, PBGC determined Avon, Tenn-ERO,

Ouimet, Ouimet Stay, Welting and Wareham Trust were to

be “treated as the employer who maintained the Plan” and

commenced a civil action against the non-bankrupt members

in the United States District Court for the District of Massa-

chusetts pursuant to ERISA § 4003(e). PBGC then filed a

complaint in the Bankruptcy Court seeking relief from the

automatic stay in bankruptcy in order to proceed against Avon

and Tenn-ERO (Bankrupts) by joining them in the civil ac-

tion. The District Court (Tauro, J., presiding) referred the

complaint to the bankruptcy judge (Lavien, J.) to serve as a

master in the civil action.

The Bankruptcy judge concluded that Avon alone had

liability under ERISA § 4062 and, since it had no positive net

worth, there was no liability. After a hearing, the District

Court (Tauro, J.) concluded that all of the petitioners, as

members of a controlled group of corporations within

§ 1563(a) of the Int. Rev. Code of 1954, were jointly and

severally liable to PBGC under ERISA § 4062 for the under-

funding of the Avon Plan, subject to the 30% net worth limita-

tion of ERISA; that the time for granting a waiver had expired

and no consideration could be given to such issue by the Court;

granted PBGC’s motion for partial summary judgment against

petitioners herein; and, remanded the case to the Bankruptcy

judge for a determination of the net worth of the controlled

group.

Finding conditions existed which permitted an immediate

appeal, the Court of Appeals for the First Circuit granted peti-

tioners’ request for permission to appeal from the District

Court’s interlocutory order and thereafter affirmed the judg-

ment of the District Court.

Reasons for Allowing the Writ.

I. Tue Decision BELow ConFLicrs WITH APPLICABLE DECI-

SIONS OF THIS Court HoLDING THAT RETROACTIVE IMPOSITION

or LIABILITY COMBINED WITH APPROPRIATION OF PROPERTY

oF ONE EMPLOYER FOR PAYMENT OF RETIREMENT BENEFITS TO

EMPLCc ’kES OF ANOTHER IS UNCONSTITUTIONAL.

The Court of Appeals for the First Circuit adopted the con-

struction urged by PBGC in the lower courts that ERISA im-

posed joint and several liability on all members of a controlled

group of corporations for the underfunding of the Avon Plan

in an amount in excess of $552,000 despite:

(a) the provisions of the Avon Plan which limited

liability for benefits to the assets in the Trust;

(b) the fact that Avon made all required payments to

its employees under its collective bargaining agreement

including the Avon Plan;

dividually or combined, had positive net worth on the

termination date;

(d) no member of the controlled group, other than

Avon, had signed or adopted the Avon Plan; and

(e) the employees of Avon alone were members of and

beneficiaries under the Avon Plan.

This holding is in direct conflict with this Court’s decision in

Railroad Retirement Board v. Alton Railroad Co., 295 U.S.

330 (1935).

Prior to the enactment of ERISA, Avon had no liability for

the Avon Plan’s asset deficiency in the event of its termination.

Avon had complied with the pre-ERISA requirements for

qualification of its pension plan under § 401 of the Int. Rev.

Code of 1954. Its only responsibility was to make annual con-

tributions, actuarially determined, during the term of the col-

lective bargaining agreement to which it was a party. Clearly,

its parent corporation, Ouimet, had no liability or responsibil-

ity for Avon’s undertakings and liabilities under Avon’s collec-

tive bargaining agreement (United Paperworkers Internation-

al Union v. T. P. Property Corp., 583 F.2d 33 (1st Cir. 1978) ;?

a fortiorari, the other members of the controlled group had no

liability for Avon’s obligations under its collective bargaining

agreement.

Any liability of Avon to its employees and PBGC prior to

September 2, 1974 was, like PBGC itself, non-existent. It

arose if at all by the passage of ERISA. It should be noted that

during the period from September 2, 1974 through March 25,

1975, the date the Avon Plan was terminated, the asset “defi-

ciency” actually declined from $606,000 to $550,000 so that if

2 Wherein the Court of Appeals for the First Circuit rejected the union’s at-

tempt to impose liability on the parent corporation to arbitrate and assume a

subsidiary’s obligations under its collective bargaining agreement, including

pension fund payments, since to do so would require the Court to disregard

the well-established legal precedent of recognizing separate corporate en-

tities “in favor of a novel rule of imputed liability.” 583 F.2d at 36. Accord,

N.L.R.B. v. Burns International Security Services, Inc., 406 U.S. 272 (1972).

the liability under § 4062 was limited to a deficiency created

after the passage of ERISA, no liability would exist.

The District Court, in holding that Avon was, together with

all members of the controlled group of corporations, jointly

and severally liable for the deficiency in assets on the termina-

tion of the Avon Plan, concluded that ERISA as so interpreted,

although admittedly retroactive, did not violate due process,

since it “would not substantially impair the provisions of the

Avon plan” (Pension Benefit Guaranty Corp. v. Ouimet

Corp., 470 F.Supp. 945, 956 [1979]) and that such liability

would “upset settled contractual expectations only to a

minimal degree.” 470 F.Supp. at 958.

In Alton Railroad, supra, this Court struck down the Rail-

road Retirement Act because it imposed liability on the

nation’s railroads to pay retirement benefits based not only on

future services, but also based on employment prior to enact-

ment of the Act. By so doing, the Act was, in essence, retroac-

tively altering the compensation contracts between the rail-

roads and their employees. In rejecting the government’s

argument that funding pension benefits based in part on past

services was in the best interests of the nation and the railroad

industry by promoting efficiency and safety in the future

operations of the railroad, the Supreme Court held that such

payment would deprive the employers of their property

without due process.

Plainly this requirement [of the Act], alters contractual

rights; plainly it imposes for the future a burden never

contemplated by either party when the earlier relation

existed or when it was terminated. The statute would

take from the railroads’ future earnings amounts to be

paid for services fully compensated when rendered in ac-

cordance with contract, with no thought on the part of

either employer or employee that further sums must be

provided by the carrier. The provision is not only

retroactive in that it resurrects for new burdens transac-

tions long since past and closed; but as to some of the

railroad companies it constitutes a naked appropriation

of private property upon the basis of transactions with

which the owners of the property were never connected.

Thus the Act denies due process of law by taking the

property of one and bestowing it upon another. This

onerous financial burden cannot be justified upon the

plea that it is in the interest of economy, or will promote

efficiency or safety. 295 U.S. at 349-350.

Notwithstanding the teachings of Alton Railroad, supra, the

First Circuit concluded, based on its reading of the legislative

history of ERISA and in reliance upon this Court’s decision in

Nachman Corp. v. Pension Benefit Guaranty Corp., ___ U.S.

___, 100 S.Ct. 1723 (1980),° that “despite the retroactivity in-

herent in the Act, there is no constitutional due process viola-

tion.” Ultimately, the First Circuit based its conclusion of “no

constitutional due process violation” upon Usery v. Turner

Alkon Mining Co., 428 U.S. 1 (1976).

Reliance upon Turner Alkon is improper since the retroac-

tivity of benefits for black lung victims imposed in that case

was essentially compensation for a tort injury, and the pay-

ment fell upon the employers who created “the dangerous con-

ditions under which the former employee labored” (428 U.S.

at 19) and on the employers “who have profited from the fruits

of their labor” (428 U.S. at 18).

However, in the instant case, the claim is in the nature of

additional wages, i.e., increased compensation over that re-

3This Court limited its review in Nachman, supra, to the question of

statutory interpretation of ERISA § 4022(a) and did not consider the consti-

tutional questions. 442 U.S. 940 (1980).

quired by the collective bargaining agreement, in order to

meet the former Avon employees’ or PBGC’s “generalized

need for funds” (428 U.S. at 19). The burden of this conclu-

sion will fall upon the creditors of the bankrupts‘ or the other

members of the controlled group having no direct relationship

with the Avon employees rather than on the former employer,

as was the situation in Turner Alkon.® Thus, this case should

be considered and determined by the rationale and holding in

Alton Railroad rather than Turner Alkon.

Moreover, the decision of the Court of Appeals for the First

Circuit conflicts with the rationale and holding of this Court

in Allied Structural Steel Co. v. Spannaus, 438 U.S. 234

(1978), wherein this Court held that a Minnesota statute

which imposed liability on employers who terminated pension

plans for the payment of an unfunded benefit to all employees

who worked at least ten years, including periods of employ-

ment prior to the effective date of the Act, was unconstitu-

tional as it violated the Contract Clause of the Constitution. In

so holding, this Court said that the effect of the Minnesota

statute on the company’s contractual obligations was “severe”

in that it essentially telescoped a normal funding period during

which the company could set aside funds necessary to meet its

obligations thereunder to one day. Such is the result of the

First Circuit’s holding that Avon (and other members of its

controlled group of corporations) became instantly and im-

mediately liable for the full underfunding of the Avon plan

when it was terminated. There was no liability on September

1, 1974. On September 2, 1974, a liability arose which had

‘(I]t is probable that PBGC will receive all of the bankrupt’s assets with

the creditors receiving nothing.” __ F.2d ____ (App. 3a).

5Ouimet and Ouimet Stay filed proofs of claim in the bankruptcy pro-

ceedings for any amounts they may be required to pay PBGC. The Trustee

in Bankruptcy filed a cross-claim seeking reimbursement from Ouimet and

Ouimet Stay for any amounts the estate may be required to pay PBGC.

the priority of a tax lien. ERISA § 4068(c). Such liability uni-

laterally amended all collective bargaining agreements con-

taining a defined benefit plan with employees as well as all se-

curity agreements with creditors. In addition, it rendered ex-

isting financial statements and credit reports invalid and ob-

solete. In striking down the Minnesota statute, this Court

stated that

[The Minnesota statute] . . . here nullifies express terms of

the company’s contractual obligation and imposes a com-

pletely unexpected liability in potentially disabling

amounts. 438 U.S. at 247.

Although Avon made the r quisite contributions to the Avon

Plan required under the bargaining agreement throughout its

existence, its premature termination on March 25, 1975 due to

dire financial circumstances deprived it of the time necessary

to fund the benefits which had accrued.® The Master found

the cause of the underfunding to be three-fold: (1) the Plan

gave credit for service prior to 1959; (2) the collective bargain-

ing agreement provided for automatic increases in benefits;

and (3) the value of the Plan’s assets reduced in value due to

market conditions.

Under the holding of the First Circuit, ERISA imposes im-

mediate liability for such deficiency contrary to the terms of

the Plan. Where no liability existed under its agreement on

September 1, 1974, suddenly and unexpectedly, on September

2, 1974, a substantial liability arose, with no time to prepare

for, avoid or protect against it. In the words of this Court in

Allied Structural Steel, supra, such change in its obligations

® ERISA § 302 and § 1013 imposed for the first time an obligation to amor-

tize past service costs, increases in liabilities and experience losses less

decreases in pension liabilities and experience gains over periods ranging

from 15 to 40 years.

was “severe” and in the words of the First Circuit in Fornar’s

v. Ridge Tool Co., 423 F.2d 563, 568 (1st Cir. 1970), rev'd on

other grounds, 400 U.S. 41 (1970); such was a change of “great

magnitude” as to violate the due process provisions of the Con-

stitution, considering only Avon’s rights and responsibilities.

More serious constitutional constraints are violated in apply-

ing this instant liability to the members of the controlled

group, other than Avon and Tenn-ERO, since such liability

rests solely upon their indirect relationship to Avon (through

common but not identical stock ownership) and not upon any

signature, action in adopting the Plan, or conduct of a pro-

scribed nature requiring the court to disregard the separate

corporate entities so as to impose common liability. As to the

other members of the controlled group, the imposition of this

novel liability under ERISA § 4062 is predicated solely on their

relationship to Avon.

[Such] constitutes a naked appropriation of private prop-

erty upon the basis of transactions with which the owners

of the property were never connected. Thus the Act

denies due process of law by taking the property of one

and bestowing it upon another. This onerous financial

burden cannot be justified upon the plea that it is in the

interest of economy, or will promote efficiency or safety.

Railroad Retirement Board v. Alton Railroad Co., supra

at 350.

Finally, the decision of the Court of Appeals for the First

Circuit disregards the distinction drawn by this Court in

Allied Structural Steel, supra, between the Minnesota Act

which “became fully effective the day after its passage” (438

U.S. at 249, n.23) and ERISA which provided “gradual ap-

plicability or grace periods” (438 U.S. at 246) thereby soften-

ing its impact and preserving its constitutionality. Assuming

arguendo that Congress intended and did impose joint and

several liability on members of a controlled group of corpora-

tions for ERISA § 4062 liability, time should be given to af-

fected employers to adjust to this “novel” concept. Time is

made available through the requirement of ERISA § 4001(b)

that it be applied “consistent and coextensive” with section

414(c) of the Int. Rev. Code of 1954. The latter section was

expressly made applicable to “plan years beginning after

December 31, 1975.” ERISA § 1017.

Il. Tue Decision BELOW 1s ERRONEOUS AND CREATES A

ConF.ict OF RATIONALE AMONG THE CIRCUITS.

Although the liability section of ERISA, § 4062, 29 U.S.C.

§ 1362 applies to “any employer who maintained a plan (other

than a multi-employer plan) at the time it was terminated”

and the facts show that only Avon signed the plan agreement;

contributed to the plan trust; and, only its employees par-

ticipated, the First Circuit held that each member of the

Ouimet Group comprising the controlled group of corpora-

tions within the meaning of § 1563(a) of the Int. Rev. Code of

1954, was jointly and severally liable for the deficiency under

§ 4062, 29 U.S.C. § 1362. The First Circuit based such liabili-

ty on its reading of § 4001(b), 29 U.S.C. 1301(b) which states,

in part, that: “all employees of trades or businesses (whether

or not incorporated) which are under common control shall be

treated as employed by a single employer and all such trades

and businesses as a single employer.”

Neither the language of the statute nor its legislative history

supports this reading of § 4001(b) by the First Circuit which

omits the words “all employees” and converts § 4001(b) into a

definitional statement of the term “single employer.” Such

rewriting of the section is erroneous because it:

(a) Adds a new “definition” to § 4001;

(b) Alters § 4001(b) by eliminating the subject of the

sentence, namely “employees,” and substitutes for it either

“corporations under common control” or “trades or businesses

under common control;”

Revenue Code of 1954 which was effected, as found by the

District Court, by the exchange of letters between the

Treasury and PBGC, so as to permit a deduction under § 404(g)

of the Int. Rev. Code of 1954 for the payment by a company

other than the actual employer which deduction was not al-

lowable prior to ERISA;’

(d) Ignores the word “single” in § 4001(b);

(e) Imposes joint and several liability on each member of

the controlled group for the § 4062 liability without any basis

or justification in the statutory language or legislative history;

(f) Makes § 4062(d) surplusage since it is not necessary to

impose § 4062(a) liability on a parent corporation on liquida-

tion if it is already liable as a member of the controlled group

of corporations;

(g) Imposes joint and several! liability on Avon and Tenn-

ERO, the bankrupts, having no positive net worth contrary to

the express wording of the § 4062 limiting liability to “30 per-

cent of the net worth of the employer;” and

7 Section 404(g) of the Int. Rev. Code of 1954 was amended by § 205 of the

Multiemployer Pension Plan Amendments Act of 1980 to allow a deduction,

effective from the enactment of the Act, for employer liability payments

under ERISA § 4062 to a taxpayer whose liability for the payments arises

solely out of membership in a controlled group of companies.

(h) Overrules well established and important judicial prec-

edent and rationale recognizing the limited liability of sepa-

rate entities by this and other federal courts.®

II]. Tue Case Presents Critica Issues oF FEDERAL LAw

WHICH SHOULD BE SETTLED BY THIS Court.

A. Liability.

Five judges in this case have considered and construed the

interrelationship of § 4001(b) with § 4062(a) of ERISA and

have arrived at three different meanings for the words used in

the statute. This issue is critical to:

(a) the many employers who are members of a con-

trolled group and their employees;

(b) any corporation considering acquiring another

which may have an underfunded pension plan;

having an underfunded plan who is seeking to be ac-

quired by a stronger corporation so as to enable it to stay

in business and continue to pay wages and make contri-

butions under its plan;® and

* Railroad Retirement Board v. Alton Railroad Co., supra; N.L.R.B. v.

Burns International Security Services, Inc., supra; Howard Johnson Co.,

Inc. v. Detroit Local Joint Executive Board, Hotel & Restaurant Employees,

417 U.S. 249 (1974); York Chrysler - Plymouth, Inc. v. Chrysler Credit Cor-

poration, 447 F.2d 786 (5th Cir. 1971); Bendix Home Systems, Inc. v.

Hurston Enterprises, Inc., 566 F.2d 1039 (5th Cir. 1978), rehearing denied

February 28, 1978; Gulfco Investment Corporation v. Hogan, 593 F.2d 921

(10th Cir. 1979), rehearing denied April 10, 1979; United Paperworkers In-

ternational Union v. T. P. Property Corp., supra.

°See N.L.R.B. v. Burns International Security Services, Inc., supra,

wherein this Court stated: “A potential employer may be willing to take

(d) PBGC itself which is obligated to fund the insured

benefits of the Avon plan as well as other similarly

situated plans.

The differing approaches and interpretations of the judges on

this critical issue and its importance not only to employees and

employers under ERISA but as it impacts on other areas of the

law require review and restatement by this Court.

If Congress intended to impose joint and several liability on

all members of a controlled group of corporations solely based

on their relationship, one would expect very clear statutory

language to that effect supported by extensive legislative find-

ings and history. In this case, § 4062 says not one word as to

how the liability is to be apportioned where there are multiple

entities and a single employer plan.'® Contrast this with

ERISA § 4064 which allocates liability among employers

under a multi-employer plan based on contributions and ap-

plies the 30% limitation of liability under § 4062(b)(2) to each

employer separately. Since imposition of liability on employ-

ers who had not signed or adopted the plan would at least be

“novel,” one should not have to seek out this liability and find

it only upon an extensive rewrite of the statute. If Congress

had intended the result found by the First Circuit, it was one

of the best kept Congressional secrets of all times.

over a moribund business only if he can make changes in corporate structure,

composition of the labor force, work location, task assignment, and nature of

supervision. Saddling such an employer with the terms and conditions of

employment contained in the old collective-bargaining contract may make

these changes impossible and may discourage and inhibit the transfer of

capital.” 406 U.S. at 287-288.

'!°The District Court (Tauro, J.) suggested that the failure of Congress to

apportion liability among members of the controlled group could be at-

tributable to “legislative oversight or to a determination that such apportion-

ment is better left as a business decision.” 470 F.Supp. at 953-954, n.20.

Fairness requires that, at least, the creditors and minority shareholders of all

affected members should have a vote in any such decision.

B. Bankruptcy.

Avon, which created and maintained the Avon Plan and

whose employees were the only ones covered by and benefited

from the plan, and Tenn-ERO, its wholly u-wned subsidiary,

which the parties and the Courts have combined herein, were

adjudicated bankrupt on March 22, 1976. On the critical

valuation date for § 4062 liability, neither had any positive net

worth. Under § 4062, neither should have any liability.

However, PBGC, by adding Ouimet, Ouimet Stay, Welting

and Wareham Trust, as members of a controlled group,

alleges that such combination creates an “employer” entity

which has a positive net worth and thereby creates a liability,

where none otherwise existed. However, the use of the term

“net worth” in § 4062 to define the limit of an employer’s

liability underscores the unmistakable intent of Congress to ex-

pose to PBGC only the funds of an employer as are not subject

to claims of general creditors. The concept of “net worth” by

its very nature shields from PBGC sufficient assets of the em-

ployer to cover outstanding liabilities, i.e., it prevents harm to

the creditors. The claim asserted against Avon and Tenn-

ERO by PBGC’s lien and claim and sustained by the lower

courts attains the very result which Congress through § 4062(b)

sought to avoid, viz., PBGC has a priority lien on all of the re-

maining assets of the bankrupts, despite the lack of any net

worth. Not only does the First Circuit’s decision have an ad-

verse impact on all creditors’ rights and their expectations in

bankruptcy, it has a chilling effect on all financial statements

issued from and after September 2, 1974.

C. Financial Statements.

The decision of the Court of Appeals for the First Circuit

that all members of a controlled group of corporations have

joint and several liability for an underfunded pension plan

which is terminated has far reaching effects on financial state-

ments, the financial community and on the credit worthiness

of every business organization. At the least, it requires that

each member of a controlled group note as a contingent liabil-

ity the amount of any underfunding of any member's plan

each year; if such a plan is thereafter terminated, each corpor-

ation must bring on its books and reflect as an actual liability

the amount of the deficiency under ERISA, regardless of the

net worth and ability to pay of the employer contracting for

and maintaining the plan; the liability may exceed 30% of an

individual member’s net worth when the net worth of other

members is added; and the liability may greatly exceed its

obligations under its own plan (of which a creditor would be

advised) since it must reflect liability under all other defined

benefit plans of every other member of a controlled group,

regardless of its ability to participate in the decision of adopt-

ing such a plan; each employer (and their creditors and share-

holders) must await the decision and action by PBGC as to

which member it will proceed against to collect the § 4062 li-

ability; and thereafter the paying entity must seek reimburse-

ment from or contribution by the other members having some

or all or no responsibility for the Plan. How does an un-

secured creditor protect himself against the priority of the

PBGC lien where the debtor is a known or unknown member

of a controlled group of corporations? What assurances can a

member of the controlled group seeking credit give that its

declared assets less disclosed liabilities are and will remain

available to an unsecured creditor if the maintenance or termi-

nation of an underfunded plan by another member (known or

unknown, existing or not yet a member) can wipe out or sub-

stantially reduce the net worth of the proposed debtor?

The legislative silence on this critical aspect of the issue is

strong, if not conclusive, evidence that Congress never envis-

ioned or intended to impose liability on multiple entities for

single employer plans.

D. Waiver of Liability.

By ERISA § 4004(f)(4), PBGC was given the power “for on-

ly the first 270 days after the date of enactment of the Act” to

waive or reduce the liability imposed by § 4062 “on any em-

ployer with respect to a plan terminating during that 270 day

period if the corporation determines that such waiver or re-

duction is necessary to avoid unreasonable hardship in any

case in which the employer was not able, as a practical matter,

to continue the plan.”

Because of horrendous losses, the Avon Plan was terminated

on March 25, 1975, within the 270 day period. However,

since neither Avon nor any member of the controlled group

submitted a written request for a waiver, PBGC declined to

consider or grant a waiver. The District Court and Court of

Appeals for the First Circuit both held that a written request

was not necessary to qualify for a waiver under § 4004(f)(4).

However, the courts below held that the expiration of the 270

day period terminated PBGC’s authority to act and peti-

tioners’ right to a waiver was thereby lost.

The District Court in A-T-O, Inc. v. Pension Benefit Cue

anty Corporation, 456 F. Supp. 545 (N.D. Ohio 1978) appeal

docketed, No. 78-3269, 6th Cir., May 24, 1980, held that

PBGC violated 5 U.S.C. § 706(2)(A) as being “arbitrary, cap-

ricious, [and] an abuse of discretion” where it failed to apply

the statutory standards of unreasonable hardship and im-

practicability of continuation in denying the plaintiff's request

for a waiver. Since “inaction is tantamount to an order deny-

ing” relief because it results in a final disposition of petitioner’s

rights, (Environmental Defense Fund, Inc. v. Hardin, 428

F.2d 1093[D.C. Cir. 1970]), the reviewing court is directed to

“compel agency action unlawfully withheld or unreasonably

delayed,” and to set aside agency action found to be “arbi-

trary, capricious [and] an abuse of discretion.” 5 U.S.C.

§ 706(1) and (2). The decision below fails to heed this clear

mandate.

The holdings by the First Circuit and District Court below

on this issue render the statutory provisions allowing a waiver

meaningless and makes the action, or inaction, by PBGC non-

reviewable. Such clearly must fail for lack of due process and

as violative of 5 U.S.C. § 706. Where PBGC would not act on

the grounds that a waiver was not requested by petitioners

herein (which the First Circuit and District Court both found

was not required by ERISA) and where the facts relevant to

the statutory standards are in the record, the courts should and

must act in determining whether a waiver under § 4004(f)(4)

should be granted. Accord, A-T-O, Inc. v. Pension Benefit

Guaranty Corporation, supra. It is difficult to conceive of a

case in which waiver would be more appropriate than in this

case.

E. Petitioners’ Construction of Statute.

Petitioners contend that the phrase in § 4001(b): “all

employees of trades or businesses (whether or not incor-

porated) which are under common control shall be treated as

employed by a single employer” (emphasis added) has the

same meaning as similar language of § 414(b) and (c) of the

Int. Rev. Code of 1954. The Congressional reports clearly

show that the “treatment of employees of trades or businesses

under common control,” as used in § 414(b) and (c) of the Int.

Rev. Code of 1954 did not require all members of a controlled

group to adopt the same plan or indeed to even have a plan.

Instead, § 414(b) and (c) were designed as a special rule to

prevent the use of the controlled group to circumvent the anti-

discriminatory provisions dealing with the qualification and

operation of the Plan. The same words should have the same

meaning in determining the amount of employees’ insured

benefits under a terminated plan and the employers liable

therefor. Viewed in the same light, § 4001(b) is meant to be a

special rule and not a definition to prevent the controlled

group from reducing or adversely affecting the amount of in-

sured benefits payable to employees of a terminated plan

merely by moving employees among members of the con-

trolled group so that liability, if any, would rest on having par-

ticipated in the proscribed misconduct or having received the

benefit of the employee’s services whose benefits are being re-

duced or eliminated, where such employer had not signed or

otherwise adopted the plan.

Under this construction, the employer who sets up and

maintains a plan by adopting and contributing to it is prima-

rily liable for any underfunding on its termination under

ERISA § 4062. Where, however, (1) such employer does not

have the necessary funds to pay the underfunding or such is

not collectible due to the limitations of § 4062 when applied to

such employer, and (2) a portion or all of the underfunding

arises from costs attributable to treating some employees of the

controlled group “as employed by a single employer,” then

upon the happening of both conditions, the other members of

the controlled group who are involved by their action are li-

able for all or such portion of the underfunding in proportion

to the benefit, if any, they have gained. As so construed, the

responsibility and payment are tied to and coextensive with

such benefit.

To adopt petitioners’ construction of the statute would give

the words used in the statute their ordinary meaning and make

them consistent with the other provisions of the statute. It

would leave ERISA intact and fuily effective to prevent any

abuse on termination, as it has to prevent abuse on quali-

fication and operation. It eliminates any constitutional ques-

tions. Such construction is favored. United States v. Thirty-

Seven Photographs, 402 U.S. 363 (1971).

Conclusion.

For the foregoing reasons, petitioners pray that this Court

allow a writ of certiorari to issue to the United States Court of

Appeals for the First Circuit for purposes of reviowing and re-

versing the decision of that Court.

Respectfully submitted,

RICHARD G. MALONEY,

MALONEY, WILLIAMS & BAER, P.C.,

133 Federal Street,

Boston, Massachusetts 02110.

(617) 482-9120

Attorney for Petitioners,

Ouimet Corporation,

Ouimet Stay & Leather

Company, Ouimet

Welting Company and

Emil R. Ouimet

Wareham Trust.

RICHARD M. ZINNER,

FRIEDMAN & ATHERTON,

28 State Street,

Boston, Massachusetts 02109.

(617) 227-5540

Attorney for Petitioners,

Avon Sole Company,

Tenn-ERO Corporation

and Herbert Kahn,

Trustee in Bankruptcy.

United States Court of Appeals

For the First Circuit

No. 79-1414

PENSION BENEFIT GUARANTY CORPORATION,

PLAINTIFF-APPELLEE,

and

UNITED RUBBER, CORK, LINOLEUM AND PLASTIC

WORKERS OF AMERICA, SOLOMON REDDIX AND

ALEX WILLIAMS,

PLAINTIFFS-INTERVENORS- APPELLEES,

OUIMET CORPORATION, OUIMET STAY & LEATHER

COMPANY, OUIMET WELTING COMPANY, EMIL R.

OUIMET WAREHAM TRUST, AVON SOLE COMPANY,

TENN-ERO CORPORATION AND

HERBERT KAHN, TRUSTEE,

DEFENDANTS-APPELLANTS.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. JosepH L. Tauro, U.S. District Judge]

Before Corrin, Chief Judge,

CAMPBELL and Bowness, Circuit Judges.

Richard G. Maloney and Sidney Werlin, with whom Maloney,

Williams & Baer, Richard M. Zinner, Friedman & Atherton, Paul

P. Daley, Hale & Dorr, Richard E. Mikels, and Riemer & Brauns-

tein were on brief, for appellants.

Judith F. Mazo, with whom Henry Rose, James R. Dulcan, and

Burns, Jackson, Miller, Summit & Washington were on brief, for

Pension Benefit Guaranty Corporation, appellee.

Bertram Diamond for United Rubber, Cork, Linoleum and

Plastic Workers of America, Soloman Reddix and Alex Williams, ap-

pellees.

PREVIOUS PAGE WAS BLANK

2 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

August 29, 1980

Bownes, Circuit Judge. Jurisdiction in this interlocutory ap-

peal from the United States District Court for the District of

Massachusetts is predicated upon 28 U.S.C. § 1292(b).! The

issue is one of first impression involving the interpretation of

the Employee Retirement Income Act of 1974 (ERISA), Pub.

L. No. 93-406, 88 Stat. 832, 29 U.S.C. §§ 1001-1381.

The case? began with the bankruptcy of a corporation,

Avon, and its wholly owned subsidiary, Tenn-ERO, which

were part of a larger group of corporations, the Ouimet

Group.’ A brief prefatory explanation of ERISA, and the

role in it of the Pension Benefits Guaranty Corporation

(PBGC), is necessary to appreciate the issues. Under ERISA,

PBGC assumes the administration and payment of benefits of

a terminated pension plan whose assets are insufficient to

cover all guaranteed benefits. PBGC may recover from the

employer 30% of its net worth determined as of a date within

one hundred twenty days of the plan termination, or the

deficit, whichever is less. The bankrupts, here, had no positive

net worth as of the valuation date. This means that, if the term

“employer” is limited to the bankrupts, PBGC recovers

1 In pertinent part, 28 U.S.C. § 1292(b) provides:

(b) When a district judge, in making in a civil action an

order not otherwise appealable under this section, shall be of

the opinion that such order involves a controlling question of

law as to which there is substantial ground for difference of

opinion and that an immediate appeal from the order may

materially advance the ultimate termination of the litigation,

he shall so state in writing in such order. The Court of Appeals

may thereupon, in its discretion, permit an appeal to be taken

from such order, if application is made to it within ten days

after the entry of the order... .

* The opinion of the district court is reported at 470 F. Supp. 945.

> The Ouimet Group challenges certain retroactively-applied pro-

visions of ERISA. After oral argument in the instant case, the

Supreme Court heard oral arguments in Nachman Corporation v.

PBGC, 48 U.S.L.W. 4524 (May 12, 1980), which also involved a

retroactivity challenge to the Act. Accordingly, we postponed our

decision until the Supreme Court had decided Nachman.

OPINION OF THE COURT 3

nothing and a dividend will be paid to the creditors. If, on the

other hand, “employer” is construed to mean the Ouimet

Group of corporations, including the bankrupts, it is probable

that PBGC will receive all of the bankrupts’ assets with the

creditors receiving nothing.

The Ouimet Group of Corporations

Over forty years ago, Emil R. Ouimet purchased the

Brockton, Massachusetts, shoe-trim manufacturing concern

for which he had worked for several years. In 1940, he

changed its name to Ouimet Leather Company. He renamed

it Ouimet Stay & Leather Company (Stay) when production

expanded to include shoe upper strippings as well as other

types of shoe findings.‘ In 1950, he founded Ouimet Corpora-

tion (Ouimet), a Delaware corporation with its principal place

of business in Nashville, Tennessee. Ouimet manufactures

shoe findings, laminations, and vinyl-coated fabrics. Emil also

founded Brockton Plastics (Brockton), a Massachusetts cor-

poration producing, among other things, shoe welting, and

Ouimet Welting (Welting), a now-dormant corporation. In

1968, Ouimet purchased the Avon Sole Company (Avon), a

shoe sole manufacturing factory located in Holbrook,

Massachusetts. In 1972, Avon formed a wholly-owned sub-

sidiary, Tenn-ERO, to operate a nonunion plant in

Lawrenceburg, Tennessee.

In 1971, Emil Ouimet created the Wareham Trust (Trust)

as a tax device. Its assets include the combined Stay-Brockton

factory and the houses in which Emil and his son Richard

reside.

Emil Ouimet owns 100% of Trust; 80% of Ouimet; and

80% of Stay He owned all stock in Avon which, in turn, held

100% of Tenn-ERO’s stock. Stay has a 100% interest in

Ouimet Welting; and a 50% interest in Brockton. At all times

‘ A finding is a trim, decorative item, or small stripping stitched

onto the upper portion of a shoe. The terms finding and stay are in-

terchangeable.

4 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

pertinent to this litigation, Emil Ouimet was president of all

Ouimet Group corporations except Ouimet and Stay, of which

Richard was president.

The Plan

Pursuant to a collective bargaining agreement with the

Rubber Workers Union and the International Brotherhood of

Firemen and Oilers, Avon instituted a pension plan for its

hourly workers in 1959. The plan provided for full vesting®

after ten years of service, if certain age criteria were satisfied.

It gave the company the right to “amend, modify, suspend or

terminate the Plan” and limited the benefits payable upon ter-

mination of the plan to “the assets then remaining in the Trust

Fund.” Avon made all actuarily mandated contributions, but

at all times the plan was underfunded. There were three

reasons for this. (1) Initial underfunding occurred because

credit was given for past years of service while no immediate

contribution to the plan for this credit was required. Rather,

the deficit was expected to be amortized over thirty years. (2)

Ouimet negotiated several benefit increases which were not

met by current contributions. (3) A decrease in the value of

certain fund investments in 1974 and 1975 led to a devaluation

of the plan assets. When Ouimet purchased Avon, the under-

funding amounted to $92,000. By March 25, 1975, the day

Avon closed its doors, it was $552,339.64.

Prior Proceedings

On June 18, 1975, Avon and Tenn-ERO filed Chapter XI

bankruptcy petitions; on March 22, 1976, they were ad-

judicated bankrupts. When the plant shut-down appeared im-

minent, Avon notified PBGC of its intent to terminate the pen-

sion plan.® PBGC responded to Avon’s request to terminate the

plan with a letter stating:

° Vesting is defined as the “nonforfeitable right of interest which

an employee acquires in the pension fund.” Employee Retirement

Income Security Act of 1974, H.R. Rep. No. 93-533, reprinted in

[1974] U.S. Cope Conc. & Ap. News 4639, 4643.

® 29 U.S.C. § 1341(a) requires plan administrators to notify

PBGC of proposed terminations at least ten days prior to the

proposed termination date.

OPINION OF THE COURT 5

It has been determined that Avon Sole Company was the

employe: who maintained the Plan at the date of ter-

mination for purposes of Section 4062 of the Act, 29

U.S.C. § 1362.

It estimated Avon’s liability to be $717,500 and filed a proof of

claim in the Avon/Tenn-ERO bankruptcy proceeding for that

amount. After examining the bankrupts’ books,’ PBGC deter-

mined that Ouimet, Stay, and Welting should also be con-

sidered employers who maintained the plan. It computed the

liability of the five corporations at $552,339.64,° and filed an

amended proof of claim in that amount in the bankruptcy

proceedings. Ouimet and Stay filed proofs claiming that, if

held liable, they should be subrogated to the rights of PBGC

against Avon and Tenn-ERO. The bankruptcy trustee cross-

claimed alleging that Ouimet and Stay should reimburse the

estate for any payments which Avon and Tenn-ERO would be

required to make to PBGC. On March 31, 1976, PBGC filed

suit against the Ouimet Group in the United States District

Court for the District of Massachusetts.* After filing

7 PBGC has broad investigatory authority under 29 U.S.C. §

1303(a)-(c).

® Maximum liability to PBGC is the lesser of the pension under-

funding or 30% of the employer's net worth. 29 U.S.C. § 1362(b).

PBGC determined the net worth of the Ouimet Group, excluding

Trust and Brockton, to be $1,875,283 on December 31, 1974.

Because 30% of net worth ($562,601.70) exceeds the amount of pen-

sion underfunding ($552,339.64) the liability equals the pension

fund deficit.

* 29 U.S.C. § 1303(e) authorizes PBGC to bring suit for legal

and/or equitable relief. Jurisdiction is vested in the United States

district courts.

After commencement of plan termination, if PBGC finds that the

plan is unable to pay basic benefits, 29 U.S.C. § 1341(e) empowers

PBGC to apply to the district court for a deciee adjudicating that

the plan must be terminated according to procedures outlined in 29

U.S.C. § 1342. Pending adjudication, “such court shall

stay .. . any pending bankruptcy.” 29 U.S.C. § 1342(f).

6 PENSION BENEFIT GUARANTY CORP, 0, OUIMET CORP.

suit against Ouimet, Stay, Welting, Avon, and Tenn-ERO,

PBGC determined that Trust should be treated as an employer

as well and it was joined as an additional defendant.

The district court named PBGC trustee of the Avon plan.’°

It appointed the bankruptcy judge sitting on the Avon/Tenn-

ERO proceedings to serve as master.'! Following a twelve-day

trial in December, 1976, the bankruptcy judge recommended

that no liability attach to the Group and that Avon/Tenn-

ERO’s negative net worth relieved them of liability to PBGC.

After release of the bankruptcy judge’s memorandum, Union

moved to intervene to protect the interests of former Avon

employees and the district court granted the motion. The

court held a hearing on March 13, 1979. In its opinion, it ruled

that ERISA imposes joint and several liability on all members

of a controlled group of corporations. After a careful analysis

of the statutory and constitutional issues, it granted PBGC’s

motions for partial summary judgment and for relief from the

automatic stay in bankruptcy and remanded the case to the

bankruptcy court for a determination of the net worth of the

Ouimet Group of corporations. Pension Benefit Guaranty

Corp. v. Ouimet Corp., 470 F. Supp. 945, 954, 958 (D. Mass.

1979). We affirm, but on somewhat different grounds.

The Statutory Scheme

The employer-sponsored retirement income program, as

one form of worker compensation, came into prominence in

'0 29 U.S.C. § 1342(b) authorizes the appointment by the district

court of PBGC as trustee. The court named PBGC trustee of Avon's

plan on April 20, 1976, ordering that the termination be effective as

of March 25, 1975. PBGC now pays monthly benefits averaging $87

to 108 employees. An additional 150 workers will receive no pension

because their rights were not vested when Avon went out of

business.

'! A district court may appoint a special master “in matters of ac-

count and of difficult computation of damages.” Fed. R. Civ. P. 53.

The proceedings were consolidated because the issues in both cases

were “substantially identical.” PBGC v. Tenn-ERO Corp., No.

76-1314 (D. Mass. May 13, 1977).

OPINION OF THE COURT 7

the 1940's. Expansion of coverage and a parallel increase in

plan assets were marked in the ensuing decades. The field was

unregulated by the federal government until the enactment, in

1958, of the Welfare and Pension Plans Disclosure Act. 29

U.S.C. § 301 et seq. Its purpose was to curb abuses by those to

whom plan administration was entrusted. In 1962,

criminalization of certain acts of malfeasance gave the earlier

legislation some clout. Employee Retirement Income Act of

1974, H.R. Rep. No. 93-533, 93d Cong., 2d Sess., reprinted in

[1974] U.S. Cope Conc. & Ap. News 4639, 4640-41. Plans ad-

ministered jointly by employers and unions were under the

dominion of the Labor Management Relations Act, 29 U.S.C.

§ 141 et seg. The tax advantages accruing to employers

prompted Congress to enact Revenue Code provisions con-

trolling plan contributions. 26 U.S.C. §§ 401-404. Only a plan

maintained “for the exclusive benefit of [the] employees or

their beneficiaries” was deemed qualified. 26 U.S.C. § 401(a)

(4). Of primary significance were antidiscrimination rules

denying deductions if a plan was designed to benefit officers,

shareholders, or highly compensated employees. Id.

By 1974, pension plans had burgeoned to include over thirty

million workers; $150 billion in assets were held in trust for

pensions, H.R. Rep. No. 93-533, supra, [1974] U.S. Cope

Conc. & Ap. News at 4641; and twenty thousand workers

were annually affected by pension plan failures. Employee

Retirement Income Security Act of 1974, S. Rep. No. 93-383,

93 Cong. 2d Sess., reprinted in [1974] U.S. Cope Conc. & Ap.

News, 4890, 5036. In many instances, benefits were subject to

forfeiture “even when separated employees [were] within a

few months, or even days, of qualifying for retirement.” H.R.

Rep. No. 93-533, supra, [1974] U.S. Cope Conc. & Ap. News

at 4643. The cloud of forfeitability was attributable to lack of

uniformity in vesting, the Internal Revenue provisions requir-

ing funding of current, but not past-service liabilities, and

8 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

plan agreements which generally limited employee benefits to

the corpus of the pension fund if a plan terminated

prematurely.

Congress confronted these problems by enacting ERISA, a

comprehensive statutory scheme detailing “minimum stan- -

dards . . . assuring the equitable character of [pension] plans

and their financial soundness.” 29 U.S.C. § 1001(a).'* 29

U.S.C. §§ 1301-81 created the Pension Benefit Guaranty Cor-

poration and instituted a system of pension plan termination

insurance. Designed to guarantee minimum pension benefits

to workers whose employers discontinue pension plans, ter-

mination insurance is an industry-wide risk — and cost-

sharing program. From a pool of premiums contributed by

employers who maintain plans, PBGC pays vested benefits to

affected employees when a plan terminates. In addition to

participation in the insurance program, which is mandatory in

most instances, “any employer who maintained a plan (other

than a multiemployer plan) at the time it was terminated,” 29

U.S.C. § 1362(a), is liable to PBGC for the lesser of

(1) the excess of —

(A) the current value of the plan's benefits

guaranteed under this subchapter on the date of termina-

tion over

(B) the current value of the plan's assets allocable to

such benefits on the date of termination, or

(2) 30 percent of the net worth of the emplover deter-

mined as of a day, chosen by the corporation but not

more than 120 days prior to the date of termination, com-

puted without regard to any liability under this section.

29 U.S.C. § 1362(b).

'2 29 U.S.C. §§ 1001-1144 set out requirements of minimum par-

ticipation, vesting, and funding. 26 U.S.C. §§ 401-415 contain coor-

dinate tax provisions. 29 U.S.C. §§ 1201-42 detail the procedure for

the agencies to whom enforcement is relegated.

OPINION OF THE COURT 9

Who Is The Employer?

We start with the definition section of subchapter III —

Plan Termination Insurance. 29 U.S.C. § 1301(b) provides in

part:

For purposes of this subchapter, under regulations

prescribed by the corporation, all employees of trades or

businesses (whether or not incorporated) which are under

common control shall be treated as employed by a single

employer and all such trades and businesses as a single

employer. The regulations prescribed under the

preceding sentence shall be consistent and co-extensive

with regulations prescribed for similar purposes by the

Secretary of the Treasury under section 414(c) of Title

26! (emphasis added).

Section 1301(b) applies, by its terms, only to groups “under

common control” as that term is defined in regulations coex-

tensive with the regulations under 26 U.S.C. § 414(c)."

13 26 U.S.C. § 414(c) states in pertinent part, “all employees of

trades or businesses (whether or not incorporated) which are under

common control shall be treated as employed by a single employer.”

'* Temporary Treasury Regulations promulgated under 26

U.S.C. § 414(c) provides in part:

§11.414(c)-2 Two or more trades or businesses under com-

mon control [TD 7388, filed 10-31-75].

(a) In general. For purposes of this section, the term “two or

more trades or businesses under common control” means any

group of trades or businesses which is either a “parent-

subsidiary group of trades or businesses under common con-

trol” as defined in paragraph (b) of this section, a “brother-

sister group of trades or businesses under common control” as

defined in paragraph (c) of this section, or a “combined group

of trades or businesses under common control” as defined in

paragraph (d) of this section. For purposes of this section and

§§ 11.414 (c)-3 and 11.414(c)-4, the term “organization”

means a sole proprietorship, a partnership (as defined in sec-

tion 7701(a)(2)), a trust, an estate, or a corporation.

(b) Parent-subsidiary group of trades or businesses under

common control — (1) General. The term “parent-subsidiary

group of trades or businesses under common control”

l0a

10 PENSION BENEFIT GUARANTY CORP. U0. OUIMET CORP.

Those regulations define a group “under common control” as a

parent-subsidiary group, brother-sister group, or combined

group. The regulations go on to define these terms

means one or more chains of organizations conducting trades

or businesses connected through ownership of a controlling in-

terest with a common parent organization if—

(i) A controlling interest in each of the organizations, except

the common parent organization, is owned (directly and with

the application of § 11.414(c)-4 (b) (1), relating to options) by

one or more of the other organizations; and

(ii) The common parent organization owns (directly and

with the application of § 11.414(c)-4(b)(1), relating to options)

a controlling interest in at least one of the other organizations,

excluding, in computing such controlling interest, any direct

ownership interest by such other organizations.

(2) Controlling interest defined—(i) Controlling interest.

For purposes of paragraphs (b) and (c) of this section, the

phrase “controlling interest” means:

(A) In the case of an organization which is a corporation,

ownership of stock possessing at least 80 percent of the total

combined voting power of all classes of stock entitled to vote of

such corporation or at least 80 percent of the total value of

shares of all classes of stock of such corporation:

(B) In the case of an organization which is a trust or estate,

ownership of an actuarial interest of at least 80 percent of such

trust or estate:

ownership of at least 80 percent of the profits interest or capital

interest of such partnership; and

(D) In the case of an organization which is a sole proprietor-

ship, ownership of such sole proprietorship.

(ii) Actuarial interest. For purposes of this section, the ac-

tuarial interest of each beneficiary of a trust or estate shall be

determined by assuming the maximum exercise of discretion by

the fiduciary in favor of such beneficiary. The factors and

method prescribed in § 20.2031-10 of this chapter (Estate Tax

Regulations) for use in ascertaining the value of an interest in

property for estate tax purposes shall be used for purposes of

this subdivision in determining a beneficiary’s actuarial in-

terest.

mon control — (1) General. The term “brother-sister group of

trades or businesses under common control” means two or

lla

OPINION OF THE COURT ll

according to the degree and nature of common stock owner-

ship. The Ouimet Group, with the exception of Brockton,

which was excluded by stipu'ation, clearly meets the test of

stock ownership in the regulations. The group is, therefore,

under common control for purposes of section 1301(b).

The apparent meaning of section 1301(b) is that a group

under common control is to be treated as a single employer for

more organizations conducting trades or businesses if (i) the

same five or fewer persons who are individuals, estates, or

trusts own (directly and with the application of § 11.414(c)-4),

singly or in combination, a controlling interest of each

organization, and (ii) taking into account the ownership of

each such person only to the extent such ownership is identical

with respect to each such organization, such persons are in ef-

fective control of éach organization.

(2) Effective control defined. For purposes of this

paragraph, persons are in “effective control” of an organiza-

tion if —

(i) In the case of an organization which is a corporation,

such persons own stock possessing more than 50 percent of the

total combined voting power of all classes of stock entitled to

vote of such corporation or more than 50 percent of the total

value of shares of all classes of stock of such corporation:

(ii) In the case of an organization which is a trust or estate,

such persons own an aggregate actuarial interest of more than

50 percent of such trust or estate:

(iii) In the case of an organization which is a partnership,

such persons own an aggregate of more than 50 percent of the

profits interest or capital interest of such partnership; and

(iv) In the case of an organization which is a sole proprietor-

ship, such persons own such sole proprietorship.

(d) Combined group of trades or businesses under common

control. The term “combined group-of-trades or businesses

under common control” means any group of three or more

organizations, if (1) each such organization is a member of

either a parent-subsidiary group of trades or businesses under

common contro! or a brother-sister group of trades or

businesses under common control, and (2) at least one such

organization is the common parent organization of a parent-

subsidiary group of trades or businesses under common control

and is also a member of a brother-sister group of trades or

businesses under common control.

12a

12 PENSION BENEFIT GUARANTY CORP. U. OUIMET CORP.

purposes of subchapter III, which is entitled Plan Termination

Insurance. It appears, then, that the term “employer,” as used

in section 1362(b), which is part of subchapter III, refers, in

the case of a group under common control, to all the “trades or

businesses” which are members of the group. Under this

reading of the statute, all members of the Ouimet Group

would be jointly and severally liable to PBGC.

Ouimet argues, however, that section 1301(b) does not

mean what it appears to mean. Rather, in Ouimet’s view, this

language was intended only to prevent employers from

avoiding application of ERISA by shifting employees around

among various corporate entities. Ouimet maintains that, in

the absence of section 1301(b), an employer could avoid ap-

plication of ERISA by dividing into several corporations, each

with less than twenty-five employees. Alternatively, an

employer could shift an individual employee among corpora-

tions so as to minimize his length of service in any one corpora-

tion to avoid allowing his benefits to become vested.

Ouimet is correct in asserting that Congress intended to pre-

vent such evasion of ERISA. It is clear, however, that this was

accomplished through the anti-discrimination rules of Title II

and the vesting and participation minimums under Title I. If

Congress had intended to limit the application of section

1301(b) to certain purposes, such as computing the number of

employees for application of section 1321(b)(13), or the length

of an employee’s service for application of section

1322(b)(3)(A), it could have done so by referring specifically to

the affected sections. Instead, Congress referred to “this sub-

chapter.” We must assume that Congress meant, by that

phrase, the whole subchapter, including section 1362(b).

Ouimet argues that our reading of section 1301(b) renders

section 1362(d)(2) superfluous. On this point, we agree with

the district court’s observation; since the definition of “parent”

in the regulations under 26 U.S.C. § 414(c) is not incorporated

into section 1362, there may be situations in which an

l3a

OPINION OF THE COURT 13

employer is liquidated into a parent corporation which does

not meet the definition of “parent” that is used to define a

group under common control. In such a situation, section

1301(b) would not apply, and section 1362(d)(2) would be

necessary to impose liability on the parent.

Ouimet also asserts that our reading of section 1301(b) is in-

compatible with section 1107(d)(7). Ouimet focuses on the

words, “[a] corporation is an affiliate of an employer if it is a

member of any controlled group of corporations . . . of which

the employer who maintains the plan is a member,” 29 U.S.C.

§ 1107(d)(7), and argues that this means that the employer

cannot be the group. Again, we agree with the district court.

This argument ignores the fact that section 1301(b) is in Title

IV of the Act and applies only to subchapter III of that Title.

The asserted incompatible language of section 1107(d)(7) is

not in Title IV, let alone subchapter III. Defendants’ construc-

tion mixes apples and oranges.

We do not think it necessary to track in detail each of

Ouimet’s other arguments against application of the plain

meaning of section 1301(b), since we consider them

adequately addressed in the district court’s opinion. We hold

that the Ouimet Group, as a group under common control, is

one employer for purposes of liability under section 1362.

We are not persuaded that, because only one of a group of

corporations under common control contributes to a plan, it is

unjust to make the group responsible for the plan’s deficit. The

facts of this case illustrate why such a group should be treated

as an integrated whole. Ouimet purchased Avon with full

knowledge of the plan and its funding requirements. Ouimet

participated in the labor negotiations resulting in greater pen-

sion benefits that contributed to the deficit. The Ouimet

Group filed a consolidated tax return on which the Avon con-

tributions were deducted. We see nothing unfair in treating

the Ouimet Group as a single employer.

We agree with the district court that the group under com-

mon contro] consists of Ouimet, Trust, Stay, Welting, and

Avon/Tenn-ERO.

l4a

14 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

Retroactivity

Defendants challenge the retroactive impact of ERISA for

underfunding liability on both statutory and constitutional

grounds. The Sixth Circuit confronted the same challenges in

Nachman Corporation v. Pension Benefit Guaranty Corpora-

tion, 592 F.2d 947 (7th Cir. 1979). Its decision upholding the

retroactivity features of the Act on both grounds was

appealed. The Supreme Court granted certiorari, but limited

its review to the statutory question. Nachman Corporation v.

Pension Benefit Guaranty Corporation, 48 U.S.L.W. 4524

(May 12, 1980). It stated the statutory question as follows:

The question in this case is whether former employees of

petitioner with vested interests in a plan that terminated

the day before much of ERISA became fully effective are

covered by the insurance program notwithstanding a pro-

vision in the plan limiting their benefits to the assets in

the pension fund.

Id. at 4524. It held that, despite the retroactive effect on the

Nachman Corporation, the pension benefits were “non-

forfeitable” and that PBGC had a statutory right to reimburse-

ment from the employer. Since the pension plan in this case

terminated prior to December 31, 1975, and contains

language substantially identical to the language in the

Nachman plan, defendants’ statutory retroactive challenge is

foreclosed by the Supreme Court decision in Nachman. See

dissent of Mr. Justice Powell. Id. at 4534.

The constitutional challenge to the retroactive effects of

ERISA on defendants is based on due process grounds. The

battle lines are drawn around redoubtable cases. Defendants

rely primarily on Allied Structural Steel Co. v. Spannaus, 438

U.S. 234 (1978), and Railroad Retirement Board v. Alton

Railroad Co., 295 U.S. 330 (1935). PBGC counters with Usery

v. Turner Elkhorn Mining, 428 U.S. 1 (1976). We agree with

the Sixth Circuit that Turner Elkhorn carries the day.

The record supporting the enactment of ERISA,

l5a

OPINION OF THE COURT 15

wholly unlike that present in Allied Structural Steel,

demonstrates that “the presumption favoring ‘legislative

judgment as to the necessity and reasonableness of a par-

ticular measure’ ” must be allowed to govern here. 438

U.S. at 247, 98 S. Ct. at 2724. Turner Elkhorn Mining,

428 U.S. at 18, 19, 96 S.Ct. 2882; Williamson v. Lee Op-

tical Co., 348 U.S. 483, 488, 75 S.Ct. 461, 99 L.Ed. 563

(1955). Title IV of ERISA satisfies Nachman’s rights to

Due Process.

Nachman Corporation v. Pension Benefit Guaranty Corpora-

tion, 596 F.2d at 963. We note that the Supreme Court quoted

extensively in a footnote the analysis the Seventh Circuit used

to distinguish ERISA from the Minnesota statute in Allied

Structural Steel Co. v. Spannaus. Nachman Corporation v.

Pension Benefit Guaranty Corporation et al., 48 U.S.L.W. at

4526 n.12. We hold that, despite the retroactivity inherent in

the Act, there is no constitutional due process violation.

Waiver

T.) temper the immediate impact of ERISA on employers

terminating plans, Congress authorized PBGC to issue full or

partial liability waivers in cases of extreme hardship during

the first two hundred seventy days after ERISA’s enactment.

29 U.S.C. §§ 1304(f)(4).!5 During the two hundred

seventy day period, PBGC promulgated no guidelines relative

to waiver application procedures, but, on May 30, 1975, the

final day of its temporary authority, it waived liability

15 29 U.S.C. § 1304(f) in relevant portion provides:

In addition to its other powers under this subchapter, for only

the first 270 days after September 2, 1974, the corporation

may—

(4) waive the application of the provisions of sections 1362,

1363, and 1364 of this title to, or reduce the liability imposed

under such sections on, any employer with respect to a plan

terminating during that 270 day period if the corporation

determines that such waiver or reduction is necessary to avoid

unreasonable hardship in any case in which the employer was

not able, as a practical matter, to continue the plan.

l6a

16 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

in most cases in which it had received a letter requesting a

waiver. These waivers were contingent upon subsequent in-

vestigation into qualification for hardship status. The sole pro-

cedural requirement of section 1304(f)(4) is that the plan ter-

minate during the applicable period. Fulfilling that require-

ment triggers eligibility for consideration of relief from

liability.

On March 14, 1975, more than two months prior to the ex-

piration of PBGC’s temporary authority, Avon notified PBGC

of its intent to terminate the plan on March 25, 1975. PBGC

replied with a request for information about the plan and the

reasons for its dissolution. Avon made a timely reply to the cor-

respondence, outlining its poor financial condition. On May

29, 1975, Avon’s plan administrator advised an Avon vice-

president, Thomas Rosser, that Avon should forward a waiver

request to PBGC “by registered mail on May 30.” PBGC did

not receive the letter, dated June 5, until the tenth of June and

refused to consider the waiver request. The Ouimet Group

now asserts that it is entitled to consideration for a hardship

waiver, contending that it had no knowledge that PBGC

would waive liability only if a specific request were made. It

contends that the June 15th letter “indicates no more than the

diligence of the actuary, who became concerned about the

absence of any action by PBGC.” Our reading of the record

leads us to the contrary conclusion. The letter from the com-

pany plan administrator to Rosser states:

Enclosed is a draft of the letter I mentioned in our

telephone conversation which should be forwarded on

Company stationery to the PBGC by registered mail on

May 30, to meet the 270 day period from September 2,

1974.

It indicates that Avon knew PBGC had instituted a waiver-

request procedure. Whether Avon learned this formally or in-

formally, it failed to act during the requisite time period. Avon

correctly states that the statute requires no_ specific

17a

CONCURRING OPINION, BOWNES, J 17

request for a waiver; but, once it had knowledge of PBGC’s

housekeeping rules, it should have followed them. Moreover,

as the district court pointed out, the Act allowed waiver by

PBGC “for only the first 270 days” after enactment. 29 U.S.C.

§ 1304(f)(4). That period has passed.

Affirmed.

Bownes, Circuit Judge (concurring specially). While I agree

with the panel, I think its statutory analysis, like that of the

district court, is incomplete. It glosses over, without address-

ing, the main statutory problem — that ERISA recognizes two

groups of businesses: businesses (whether or not incorporated)

which are under common control, and a controlled group of

corporations. Each is defined separately and _ treated

separately under the Act. Unfortunately, the parties and the

district court, to some degree, have used the terms inter-

changeably. Since the key question is whether the single

employer definition of businesses under common control

under section 1301(b)'® brings the Ouimet Group within the

liability provisions of section 1362(a),'’ and, since section 1301

does not refer to controlled groups of corporations at all, it is

6 29 U.S.C. § 1301(b) provides in pertinent part:

For purposes of this subchapter, under regulations pre-

scribed by the corporation, all employees of trades or

businesses (whether or not incorporated) which are under com-

mon control shall be treated as employed by a single employer

and all such trades and businesses as a single employer. The

regulations prescribed under the preceding sentence shall be

consistent and coextensive with regulations prescribed for

similar purposes by the Secretary of the Treasury under section

414(c) of Title 26.

'7 29 U.S.C. § 1362(a) provides in pertinent part: “This section

applies to any employer who maintained a plan (other than a multi-

employer plan) at the time it was terminated[.].”

18a

18 PENSION BENEFIT GUARANTY CORP. 0. OUIMET CORP.

necessary to examine the Act to determine how both entities

are treated and into which category the Ouimet Group falls.

Congress defined controlled group by adopting the Internal

Revenue Code definitions of 26 U.S.C. § 1563(a)'® which make

stock ownership the test. It did not, at the time it passed

ERISA, define groups under common control in terms of any

16 29 U.S.C. § 1060(c) refers to 26 U.S.C. § 1563(a)(1)-(3) which

contains the following definition of controlled group of corpora-

tions.

(a) Controlled group of corporations.—For purposes of this

part, the term “controlled group of corporations” means any

group of —

(1) Parent-subsidiary controlled group.—One or more

chains of corporations connected through stock owner-

ship with a common parent corporation if—

(A) stock possessing at least 80 percent of the

total combined voting power of all classes of stock

entitled to vote or at least 80 percent of the total

value of shares of all classes of stock of each of the

corporations, except the common parent corpora-

tion, is owned (within the meaning of subsection (d)

(1)) by one or more of the other corporations; and

(B) the common parent corporation owns

(within the meaning of subsection (d) (1) stock

possessing at least 80 percent of the total combined

voting power of all classes of stock entitled to vote

or at least 80 percent of the total value of shares of

all classes of stock of at least one of the other cor-

porations, excluding, in computing such voting

power or value, stock owned directly by such other

corporations.

(2) Brother-sister controlled group.—Two or more

corporations if stock possessing at least 80 percent of the

total combined voting power of all classes of stock

entitled to vote or at least 80 percent of the total value of

shares of all classes of stock of each of the corporations is

owned (within the meaning of subsection (d) (2)) by one

person who is an individual, estate, or trust.

(3) Combined group.—Three or more corporations

each of which is a member of a group of corporations

described in paragraph (1) or (2), and one of which—

(A) is a common parent corporation included in

a group of corporations described in paragraph (1),

and also

(B) is included in a group of corporations

described in paragraph (2).

19a

CONCURRING OPINION, BOWNES, J. 19

existing provisions of the Internal Revenue Code. In section

1301(b), it provided that, under regulations prescribed by

PBGC, all employees with trades or businesses under common

control are to be treated as employed by a single employer. It

further directed that the PBGC regulations “shall be consistent

and coextensive with regulations prescribed for similar pur-

poses by the Secretary of the Treasury under section 414(c) of

Title 26.” The regulations promulgated by the Secretary of the

Treasury after the enactment of ERISA under 26 U.S.C. §

414(c), see footnote 14, supra, defined groups under common

control in the same terms as controlled groups. This, however,

cannot change the separate treatment given these two entities

under the Act.

The Ouimet Group fits into the definition of both entities; it

is a group of businesses under common control and also a con-

trolled group of corporations. The problem inherent in this

dual role is that businesses under common control and a con-

trolled group of corporations are not treated in the same man-

ner throughout the Act.

That section defining a multiemployer plan states, “all cor-

porations which are members of a controlled group of corpora-

tions . . . shall be deemed to be one employer.” 29 U.S.C. §

1002(37)(B)(ii). There is no mention of trades or businesses

under common control in this section of the Act.

Multiemployer plans are exempted from the liability provi-

sions of 29 U.S.C. § 1362(a). Liability is imposed under 29

U.S.C. § 1364(a) on “all employers who maintain a plan under

which more than one employer makes contributions at the

time such plan is terminated . . .” Since the plan here is not

multiemployer and since Ouimet is a controlled group, it can

be argued that only the employer (the bankrupts) who main-

tained the plan are liable.

For purposes of minimum participation, vesting and benefit

accrual, a controlled group and businesses under common con-

20a

20 PENSION BENEFIT GUARANTY CORP. U. OUIMET CORP.

trol receive separate but equal tandem treatment under 29

U.S.C. §§ 1060(c) and (d).'*

Disparate treatment of these entities does not, however,

eliminate the common control definition of employer from the

liability section of the Act. I would hold specifically that

where, as here, there is a controlled group of corporations that

also meets the definition of businesses under common control,

section 1301(b) makes the group a single employer for liability

purposes under section 1362(a).

19 29 U.S.C. §§ 1060(c) and (d) provide:

title, all employees of all corporations which are members of a

controlled group of corporations (within the meaning of sec-

tion 1563(a) of Title 26, determined without regard to section

1563(a)(4) and (e)(3)(C) of Title 26) shall be treated as

employed by a single employer. With respect to a plan adopted

by more than one such corporation, the minimum funding

standard of section 1082 of this title shall be determined as if

all such employers were a single employer, and allocated to

each employer in accordance with regulations prescribed by

the Secretary of the Treasury.

(d) For purposes of sections 1052, 1053, and 1054 of this

title, under regulations prescribed by the Secretary of the

Treasury, all employees of trades or businesses (whether or not

incorporated) which are under common control shall be

treated as employed by a single employer. The regulations

prescribed under this subsection shall be based on principles

similar to the principles which apply in the case of subsection

2la

United States Court of Appeals

For the First Circuit

No. 79-1414.

PENSION BENEFIT GUARANTY CORPORATION, ET AL.,

PLAINTIFFS, APPELLEES,

OuIMET CORPORATION, ET AL.,

DEFENDANTS, APPELLANTS.

JUDGMENT

Entered August 29, 1980

This cause came on to be heard on appeal from the United

States District Court for the District of Massachusetts, and was

argued by counsel.

Upon consideration whereof, it is now here ordered, ad-

judged and decreed as follows: The judgment of the district

court is affirmed.

By the Court:

/s/ Dana H. Gallup.

Clerk.

22a

United States District Court

District of Massachusetts

In re:

TENN-ERO CORPORATION,

AVON SOLE COMPANY,

Bankrupts

PENSION BENEFIT

GUARANTY CORPORATION,

Plaintiff

TENN-ERO CORPORATION,

AVON SOLE COMPANY and

HERBERT C. KAHN, Trustee,

Defendants

PENSION BENEFIT

GUARANTY CORPORATION

vo.

OUIMET CORPORATION,

OUIMET STAY & LEATHER

COMPANY and OUIMET

WELTING COMPANY

Memorandum *

Bankruptcy No.

75-1520-HL

No. 75-1521-HL

Civil Action

No. 76-1314-T

This opinion concerns itself with the possible liability of a

bankrupt corporation, jointly and severally with its parent and

brother-sister corporations, for pension underfunding pur-

suant to the Employee Retirement Income Security Act of

1974.

*In Pension Benefit Guaranty Corp. v. Ouimet Corp., et al, C.A. No.

76-1314-T, this Memorandum constitutes the Master's Report and its Find-

23a

Prior to 1975, the Avon Sole Company (Avon) engaged in the

manufacture of shoe soling material in its plant in Massachu-

setts. In 1973 Avon formed Tenn-ERO Corporation (Tenn-

ERO), a wholly owned subsidiary,' to manufacture soling

material in a new plant in Tennessee. During its fiscal year

ending September, 1974, Avon and Tenn-ERO (the Bank-

rupts) suffered consolidated operating losses of $800,000. Los-

ses increased in the first quarter of 1975 and as a result

management decided to discontinue manufacturing oper-

ations in Massachusetts. The Avon plant closed on March 25,

1975, but heavy losses continued, and on June 18, 1975 Avon

and Tenn-ERO filed petitions in this Court pursuant to

Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq.

Subsequently, on March 22, 1976, Avon and Tenn-ERO were

adjudicated bankrupts.

At the time of the closing of the Massachusetts plant, Avon

was a party to a pension plan agreement, dated May 4, 1959,

covering its unionized employees, all of whom worked in the

Massachusetts plant. Pursuant to the Employee Retirement

Income Security Act of 1974 (ERISA), P.L. 93-4006, 29

U.S.C. § 1001 et seg, Avon notified the Pension Benefit

Guaranty Corporation (PBGC) of the impending discon-

tinuance of operations in Massachusetts and the need to ter-

minate the pension plan. Under ERISA the PBGC is charged

with the administration of the pension plan termination proc-

ess and the distribution of plan benefits after termination.*

ings of Fact and Conclusions of Law are submitted to the District Judge for

approval. The unusual procedural posture of this case is explained infra.

' Although separate in name, the companies were for all practical purposes

one. and have so been treated by all parties throughout these proceedings.

2On April 20, 1976, the PBGC was appointed trustee of the Avon Sole

Company Pension Plan pursuant to ERISA § 4041 by Judge Tauro of the

U.S. District Court for the District of Massachusetts.

24a

The PBGC filed a proof of claim in the bankruptcy pro-

ceeding of Avon and Tenn-ERO on February 6, 1976, claim-

ing that pursuant to ERISA § 4062 the debtors were liable to

the PBGC for an estimated $717,500.

Title IV of ERISA provides that upon the termination of a

pension plan, the PBGC is to assume the plan’s administration

and, if necessary, to pay any guaranteed pension benefits if the

plan itself has not been sufficiently funded to pay them.

ERISA § 4062 provides that an employer who maintains an

underfunded pension plan which terminates is liable to the

PBGC for an amount that is either the deficit between the

plan’s guaranteed benefits and its assets (in other words, the

out of pocket expense of the PBGC) or 30% of the employer’s

net worth, whichever is less.°

3 Liability of Employer

Sec. 4062. (a) This section applies to any employer who maintained a plan

(other than a multiemployer plan) at the time it was terminated, but does not

apply —

(1) to an employer who maintained a plan with respect to which he paid

the annual premium described in section 4006(a)(B) for each of the 5 plan

year during which the plan terminated unless the conditions imposed by the

corporation on the payment of coverage under section 4023 do not permit

such coverage to apply under the circumstances, or

(2) to the extent of any liability arising out of the insolvency of an insur-

ance company with respect to an insurance contract.

(b) Any employer to which this section applies shall be liable to the cor-

poration, in an amount equal to the lesser of —

(1) the excess of —

(A) the current value of the plan’s benefits guaranteed under this title on

the date of termination over

(B) the current value of the plan’s assets allocable to such benefits on the

date of termination, or

(2) 30 percent of the net worth of the employer determined as of a day,

chosen by the corporation but not more than 120 days prior to the date of

termination, computed without regard to any liability under this section.

(2) the net worth of an employer is —

25a

In September, 1968, when Ouimet Corporation acquired

the stock in Avon, the Avon pension plan had unfunded vested

benefits in the amount of $92,000. In September, 1974, when

ERISA became effective, the underfunding amounted to

$606,929.53. On March 25, 1975, upon plan termination, the

underfunding was reduced to $552,339.64.

The cause of the underfunding was basically three-fold.

First, in 1959 when the plan was instituted participants were

given credit for past years of service with Avon. So the plan

owed benefits before contributions even began. Second, in

1969, pursuant to a collective bargaining agreement, auto-

matic benefit increases were written into the plan and these

had not been fully amortized by the date of termination. And

third, the plan’s assets had been invested in certain equity and

(1) determined on whatever basis best reflects, in the determination of the

corporation, the current status of the employer’s operations and prospects at

the time chosen for determining the net worth of the employer, and

(2) increased by the amount of any transfers of assets made by the

employer determined by the corporation to be improper under the cir-

cumstances, including any such transfers which would be inappropriate

under the Bankruptcy Act if the employer were the subject of a proceeding

under that Act.

(d) For purposes of this section the following rules apply in the case of cer-

tain corporate reorganizations.

(1) If an employer ceases to exist by reason of a reorganization which in-

volves a mere change in identity, form, or place of organization, however ef-

fected, a successor corporation resulting from such reorganization shall be

treated as the employer to whom this section applies.

(2) If an employer ceases to exist by reason of a liquidation into a parent

corporation, the parent corporation shall be treated as the employer to

whom this section applies.

(3) If an employer ceases to exist by reason of a merger, consolidation, or

division, the successor corporation or corporations shall be treated as the

employer to whom this section applies.

(e) If an employer ceases operations at a facility in any location and, as a

result of such cessation of operations, more than 20 percent of the total

number of his employees who are participants under a plan established and

maintained by him are separated from employment, the employer shall be

treated with respect to that plan as if he were a substantial employer under a

plan under which more than one employer makes contributions and the pro-

visions of sections 4063, 4064, and 4065 shall apply.

26a

fixed-income securities, and at the date of termination the

market value of these securities was approximately $75,000

less than their costs. None of these factors, on its face, rep-

resented any illegal or improper conduct on the part of Avon.

In fact, ERISA, recognizing that plan underfunding for

reasons such as these would often be the case, provides for the

amortization of past underfunding over a period of thirty to

forty years. ERISA § 302. The reason the Avon pension plan

terminated in an underfunded state in this case was because it

terminated before amortization under ERISA was complete.

During February and March, 1976, the PBGC examined the

books and records of the Bankrupts as well as those of certain

related business enterprises — Ouimet Corporation, Ouimet

Stay & Leather Company, Ouimet Welting Company and the

Emil R. Ouimet Wareham Trust (collectively the Ouimet

Group).

At all times relevant to this case, Ouimet Corporation

owned 100% of the stock of Avon/Tenn-ERO. The Ouimet

Stay & Leather Company owned 100% of the stock of Ouimet

Welting Company and 50% of the stock of Brockton Plastics

Company. Emil R. Ouimet owned in excess of 80% of the

outstanding stock of Ouimet Corporation and the Ouimet Stay

& Leather Company, and 100% of the stock of the Emil R.

Ouimet Wareham Trust.‘

‘ __ ll A, ~iaaaae

100 % + 80 % + 80 %

Weschinn Trust Ouimet Corp. Ouimet Stay & Leather

100% 100%

Avon Ouimet

Welting

100 % 50 %

| |

Tenn-ERO Brockton Plastics

27a

On March 15, 1976, the PBGC filed an amended proof of

claim in the instant proceedings in the amount of $552,340

and based this figure on the treatment of the Ouimet Group as

well as the Bankrupts as the plan employer for purposes of

ERISA § 4062.

On March 22, 1976, Ouimet Corporation and Ouimet Stay

& Leather Company filed proofs of claim in the Avon and

Tenn-ERO bankruptcy proceeding alleging that if Ouimet

Corporation and Ouimet Stay & Leather Company were held

liable to the PBGC as a result of the Avon pension plan term-

ination, they were subrogated to the rights of the PBGC

against the Bankrupts. The Trustee in Bankruptcy filed a

cross claim asserting that if the PBGC’s claim against the

Bankrupts were allowed, the estate had a right to collect from

Ouimet Corporation and Ouimet Stay & Leather Company in

the amount distributed to the PBGC. Ouimet Corporation

and Ouimet Stay & Leather answered the cross claim with

denials.

On March 31, 1976, the PBGC commenced a civil action

against the Ouimet Group in the United States District Court,

pursuant to ERISA § 4068(d), to collect the alleged § 4062

liability of the Ouimet Group. The PBGC then filed a com-

plaint in the Bankruptcy Court seeking relief from the auto-

matic stay in bankruptcy in order to proceed against the Bank-

rupts by joining them in the District Court action.

The procedural posture of the instant case embodies an ob-

jection by the Trustee in Bankruptcy to the PBGC’s claim

against the Bankrupts, the complaint filed by the PBGC in this

Court seeking relief from the automatic stay of Bankruptcy

Act § 11 and Rule 401 of the Rules of Bankruptcy Procedure,

and a reference to this Court as Master in the U.S. District

Court action of the PBGC against the Ouimet Group. The

issues as well as the role of the Court in all these matters are

substantially identical, and for purposes of convenience they

28a

will be dealt with as a single proceeding to determine the

validity and amount of any liability in connection with the

termination of the Avon Sole Company Pension Plan.

Trial of this case began on October 19, 1976 and consumed

all or part of twelve days. At least 257 pages of legal memo-

randa have been filed at various stages of the proceedings.

All counsel have labored diligently and competently in full

recognition that this is a case of first impression, not only in

this district, but, because of the novelty of the Act, in the

United States. The case has important implications in bank-

ruptcy administration as well as in the implementation of

ERISA and the viability of certain concepts of corporate law.

ERISA provides for the payment to the PBGC for monies

spent to pay benefits due from a terminated pension plan

whose own assets were insufficient. Payment must come from

the employer and the amount is limited so as not to exceed

30% of the employer’s net worth. ERISA § 4062. It is con-

ceded, and the Court so finds, that Avon and Tenn-ERO, the

Bankrupts, had no positive net worth at the relevant date so

that unless the Ouimet Group may be included as the respons-

ible employer, the PBGC cannot recover any of its benefit ex-

penditures. If the Ouimet Group is included as the employer,

then the question of the meaning and proper application of the

waiver provision of ERISA § 4004(f) must be resolved. Final-

ly, if the Ouimet Group becomes part of the employer and

waiver of liability is inappropriate, the net worth of the

employer must be established in order to determine the prop-

riety of the PBGC’s claim.

The Pension Benefit Guaranty Corporation is a “body

corporate” in the U.S. Department of Labor, ERISA

§ 4002(a), and as such it is an agency within the meaning of

29a

§ 2a of the Administrative Procedure Act (APA), 5 U.S.C.

§ 551. See also, Joint Explanatory Statement of the Commit-

tee of Conference, House Conference Report, No. 1280, 93rd

Cong., 2d Sess. (1974). Because it involves the actions of an

administrative agency, this case must be decided in light of the

constraints existing both upon agency action and a court’s ex-

amination of that action.

The framework for judicial review of agency action is sup-

plied by APA § 10,5 U.S.C. §§ 701, 702. That section affords

a right of review to a person adversely affected by agency ac-

tion “except to the extent that (1) statutes preclude judicial

review; or (2) agency action is committed to agency discretion

by law.” The U.S. Supreme Court has enunciated the prin-

ciple that only on a showing of “clear and convincing” intent

to preclude court review should courts refuse to review agency

action. Dunlop v. Bachowski, 421 U.S. 560 (1975); Abbott

Laboratories v. Gardner, 387 U.S. 136 (1967); Heikkila v.

Barber, 345 U.S. 229 (1953). Professor Davis argues that this

statement of the Court is somewhat more extreme than is

justified by the majority of Supreme Court cases in this area;

however, even he defines the general rule of the Supreme

Court as establishing a presumption of reviewability to be re-

butted by showing either a contrary Congressional intent or

the inappropriateness of judicial consideration. 4 K. Davis,

Administrative Law Treatise §§ 28.08 and 28.16-1 (1958 and

Supplements) (hereinafter cited as Davis). Professor Jaffe

concurs in this presumption of reviewability. L. Jaffe,

Judicial Control of Administrative Action at 336 and 372-3

(1965) (hereinafter cited as Jaffe).

Thus, in the instant case, a finding that ERISA fails to evi-

dence a Congressional intent, express or implied, to preclude

review, together with a finding that review is not inappropri-

ate, are enough to justify judicial review under APA § 10.

30a

In the case of ERISA, it is unnecessary to look beyond the

words of the Act itself to determine the propriety of general

court review. Title IV § 4003(f) provides that an employer

adversely affected by any action of the PBGC may bring an ac-

tion in the appropriate court. In the instant case, the Bank-

rupts and the Ouimet Group, having been declared liable by

the PBGC pursuant to ERISA § 4062, have clearly been ad-

versely affected by an agency action and this Court may there-

fore examine the validity of the PBGC’s action.

Once reviewability has been established, it is necessary to

define the scope of that review.

The instant case involves the assessment by an administra-

tive agency of a monetary liability based on factual findings

obtained from examination of detailed and complicated fi-

nancial data. At no time prior to the assessment were the

original parties offered the opportunity to appear before the

agency to explain their financial records or defend their posi-

tions. Therefore, before any liability may be finally deter-

mined, such a hearing is a constitutional necessity. Bi-

Metallic Co. v. Colorado, 239 U.S. 441 (1915); Londoner v.

Denver, 210 U.S. 373 (1908).

* Actually, the express words of ERISA § 4003(f) are slightly confusing

because of an apparent typographical error.

Any participant, beneficiary, plan administrator, or employee ad-

versely affected by any action of the corporation [PBGC] or by a

receiver or trustee appointed by the corporation, with respect to a plan

in which such participant, beneficiary, plan administrator or em-

ployer has an interest, may bring an action against the corporation,

receiver or trustee in the appropriate court. (Emphasis added)

It is obvious that there is an error either in the word “employee” or “employ-

er.” Since § 3(7) of ERISA defines a “participant” to include an employee,

to repeat that term would be purposeless. To include employers, however,

would be totally consistent with the section’s obvious intent to make court

review available to all those who could suffer under Title IV. It would seem,

therefore, that the error lies in the word “employee,” which should read “em-

ployer.” The PBGC, in open court, has concurred with this interpretation.

3la

Professor Davis formuiates this due process hearing re-

quirement into an adjudicative/legislative dichotomy, saying

that when an agency adjudicates facts a trial type hearing is

required. 1 Davis § 7.04. Professor Jaffe speculates that cate-

gorization often confuses more than clarifies, but accepts the

basic due process pronouncement:

When a person is the object of an administrative order

which will be enforced by a writ levying upon his prop-

erty or person, he is at some point entitled to a judicial

test of legality.

Jaffe at 384.

This is not to say, however, that the hearing must always oc-

cur at the agency level. So long as the aggrieved party is pro-

vided a de novo hearing prior to the enforcement of the agency

action, the constitutional requisites have been met. Nickey v.

Mississippi, 292 U.S. 393 (1934); Phillips v. Commissioner,

283 U.S. 589 (1931); Hagar v. Reclamation District, 111 U.S.

701 (1884). Thus, when an agency assessed a tax against an

individual, the U.S. Supreme Court has held that the failure of

the agency to provide the taxpayer a hearing prior to the

assessment did not violate due process requirements because in

order to actually enforce the assessment the agency had to

resort to the courts at which time a full hearing occurred.

Hagar v. Reclamation District, supra.

The instant case is similar to those in which the Supreme

Court has held that de novo court review of agency action

satisfies due process. The PBGC, without any prior evidentia-

ry hearing, assessed a liability against the Bankrupts and the

Ouimet Group. To enforce collection of that assessment the

instant court action has been necessary. ERISA § 4068(d).

Therefore, this Court, in offering all parties the opportunity to

32a

present their cases, must consider the evidence presented de

novo. Ewing v. Mytinger & Casselberry, 339 U.S. 594 (1950);

Lichter v. U.S., 334 U.S. 742 (1948); Nickey v. Mississippi,

supra.

In light of the de novo hearing requirement, the Court’s

scope of review of the PBGC’s action is fairly broad. To the

extent necessary to its decision, the Court “shall decide all rele-

vant questions of law, interpret constitutional and statutory

provisions and determine the meaning or applicability of the

terms of an agency action.” APA § 10(c),5 U.S.C. § 706. The

Court shall set aside an agency action if it is, inter alia, ar-

bitrary, capricious, contrary to constitutional right or “unwar-

ranted by the facts to the extent that the facts are subject to a

trial de novo by the reviewing court.” Id.

The standards for this Court’s scope of review must take into

account that the agency has already acted, albeit without a

hearing. Even the Court’s de novo reception of evidence can-

not ignore the agency’s findings. Thus, unless the weight of

the evidence presented in the de novo hearing supports a con-

trary finding, the Court must uphold the agency action. It is

the burden of the aggrieved party to establish that the agency

action complained of violates statutory or procedural require-

ments or is unwarranted according to the weight of the evi-

dence. Redman v. U.S., 507 F. 2d 1007 (5th Cir. 1975).

Further, as part of the consideration of its scope of review of

the agency’s interpretation of a statute, the Court takes note of

the deference a judicial tribunal must extend to an adminis-

trative agency’s specialized expertise. The rule is venerable

that a reviewing court must give great weight to the inter-

pretation of a statute by the agency charged with its adminis-

tration. Columbia Broadcasting System, Inc. v. Democratic

National Committee, 412 U.S. 94 (1973).

It is also well established, however, that the courts are the

final authorities on the issue of statutory construction and as

33a

such the courts are not bound by an administrative interpreta-

tion. Especially is this true when the agency interpretation

creates internal statutory inconsistencies or is inconsistent with

a statutory mandate, frustrates congressional policy or creates

serious constitutional questions. Morton v. Ruiz, 415 U.S. 199

(1974); Volkswagonwerk v. Federal Maritime Commission,

390 U.S. 261 (1968); Annot. 39 L. Ed. 2d 942 (1975). The

Court takes note in the instant case of the PBGC’s youth and

the consequent dearth of established agency policy and prece-

dent that existed at the pertinent time in areas of its jurisdic-

tion. To a certain extent this inexperience must discourage

notions of agency expertise that are part of the justification for

a court’s deference. Furthermore, to the extent that the

Court’s review concerns the meaning of the words of a statute,

for instance, the definition of the term “employer” or the scope

of the waiver provision within ERISA, such questions are

traditionally a matter of judicial competence and concern.

Jaffe at 576 et seq.

The liability which the PBGC asserts in this case arises out

of the employer liability provisions of ERISA, specifically

§ 4062.

The PBGC claims that liability under ERISA § 4062 must

be assessed not only against the Bankrupt, who was the actual

employer, but also against the Ouimet Group because the

term “employer” as used in § 4062 means all trades or busi-

nesses under common control within the terms of ERISA

§ 4001(b).° The PBGC apparently maintains that in light of

®ERISA § 4001(b) states:

An individual who owns the entire interest in an unincorporated

trade or business is treated as his own employer, and a partnership is

34a

ERISA § 4001(b), the term “employer” wherever it appears in

Title IV of ERISA encompasses the control group concept.

In regulations promulgated by the PBGC pursuant to

ERISA § 4001(b), the PBGC adopts the regulations issued by

the Treasury Department under § 414(c) of the Internal Rev-

enue Code. 29 C.F.R. § 26.12 (Supp. 1976). The Treasury

Department defines “trade or business under common

control” in Temp. Reg. 11.414(c). See also Proposed Regs.

1.414 et seq, CCH Fed. Tax Rept. para. 2669F.

The Treasury Regulations delineate three groups of business

relationships as common control situations. The first two,

parent-subsidiary and brother-sister, are self explanatory. The

third, the combined group, consists of three or more businesses

where each is a member of either a parent-subsidiary or

brother-sister group and at least one is both the parent in a

parent-subsidiary group and a member of a brother-sister

group. The Regulation gives the following example: A, an

individual, owns substantially all the stock of subsidiary ABC

and DEF corporations. ABC owns substantially all the stock

of subsidiary X corporation. A, ABC, X and DEF are

members of a combined group since each is a member of either

a parent-subsidiary or brother-sister group and ABC is both a

parent in a parent-subsidiary group and a “sibling” in a

brother-sister group.

treated as the employer of each partner who is an employee within the

meaning of section 401(c)(1) of the Internal Revenue Code of 1954.

For purposes of this title, under regulations prescribed by the corpora-

tion, all employees of trades or businesses (whether or not incorpor-

ated) which are under common control shall be treated as employed by

a single employer and all such trades and businesses as a single employ-

er. The regulations prescribed under the preceding sentence shall be

consistent and coextensive with regulations prescribed for similar pur-

poses by the Secretary of the Treasury under section 414(c) of the In-

ternal Revenue Code of 1954. (Emphasis added)

35a

In the instant case the relationship of the entities places

them in the combined group category of Temp. Treas. Reg.

11.414(c).

The PBGC concedes that unless the term “employer” in the

liability provision of ERISA § 4062 is defined to include con-

trol group entities, the PBGC would not succeed in recouping

any of the funds it may spend to pay benefits in the underfund-

ed Avon Sole Company Pension Plan.

ERISA envisions that the PBGC will assume the administra-

tion and disbursement of a terminated pension plan whose

assets are insufficient to cover all guaranteed benefits. ERISA

further provides that within certain limits, the PBGC may re-

cover from the former plan employer the funds it is forced to

spend in funding the plan. The PBGC is never permitted to

hold an employer liable for an amount in excess of 30% of the

employer’s net worth determined as of a date within 120 days

of the plan termination. ERISA § 4062(b). The PBGC

through its own valuation has concluded that the Bankrupts

had no positive net worth on the net worth valuation date, De-

cember 31, 1974. Thus, if the employer under § 4062 is the

Bankrupts alone, the PBGC recovers nothing and a dividend

will be paid to the Bankrupts’ creditors.

If, on the other hand, the employer consists of the Bank-

rupts and the Ouimet Group, the net worth valuation, at least

according to the PBGC, increases to such a degree that PBGC

claims it can recover the entire potential out of pocket expense

of $552,339.64, and the creditors of the Bankrupt would not

receive a dividend.®

The Bankrupts and the Ouimet Group, of course, strenu-

ously argue that, for liability purposes under ERISA, only the

Bankrupts are the employer. They further argue that even if

*The bankrupt estate has assets of $374,000 and unsecured claims of

$2,200,000. The PBGC’s claim is given tax priority status, ERISA

§ 4068(b) (2), so that after costs of administration the PBGC’s priority would

exhaust the assets leaving nothing for the unsecured creditors.

36a

the PBGC prevails as to the definition of “employer”, ERISA

§ 4004(f)(4) requires that all liability in this case be waived.

Finally, they contend that if unwaived liability does exist,

under a proper calculation of net worth that liability is con-

siderably less than that which the PBGC demands.’

Because ERISA has been law for such a short period, the

courts have had little opportunity to interpret its manifold and

complex provisions. This Court has been unable to discover

any judicial decision relating to the extent of employer liability

under ERISA § 4062.°

After careful examination of the express statutory language

of ERISA, its legisiative history and the public policies it is in-

tended to advance, this Court is convinced that ERISA § 4062

levies liability for the PBGC’s assumption of pension plan pay-

ments only against the person or corporation acting directly as

7 The PBGC, defining net worth in terms of fair market value and assign-

ing a zero net worth to the Bankrupts, concludes that the net worth of the

control group on the net worth valuation date was so great that 30% of that

value is not exceeded by the entire $552,339.64 potential plan underfunding

to be borne by the PBGC.

The Bankrupts and the Ouimet Group dispute the PBGC’s conclusion.

They variously contend that net worth is based on book value, that the net

worth valuation date chosen by the PBGC was erroneous, that too many

businesses were included in the control group and, even accepting the

PBGC’s position as to all of the aforementioned, that the Ouimet Group's net

worth was far less than that calculated by the PBGC and that when the

negative net worth of the Bankrupts is subtracted therefrom, the total net

worth of the control group falls between $464,000 and $650,000 and that the

liability is 30% of that net worth — an amount far less than $552,339.64.

* This situation is not likely to continue much longer. Congressman John

Erlenborn, one intimately involved in the drafting and enactment of ERISA,

in a recent speech before the Midwest Pension Conference, pointed to a host

of problems associated with the employer liability provisions of ERISA. He

suggested that, as they now exist, the employer liability provisions should be

renamed the employer extermination provisions. This suggests the prob-

ability, as conglomerates attempt to clarify their potential liabilities, of

future litigation and possibly Congressional action in this area.

37a

an employer in relation to an employee benefit plan, or, as

provided in § 4062(d), against certain successor in interest

corporations when the direct plan employer attempts to avoid

liability. In the instant case the employer for § 4062 purposes

would be the Bankrupts.

This Cou t in the first instance is guided by the basic princi-

ple that a statute’s plain language is the primary indicator of

its meaning. Massachusetts Financial Services, Inc. v.

Securities Investors Protection Corp., 545 F. 2d 754 (lst Cir.

1976).

ERISA § 4062(a)-(c) establishes a formula for determining

employer liability. § 4062(d) expands that liability in in-

stances of certain corporate reorganizations. If, as the PBGC

contends, ERISA § 4001(b) and its control group concept ap-

plies to ERISA § 4062, then § 4062(d)(2) becomes superfluous.

Under control group theory a parent-subsidiary relationship

would already create liability in both businesses, so that the

subsequent merger of the subsidiary into the parent would not

affect the parent’s liability. And if the control group concept

of § 400l(b) is extended to § 4062, not only would

§ 4062(d)(2) be superfluous, but its language would directly

conflict with such concepts. § 4062(d)(2) speaks of an “em-

ployer” and its “parent.” But under control group theory, the

word “employer” already includes both a parent and subsidi-

ary. No reading of § 4062(d)(2) can be reconciled with a

simultaneous application of the control group concept.

It is an accepted principle of statutory interpretation that

general provisions in one part of a statute must yield to specific

provisions in another part. MacEvoy v. U.S., 322 U.S. 102

(1943); Baltimore National Bank v. State Tax Commissioner of

Maryland, 297 U.S. 209 (1936).

Ascertainment of congressional intent with respect to the

standard of liability created by a particular section . . .

38a

[of an act] . . . must therefore rest primarily on the

language of that section.

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 200 (1976). See

also, Santa Fe Industries, Inc. v. Green, ____ U.S. ___, 45

U.S.L.W. 4317 (1977).

The inability to reconcile ERISA § 4001(b) with ERISA

§ 4062(d)(2) is but one support of the position that the § 4001

(b) control group reference was intended to apply to some sec-

tion other than § 4062 and not as a general definition of

“employer” in Title IV.

Indiscriminate application of control group theory through-

out Title IV would torture the meaning of certain sections in

that title. For example, under ERISA § 4004(e)(4) the PBGC

is given the limited authority to waive an employer’s liability

in certain instances when “the employer was not able, as a

practical matter, to continue the plan.” It is obvious that the

term “employer” in the above quote refers to the direct

employer who is the only one who, as a practical matter, is or

is not able to continue a plan. See also, ERISA §§ 4023(d),

4044(d)(1) and 4047.

An examination of the semantic structure of § 4001 reveals

that while § 4001 is headed “Definitions” it is subdivided into

a typical definition section and a section enunciating the con-

trol group concept. If the statute meant the word “employer”

wherever it appeared in Title IV to include all trades or

businesses under common control it would have included the

term “employer” in § 4001(a) as a definition and defined it to

apply throughout Title IV. Instead, the control group con-

cept is separated in § 4001(b) and states in pertinent part:

For purposes of this title, under regulations prescribed by

the corporation [PBGC], all employees of trades or busi-

39a

ness ... which are under common control shall be treated

as employed by a single employer and all such trades and

businesses as a single employer. (Emphasis added.)

The PBGC’s regulations under ERISA § 4001(b) simply co-

opt the Treasury Regulations under Internal Revenue Code

§ 414(c). Seesupra. They define the control group but do not

establish the extent of its application in Title IV. Thus, at

present, it is not known to what sections in Title IV the control

group concept applies. If Congress had in mind the possibility

of control group liability under § 4062, it left it to the PBGC to

establish the proper application to that concept in light of all

the various provisions in Title IV that would have to be con-

sidered in order to maintain consistency. In the interim, or

permanently if the PBGC declined to promulgate regulations,

the successor in interest provision of § 4062(d) would prevent

intercorporate abuse of the pension insurance program.

Further support for the proposition that ERISA § 4062

employer liability does not comprehend the control group is

the omission from Title IV of a provision for apportionment of

employer liability. It is difficult to imagine that the draftors

would provide for control group liability without also dealing

with its apportionment. Judicial precedent on joint and

several liability, if that is indeed the standard for apportion-

ment, is neither well defined nor consistent.® Judicial efforts

to apportion control group liability without statutory

guidelines would result in inconsistency and unpredictability

in a statutory scheme whose general comprehensiveness belies

such a situation.

®Compare, for example, Lorimer v. Julius Knack Coal Co., 246 Mich.

214, 224 N.W. 362 (1929) with United States Fidelity and Guaranty Co. v.

Naylor, 237 F. 314 (8th Cir. 1916).

40a

In light of the ambiguity created by ERISA § 4001(b) and

the unreasonable interpretation its wholesale application

would bring to certain Title IV provisions, especially § 4062,

the Court may resort to legislative history to assist its construc-

tion. Massachusetts Financial Services, Inc. v. Securities In-

vestors Protection Corp., supra.

The policy justification for holding an employer liable for

the termination of an underfunded pension plan has been fre-

quently enunciated. The intention is to “preclude abuse by

[the employer] shifting the financial burden to the plan termi-

nation insurance program [and the PBGC] despite the fact

that the employer had available funds to continue funding the

plan.” House Education & Labor Committee Report, No.

533, 93rd Cong., 2d Sess. at 15 (1973). Put another way, the

employer liability provision deters “unrealistic promises” by

encouragi:g an employer considering a pension plan to

carefully determine if he can afford it, because if he can’t and

it is terminated he will be liable for its underfunding. Senate

Finance Committee Report, No. 383, 93rd Cong., 2d Sess. at

117 (1973).

The Report of the House-Senate Conference Committee, H.

Rep. No. 1280, 93rd Cong., 2d Sess. (1973), is silent as to the

policy behind the assessment of employer liability generally,

but since the Conference version of ERISA retained the basic

framework of employer liability provided in both the House

and Senate versions, it is safe to assume that the House and

Senate rationale was adopted. In discussions on the floors of

both the House and Senate just prior to passage of ERISA the

above stated policy was outlined in support of the employer

liability provisions of the Conference bill. 120 Cong. Rec. H

1126 — H 1175 and S 15737 — S 15774 (1974).

In the early House and Senate versions of ERISA no mention

is made of control group theory in the employer liability pro-

visions. See, 3 U.S. Code Cong. & Admin. News 4639 et seq

4la

(1974). On the other hand, in these versions, each contains

the precursor to present § 4062(d). See, House Education &

Labor Committee Report, No. 533, 93rd Cong., 2d Sess.

(1973); Senate Labor & Public Welfare Committee Report,

No. 127, 93rd Cong., 2d Sess. (1973); Senate Finance Com-

mittee Report, No. 303, 93rd Cong., 2d Sess. (1973). The

Senate Finance Committee Report offers a clear explanation:

Under the bill, a successor employer is treated as the

employer to which the liability rules apply — whether

the change has come about because of a reorganization

which involves a mere change in identity, form, or place

of organization, or by reason of a liquidation into a

parent corporation, or by reason of a merger or consolida-

tion. In other words, a potential liability cannot be

avoided where the employer is bought out by another

company and ceases to exist because it is merged into the

other company.

S. Rep. No. 383, 93rd Cong., 2d Sess. at 118 (1973).

The legislative history of the control group concept of

ERISA § 4001(b) is, unfortunately, not so clear. As has been

stated, no comparable provision may be found in any version

of ERISA prior to the House-Senate Conference’s final draft.'°

'0 This fact in itself seems to present a serious obstacle to the assertion that

control group theory applies to ERISA § 4062. 2 U.S.C. § 190C(a) states:

In any case in which a disagreement to an amendment in the nature

of a substitute has been referred to conferees, it shall be in order for the

conferees to report a substitute on the same subject matter; but they

may not include in the report matter not committed to them by either

House. They may, however, include in their report in any such case

matter which is a germane modification of subjects in disagreement.

(Emphasis added.)

42a

In the Joint Explanation of the Committee on Conference ac-

companying the final draft of ERISA, under the section head-

ed “Employer Liability”, the Conference Committee describes

the liability provision and states that in determining the

employer who may be liable, all trades or businesses under

common control are to be treated as a single employer. H.

Conf. Rep. No. 1280, 93rd Cong., 2d Sess. at 169 (1974). No

mention is made of the successor in interest provision [now

§ 4062(d)]. In light of the inconsistency between the two pro-

visions, it is possible that the Conference Committee intended

to substitute control group liability for successor in interest

liability, but this is unknown. What is known is that the suc-

cessor in interest provision remains in § 4062 while the control

group provision has found its way into the opening section of

Title IV thus apparently rendering the Conference Commit-

tee’s above-cited comment dubious.

The express purpose for requiring employer liability in case

of termination of an underfunded pension plan, and the

logical purpose as well, is to discourage employers, irresponsi-

ble or malicious, from establishing pension benefits more

generous than they can afford to fund or from terminating

plans which they can afford to maintain, knowing that the

PBGC stands ready to take up the plan administration.'' In

this light the successor in interest provisions of § 4062(d) close

an obvious loophole — overextension of plan benefits, un-

justified termination and then pro forma corporate reorgani-

zation to escape liability. The control group concept, on the

other hand, not only doesn’t advance the purpose of ERISA

''The employer liability provisions of ERISA are not intended as a

primary revenue raising measure for the PBGC who has to pay the pension

benefits of underfunded plans. Under ERISA § 4006, the PBGC is to

prescribe insurance premiums to be paid periodically by all plan employers

“to provide sufficient revenues to the . . . [PBGC fund] . . . to carry out its

functions under this title.”

43a

§ 4062, it may impede it. A solvent employer who knows it

will be held liable if its pension plan terminates in an under-

funded state will strive for a fiscally responsible plan. Query:

whether the same incentive exists for an employer who knows

that in certain situations its liability may be assumed by its

parent and even sister corporations, the latter possibly with a

deeper pocket yet in any business sense often completely

unrelated to the employer.

The legislative history of ERISA pcints to one further basis

upon which to rest a finding that ERISA § 4062 does not com-

prehend control group liability, namely, that the drafters did

not intend to assess plan termination liability against an insol-

vent employer.

Early drafts of ERISA contain specific provision limiting

employer liability to solvent employers. 3 U.S. Code Cong. &

Admin. News 4664 and 4879 (1974). See also, House Educa-

tion & Labor Committee Report, supra, § 405; Senate Labor

& Public Welfare Committee Report, supra, § 405.

Although the enac'ed version of ERISA contains no specific

prerequisite of solvency prior to assessment of employer liabili-

ty, the spirit of that provision lingers in the present § 4062 in

its limitation of liability to a percentage of net worth. It may

very well have been that the express provision applying

* employer liability to solvent employers was deleted because

the limitation of liability to 30% of net worth was felt to ac-

complish the same result. An insolvent company by definition

would have little or no net worth and thus little or no termina-

tion liability.

Despite the fact that there is no express statement limiting

employer liability to solvent employers, remarks made on the

floors of both houses of Congress during debate on the final

version of ERISA indicate that such a limitation should be im-

plied.

44a

Obviously the purpose of plan termination insurance is to

protect the participants and beneficiaries from any loss of

benefits and where the employer contributing to the plan

which terminates is insolvent, there is no claim against

the employer for the amount of funds expended by the

[PBGC].

120 Cong. Rec. H1137 (1974) (remarks of Congressman

Gaydos).

Since there would be a possibility of abuse by solvent

employers who terminate a plan and shift the financial

burden to the insurance program notwithstanding their

own financial ability to continue funding such plan, the

Conference Bill imposes liability on employers whose

plans terminate...

120 Cong. Rec. $15740 (1974) (remarks of Senator Williams).

See also, Comment, The Employee Retirement Income Securi-

ty Act of 1974: Policies and Problems, 26 “yracuse L.R. 539 at

552 (1975).

The concept of control group liability advocated by the

PBGC is inconsistent with ERISA’s policy of limiting liability

to solvent employers. No better example of this fact exists

than the case at bar in which the PBGC asserts liability against

the Bankrupts as part of the control group which would result

in exhausting the bankruptcy estate and depriving the un-

secured creditors of any dividend, when it admittedly could

make no such assertion against the Bankrupts alone. '*

'2 It may be posited that this last argument against control group liability is

not really broad enough and merely supports the removal of the insolvent

45a

In light of the Bankruptcy Act policy of ratable distribution

of a bankrupt’s property to his creditors, is it reasonable to

assume that unsecured creditors who provide credit on the

basis of a borrower-employer’s financial condition, when in

the case of a solvent borrower-employer they would normally

be subject to a loss no greater than 30% of the borrower’s net

worth on termination of an underfunded pension plan, now,

because the borrower is bankrupt, would not only suffer

severe losses as a result of the bankruptcy but would lose even

the small bankruptcy dividend because the dumping of the

bankrupt into a control group creates an unanticipated liabili-

ty that completely consumes the bankruptcy estate?

Congress was aware of the Bankruptcy Act when it drafted

and passed ERISA. For example, ERISA § 4068(b)(2) pro-

vides that an employer’s liability for underfunded plan termi-

nation be treated for bankruptcy priority purposes as a tax due

and owing to the United States. Congress appeared to be

aware of the difference that would result in cases of the

bankruptcy of the terminating employer and expressly pro-

vided that in such cases where net worth would not be an ap-

propriate measure of the ERISA liability that the PBGC claim

be given tax claim priority. See also, ERISA § 4042.

employers from the control group and the assessment of liability against the ¢

solvent remainder. Such a position would be ludicrous and points up more

clearly the inapplicability of control group concepts to the employer liability

provisions of ERISA. To absolve the insolvent employer directly responsible

for the underfunded plan and the one solely to whom the policies behind

liability apply, but to indiscriminately hold liable its corporate relatives, is to

completely ignore elementary tenets of business incorporation. It may be

that in a given situation the interrelatedness of the corporate entities man-

dates some sort of control group liability upon entities other than the ter-

minating employer. Such situations would be susceptible to control group

theory through the regulations that ERISA § 4001(b) requires of the PBGC,

and in any case are often covered by ERISA § 4062(d).

46a

Before presuming a construction of ERISA that alters long

established bankruptcy policy, an unequivocal expression of

Congressional intent to do so should be evident. All that is evi-

dent in fact is that Congress intended to give the ERISA claim

a priority status not to appropriate the entire estate by the

unrestricted use of the control group concept.

In light of the express statutory language, the legislative

history and its policies, this Court believes that when ERISA

provides for liability to be borne by an employer whose pen-

sion plan has terminated in an underfunded state, that

employer must be the direct employer and not some stranger

to the plan beneficiaries who becomes the employer through

control group theory. In the instant case the employer for

purposes of ERISA § 4062 are the Bankrupts, the Avon Sole

Company and its wholly owned subsidiary Tenn-ERO Cor-

poration.

III.

Assuming arguendo, that for purposes of employer liability

under ERISA § 4062, control group theory does apply and thus

in the instant case, since the control group has some positive

net worth, a liability may be assessed, that liability would still

be subject to possible waiver under ERISA § 4004(f).'°

‘ERISA § 4004(f) provides:

In addition to its other powers under this title, for only the first 270

days after the date of enactment of this Act the corporation may—

(1) contract for printing without regard to the provisions of chapter

5 of title 44, United States Code,

(2) waive any notice required under this title if the corporation

finds that a waiver is necessary or appropriate,

(3) extend the 90-day period referred to in section 4041 (a) for an ad-

ditional 90 days without the agreement of the plan administrator and

without application to a court as required under section 4041(d), and

47a

An employer with potential liability for termination under

ERISA § 4062 may escape liability if the plan is terminated

(1) within the first 270 days after enactment of ERISA, (2) the

employer as a practical matter could not continue the plan,

and (3) an assessment of liability would result in unreasonable

hardship to that employer. ERISA § 4004(f)(4).

The PBGC argues that the Bankrupts and the Ouimet

Group are not eligible for liability waiver under § 4004(f)(4)

because, although the plan terminated within the 270 day

period, a waiver of liability was not requested within that 270

day period. A requirement that the employer request waiver

within the 270 day period is nowhere a part of § 4004(f), nor is

its implication logical, equitable or consistent with the obvious

intent of the section to alleviate hardship in certain cases of

plan termination during the first nine months of ERISA’s

operation. It is conceivable, for instance, that in accordance

with ERISA §§ 4042 and 4048(2), the PBGC’s termination of a

plan could have occurred on the 270th day of the 270 day

period. ERISA § 4004(f)(4) cannot be read to preclude an

employer, who may otherwise be eligible, from seeking waiver

of liability merely because it failed to so request within the few

hours or minutes remaining of the 270th day.

Assuming then, that liability existed in this case and, since

the Avon Sole Company Pension Plan terminated during the

270 day period, that those liable would be eligible for waiver

of liability, it would remain to be determined whether the

other criteria for waiver under ERISA § 4004(f)(4), namely,

undue hardship and impracticality of continuation, have been

(4) waive the application of the provisions of sections 4062, 4063,

and 4064 to, or reduce the liability imposed under such sections on,

any employer with respect to a plan terminating during that 270 day

period if the corporation determines that such waiver or reduction is

necessary to avoid unreasonable hardship in any case in which the

employer was not able, as a practical matter, to continue the plan.

48a

satisfied. Since the statutory scheme seems to have left this

determination to the discretion of the PBGC, the Court in the

first instance would feel compelled to defer to the agency for

such findings.

Thus, in the event that control group theory applied to

ERISA § 4062 on liability, before that liability could be finally

approved by a Court, the PBGC would have to consider and

decide the possibility of waiver in accordance with ERISA

§ 4004(f)(4).

IV.

The instant case has been decided without a judgment of

liability against any of the parties defendant. It should be

pointed out, however, that a contrary conclusion on the

definition of “employer” in ERISA § 4062 and a finding of

some employer liability, would cause to surface doubt as to the

constitutionality of ERISA § 4062.

Prior to the enactment of ERISA, no law existed that re-

quired pension plans to be fully funded, that is, to be able to

pay all vested benefits if the plan were to suddenly terminate.

Employers were constrained only by whatever annual contri-

bution requirements they may have contracted for in a plan or

collective bargaining agreement, and if they claimed an in-

come tax deduction for plan contributions, by the require-

ments of the Internal Revenue Code. None of these con-

straints required full funding and one of the prime functions of

ERISA was to introduce this requirement. Statement of Presi-

dent Gerald R. Ford upon signing ERISA, September 2, 1974.

ERISA generally requires all plan funding from the effective

date onward to be adequate to cover current liabilities and if

the plan dates from before the Act and is underfunded, amor-

tization of that past liability over a period of years. ERISA

§ 302. It is to advance this objective that ERISA § 4062 makes

49a

a monetary assessment on an employer whose terminated plan

is underfunded.

But in a case where a pension plan is underfunded because it

was established prior to ERISA, when the law in no way pro-

hibited underfunding, to subsequently hold the employer

liable for this innocent past act is a retroactive application of

the law that may violate the Fifth Amendment to the U.S.

Constitution, and possibly Article I section 10 as well. Dar-

lington, Inc. v. Federal Housing Administration, 142 F. Supp.

341 (E.D. S.C. 1956) rev’d on other grounds 352 U.S. 977

(1957); C. Hockman, The Supreme Court and the Constitu-

tionality of Retroactive Legislation, 73 Harv. L.R. 692 (1960).

It is well established that retroactive liability is not alone

sufficient to void an act on constitutional grounds. The retro-

activity must be irrational or otherwise violative of due proc-

ess. Usery v. Turner Elkhorn Mining Co., 49 L. Ed.2d 752

(1976). In Usery, a recent and definitive case on this issue,

Justice Marshall, writing for the Supreme Court, sets forth

certain factors to be considered in determining the constitu-

tionality of a retrospective law. It is in light of these factors

that the constitutional doubts arise in the instant case.

ERISA contains no transition period after its enactment

during which employer liability is not assessed.'* Usery,

supra, at 763. Its liability provision to a great extent is found-

ed on considerations of deterrence and blameworthiness,'® yet

the Usery Court held that in order to justify retroactive imposi-

tion of liability on grounds of deterrence or blameworthiness,

it should be shown that, had the retroactive law in fact been in

existence all along, those sought to be held liable would have

still failed to comply. Usery, supra, at 767, citing Welch v.

'* The waiver provison of ERISA § 4004(f)(4) could assume this role but for

the extremely narrow interpretation given it by the PBGC.

'SSee discussion of legislative history, supra.

50a

Henry, 305 U.S. 134 (1938). In the instant case this translates

into a showing that, had there always been a law against in-

adequate pension plan funding, Avon would nevertheless have

continued to underfund its plan. The PBGC has made no

such showing, nor in all probability could it. Furthermore,

any attempt to justify ERISA liability as the Usery Court

justified the statute in that case, namely, as a device to spread

costs to employers who have profited by the fruits of their

employees’ labor, Usery, supra, at 768, fails in light of the at-

tempted imposition of liability on entities like sister corpora-

tions having no relation whatever to the Avon pension plan, its

underfunding or its beneficiaries.

And finally, the Supreme Court in Usery, after upholding

the retroactive legislation in that case, specifically dis-

tinguishes that situation from one similar to the instant case.

The Court points out that the legislation in question in Usery

related to a specific need created by dangerous working condi-

tions saying that retroactive legislation relating to pension

benefits and the need to supplement a former employee's

salary may not be constitutional. Usery, supra, at 768-9,

citing Railroad Retirement Board v. Alton R. Co., 295 U.S.

330 (1935).

The potential constitutional infirmity of ERISA § 4062

grows larger if, as the PBGC asserts, the retroactive liability is

imposed not only on the direct plan employer, but on related

entities in the control group. The related entities, never mind

whether or not the pension plan’s underfunding was legal at

the time, may have had no control whatever, or even knowl-

edge, of the plan underfunding. Cf. State v. A.S. Nye Kris-

tianberg, 84 F. Supp. 775 (D.C. Md. 1949).

In the instant case the Ouimet Group had no employer-

employee relationship with the pension beneficiaries. It could

not compel the Bankrupts to make benefit contributions, con-

trol labor contracts or influence the pension fund investments,

5la

whose subsequent depreciation in value partly accounted for

the plan underfunding.

And of course the creditors relied, as they had a right to, on

the balance sheets of the companies that would not and could

not reflect ERISA liability magnified by a control group con-

cept.

The potential constitutional infirmity brought about by in-

terpreting ERISA § 4062 to include control group concepts

militates strongly against such an interpretation. It is a “car-

dinal principle” that a statutory construction inconsistent with

the Constitution be avoided if an alternative, consistent con-

struction may be ascertained. Pernell v. Southall Realty, 416

U.S. 363, 365 (1974).

Internal conflicts and constitutional questions are elim-

inated or greatly reduced while the act remains consistent with

its legislative history and avoids a disruption of the traditional

rights of unsecured creditors if in the instant case the control

group concept is not used as a definition of employer for pur-

poses of liability under § 4062.

In light of the foregoing, it is this Court’s conclusion, pur-

suant to Title [V of ERISA, that liability for the terminated

underfunded Avon Sole Company Pension Plan exists solely

with the actual employers, namely, the Bankrupts, the Avon

Sole Company and Tenn-ERO Corporation, and that because

the Bankrupts had no positive net worth on the net worth

valuation date, there is no liability pursuant to ERISA § 4062.

It is unnecessary to further prolong these findings by consider-

ing the issue of the actual net worth of the control group.

In its rule as a Court of Bankruptcy, the PBGC’s request for

relief from the automatic stay in bankruptcy is denied and its

claim against the Bankrupts is disallowed.

In its role as Special Master, the above findings of fact and

conclusions of law are submitted for approval of the District

52a

Court and a decision in favor of the Defendants, in C.A. No.

76-1314-T, is recommended.

Dated at Boston, in said District, this 13th day of May,

1977.

HAROLD LAVIEN

Bankruptcy Judge and Special Master

53a

United States District Court

District of Massachusetts

In re:

TENN-ERO CORPORATION,

AVON SOLE COMPANY,

Bankrupts

PENSION BENEFIT

GUARANTY CORPORATION,

Plaintiff

Bankruptcy No.

v. 75-1520-HL

No. 75-1521-HL

TENN-ERO CORPORATION,

AVON SOLE COMPANY and

HERBERT C. KAHN, Trustee,

Defendants

ORDER

In accordance with the Court’s Memorandum of May 13th

1977, it is

ORDERED

That the claim of the Pension Benefit Guaranty Corpora-

tion in the above-captioned case is disallowed, and it is further

ORDERED

That relief from the automatic stay is denied. No action

shall be brought seeking to enforce against the Bankrupts any

liability under the Employee Retirement Income Security Act

in any court other than the Bankruptcy Court.

Entered at Boston, in said District, this 13th day of May,

1977.

HAROLD LAVIEN

Bankruptcy Judge

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.