# Petition — Ouimet Corp. v. Pension Benefit Guaranty Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_0396%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1983 - **Citation:** 464 U.S. 961 ## Text ; ——_asasi 83-397- —_ [ses sipene conus + FILES SEP % 1983 Po: ce 3,4 In the Supreme Court of the United States. Octroser Term, 1983. OUIMET CORPORATION, OUIMET STAY & LEATHER COMPANY, OUIMET WELTING COMPANY anpb EMIL R. OUIMET WAREHAM TRUST, PETITIONERS, vo. PENSION BENEFIT GUARANTY CORPORATION, AVON SOLE COMPANY, TENN-ERO CORPORATION AND HERBERT KAHN, Trustee, RESPONDENTS. Petition for a Writ of Certiorari to the United States Court of Appeals for the First Circuit. es Ricuarp G. MALONEY, Ma.Loney, WiLuiaMs & Bag, 133 Federal Street, Boston, Massachusetts 02110. (617) 482-9120 BOSTON , MASSACHUSETTS BATEMAN & SLADE, INC. Questions Presented. 1. Whether the decision of the United States Court of Appeals for the First Circuit in its first opinion erroneously im- posed under ERISA § 4062, 29 U.S.C. § 1362, joint and several liability on all members of the control group of corporations for the entire underfunding ($552,339.64) of a terminated pension plan of one of its members despite the “retroactivity inherent in the Act,” or, in the alternative, should such liability be limited to the amount of unfunded vested benefits which accrued after the direct employer involved with the pension plan became a member of the control group? 2. Whether the decision of the United States Court of Ap- peals for the First Circuit which initially imposed joint and several liability on all members of the control group of cor- porations for the deficiency in funding on a lawfully termi- nated pension plan contracted for and maintained by one of its bankrupt members, namely, Avon Sole Company, erroneously excluded the bankrupt members from such liability in its sec- ond opinion? 3. Whether the decision of the United States Court of Ap- peals for the First Circuit erroneously held that liability among the members of the controi group of corporations should be al- located on a pro rata basis and whether the decision erroneous- ly denied the solvent members of the control group a right of indemnification from the bankrupt members of the control group? 4. Whether the decision of the United States Court of Ap- peals for the First Circuit in its second opinion following re- mand erroneously held that petitioners were jointly and sever- ‘In accordance with Rule 28.1, Ouimet Corporation, Ouimet Stay & Leather Company and Emil R. Ouimet Wareham Trust are affiliated cor- porations. Avon Sole Company, before its bankruptcy, was a wholly owned subsidiary of Ouimet Corporation. ally liable for interest on the funding deficiency at the rates established under 26 U.S.C. § 6621, and, if not, erroneously held that the interest added to such liability is not subject to the 30% limitation of liability provided in ERISA § 4062, 29 U.S.C. § 1362? 5. Whether the decision of the United States Court of Ap- peals for the First Circuit erroneously construed the decision of this Court in United States v. Vogel Fertilizer Company, 455 U.S. 16 (1982) by applying the attribution rules of § 1563(d) and (e) of the Internal Revenue Code to the 80% stockholder of the control group? Table of Contents. Statutory provisions involved Opinions below Statement of jurisdiction Statement of the case Reasons for allowing the writ I. The Ouimet II decision imposes retroactive lia- bility beyond constitutional limits II. Ouimet II is inconsistent with Ouimet I on an issue of federal law which should be settled and decided by this court A. Joint and several liability of bankrupt mem- bers of a control group B. Allocation of joint and several liability among members of a control group — contribution C. Indemnification D. Interest E. The Court of Appeals misconstrued the ration- ale and holding of this court in United States v. Vogel Fertilizer Co., 455 U.S. 12 (1982) in de- termining the composition of the control group Conclusion ano — = < 13 13 S 8 & 27 29 Appendix follows page 29 Table of Authorities Cited. CASES. Aetna Cas. & Sur. Co. v. L.K. Comstock & Co., Inc., 488 F. Supp. 732 (D. Nev. 1980) 22 ii TABLE OF AUTHORITIES CITED. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) 9, 10n, 11, 15, 16n, 17 Bosse v. Litton Unit Handling Systems, 646 F.2d 689 (1st Cir. 1981) 22 Fornaris v. Ridge Tool Co., 423 F.2d 563 (Ist Cir. 1970), rev'd on other grounds, 400 U.S. 41 (1970) 9 Glover v. Johns-Manville Corp. , 662 F.2d 225 (4th Cir. 1981) 21 Guillard v. Niagara Machine & Tool Works, 488 F.2d 20 (8th Cir. 1973) 22 Hartford Acc. & Indem. Co. v. R. Hershel Mfg. Co., 453 F. Supp. 1375 (D. N.D. 1978) 22, 23 Hipp v. United States, 313 F. Supp. 1152 (E.D. N.Y. 1970) 22 McLean v. Alexander, 449 F. Supp. 1251 (D. Del. 1978), rev'd on other grounds, 559 F.2d 1190 (3d Cir. 1979) 20 Olson Farms, Inc. v. Safeway Stores, Inc., 649 F.2d 1370 (10th Cir. 1979) 21 Pension Benefit Guaranty Corporation v. Anthony Co., 537 F. Supp. 1048 (N.D. Ill. 1982) 9, 11, 18, 20, 26 Pension Benefit Guaranty Corporation v. Anthony Co., 542 F. Supp. 43 (N.D. Ill. 1982) 12 Pension Benefit Guaranty Corporation v. Dickens, 535 F. Supp. 922 (W.D. Mich. 1982) 18 Railroad Retirement Board v. Alton Railroad Co., 295 U.S. 330 (1935) 10 Shelter Farming Corporation and Carpenters Pension Trust for Southern California, v. PBGC, ____ F.2d —___ (9th Cir. 1983) 10n TABLE OF AUTHORITIES CITED. iii Shropshire, Woodliff & Co. v. Bush, 204 U.S. 186 (1907) 23 Standard Oil Co. v. Kurtz, 330 F.2d 178 (8th Cir. 1964) 23 Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630 (1981) 19, 20 United Paperworkers International Union v. T.P. Property Corp., 583 F.2d 33 (1st Cir. 1978) 6 United States v. Vogel Fertilizer Co., 455 U.S. 12 (1982) 5, 27, 28, 29 Usury v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976) 10n STATUTES. United States Constitution 8, 10 Fifth Amendment 26 U.S.C. (Internal Revenue Code of 1954) § 414 § 1563 § 1563(a) (2) § 6601 (a) § 6601 (e) § 6601 (e)(2) § 6621 § 6621(a) 28 U.S.C. § 1254/1) Title IV of ERISA § 4001(b), 29 U.S.C. § 1301(b) 29 U.S.C. § 1307(b) Title IV of ERISA § 4062, 29 U.S.C. § 1362 viii, 5, 14, 15, 16 et seq. § 1362(b)(2) 17 < é: ve 3 5. Re SRERRKRK< iv TABLE OF AUTHORITIES CITED. Title IV of ERISA § 4064, 29 U.S.C. § 1364 ix, 17 Title IV of ERISA § 4068, 29 U.S.C. 1368 x, 15, 16 § 1368(a) 23, 25, 26 § 1368(c)(2) 15 29 C.F.R. § 2622.7 (1982) 24 § 2622.7(c) 23 MISCELLANEOUS. Hochman, The Supreme Court and the Constitutional- ity of Retroactive Legislation, 73 Harvard L. Rev. 692 (1960) ll 3 Moore’s Federal Practice { 14.03{3] 22 Sen. Report # 93-127, 93d Cong. 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 4862 26 Statutory Provisions Involved. Unrrep States ConstrruTION, AMENDMENT V: No person shall . . . be deprived of life, liberty, or prop- erty, without due process of law... . INTERNAL ReveNveE Cope or 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 corpora- tions which are members of a controlled group of cor- porations (within the meaning of section 1563(a), de- termined without regard to section 1563(a)(4) and (e)(3)(C)) 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 412, the tax imposed by section 4971, and the applicable limitations provided by sec- tion 404(a) shall be determined as if ail such employers were a single employer, and allocated to each em- ployer in accordance with regulations prescribed by the Secretary. (c) EPMPLOYEES OF PARTNERSHIPS, PROPRIE- TORSHIPS, 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 or businesses (whether or not incorporated) which are under com- mon 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). Section 6601. Interest on Underpayment, Nonpayment, or Extensions of Time for Payment of Tax. (a) GENERAL RULE — If any amount of tax im- posed by this title (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date pre- scribed for payment, interest on such amount at an an- nual rate established under section 6621 shall be paid for the period from such last date to the date paid. — (e) APPLICABLE RULES — Except as otherwise provided in this title — (1) INTEREST TREATED AS TAX — Interest pre- scribed under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. Any reference in this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this ti- tle shall be deemed also to refer to interest imposed by this section on such tax. vii (2) NO INTEREST ON INTEREST — No interest under this section shall be imposed on the interest pro- vided by this section.* Section 6621. Determination of Rate of Interest. (a) IN GENERAL — ‘he annual rate established under this section shall be such adjusted rate as is established by the Secretary of subsection (b). (b) ADJUSTMENT OF INTEREST RATE — The Secretary shall establish an adjusted rate of interest for the purpose of subsection (a) not later than October 15 of any year if the adjusted prime rate charged by banks during September of that year, rounded to the nearest full percent, is at least a full percentage point more or less than the interest rate which is then in effect. Any such adjusted rate of interest shall be equal to the ad- justed prime rate charged by banks, rounded to the nearest full percent, and shall become effective on Feb- ruary 1 of the immediately succeeding year. An ad- justment provided for under this subsection may not be made prior to the expiration of 23 months following the date of any preceding adjustment under this sub- section which changes the rate of interest.’ *26 U.S.C. § 6601 (e) deleted by P.L. 97-248, § 344, which added a new section 6622 allowing interest to be compounded daily for interest accruing after December 31, 1982. *P.L. 97-248 amended § 6621(b) and applies to adjustments taking effect on January 1, 1983. viii Trrte 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 each partner who is an employee within the meaning of section 401(c)(1) of the Internal Revenue Code of 1954. For pur- poses of this title, under regulations prescribed by the cor- poration, 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 prescribed for similar pur- poses by the Secretary of the Treasury under section 414(c) of the Internal Revenue Code of 1954. Trrie IV or ERISA § 4062, 29 U.S.C. § 1362. (a) This section applies to any employer who main- tained a plan (other than a multiemployer plan) at the time it was terminated... . (b) Any employer to which this section applies shall be liable to the corporation, in an amount equal to the lesser of — (1) the excess of — (A) the current value of the plan's benefits guaran- teed under this title on the date of termination over (B) the current value of the plan's assets alloca- ble to such benefits on the date of termination, or (2) 30 percent of the net worth of the employer deter- mined as of a day, chosen by the corporation but not more than 120 days prior to the date of ter- mination, computed without regard to any liabili- ty under this section. ix (d) For purposes of this section the following rules ap- ply in the case of certain corporate reorganizations: (1) If an employer ceases to exist by reason of a reorganization which involves a mere change in identi- ty, form, or place of organization, however effected, a successor corporation resulting from such reorganiza- tion shall be treated as the employer to whom this sec- tion applies. (2) If an employer ceases to exist by reason of a liq- uidation into a parent corporation, the parent corpora- tion shall be treated as the employer to whom this sec- tion applies. (3) If an employer ceases to exist by reason of a mer- ger, consolidation, or division, the successor corpora- tion or corporations shall be treated as the employer to whom this section applies. Trrie 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 1362 except that the amount of the liability determined under section 1362(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 employers for such last 5 years, and the limitation described in section 1362(b) (2) shall be applied separately to each employer. The corporation may also determine the liability of each such employer on anv other equitable basis prescribed by the corporation in regulations. Trrie IV or ERISA § 4068, 29 U.S.C. § 1368. (a) If any employer or employers liable to the corpora- tion under section 1362, 1363, or 1364 of this title neglect or refuse to pay, after demand, the amount of such liability (including interest), there shall be a lien in favor of the corporation upon all property and rights to prop- erty, whether real or personal, belonging to such em- ployer or employers. Term of lien. (b) The lien imposed by subsection (a) of this section arises on the date of termination of a plan, and continues until the liability imposed under section 1362, 1363, or 1364 of this title is satisfied or becomes unenforceable by reason of lapse of time. Priority. (c) (1) Except as otherwise provided under this section, the priority of the lien imposed under subsection (a) of this section shal] be determined in the same manner as under section 6323 of Title 26. No. - . In the Supreme Court of the United States. Ocroser Term, 1983. OUIMET CORPORATION, OUIMET STAY & LEATHER COMPANY, OUIMET WELTING COMPANY anpb EMIL R. OUIMET WAREHAM TRUST, PETITIONERS, v. PENSION BENEFIT GUARANTY CORPORATION, AVON SOLE COMPANY, TENN-ERO CORPORATION AND HERBERT KAHN, Trustee, RESPONDENTS. Petition for a Writ of Certiorari to the United States Court of Appeals for the First Circuit. Opinions Below. The opinion of the Court of Appeals fe!'owing remand, not yet reported, appears in the Appendix hereto [hereinafter cited as “Ouimet II]. The Court of Appeals’ initial opinion appears at 630 F.2d 4 (lst Cir. 1980), cert. denied, 450 U.S. 914 (1981), affg, 470 F.Supp. 945 (D. Mass. 1979) {hereinafter cited as “Ouimet I’). Statement of Jurisdiction. The judgment of the United States Court of Appeals for the First Circuit was delivered and entered on June 9, 1983. This Court's jurisdiction is invoked under 28 U.S.C. § 1254(1). 2 Statement of the Case. Avon Sole Company (hereinafter “Avon”) was a corpora- tion engaged in the manufacture of soles in its plant in Avon, Massachusetts for many years. In 1959, Avon entered into a retirement plan agreement as part of its collective bargaining agreement with its plant employees at the Avon plant (herein- after “Avon retirement plan.”). Thereafter, Avon paid the salaries and benefits to its employees required under its collec- tive bargaining agreement, including contributions under and to the Avon retirement plan. The parties stipulated: “Through the fiscal year ending September 30, 1974, the Plan was funded in compliance with applicable standards under the Internal Revenue Code.” The Avon retirement plan gave Avon “the right to amend, modify, suspend or terminate the Plan” and limited the bene- fits payable on termination of the plan to “the assets of the Retirement Fund,” with Avon having “no liability or obliga- tions .. . to make contribution or payment to establish or maintain the Plan, whether in event of termination of the Plan or otherwise.” On September 13, 1968, Ouimet Corporation (hereinafter “Ouimet”), a Delaware corporation, acquired all of the stock of Avon. The parties stipulated that on September 13, 1968, the Avon retirement plan “had unfunded vested benefits worth $92,000 determined on the basis of actuarial practices, procedures and assumptions that were acceptable under ap- plicable Internal Revenue Code standards.” Because of severe financial difficulties, Avon closed its plant in Massachusetts and terminated the Avon retirement plan on March 25, 1975. ERISA became law on September 2, 1974. Under ERISA, the Avon retirement plan was determined to have a deficiency in assets of some $552,000 to fund the ERISA insured benefits under the plan. On March 22, 1976, Avon and its subsidiary Tenn-ERO were adjudicated bankrupts. 3 Based on his analysis of the statute, Judge Tauro of the United States District Court concluded that “ERISA imposes termination liability on all affiliates of a control group” (470 F.Supp. at 953) and that such liability was joint and several on each member of the control group. 470 F.Supp. at 954. The Court of Appeals for the First Circuit affirmed the judgment of the district court “but on somewhat different grounds” (Ouimet I, 630 F.2d 4 [lst Cir. 1980}), and certiorari was denied by this Court on February 23, 1981. 450 U.S. 914. Thereafter, the case was returned to the bankruptcy judge sit- ting as a master on Judge Tauro’s remand order of March 22, 1979 “for a determination of the net worth of the defendant controlled group,” as such was defined in his opinion, namely, Judge Tauro found that the Emil R. Ouimet Wareham Trust, Ouimet Stay & Leather Company, Ouimet Welting, Ouimet Corporation (hereinafter “Ouimet Group”) and Avon Sole Company and Tenn-ERO Corporation (hereinafter “bankrupts”) “are all members of the same controlled group of businesses.” 470 F.Supp. at 949. The master issued his report (memorandum on remand and judgment) on October 15, 1982 and found inter alia that (1) the fair market value of the control group as a single employer was $2,333,000 on the applicable date, 30 percent of which ($699,900) exceeded the deficiency in funding of $552,339; (2) all members of the control group are jointly and severally liable for the full amount of the liability of $552,339.64 regardless of the individual action or inaction, regardless of when they became members of the control group, and regardless of their individual net worths; (3) the bank- rupts must contribute a maximum of 30 percent of their value of their estates rather than their entire estates based upon the doctrine of contribution and allocated the total liability among members of the controlled group as follows: 4 Employer Amount Ouimet Corporation $287,497 Ouimet Stay & Leather Company 95,832 Emil R. Ouimet Wareham Trust 90,508 Bankrupts 78,502 Total $552,339; (4) the Ouimet Group is liable for interest on their allocated liability from thirty (30) days after the actual demand for pay- ment (March 5, 1976) to the date of payment at the rates es- tablished under 26 U.S.C. § 6621] until payment; and (5) the bankrupts are not liable for interest on their allocated share of liability. All parties appealed from the master’s report and filed objections thereto. Judge Tauro issued an order dated July 14, 1982, in which he affirmed the master’s October 15, 1981 judgment and memorandum on remand in its entirety. All parties filed ap- peals from the July 14, 1982 order of the United States District Court. On June 9, 1983, the United States Court of Appeals for the First Circuit ordered the judgment of the district court vacated and the cause remanded for further proceedings con- sistent with its opinion of even date which inter alia deter- mined (1) that imposing on the solvent Ouimet Group “the $92,000 liability relating to the period before Avon was ac- quired does not violate due process. . . [because Ouimet] ac- quired Avon ‘with full knowledge of the Plan and its funding requirements.’ Ouimet, 630 F.2d at 12” and “([t)he statute places the Ouimet Group in the shoes of Avon regardless of the specifics of Ouimet's acquisition of that company”; (2) reject- ed petitioners’ argument that indemnification was applicable 5 so as to first apply the bankrupts’ estates to the payment of the liability or, in the alternative, that contribution was ap- plicable based on the benefits each derived from the plan, Avon before acquisition and Ouimet after acquisition; (3) then proceeded “to allocate liability which had been created by a federal statute” solely to the solvent members of the Ouimet Group by eliminating the liability of the bankrupts for the reason that “the thirty percent of net worth limitation clearly appears to eliminate the bankruptcy estate as a source of pay- ment to PBGC because the estate had zero, actually negative, net worth”; (4) that PBGC’s “regulations imposing interest at the I.R.C. § 6621(a) rate” is “reasonable” and “entitled to deference” and such is not a part of the “liability” imposed by § 1362 and therefore not subject to the 30 percent limitation of net worth; and (5) by construing this Court's opinion in United States v. Vogel Fertilizer Co., 455 U.S. 12 (1982), in such a way as to allow the attribution rules of the Internal Revenue Code to apply so as to bring Emil R. Ouimet's ownership in excess of 80 percent of Ouimet Stay & Leather Company by including his wife's shares and those belonging to his father's estate to the number of shares actually owned by Emil R. Ouimet (79.2% ). Ouimet I], _ F.2d —_ (App. la-2la.) Reasons for Allowing the Writ. I, Tue Ouimet 1] Decision ImMposes RETROACTIVE Liasiuity Beyond ConstIruTIONAL Lis, In Ouimet I, the First Circuit concluded that ERISA im- posed joint and several liability on all members of a controlled group of corporations, which included petitioners and bank- rupts, despite the fact that all of the deficiency arose prior to the enactment of ERISA on September 2, 1974, In Ouimet 11, the First Circuit held that ERISA can impose liability on members of the controlled group even though a portion of such liability arose prior to the time Avon became a member of the controlled group. Petitioners contend that retroactivity is a finite concept and its judicial approbation cannot exceed its legal and factual foundations. The First Circuit justified its construction of ERISA in Out- met I and Ouimet I] by which it treated each member of the controlled group as a “single employer” on three grounds, namely (1) Ouimet purchased Avon in 1968 with the full knowledge of the plan and its funding requirements that had been set up and maintained by Avon in 1959 pursuant to its collective bargaining agreement with its employees; (2) Oui- met participated in the labor negotiations which included the Avon retirement plan after acquisition; and (3) Ouimet filed a consolidated tax return on which Avon's contributions were deducted. The stipulated facts demonstrate that the factors as relied upon by the First Circuit to justify the retroactivity inherent in the Act, are more illusory than actual, e.g. : (1) At the time Ouimet acquired Avon in 1968 and in- deed until September 2, 1974, Avon by contract and under the applicable statutory provisions had no obliga- tion for any unfunded liability in the event of the plan's termination. Its only responsibility was to make annual contributions, actuarially determined, during the term of the collective bargaining agreement to which it alone was a party. Moreover, after its acquisition by Ouimet, the parent corporation, Ouimet Corporation, had no liability for Avon's undertakings and liabilities under Avon's col- lective bargaining agreement, including the funding of ‘ts pension plan, United Paperworkers International Union 7 v. T. P. Property Corp., 583 F.2d 33 (Ist Cir. 1978), a fortiori, the other members of the control group, in a brother-sister relationship, had no liability to or under the Avon retirement plan. Thus, when Ouimet stepped into Avon's shoes in 1968, it assumed and incurred no liability for any underfunding of the Avon retirement plan. (2) Ouimet participated in the labor negotiations of Avon after its acquisition in 1968 and Avon continued to discharge all of its contractual obligations under its col- lective bargaining agreement through March 25, 1975. It is only the liability imposed by ERISA that Avon, by its bankruptcy, was unable to discharge. The liability arose by virtue of Congress enacting ERISA. The First Circuit held that because of Avon's membership in the Ouimet group, the Ouimet group must pick up this liability even though none of the petitioners ever signed the contract, none of their employees can ever benefit from it, and, under Ouimet I], Avon and its creditors escape all liabili- ty although it (Avon) was the originator of and sole obli- gor under the collective bargaining agreement. (3) Ouimet Corporation and Avon (and later Tenn- ERO) filed consolidated tax returns. Ouimet Stay & Leather Company and the Emil R. Ouimet Wareham Trust, as brother-sister corporations, could not and did not join in the consolidated return. Thus, neither Oui- met Stay & Leather Company nor the Emil R. Ouimet Wareham Trust received any tax benefit, if indeed there was one, from Avon's contribution to the Avon retire- ment plan. Because of the above factors, the First Circuit held that, by the enactment of ERISA, Congress instantly and constitution- 8 ally imposed joint and several liability on all members of the control group of corporations for any underfunding of the ter- minated plan solely by virtue of their association, nothing more, and even if it included a deficiency which accrued prior to the enactment of ERISA. Such reading offends the due process limitations of the Con- stitution because, while It is . . . wholly rational — in due process terms — [to] retroactively . . . require the direct employer to provide complete funding of vested pension plan benefits. Analysis for a parent corporation is entirely different — at least where (like Kaplan) it has acquired its subsidi- ary after the latter’s establishment of its pension plan. So long as the subsidiary remains a “closed container” in economic terms, the parent has derived no direct eco- nomic benefit from pension plan underfunding — and of course it never promised the pension benefits. In such a situation there is no rational link between the congres- sional end of insuring pension benefits and the means of assessing the acquiring parent corporation to pay those benefits. . . It distorts history to speak of “juggling” corporate structures to “eviscerate” ERISA’s provisions before ERISA created a wholly new concept of liability. But the foregoing analysis indicates the rationality, in due process terms, of holding the acquiring parent accountable for underfunding to the extent of any direct financial benefits it derived from the subsidiary during its affiliation. Where funds have been siphoned off from the subsidiary, it has been disabled pro tanto from meeting the responsibilities ERISA imposes. It is not irrational to call on the parent to make good on those liabilities to that extent (effectively restoring the subsidiary to where it 9 would have been economically but for the transfers to the parent). In due process terms, ERISA could assess liabili- ty to the extent of those direct financial benefits, because they have a rational link with the public policy or insur- ing vested pension benefits through the direct employer's responsibility for past underfunding. .. . Application of such a concept would satisfy the Nach- man means-end test, in a way that the full-scale imposi- tion of liability on a parent solely because of its stock ownership could never do. Pension Benefit Guaranty Corporation v. Anthony Co., 537 F. Supp. 1048, 1055-1056 (N.D. Ill. 1982) (footnotes omitted) (emphasis added). It is respectfully submitted that the master’s findings (1) sus- tained and recognized the separate legal entities of Ouimet Corporation and Avon Sole Company; (2) failed to demon- strate that Ouimet Corporation manipulated or transferred Avon employees among its affiliated corporation; and (3) failed to establish any direct benefits to Ouimet Corporation from its acquisition and ownership of Avon. To the contrary, the stipulated facts showed that Ouimet Corporation sus- tained substantial losses from its ownership. Accordingly, it would violate due process to impose retroactive liability for Avon's underfunding on Ouimet Corporation, Ouimet Stay & Leather Company, and Emil R. Ouimet Wareham Trust. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978); Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir. 1970), rev'd on other grounds, 400 U.S. 41 (1970); Pension Benefit Guaran- ty Corporation v. Anthony Co., supra. In the alternative, petitioners contend that if membership in the control group is the essential link justifying the retroactive imposition of such liability on members of the control group, 10 then it must be concluded that only that liability for under- funding which arose during Avon’s association (membership) with the petitioners should be subject to collection by PBGC under the statute if the statute is to satisfy the due process re- quirements of the Constitution. Otherwise: [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., 295 U.S. 330, 350 (1935).? Accordingly, the joint and several liability of the members of the petitioners should be reduced by the amount of $92,000, the unfunded liability for vested benefits which had accrued under the Avon retirement plan prior to the date Avon became a member of the Ouimet Group. Prior to that date, there is and was no legal basis for making the petitioners liable for Avon's contractual or statutory liability. In this way, the peti- tioners would be jointly and severally liable only for the un- funded benefits arising subsequent to September 13, 1968 with * The Alton decision was “narrowed” by Usury v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976), “which suggested that the Supreme Court favors granting deference to Congress’ judgment in allocating economic benefits and burdens” but Alton “had never been expressly overruled” and the “degree of deference” was restricted by Allied Structural Steel Co. v. Span- naus, 438 U.S. 234 (1978). Shelter Farming Corporation and Carpenters Pension Trust for Southern California v. PBCC, ____ F.2d (9th Cir. 1983). 1] the result that the retroactive impact of ERISA will at least be limited to and co-extensive with the period during which the proscribed relationship existed. Cf: Pension Benefit Guaranty Corporation v. Anthony Co., supra (liability of parent predicated upon showing of direct benefit). To hold the petitioners liable without the limitations sug- gested herein is to pass beyond the constitutional restraints of retroactive legislation so as to reach “back to attach new legal rights and duties to already completed transactions,” (Hoch- man, The Supreme Court and the Constitutionality of Retro- active Legislation, 73 Harvard L. Rev. 692 (1960)) bearing no relationship to the statutory purpose or language. Accord, Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978); Pension Benefit Guaranty Corporation v. Anthony Co., supra. The due process clause prohibits the severe and serious conse- quences of upsetting long established rights of the petitioners, their stockholders and creditors by attempting to retroactively impose on them a liability that pre-dated the enactment of ERISA or the essential link, i.e., membership in the control group by Avon. In fact PBGC would do well to note that Congress did not mandate the result for which PBGC argues. It was rather the Regulations authorized by Congress that did so, even though the Regulations could have been drafted to avoid the due process violation found by this Court. This is particularly true in terms of the problem posed by this case: a corporate acquisition taking place after a pension plan was already adopted and before ERISA created a previously unknown and unanticipated concept of personal liability for future contributions. There would have been nothing to prevent the Secretary of the Treasury, in whose expertise Congress reposed its confi- dence, from defining parent corporation liability in terms 12 of parent company benefits. That would have been responsive both to the congressional mandate and to the constitutional due process mandate. Under the circum- stances PBGC cannot claim to wrap itself in the mantle of a Congress unjustly subverted by a federal court. Pension Benefit Guaranty Corporation v. Anthony Co., 542 F. Supp. 43, 44 (N.D. Ill. 1982) (emphasis in original). Finally, viewed as a classical confrontation between owners and their employees, the sympathies of the First Circuit are obviously with the employees. However, if viewed as a use by Congress of the tax laws to shift the benefits and burdens among taxpayers, then it can be clearly seen as simply granting a retroactive wage increase to the plant employees of Avon. While a retroactive pay increase is always most satisfying, it lacks one essential element of fairness in this instance, as re- gards the owner-employer, namely, ERISA failed to give a retroactive price increase for Avon’s products or a reasonable time within which to amortize the cost. Instead, a crushing retroactive liability is imposed on the ongoing businesses which are attempting to survive the bank- ruptcy of one of its members pursuant to a plan to which they are contractual strangers, and on their employees, the pay- ment of which can result in no benefit to them but whose fu- tures are held hostage until the liability is paid. 13 II. Ouimet I] ts INCONSISTENT WITH Ouimet I ON AN ISSUE OF FeperaL Law WHICH SHOULD BE SETTLED AND DECIDED BY THIS CouRT. A. Joint and Several Liability of Bankrupt Members of a Control Group. In Ouimet I, the First Circuit ruled that ERISA requires that all members of a group under common control be jointly and severally liable to PBGC for ERISA termination liability. The case was then remanded to the bankruptcy judge, sitting as a master, for a determination of the Ouimet Group’s con- solidated net worth in accordance with that decision. The bankruptcy judge not only determined the Group’s con- solidated net worth to be $2,333,000, so that each member of the control group was jointly and severally liable for the entire underfunding ($552,339) since it was less than 30 per cent of the consolidated net worth ($699,900), but the master also allocated to each member of the group its respective share of the total liability, as follows: Employer Liability Ouimet Corporation $287 497 Ouimet Stay & Leather Company 95,832 Emil R. Ouimet Wareham Trust 90,508 Bankrupts 78,502 $552,339 The First Circuit in Ouimet I] vacated the master’s alloca- tion and stated that the bankrupts should pay no share of the 14 liability because each had zero net worth and instructed the district court to reallocate the total liability among the solvent members of the control group, namely, the petitioners. In ef- fect, the court in Ouimet II severed the bankrupts from the control group. This order ran contrary to the First Circuit's ruling in Ouimet I, wherein the Court ruled that “the Ouimet Group, as a group under common control, is one employer for purposes of liability under section 1362.” Ouimet I, 630 F.2d at 12 (emphasis added). Under its rationale in Ouimet I, the First Circuit merged the bankrupts with the solvent members of the Ouimet Group to find a single employer having a positive net worth which overcame the 30 per cent limitation of net worth provided in 29 U.S.C. Section 1362. The court thus ruled in Ouimet I that “all members of the Ouimet Group would be jointly and severally liable to PBGC.” 630 F.2d at ll. Because the bankrupts were members of the Ouimet Group, they were liable to the PBGC as well. The First Circuit rationalized this approach by referring to the 30 percent net worth limitation of Section 1362 and find- ing that it “clearly appears to eliminate the bankruptcy estates as a source of payment to PBGC because the estates have zero, actually negative, net worth.” Ouimet II, F.2d at (App. lla). Thus, the Court ruled that “[t]here is simply no provision in the statute which authorizes PBGC to impose termination liability on an insolvent party.” Id. at (App. 12a). This inconsistency between Ouimet I and Ouimet II raises an important question of Federal Law which should be decid- ed by this Court; to wit: Whether a bankrupt member of a control group, which was the direct employer, is jointly and severally liable for ERISA termination liability with the sol- vent members of the group. It is respectfully submitted that the rationale upon which the court relies in Ouimet I] to elim- 15 inate liability of the bankrupts is not sustained by the statute or its history. Assuming, arguendo, the correctness of Ouimet J, it is clear that consistency and rationality require that the 30 percent limitation of Section 1362 be applied once, namely, to the consolidated group's net worth, and not twice, on an in- dividual basis. The First Circuit's reasoning in Ouimet I] appears premised upon “Congress’ intent in enacting the net worth ceiling. . . to avoid imposing extreme economic hardship on employers and driving them to the brink of bankruptcy.” Ouimet 11, ___— F.2d at __ (App. 12a). While perhaps a correct state- ment of congressional intent for establishing the 30% limita- tion, that purpose has no application as to whether the bankrupts’ liability, as established in Ouimet I, may be col- lected by PBGC. One flaw in the First Circuit's rationale is that it fails to take into account the provisions of Section 1368(c) (2) which state: “In the case of bankruptcy or insolvency proceedings, the lien imposed under subsection (a) of this section shall be treated in the same manner as a tax due and owing to the United States.” This section makes it clear that a bankrupt may have liability under Section 1362. Moreover, far from expressing considera- tion for general creditors, the statute gives PBGC a priority lien, Section 1368, therefore, clearly recognizes that the bank- rupts have a liability to PBGC and is inconsistent with the First Circuit's second application of the 30 percent limitation of liability to each member of the control group of corpora- tions resulting in the release of the bankrupts from that liabili- ty. It is to be remembered that the First Circuit first ruled in Ouimet I that joint and several liability to was properly im- posed upon each member of the Ouimet group, including the 16 two bankrupts, as that group constitutes a “single employer.” ERISA imposes such termination liability and once properly imposed, the liability may be collected from the bankrupts and Section 1368 provides a priority lien on the assets of the bankrupts in favor of PBGC to assist in its collection. The lien arises upon the termination of a plan and is not discharged by bankruptcy. Notwithstanding the bankruptcy, the PBGC may still collect the termination liability from the bankrupts, even though it has no positive net worth and even though the unsecured creditors may be denied any dividend. The 30 percent limitation of Section 1362 was designed to preclude a company from being forced into bankruptcy by the congressional imposition of new liability. However, once bankrupt, the statute specifically recognizes that collection may still proceed against the estate of the bankrupt. Obvi- ously, where the bankrupt stands alone as the sole employer, there can be no collection of termination liability if the bank- rupt had no net worth on the date of termination of the plan (contraria, if it had a positive net worth on date of termination but later went bankrupt). But if the bankrupt is a member of a control group constituting a single employer, it continues to have joint and several liability for the entire amount of the underfunding determined to be due, subject only to 30% of the group’s consolidated net worth. Nothing in ERISA pro- vides that the fact of bankruptcy precludes or limits collection of that liability. A second flaw in the First Circuit's reasoning in Ouimet I] is that its analysis imposed an additional step to the imposition of termination liability not provided for in the statute or its history and which, petitioners contend, is contrary to congres- sional intent. Section 1362 provides that the liability imposed by ERISA pertains to “[a]ny employer to which this section applies” (em- phasis added). In Ouimet J, the Court held that the employer 17 was the Ouimet Group — including the bankrupts. That liability was imposed based upon the group’s positive net worth and by application of Section 1362’s 30 percent of net worth limitation to the group’s combined net worth. The ap- plication of the “30 percent” limitation to the group as a single entity is consistent with the use of the singular word “employer” in Section 1362. However, in ruling that the bankrupts’ estates were not sub- ject to imposition of termination liability, the court severed the single employer into its component parts and applied for a second time the “30 percent” limitation on an individual basis. Nothing in ERISA sanctions such a result. Moreover, it would be erroneous to suggest that the failure of the statute to pro- vide for a severance of the control group and second applica- tion of the “30 percent” limitation is consistent with congres- sional intent. Congress provided for just such a procedure with respect to the termination of plans maintained by more than one employer. In determining the liability of employers under a multiemployer plan, 29 U.S.C. § 1364 (1974) provided that: ‘(b) The corporation shall determine the liability of each such employer and in a manner consistent with section 1362. . . and the [30 percent] limitation described in section 1362(b) (2) of this title shall be applied separately to each employer.” (em- phasis added). Clearly, Congress had in mind at the time ERISA was en- acted that the “30 percent” limitation of Section 1362(b) (2) would be applied in multiemployer settings to the individual employers comprising the group contributing to the plan. Congress chose not to carry that application back into control group liability under Section 1362 when it came time to allocate liability among the individual members of the control group. The failure of Congress to do so suggests that such an application was not intended The rationale is quite obvious. 18 Since the control group is considered a single employer, the “30 percent” limitation would be applied only once — to the single employer's (the group's) net worth, For the court in Ouimet I] to apply that limitation a second time to each member of the control group imposes an additional step in the process of assessing liability not envisioned by Congress or the statute. The question posed herein is an important question pertain- ing to the interpretation of ERISA and the application of ERISA liability to bankrupt members of a control group. The question is one bound to arise time and again as plan termina- tions resulting from or involved in bankruptcy is common and the question is thus worthy of decision by this Court. See generally, Pension Benefit Guaranty Corporation v. Anthony Co., 537 F. Supp. 1048 (N.D. Ill. 1982); Pension Benefit Guaranty Corporation v. Dickens, 535 F.Supp. 922 (W.D. Mich. 1982). B. Allocation of Joint and Several Liability Among Members of a Control Group — Contribution. The next question posed by Ouimet IJ is the manner of allocating termination liability among the members of the control group. In Ouimet /, the First Circuit determined that the control group was the employer for purposes of determin- ing the extent of liability under Section 1362, and that all members of the group were jointly and severally liable to the PBGC. Ouimet J, 630 F.2d at 8-12, ERISA, however, is quiet as to the respective rights and responsibilities of the members of the control group. The master determined that there was a right of contribution between the members of the control group if one member paid more than its just share of the com- mon burden and the First Circuit affirmed that position. Ouimet I], ___ F.2d at ____ (App. 20a). 19 As a result, there is no dispute that a right of contribution exists among members of a control group against which ter- mination liability exists. Because ERISA makes no express provision for such a right, the Court of Appeals necessarily considered such a right to arise by implication, consistent with congressional intent. Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 639 (1981). Having fashioned a right to contribution, the issue of al- locating liability arises. In Texas Industries, this Court recognized that fashioning a just formula for allocating liabili- ty presents “difficult issues.” 451 U.S. at 637. For the reason that the allocation of liability presents difficult issue which “may result in additional trial and pretrial proceedings” (451 U.S. at 638), an important question of federal law arises which should be decided by this Court, the resolution of which would assure consistency in this difficult area and eschew the “additional . . . proceedings” that may arise if this issue is not now decided. The First Circuit, in Ouimet 1], “approve[d] the bank- ruptcy judge's allocation of termination liability among the solvent members of the Ouimet Group.” Ouimet JJ, —_— F.2d at __ (App. 20a). What was affirmed was the bankruptcy judge's assessment of a pro rata share of liability to each member of the group, the result of which was that sol- vent members were allocated 84 per cent of the liability and the bankrupts the balance. There is a significant error in this approach, however. A pro rata assessment simply means “assessing an equal amount against each participant on the theory that each one is equally liable for the injury caused by collective action.” Texas Jn- dustries, Inc. v. Radcliff Materials, Inc., 451 U.S. at 637. * As argued in the preceding section, any allocation should be directed to both the solvent and bankrupt members of the group. ~! 20 The adoption of such a simplistic approach to allocating respective contribution shares of liability ignores the ultimately equitable nature of contribution rights. As this Court recog- nized in Texas Industries, there are numerous approaches to the allocation of contribution shares, What the First Circuit failed to recognize in Ouimet // is that “[t }he task of the Court is to choose the [method] most fair to all parties, keeping in mind that equity is the cornerstone of remedial relief.” McLean vy. Alexander, 449 F. Supp. 1251, 1268 (D. Del. 1978), rev'd on other grounds, 559 F.2d 1190 (3d Cir. 1979). Thus, the court in McLean rejected what was, in effect, af- firmed in Ouimet I], the administratively expedient approach of simply dividing the damages by the number of responsible parties. Moreover, an allocation of liability based upon a comparison of culpability or wrongdoing is inadequate in this type of case, where the members of the control group are not wrongdoers in the tort sense. The equitable approach consistent with the nature of the contribution remedy for allocating liability is one which measures the benefits received by the members of the control group in relationship to the terminated plan. In that regard, an allocation should be made between direct employers, such as the bankrupts here, and the indirect employers (the peti- tioners). Such an approach for assessing liabilities was recog- nized by the Court in Pension Benefit Guaranty Corporation v. Anthony Co., supra, and would be consistent with the equitable nature of the contribution remedy recognized to ex- ist in ERISA, C. Indemnification. The bankruptcy judge, while recognizing a right of con- tribution, rejected the application of the concept of indemnifi- cation because he considered the parties not to be primarily 21 and secondarily liable. In the master's view, both sides could claim to be victims of the ‘but for’ test.” The First Circuit elected not to differentiate between contribution and indem- nification, holding instead that “the real problem here is to allocate a liability which has been created by a federal statute.” Ouimet J], __ F.2d at ____ (App. 10a). The court then seerningly rejects the indemnification concept because it refuses to accept the petitioners’ argument that as between the members of the group, there are two classes of defendants as measured by primary and secondary liability.* When federal law has provided for noncontractual indem- nification, such typically arises “where the indemnitee’s liability is merely passive; such as constructive, vicarious or derivative, while the indemnitor’s liability is active, flowing directly from its own act or omission.” Glover v. Johns- Manville Corp., 662 F.2d 225, 229 (4th Cir. 1981). The im- portant question to be decided is whether those members of a control group, liable only by operation of Section 1362, are en- titled to indemnification from the direct employers. Petitioners contend that their liability is different from that of Avon and its subsidiary, not just in degree but in character as well (Olson Farms, Inc. v. Safeway Stores, Inc., 649 F.2d 1370 [10th Cir. 1979]), and arises only vicariously or derivatively, entitling them to indemnification from the bank- rupts’ estates. Liability to PBGC arose only as a result of the creation of the pension plan by Avon; its subsequent termina- tion of the plan and the resulting underfunding. Avon was the sole party to the collective bargaining agreement which gave * While the court chides the group for adopting this perception, it takes the same view when it breaks down the group into two classes, solvent and insol- vent employers, and then applies the 30 percent limitation to the individual employers for purposes of determining actual liability. 22 rise to the liability involved herein and only its employees were covered. The joint and several liability of the indirect employers in Ouimet Group arose not out of any direct rela- tionship to the plan but rather because of their subsequent relationship to the bankrupts and then only by the retroactive operation of ERISA. Only after the establishment of Avon's primary liability (a necessary condition precedent), was it determined that the Ouimet Group, as a result of their rela- tionship to Avon (not the plan) were also liable. Further, that Avon had no positive net worth did not extinguish its primary liability but only rendered the debt uncollectible from it alone, absent a positive net worth in the controlled group. Thus, the master’s “but for” test, as applied to Avon, is inapplicable. Avon’s primary liability existed irrespective of the net worth of the Ouimet Group. Thus, the solvent members of the Ouimet Group stand in the same shoes as an employer which, by operation of law, is vicariously liable for the actions or inac- tions of its employee — liability that gives rise to a right of full indemnification from the bankrupts’ estates. 3 Moore's Federal Practice § 14.03[3]; Hipp v. United States, 313 F.Supp. 1152 (E.D. N.Y. 1970). This is simply the application of the rule that indemnifica- tion is available “where one has a primary or greater liability or duty which justly requires him to bear the whole burden as between the parties” (Guillard v. Niagara Machine © Tool Works, 488 F.2d 20, 23 (8th Cir. 1973); Hartford Acc. & In- dem. Co. v. R. Hershel Mfg. Co., 453 F.Supp. 1375, 1379 [D. N.D. 1978]) and is consistent with noncontractual indem- nification which arises by operation of law to prevent a result which is regarded as unjust or unsatisfactory. Aetna Cas. & Sur. Co. v. L.K. Comstock & Co., Inc., 488 F.Supp. 732 (D. Nev. 1980). See Bosse v. Litton Unit Handling Systems, 646 23 F.2d 689, 693-694 (Ist Cir. 1981). The retroactive application of liability to the indirect employers is unjust where the bankrupts’ estates have substantial assets. The unfairness is compounded by the decision in Ouimet IJ that no portion of the bankrupts’ estates is available to satisfy any portion of the liability. Because indemnity is the remedy securing the right of a per- son to recover reimbursement from another for the discharge of a liability which, as between himself and the other, should have been discharged by the other (Hartford Acc. & Indem. Co. v. R. Herschel Mfg. Co., 453 F.Supp. at 1379), the preservation of that right requires subrogation of PBGC’s rights to the Ouimet Group. Moreover, if the Ouimet Group is required to pay any of the bankrupts’ primary liability to PBGC, the solvent members right to indemnification from the bankruptcy estates must be on a priority basis because they are subrogated to the rights and priorities of PBGC against Avon. Standard Oil Co. v. Kurtz, 330 F.2d 178 (8th Cir. 1964); Shropshire, Woodliff & Co. v. Bush, 204 U.S. 186 (1907). D. Interest. The First Circuit held that the parenthetical in 29 U.S.C. § 1368(a) (1976) (providing a lien for the amount of the) “liability (including interest)” constituted a delegation of power to the PBGC by Congress to prescribe the rates and computations of interest. The court then concluded that the PBGC Regulations imposing interest at the variable rates of I.R.C. § 6621(a) (29 C.F.R. § 2622.7(c) (1982)) “implements the statute in a reasonable manner and is entitled to deference . and that these rates need not be incorporated into the liability determination.” Ouimet I], ___ F.2d at ___ (App. 20a). 24 This result was reached in the face of the following: 1. PBGC’s Regulations (29 C.F.R. § 2622.7) state that “in- terest shall be compounded annually” which is expressly con- trary to the provisions of § 26 U.S.C. § 6601(e)(2). Com- pound interest is now permitted under § 660l(e) from and after January 1, 1983 only. 2. The above Regulations which imposed compound inter- est by PBGC were first published in the Federal Register on January 28, 1981. Thus, not only is the principal liability im- posed by Title IV of ERISA done so retroactively, but in Oui- met II, the First Circuit approved PBGC’s decision to com- pound interest retroactively. 3. ERISA does not impose a civil or criminal penalty for late payment of the liability. However, in applying com- pound interest from 1976 and before the amount of individual liability is actually determined in the case at bar clearly has the effect of a penalty. 4. The Regulations incorporate the fluctuating rates of § 6621 of the Internal Revenue Code with the result that the following annual rates of interest will be applicable for the periods specified below: March 5, 1976-January 31, 1978 7% February 1, 1978-January 31, 1980 6% February 1, 1980-January 31, 1982 12% February 1, 1982-December 1, 1982 20 % January 1, 1983-June 30, 1983 16% July 1, 1983-December 31, 1983 11% 5. The interest factor used by PBGC in calculating the defi- ciency was slightly under 8 percent per annum. 6. The First Circuit held that the 30 percent limitation of liability provided by Section 1362 does not apply to interest with the result that the principal of the underfunding of some 25 $552,000 is doubled by the addition of interest as calculated by PBGC and such is substantially in excess of the 30 percent of the group’s consolidated net worth. The petitioners respectfully point out that the decision of the First Circuit with respect to the approbation of the PBGC’s Regulations imposing compound interest retroactively on the liability is erroneous for the following reasons: 1. ERISA does not by its express terms impose interest on employer liability. 2. Congress did specify interest on late premiums under 29 U.S.C. § 1307(b) as follows: If any premium is not paid by the last date prescribed for a payment, interest on the amount of such premium at the rate imposed under § 6601 (a) of Title 26 (relating to interest on underpayment, non-payment, or extensions of time for payment of tax) shall be paid for the period from such last date to the date paid. 3. It is clear that Congress knew how to incorporate the fluctuating rates of the Internal Revenue Code and chose not to do so with respect to the liability under Section 1362. 4. The application of the fluctuating rates to Section 6621 of the Internal Revenue Code would generate a “profit” to PBGC since it utilized less than an 8% rate in calculating the liability. That is not the purpose of interest. 5. To hold that the parenthetical in Section 1368(a) was Congress’ way of delegating power to PBGC to impose interest suggests Congress did not know how to impose interest; did not know how to incorporate the rates of the Internal Revenue Code or did not think of it; and that interest is such a unique and complex concept that it needs the special expertise of PBGC for its calculation, all of which is absurd. 26 6. Compound interest for the period January 1, 1976 to January 1, 1983 was specifically prohibited by § 6601 (e) of the Internal Revenue Code. 7. Finally, Section 1362, which is entitled “Liability of Employer” the employer's “liability” is limited to 30 percent of its net worth. Section 1368(a), upon which PBGC and the First Circuit relies to hold that “liability” under Section 1362 also in- cludes interest, later reversed themselves and held that such in- terest is not a part of the “liability” for purposes of the 30 percent limitation. By these gymnastics, PBGC is allowed to have it both ways, that is, to have “liability (including interest)” to mean employer liability includes interest for purposes of adding in- terest, but interest is excluded and is not considered part of the “liability” for purposes of the 30 percent limitation. “There is simply no room to imply from that language that a ‘single employer’ in the ‘common control’ context is to have a dif- ferent meaning for liability purposes than for the 30 % of net worth calculation.” Pension Benefit Guaranty Corporation v. Anthony Co., 537 F.Supp. at 1052 So too, with interest, there is no room to imply that it is to have a different meaning for liabili- ty purposes than for the 30 percent of net worth limitation. See Sen. Report # 93-127, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 4862 which states: Having determined that participation in the plan ter- mination insurance program was essential for all plans, and that some degree of employer liability was necessary, the question of the degree of such liability becomes im- portant. The committee had concern that if the degree of liability was absolute to the extent of the employer's assets, it might drive some employers to the brink of bankruptcy, impose substantial economic hardship, or discourage the establishment of plans or the reasonable liberalization of benefits. 27 Accordingly, the committee endorsed a formula of employer liability which requires the employer to reim- burse the pian termination insurance program for the total amount of insurance paid, but in no event greater than 50% of employer’s net worth at time of plan ter- mination. To further evidence congressional concern, the final version of the statute rejected the original 50 percent limitation in favor of a 30 percent limitation. The “challenged Regulation is not a reasonable statutory interpretation unless it harmonizes with the statute’s ‘origin and purpose’ (citation omitted).” United States v. Vogel Fertilizer Co., 455 U.S. at 26. PBGC’s position as regards interest is clearly not harmonious with ERISA. E. The Court of Appeals Misconstrued the Rationale and Holding of this Court in United States v. Vogel Fertilizer Co., 455 U.S. 12 (1982), in Determining the Composition of the Control Group. The stipulated facts show that Emil R. Ouimet owned in his own name in excess of 80 percent of the outstanding shares of Ouimet Corporation, 100 percent of the outstanding shares of Emil R. Ouimet Wareham Trust and 1,188 shares out of 1,500 shares or 79.2 percent of the shares of Ouimet Stay & Leather Company. The First Circuit held that Emil R. Ouimet owned in excess of 80 percent of Ouimet Stay & Leather Company shares by attributing to Emil R. Ouimet the stock owned by his wife and his beneficial interest in his father’s estate. Neith- er the wife nor the father’s estate owned shares in the Emil R. Ouimet Wareham Trust or Ouimet Corporation. Thus, the First Circuit included the stock registered in the name of two other persons to satisfy the 80 percent ownership requirement 28 of Emil R. Ouimet in Ouimet Stay & Leather Company. By the addition of these other shares, the First Circuit concluded that Ouimet Corporation, Ouimet Stay & Leather Company and the Emil R. Ouimet Wareham Trust were all members of the control group since Emil R. Ouimet individually owned 80 percent or more of all three corporations. The First Circuit concluded that Vogel Fertilizer did not prevent “attributing” stock from one person to another in order to satisfy the statutory requirements. Petitioners respectfully suggest that this misconstrues and misreads the rationale and holding of this Court in United States v. Vogel Fertilizer Co., 455 U.S. 12 (1982). In Vogel Fertilizer, this Court held that a brother- sister relationship does not make a corporation a member of a “controlled group of corporations” within Section 1563 of the Internal Revenue Code unless “the same indivisible group of five or fewer persons represent(s) 80 percent of the ownership of each corporation.” 455 U.S. at 25. This Court's holding in Vogel Fertilizer is clear as is its ra- tionale. Thus, a person whose stock is included in satisfying the 80 percent test of Section 1563 must own stock in each cor- poration alleged to be a member of the control group. This would include stock added by “attribution” or by any other reason. Otherwise, the rationale and holding of this Court in the Vogel Fertilizer case is easily circumvented. This Court clearly stated in Vogel Fertilizer the need that stock ownership be direct and not indirect as follows: Congress purposefully substituted the mechanical for- mula of § 1563(a)(2) for the subjective case-by-case, analysis that had previously prevailed. Inherent in such an objective test is a sharp dividing line that is crossed by incremental changes in ownership. Moreover, it is ob- vious that a shareholder would not buy a small amount of stock in order to create a controlled group, since it is to 29 the taxpayer's advantage not to be part of such a group. Finally, a person’s “mere” ownership of one share of stock plays an important role in the operation of the test. It in- sures that each of the “5 or fewer” shareholders represent- ing the bulk of the financial interest of the corporations actually knows of the other corporations within the putative brother-sister controlled group. Under this con- struction of the statute, controlled-group membership cannot catch such a shareholder by surprise, as it could under the Commissioner’s construction. 455 U.S. at 34, 35. Thus, if it is necessary to add stock of any individual to raise the stock ownership of Emil R. Ouimet to 80 percent or more of Ouimet Stay & Leather Company then such individuals must also own stock in the other corporations to be included in the group. Such are not the facts. 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 reviewing and reversing the decision of that court. Respectfully submitted, RICHARD G. MALONEY, MALONEY, WILLIAMS & BAER, 133 Federal Street, Boston, Massachusetts 02110. (617) 482-9120 Appendix. Table of Contents. First Circuit Court of Appeals Opinion First Circuit Court of Appeals Judgment la la United States Court of Appeals for the First Circuit. No. 82-1651. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLEE, v. OUIMET CORPORATION, &r AL., DEFENDANTS, APPELLANTS. No. 82-1652. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLEE, v. OUIMET CORPORATION, Er AL., DEFENDANTS, APPELLEES, v. HERBERT C. KAHN, TRUSTEE IN BANKRUPTCY OF TENN-ERO CORPORATION Anp IN AVON SOLE COMPANY, Destors, APPELLANTS. No. 82-1653. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLANT, o. 2 OUIMET CORPORATION, Er AL., DEFENDANTS, APPELLEES. APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. [Hon. Joserx L. Tauro, U.S. District Judge) 2a Before BowNeEs AND Brever, Circuit Judges, AND Wyzanskl,* Senior District Judge. Richard G. Maloney, with whom Burton L. Williams, and Maloney, Williams & Baer, P.C. were on brief, for Ouimet Corporation, et al. Frederick G. Fisher, Jr., with whom Paul P. Daley, Hale and Dorr, Sidney Werlin, Richard Zinner, Friedman & Ather- ton, Bernard A. Riemer, and Riemer and Braunstein were on brief, for Herbert C. Kahn. Bernard P. Klein, Senior Attorney, with whom Henry Rose, General Counsel, Mitchell L. Strickler, Deputy General Counsel, Baruch A. Fellner, Associate General Counsel, and James N. Dulcan, Assistant General Counsel, were on brief, for Pension Benefit Guaranty Corporation. June 9, 1983 Bowens, Circuit Judge. This case is a sequel to Pension Benefit Guaranty Corp. v. Ouimet Corp., 470 F. Supp. 945 (D. Mass. 1979), aff'd., 630 F.2d 4 (1st Cir. 1980), cert. denied, 450 U.S. 914 (1981). In that case the district court held that the Employee Retirement Income Security Act (ERISA) authorizes the Pension Benefit Guaranty Corporation (PBGC) to impose liability for a pension plan termination jointly and severally on members of a commonly controlled group of businesses, and not just on the member that had established and contributed to the plan. We affirmed on somewhat different grounds and the case was remanded to the bankruptcy judge sitting as a master pur- suant to Federal Rule of Civil Procedure 53 for a determination of the controlled group’s net worth. The bankruptcy judge’s net worth determination and ultimate allocation of liability among members of the commonly controlled group on remand have been affirmed by a district court order dated July 14, 1982, from which all of the parties now appeal. We find this allocation of liability to be erroneous as a matter of law and remand the * Of the District of Massachusetts, sitting by designation. 3a case to the district court for determinations consistent with this opinion. I. Facts and Prior Proceedings As explained more fully in our first opinion, Ouimet, 630 F.2d at 6-7, this case concerns a group of business entities (the Ouimet Group) primarily owned, either directly or indirectly, by Emil R. Ouimet.' He, or in some instances his son, also served as president of each of these entities. The case com- menced with the bankruptcy of two members of the Ouimet Group, Avon Corporation (Avon) and its wholly-owned sub- sidiary, Tenn-ERO.* Avon became a member of the Ouimet Group in 1968 when its stock was purchased by the Ouimet Corporation. Nine years earlier Avon had established a pension plan for its hourly workers pursuant to a collective bargaining agreement. This plan gave Avon the right to “amend, modify, suspend or ter- minate [it)” and limited any benefits payable upon termina- tion to “the assets then remaining in the Trust Fund.” Although Avon had made all actuarially required contribu- tions, the plan was at all times underfunded because these con- tributions were insufficient to provide for all plan benefits.’ This underfunding totalled $92,000 at the time Avon became a member of the Ouimet Group and $552,339.64 when Avon ceased operations in 1975. ‘For a diagram of the relationship of these businesses, see Ouimet, 470 F.Supp. at 947 n.1. *For all practical purposes these two entities were one and the same; they have been treated as such throughout the proceedings involved in this case. *More specifically, the underfunding existed because (1) the plan gave credit for past years of service without requiring immediate contributions to fund these credits, (2) Ouimet negotiated several benefit increases but failed to fund them with current contributions, and (3) the value of fund in- vestments declined during the years immediately before the plan's termina- tion. Ouimet, 630 F.2d at 7. 4a In 1974 Congress established a system of pension plan ter- mination insurance in Title IV of ERISA to guarantee the vested benefits of workers covered by defined benefits plans.‘ PBGC, the corporation created to administer the insurance program, in essence pays employees’ vested benefits to the ex- tent that the terminated pension plan’s assets are insufficient to cover them. PBGC finances benefit payments by collecting insurance premiums from administrators of covered plans, 29 U.S.C. § 130](a)(1) (Supp. V 1981), and by imposing reimbursement liability on the employer that terminated the plan, 29 U.S.C. § 1362 (1976 & Supp. V 1981). The employer liability provided for by section 1362 is limited to thirty per- cent of the employer’s net worth.®. In our earlier opinion we held that, due to the plain meaning of the statutory language in 29 U.S.C. § 1301(b) (1976),* the Ouimet Group con- ‘For the current codification of this insurance system, see 29 U.S.C §§ 1301-1461 (1976 & Supp. V 1981). * The statute sets out the amount of liability as follows: Any employer to which this section applies shal] 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 subchapter 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. 29 U.S.C. § 1362(b) (1976). * The relevant language in this section, which has remained unchanged by subsequent amendments to the section, is as follows: For purposes of this subchapter, under regulations prescribed by the corporation, all employees of trades or businesses (whether or not in- corporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses 5a stituted one employer for the purpose of employer liability under section 1362. Ouimet, 630 F.2d at 11-12. Thus, in determining the reimbursement liability resulting from Avon's plan termination the net worth ceiling was to be measured by the aggregate net worth of the Ouimet Group and the various members of the Group were to be held jointly and severally liable to PBGC. On remand the bankruptcy judge accepted PBGC’s deter- minations with respect to the valuation date’ and method of valuing the Ouimet Group’s net worth,* and found that the Group’s net worth was sufficiently large that the thirty per- cent provision did not operate to reduce the $552,339.64 liability amount. He then accepted PBGC’s claim for interest on the liability from thirty days after the initial demand for payment up to the payment date at the rates provided under I.R.C. § 6621, but disallowed the imposition of interest against the bankrupt companies, Avon and Tenn-ERO. In determining the allocation of liability to each member of the Ouimet Group the bankruptcy judge noted that ERISA pro- vides no explicit guidance on the issue and then attempted to as a single employer. The regulations prescribed under the preceding sentence shal! be consistent and coextensive with regulations prescribed ee Se © Oe eee eae eee 414(c) of title 26. 29 U.S.C. § 1301(b)(1) (Supp. V 1981). * The statute requires PBGC to choose a valuation date that is not more than 120 days before the termination date. See supra note 5 (text of provi- sion). PBGC selected December 31, 1974, as the valuation date in this case. "In relevant part 29 U.S.C. § 1362(c) (1976 & Supp. V 1981) provides that, for the purposes of computing an employer's liability, net worth is “determined on whatever basis best reflects, in the determination of the cor- poration, the current status of the employer's operations and prospects at the time chosen for determining the net worth of the employer... .” In this in- sistance PBGC concluded that a fair market valuation was the most appro- priate measure of net worth. 6a make the allocation in a manner consistent with the congres- sional intent behind the statute. The judge acknowledged that the thirty percent of net worth limitation suggests that the bankrupts, having no net worth, could not be liable, but re- jected this suggestion apparently because ERISA give PBGC’s liability claim against an employer a priority status in bank- ruptcy proceedings. He finally arrived at an allocation based upon the thirty percent of net worth limitation; for the bank- rupts, however, he substituted thirty percent of asset value for thirty percent of net worth. Based on ratios arrived at by dividing thirty percent of each member’s net worth and thirty percent of the bankrupts’ asset values by the total of thirty per- cent of the Group’s aggregate net worth plus thirty percent of the bankrupts’ asset values, the judge allocated liability as follows: Ouimet Corporation $287,497 Ouimet Stay & Leather Company 95,832 Emil R. Ouimet Wareham Trust 90,508 Avon Sole Co. & Tenn-ERO 78,502 Total Liability to PBGC $552,339 The district court affirmed the bankruptcy judge’s judg- ment and memorandum in their entirety. On appeal the Ouimet Group advances several theories designed to reduce the termination liability or interest imposed on its remaining solvent members; some of these reductions would be at the ex- pense of the bankruptcy estates of Avon and Tenn-ERO. PBGC and the Trustee in Bankruptcy have responded where appro- priate and PBGC also has asserted that the court below erred in not allowing interest on the entire amount of the liability. 7a Il. Reduction of Liability for Benefits Accrued Before Avon's Membership in the Ouimet Group The Ouimet Group's first argument is that the joint and several liability of its members should be reduced by $92,000, the unfunded liability for vested benefits which had accrued under the pension plan before Avon became a member of the Group. This contention stems from our earlier holding that ERISA’s retroactive imposition of joint and several liability on Group members other than Avon was justified by virtue of their membership in the Group. The Group maintains that it foHows from this that ERISA could constitutionally impose retroactive liability on other members only for the unfunded benefits attributable to the period during which Avon was a member. PBGC responds to this argument primarily by stressing that the issue has already been litigated by the parties and decided by this court when we upheld the retroactive application of ERISA’s termination liability provisions based upon the rea- soning of Nachman Corp. v. Pension Benefit Guaranty Corp., 592 F.2d 947 (7th Cir. 1979) (retroactivity upheld on statutory and constitutional grounds), aff'd, 446 U.S. 359 (1980) (ad- dressing the statutory question only). Indeed, the Ouimet Group’s current argument is strikingly familiar and relies on the same cases cited by it earlier — Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978), and Railroad Retirement Board v. Alton Railroad, 295 U.S. 330 (1935). We hesitate to dismiss the Group’s argument summarily, however, because it does contain some nuance of focusing on the liability accrued prior to Avon’s membership in the Ouimet Group. As PBGC acknowledges in its brief, the Ouimet Group did not specif- ically argue this point earlier. Instead of relying upon cases that we distinguished in our earlier opinion, the Ouimet Group perhaps should have cited Sa Pension Benefit Guaranty Corp. v. Anthony Co., 537 F. Supp. 1048 (N.D. Ill. 1982), in advancing its current point. The court in Anthony considered the constitutionality of imposing employer liability on a parent whose subsidiary terminated a pension plan; the parent had acquired the subsidiary after the plan was established and before ERISA’s effective date. The court distinguished Nachman as upholding the statute’s retro- active application to direct employers. It held that liability could constitutionally be imposed on the direct employer's parent only to a limited extent, concluding that it would be ra- tional in due process terms to hold “the acquiring parent ac- countable for underfunding to the extent of any direct finan- cial benefits it derived from the subsidiary during its affilia- tion.” Anthony, 537 F. Supp. at 1056 (footnote omitted). The court suggested that the parent could be held liable for such items as dividends it received from the subsidiary or income tax savings realized from deductions attributable to the subsid- iary. By implication Anthony suggests that it would violate due process to hold the parent liable for unfunded benefits at- tributable to the period before it acquired the subsidiary because the parent would have received no financial benefits relating to this period. We do not agree that rationality in due process terms re- quires a dollar by dollar accounting of the financial benefits controlled group members have realized as a result of their af- filiation with the terminating employer. The mere fact that such benefits typically accrue in the controlled group setting is sufficient to support a conclusion that Congress acted rational- ly and not arbitrarily in drafting ERISA to impose retroactive liability on controlled group members. The circumstances surrounding the Ouimet Group amply demonstrate this. As we noted in our first opinion, Ouimet had agreed to benefit in- creases under the plan which contributed to its underfunding and the Ouimet Group realized tax benefits on the Avon plan 9a contributions. Ouimet, 630 F.2d at 12. The analysis in An- thony ignored the realities of business affiliation, such as that a parent does not have to actually receive dividend payments to benefit from its subsidiary’s successful operations. It does not require a quantum leap for us now to hold ex- plicitly that imposing on the entire Group the $92,000 liability relating to the period before Avon was acquired does not violate due process. The Ouimet Group does not have an in- defeasible reliance interest here because it acquired Avon “with full knowledge of the plan and its funding re- quirements.” Ouimet, 630 F.2d at 12. Presumably the price at which Ouimet acquired Avon reflected the plan’s funding inadequacies up to that date — such as for past service costs — and thus Ouimet stepped into the shoes of Avon with respect to the benefits and burdens of the plan; certainly in most business acquisitions involving the purchase of stock this would be the case. More importantly, the Ouimet Group’s argument here runs counter to the essence of our first holding, that in enact- ing ERISA’s termination liability provisions Congress treated entities under common control as one employer. The statute places the Ouimet Group in the shoes of Avon regardless of the specifics of Ouimet’s acquisition of that company. This ap- proach is rationally related to ERISA’s objectives of protecting employees’ retirement benefits while not creating disincentives to the adoption or liberalization of retirement plans. See Comment, Extending Liability for Pension Plan Terminations to Controlled Group Members: Pension Benefit Guaranty Corp. v. Ouimet Corp., 61 B.U.L. Rev. 447, 489-502 (1981). Much of the analysis in Nachman Corp. v. Pension Benefit Guaranty Corp., 592 F.2d 947, concerning direct employers is pertinent here and supports the conclusion that due process does not require reducing the Ouimet Group’s liability by the amount of vested benefits accrued before Avon became a member. 10a III. Reduction of Liability Under Theories of Indemnity and Contribution The Ouimet Group’s indemnity and contribution arguments reflect the same misperception of our earlier hold- ing that commonly controlled entities constitute one employer for the purpose of termination liability. Underlying both of its contentions is the Group’s continued assertion that there are two classes of defendants to PBGC’s claims in this case, the direct employers of the plan participants and the remaining members of the Group, and that the former class has primary liability while the latter is merely secondarily liable. Thus, the Ouimet Group argues that it is entitled to indemnification to the full extent of the $386,515.32 in the bankrupts’ estates. Under what it refers to as a contribution theory the Group of- fers two other possible allocations of liability. First, it main- tains that the bankrupts’ estates should be applied first to the liability and that the Group should be jointly and severally liable for the balance. It appears that this approach would result in the same allocation as the indemnity theory: the bankrupts’ estates would be fully exhausted before the solvent companies could be held liable. In the alternative the Group argues for an allocation based on the comparative benefits yielded by the plan. It measures the benefits a business realizes from a pension plan by the number of months during which that business was connected with the plan. Given that the plan existed for 190 months and that Avon became af- filiated with the Group after 112 of these months, the Group suggests that 112/190 of the liability be allocated to Avon and the remainder to the Group. As often happens, these arguments confuse the concepts of indemnification and contribution. See W. Prosser, Law of Torts 310 (4th ed. 1971). To the extent that the Group seeks an allocation which requires each entity to pay its proportion- ate share of the liability it is requesting a right of contribution. lla See id. The notions of primary and secondary liability which underlie the Group's claims, however, suggest that it is re- questing indemnification. In any event, the real problem here is to allocate a liability which has been created by a federal statute. We find guidance in solving this problem in two re- cent Supreme Court cases — Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630 (1981), and Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77 (1981). Not surprisingly, these cases suggest that we first determine if the statute, either expressly or by implication, provides the method of allocation. See Texas Industries, 451 U.S. at 638 (A right to contribution under the antitrust laws may arise in one of the following ways: “first, through the affirmative creation of a right of action by Congress, either expressly or by clear im- plication; or, second, through the power of the federal courts to fashion a federal common law of contribution.”); North- west Airlines, 451 U.S. at 90-91 (similar statement with respect to the question of a right to contribution under the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964). Factors relevant to the analysis include statutory language, legislative history, and policy considerations. Jd. at 89, 95. The allocation to be made in this case is really one between the solvent members of the Ouimet Group and the creditors of the bankrupt companies, Avon and Tenn-ERO. The credi- tors’ claims significantly exceed the assets available in the bankruptcy estates and to the extent that assets from these estates are used to satisfy PBGC’s claim there will be an even smaller amount available to creditors. Hints of a solution to this allocation problem along with lines suggested by the Ouimet Group can be found in our first Ouimet opinion as well as in that of the district court. In an introductory discus- sion of the controlled group liability issue we stated that if the statute limited liability to the direct employer, Avon, then 12a “PBGC [would] recover{} nothing and a dividend [would] be paid to the creditors.” Ouimet, 630 F.2d at 6. If the statute instead was construed to extend liability to other members of the Ouimet Group, we foresaw that it would be “probable that PBGC will receive all of the bankrupts’ assets with the creditors receiving nothing.” Jd. Similarly, the district court speculated that “[b]y applying the net worth of the entire con- trolled group, the bankruptcy estate will probably be ex- hausted, and the unsecured creditors will receive little or no dividend.” Ouimet, 470 F. Supp. at 953 n.19. Now with the issue squarely before us, we do not think that the statutory provisions treating commonly controlled busi- nesses as one employer should operate — by using the entire Group’s net worth in computing the thirty percent ceiling — to increase the liability amount and then allow the Group to pass as much of this increase as possible along to creditors of the bankrupts. It is true that the statute does not explicitly allocate liability among controlled group members which, under section 1301(b), are to be treated as a single employer. Ouimet, 470 F. Supp. at 953-54 n.20. It is also true that when Congress wanted to allocate liability among employers participating in plans other than single-employer plans it did so explicitly. See, e.g., 29 U.S.C. § 1363 (1976 & Supp. V 1981) (providing a specific formula for allocating liability to the withdrawing employer and stating that this formula may be overridden by an “indemnity agreement in effect among all other employers under the plan”). These facts, however, do not negate the conclusion that allocation of the termination liability in this case to the creditors of Avon and Tenn-ERO cuts against the language and policies of the statutory scheme. The thirty percent of net worth limitation clearly appears to eliminate the bankruptcy estates and a source of payment to PBGC because the estates have zero, actually negative, net worth. The bankruptcy judge recognized this but apparently 13a could not reconcile it with the special priority status the PBGC claim receives in bankruptcy. The simple answer is that the provisions of 29 U.S.C. § 1368 (1976 & Supp. V 1981), which in essence create a lien similar to a tax lien, evidence the intent of Congress that as between PBGC and the bankrupt employ- er’s creditors the termination liability should be absorbed by the creditors. These provisions do not support the conclusion that as between controlled affiliates who are to be treated as a single employer and the direct employer's creditors the loss is to be absorbed by the creditors. Congress’ intent in enacting the net worth ceiling was to avoid imposing extreme economic hardship on employers and driving them to the brink of bankruptcy. Concomitantly, Congress also sought to avoid discouraging the establishment or liberalization of pension plans. H.R. Rep. No. 533, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 4639, 4654; S. Rep. No. 127, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 4838, 4862. The seriousness with which Congress considered these objec- tives is demonstrated by the fact that the conference com- mittee reduced the ceiling to thirty percent of net worth from the fifty percent originally proposed in the House and Senate bills. There is simply no provision in the statute which authorizes PBGC to impose termination liability on an insol- vent entity. The bankruptcy judge’s approach of substituting assets for net worth reads more into the statute than we are willing to accept. Furthermore, the conclusion that the solvent members of the Ouimet Group, and not Avon’s creditors, should bear re- sponsibility for the liability to PBGC follows from the objec- tives of imposing termination liability. These objectives, to deter employers from making unrealistic promises to employ- ees and to protect against abuse of the termination insurance program, are illuminated by the following passage from the legislative history: l4a Concern was expressed to the committee that in the absence of appropriate safeguards under an insurance system, an employer might establish or amend a plan to provide substantial benefits with the realization that its funding may be inadequate to pay the benefits called for. Such an employer might, it was argued, rely on the insur- ance as the backup which enables it to be more generous in promising pension benefits to meet labor demands than would be the case if it knew that the benefits would have to be paid for entirely out of the assets of the employer. S. Rep. No. 383, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 4890, 4971. Instead of relyingon the insurance program as a backup, the Ouimet Group is trying to rely as much as possible on Avon's creditors. This conflicts with the congressional intent of holding employers account- able for the pension benefits they promise to ensure that employees can safely rely on these promises in their retirement planning. This type of accountability is central to ERISA’s primary goal of protecting employees’ benefits. See A-T-O, Inc. v. Pension Benefit Guaranty Corp., 634 F.2d 1013, 1023 (6th Cir. 1980); see also Comment, Extending ERISA Liability for Pension Plan Terminations to Controlled Group Members: Pension Benefit Guaranty Corp. v. Ouimet Corp., 61 B.U.L. Rev. 477, 489-502 (1981) (maintaining that holding controlled group members liable for plan terminations fosters the statute’s insurance objective and that such seemingly harsh treatment of employers does not produce the disincentives Congress sought to avoid). As we have indicated, the Ouimet Group participated in labor negotiations that resulted in promises of benefit increases and benefitted from Avon's plan at the very least to the extent of deductions on its consolidated l5a income tax returns. Under these circumstances we think the statute clearly requires that PBGC’s claim be satisfied out of the Group’s net worth, leaving the entire amount of the bank- rupts’ estates for the satisfaction of creditors. On the surface this result may appear to disregard unduly the legal separateness of the corporate entities involved.* There is precedent, however, for piercing the corporate veil in bankruptcy situations. Under its general equitable powers a bankruptcy court may “substantially consolidate” the assets and liabilities of various entities. Substantial consolidations will usually, but not always, involve only debtors and be granted if absolutely necessary for achieving reorganization or protecting creditors’ economic interests. See generally 5 Col- lier on Bankruptcy § 1100.06 (15th ed. 1979). Some of the facts a court will look for in deciding whether to grant a sub- stantive consolidation include the parent owning a majority of the subsidiary’s stock, the entities having common officers or directors, the subsidiary being grossly undercapitalized, the subsidiary transacting business solely with the parent, and both entities disregarding the legal requirements of the sub- sidiary as a separate corporation. /d. at 1100-35 (quoting Fish v. East, 114 F.2d 177, 191 (10th Cir. 1940)); cf. DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 684-90 (4th Cir. 1976) (citing similar factors in concluding that officer/shareholder of indebted corporation could be held individually liable on the corporation’s debt). There is no need to show that any or all of these factors are present to justify holding the solvent members of the Ouimet * Perhaps this explains why the Trustee in Bankruptcy failed to press for this result on appeal and instead acceded to the allocation of the bankruptcy judge. The Trustee had argued below that it followed from the thirty per- cent of net worth ceiling that the solvent members of the Group should pay the liability in proportion to their net worth and that the bankrupts should bear no liability. 16a Group responsible for the entire liability in this case. Avon's corporate veil was, in effect, pierced by Congress when it en- acted the termination liability provisions of ERISA. The cor- porate form is a creation of state law and states may impose stringent limitations on attempts to disregard it; the factors courts consider in deciding whether to grant substantive con- solidations reflect such limitations. These limitations, however, do not constrict a federal statute regulating inter- state commerce for the purpose of effectuating certain social policies. See Sebastopol Meat Co. v. Secretary of Agriculture, 440 F.2d 983, 985 (9th Cir. 1971) (state limitations on the “alter ego” doctrine need not be accepted in an agency's ap- plication of federal regulatory statutes); Corn Products Refin- ing Co. v. Benson, 232 F.2d 554, 565 (2d Cir. 1956) (existence of separate corporate entity may be disregarded when neces- sary to further the purpose of a federal regulatory statute). Thus, concerns for corporate separateness are secondary to what we view as the mandate of ERISA in this case. IV. Composition of the Ouimet Group The Ouimet Group next argues that the Supreme Court's holding in United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982), has altered the composition of the controlled group as originally determined by the district court in its first opinion. Specifically, the Group maintains that the Emil R. Ouimet Wareham Trust (Trust), which had been included in the con- trolled group because of its brother-sister relationship with other Ouimet companies, Ouimet, 470 F. Supp. 947-49, should no longer be included in the Group. The exclusion of Trust and its net worth would reduce the Group's termination liability by at least $6,000. 1.R.C. § 1563(a)(2), in pertinent part, defines a brother- sister relationship as existing between two corporations when five or fewer persons own at least eighty percent of the voting 17a power of each corporation.'’® In invalidating a Treasury regulation promulgated under this section the Court in Vogel Fertilizer held that each person whose stock is considered in applying the eighty percent test must own at least one share of stock in each corporation. Vogel Fertilizer, 455 U.S. at 22-35. The Ouimet Group maintains that this requirement has not been met with respect to Trust because Emil Ouimet, who is the sole owner of Trust, owns just under eighty percent of Ouimet Stay & Leather Company, a corporation which along with Ouimet Corporation had originally been held to have had a brother-sister relationship with Trust. This argument misreads Vogel Fertilizer. Under that case's holding, if Emil Ouimet did indeed own less than eighty per- cent of Ouimet Stay & Leather then that company would not be a member of the controlled group. Trust and Ouimet Cor- poration would remain in a brother-sister relationship as de- fined in Vogel Fertilizer because Emil Ouimet owned at least eighty percent of each of them. More importantly, we find that the controlled group as originally defined by the district court satisfies the Vogel Fertilizer requirement because Emil Ouimet in fact owned at least eighty percent of Ouimet Stay & Leather. The text of I.R.C. § 1563(a)(2) is as follows: Brother-sister controlled group Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock pomeming — (A) 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 the stock of each corporation, and (B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 530 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation. 18a The principles of I.R.C. § 1563(a)(2) are relevant to con- trolled group plan termination liability because ERISA defines an employer in terms of the regulations promulgated under I.R.C. § 414(c). 29 U.S.C. § 1301(b)(1) (Supp. V 1981); see supra note 6 (text of provision). I.R.C. § 414(c) and the related regulations define controlled groups of businesses using the principles of the I.R.C. § 1563 definitions. See generally Comment, Extending ERISA Liability for Pension Plan Ter- minations to Controlled Group Members: Pension Benefit Guaranty Corp. v. Ouimet Corp., 61 B.U.L. Rev. 477, 491-02 (1981) (suggesting that the difference between section 1563 and section 414 is that the latter encompasses unincorporated as well as incorporated entities in the controlled group defini- tions and thus includes Trust). The family attribution rules set forth in the section 414(c) regulations operate to increase Emil Ouimet’s ownership percentage in Ouimet Stay & Leather to over eighty percent.'' Under Temporary Treas. Reg. § 11.414(c)-4(b)(5) (1975), Emil Ouimet is deemed to own his wife's six shares and under Temporary Treas. Reg. § 11.414(c)-4(b)(3) (1975), he is deerned to own almost seven shares from his father’s estate. These shares are sufficient to push his ownership interest in Ouimet Stay & Leather to over eighty percent without even considering the indications in the record that Emil Ouimet actually owns some more shares which are in the names of others. Thus, the same shareholder owns at least eighty percent of Trust, Ouimet Stay & Leather, and Ouimet Corporation and these entities are in a brother- '! We reject the Ouimet Group's contention that under Vogel Fertilizer the family attribution rules can only apply to stock owned by persons who own stock of each of the entities under consideration. The attribution rules set out in 1.R.C. § 1563(d) & (e) clearly do not include such a requirement. Vogel Fertilizer invalidated Treasury regulations which were inconsistent with other portions of § 1563 and clearly had no effect on that section's at- tribution provisions. 19a sister relationship as defined in Vogel Fertilizer. Therefore, for the purpose of imposing terminating liability the Ouimet Group includes Trust and remains as originally defined by the district court. V. Interest Accrued During the Period the Liability Remains Unpaid The district court affirmed the bankruptcy judge’s conclu- sion that interest should not accrue on that portion of the Ouimet Group’s termination liability allocated to the bank- rupts. It follows from our holding here that interest should ac- crue on the entire amount of the liability because no amount is to be allocated to the bankrupts. The Ouimet Group raises several points with respect to the amount of interest which should attach to its liability. First it argues that the statute does not provide for the imposition of interest, and that if interest is imposed it should not accrue un- til after this court issues its opinion and the amount of liability is conclusively determined. We think the statute clearly pro- vides that PBGC may impose interest for an employer's delay in satisfying its claim. See 29 U.S.C. § 1368(a) (1976) (pro- viding for a lien in the amount of an employer's “liability (in- cluding interest)” (emphasis added)); see also Ludlow Indus- tries v. Pension Benefit Guaranty Corp., 524 F. Supp. 155, 158 (N.D. Ill. 1981). This interest logically would begin to ac- crue on the plan termination date, the date on which the employer's liability arises. Cf. 29 U.S.C. § 1368(b) (1976) (providing that the lien imposed when an employer neglects or refuses to pay arises on the plan termination date); 29 U.S.C. § 1362(b) (1976) (providing for computation of termination liability as of the termination date). Accruing interest as of the termination date is consistent with the idea that imposing interest will encourage prompt settlement of PBGC’s claims as well as compensate it for the time value of money foregone 20a during any period of delay in payment. We note that PBGC’s regulations also encourage PBGC itself to facilitate a rapid determination and settlement of liability by imposing the same interest on PBGC for any overpayments made to it by the employer. 29C.F.R. § 2622.7(b) (1982). The Ouimet Group has little room to complain because it has already been granted a one year delay beyond the termination date for the com- mencement of interest. The Ouimet Group next cites Ludlow Industries, 524 F. Supp. 155, for the proposition that if interest accrues for its delay in payment, then for purposes of consistency the interest rate should be correlated with the factor used to discount the pension plan’s vested nonforfeitable benefits to present value in computing the termination liability. Thus, the Group maintains that if we approve PBGC’s imposition of interest for payment delays at short-term rates the termination liability should be recomputed using these same rates in discounting benefits. PBGC’s regulations have adopted the variable short- term rates provided in I.R.C. § 6621(a) for accruing interest on payment delays. 29C.F.R. § 2622.7(c) (1982). Short-term rates are appropriate here on the theory that any delay in pay- ment will not extend indefinitely. In effect, PBGC or the employer is being compensated for the short-term use of its money. On the other hand, long-term rates — which were used in determining the liability due at the termination of Avon’s plan — are appropriate in making the termination liability calculation because this involves discounting pension benefits that are scheduled to be received by employees over many years. There is no reason for the rates in these two calculations to be the same and we reject the Group’s argu- ment that if we uphold, as we have, short-term interests rates for payment delay the termination liability amount must be redetermined to reflect discounting at the short-term rates. We find that PBGC’s regulation imposing interest at the 2la I.R.C. § 6621(a) rates from the termination date implements the statute in a reasonable manner and is entitled to deference, see Vogel Fertilizer, 455 U.S. at 24, and that these rates need not be incorporated into the liability determination. Finally, we have considered and find no merit in the Ouimet Groups’s other arguments with respect to interest, in- cluding the contention that the interest imposed pursuant to 29 C.F.R. § 2622.7(c) (1982) is a component of an employer's termination liability and the total amount of liability and in- terest must be limited to thirty percent of net worth. Section 1362, which includes the thirty percent ceiling, clearly per- tains solely to an employer’s liability for the current value of the plan’s unfunded vested benefits. See 29 U.S.C. § 1362 (1976 & Supp. V 1981). This amount, which is determined as of the termination date, is limited to thirty percent of net worth. Section 1368, which indicates that PBGC may impose an interest charge, addresses entirely different issues relating to satisfaction of PBGC’s claim that arise after the termination date. This straightforward reading of the statutory language does not eviscerate the net worth limitation when, as in this case, it exposes employers to potential interest charges which increase the total amount due to substantially higher than thir- ty percent of net worth because an employer may avoid such charges by paying its termination liability promptly. In conclusion, we approve the bankruptcy judge’s allocation of termination liability among the solvent members of the Ouimet Group according to ratios using thirty percent of their net worth amounts. This case must be remanded, however, to allocate to these solvent companies the liability originally allocated to the bankrupts. Interest on the reallocated liabilities should be computed in a manner consistent with this opinion. Remanded. 22a United States Court of Appeals for the First Circuit. No. 82-1651. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLEE, 0. OUIMET CORPORATION, er AL., DEFENDANTS, APPELLANTS. No. 82-1652. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLEE, v. OUIMET CORPORATION, Er AL., DEFENDANTS, APPELLEES, 0. HERBERT C. KAHN, TRUSTEE IN BANKRUPTCY OF TENN-ERO CORPORATION anp IN AVON SOLE COMPANY, Destors, APPELLANTS. No. 82-1653. PENSION BENEFIT GUARANTY CORPORATION, PLAINTIFF, APPELLANT, 0. OUIMET CORPORATION, er AL., DeEFENDANTS, APPELLEES. JUDGMENT Entered: June 9, 1983 These causes came on to be heard on appeals from the United States District Court for the District of Massachusetts, and were argued by counsel. 23a Upon consideration whereof, It is now here ordered, ad- judged, and decreed as follows: The judgment of the District Court is vacated and the cause is remanded to that Court for further proceedings consistent with the opinion filed this date. No costs. By the Court: Francis P. Scigliano Clerk. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_0396%3A1. Public record. Not legal advice.