Appendix — East Dayton Tool & Die Co. v. Pension Benefit Guaranty Corp.

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APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 93-3185

PENSION BENEFIT GUARANTY CORPORATION,

Plaintiff-A ppellant,

East DAYTON TOOL AND Diz CoMPANY, et al.,

Defendants-A ppellees.

On Appeal from the United States District Court

for the Southern District of Ohio

Decided and Filed January 24, 1994

Before: KEITH and NORRIS, Circuit Judges; and

ZATKOFF, District Judge.*

DAMON J. KEITH, Circuit Judge. Plaintiff /Appellant

Pension Benefit Guaranty, Corp. (“PBGC”) appeals the

district court’s judgment finding the Defendants /Appellees

East Dayton Tool and Die Co., Inc. (“East Dayton”), et

al., did not control East Dayton’s pension plan on its

termination date and therefore, were not liable for the

pension plan’s unfunded benefit liabilities, and its sub-

sequent grant of individual Appellees’ 12(b)(6) motion.

For the reasons stated below, we REVERSE and

REMAND.

*The Honorable Lawrence P. Zatkoff, United States District

Judge for the Eastern District of Michigan, sitting by designa-

tion.

In 1959, East Dayton, an Ohio corporation that de-

signed, manufactured and sold tools and dies, established

the East Dayton Tool & Die Restated Retirement Plan for

Salaried Employees (the “Plan”) which qualified for cover-

age under Title IV of the Employee Retirement Income

Security Act (“ERISA”). Dorothy Darrow (“Darrow”),

the daughter of East Dayton’s founder, eventually in-

herited 100% of East Dayton stock.

On August 23, 1973, Darrow sold East Dayton’s

common shares for $1.35 million to Paul H. Granzow

(“Granzow”’), Charles F. Sherman (“Sherman”), Robert

M. Tormey (“Tormey”), individual Appellees, and Clifton

C. Hawkins, Jr. (“Hawkins”).* The individual Appellees

each purchased 30% of the stock and Hawkins purchased

the remaining 10%. In return for the stock, individual

Appellees gave Darrow $150,000 in cash and a $1.2

million promissory note secured by the voting rights of

East Dayton stock and the right to compel the sale of East

Dayton stock upon default. The shares of stock, although

pledged to Darrow, were held in escrow by Third National.

The loan documents provided upon default, Darrow could

either compel the sale the stock or elect at least two

directors to East Dayton’s Board of Directors.”

1 Hawkins was not sued in his individual capacity, and therefore

he is not included in the collective reference to “individual Ap-

pellees.”

2 The Escrow Agreement in pertinent part provided:

2. So long as Company [East Dayton] shall well and truly

pay the promissory rote according to its terms and tenor, the

said stock certificates shall be held by the Escrow Agent, and

Shareholders shall continue to have all the rights of owner-

ship, except possession and transfer rights.

3. Upon written notice given to Escrow Agent by Darrow of

default in the payment of any installm:nt of interest or prin-

cipal] due according to the terms of said promissory note, then

At the time of stock acquisition, each individual Appe!-

lee owned one-third of the holding company Roscommon

Financial Corporation (“Roscommon Financial”). In

February 1974, the individual Appellees transferred their

East Dayton stock to Roscommon Financial. Shortly

thereafter, Roscommon Financial acquired Hawkins’ stock

and became East Dayton’s sole shareholder.

On January 26, 1976, after operating East Dayton for

two and a half years, Roscommon Financial Defaulted on

Darrow’s loan. Darrow refused to consent to a loan which

would have allowed Roscommon Financial to continue

business, and instead, pursuant to the options provided in

the loan documents, appointed two directors to East

Dayton’s Board. On February 7, 1976, the newly elected

Fast Dayton Board decided to liquidate East Dayton and

to repay Darrow with the proceeds. The individual Appel-

lees did not approve of or participate in the decision to

liquidate. At that time, because Darrow had control of the

voting rights of the stock, Granzow offered to formally

transfer the East Dayton stock from the escrow agent to

Darrow. Darrow refused.

On April 26, 1976, East Dayton filed a Notice of Intent

to Terminate the Plan with PBGC. After an investigation,

PBGC notified East Dayton its Plan assets were insufficient

by $326,362 to satisfy the benefits guaranteed by ERISA

under Title TV. On April 27, 1976, East Dayton, with

Granzow acting as President, and PBGC agreed to ter-

minate the Plan, effective May 15, 1976, and to appoint

PBGC the statutory trustee of the Plan. The parties agreed

Escrow Agent shal! either (i) cause the shares to be sold as

hereinafter set forth, or (ii) shall cause the immediate elec-

tion of the Board of Directors of the Company, of not less

than two persons chosen by Darrow or her executors or assigns;

said directors to continue in office until the Company cures

the default, or, in the event the default cannot be cured in

the opinion of the two directors, then Escrow Agent shall

fsell the stock] ....

on the plan termination date, May 15, 1976, Roscommon

Financial owned: (1) 100% of the East Dayton stock;

(2) 88% of Dayton Casting Company stock; and (3)

90% of Advance Foundry Company stock. The parties

also acknowledged the individual Appellees each owned

¥3 interest in the partnership Roscommon Realty.* PBGC,

therefore, determined East Dayton, Roscommon Financial,

Dayton Casting, Advance, Roscommon Realty and two

other entities (later found not liable by PBGC) were

members of the same control group as defined by 29 U.S.C.

§ 1301(b), and therefore, were jointly liable for the

amount of $326,362.

On May 6, 1981, the Roscommon Group appealed

PBGC’s initial liability determination to PBGC’s Appeals

Board. On appeal, Roscommon Group argued they were

not a control group for liability purposes because Ros-

common Financial did not control East Dayton on the

plan termination date. The Roscommon Group noted the

loan documents, upon default, divested them of all

authority and vested control in Darrow.

On April 28, 1982, the Appeals Board issued the

agency’s final determination finding the Roscommon

Group was a member of a commonly controlled group

on the plan termination date under § 4001(b) of ERISA.

As such, the Roscommon Group qualified as an “em-

ployer” which maintained the Plan and was liable for the

guaranteed benefits. The Appeals Board noted the Ros-

common Group’s tax returns indicated 100% ownership

of East Dayton. This ownership entitled the Roscommon

Group to $2 million in tax deductions. PBGC imposed

liability upon the Roscommon Group but not upon the

individual Appellees.

% Roscommon Financial, Roscommon Realty, East Dayton, Dayton

Casting Company, Inc. Advance Foundry Company, Inc., and in-

dividual Appellees are collectively referred to as the Roscommon

Group.

On May 13, 1982, PBGC sought enforcement of the

agency’s determination in the United States District Court

for the Southern District of Ohio. On June 22, 1982,

the Roscommon Group filed an Answer, Counterclaim

and a Motion for Judgment on the Pleadings. Simul-

taneously, the individual Appellees filed a Motion to Dis-

miss PBGC’s complaint. Because both motions relied on

the evidence in the administrative record, both were

treated as summary judgment motions and were denied.

On January 23, 1985, the district court referred the

case to a magistrate. The magistrate, relying on the rea-

soning in In re Challenge Stamping & Porcelain Co., 719

F.2d 146 (6th Cir. 1983) (“Challenge Stamping”), con-

cluded once Roscommon Financial defaulted, the loan

documents effectively transferred control to Darrow prior

to the termination date. The Roscommon Group was

not an employer controlling East Dayton on the Plan’s

termination date, and therefore, was not liable for East

Dayton’s unfunded benefit liabilities. The district court

adopted the magistrate’s recommendation and entered

judgment for the Appellees. The district court also

granted individual Appellees’ Rule 12(b)(6) Motion to

Dismiss because PBGC failed to state a cause of action

with respect to them. This timely appeal followed.

Il.

On appeal, PBGC argues the district court incorrectly

utilized a subjective test in blatant disregard for Con-

gress’ express intent that an objective test be used to iden-

tify trade or businesses under “common control” for pur-

poses of 29 U.S.C. § 1301(b). Additionally, PBGC ar-

gues the district court erroneously granted the individual

Appellees’ Motion to Dismiss. Each allegation of error

will be discussed below.

PBGC argues Congress expressly defined an employer

for Title IV liability purposes as trades or businesses un-

der common control with the pension plan sponsor. Fur-

ther, Congress explicitly authorized PBGC to define trades

and businesses under “common control” for the imposi-

tion of liability for the termination of underfunded pen-

sion plans. PBGC clearly defined “common control” as

an ownership interest of 80% of the total combined vot-

ing classes or of the total value of all shares of all classes

of stock connecting a group of trades and businesses

(“80% control test”). Therefore, according to PBGC,

the judiciary must apply PBGC’s test unless the regulation

is arbitrary and capricious, an abuse of discretion, or

Otherwise not in accordance with law. Thus, PBGC ar-

gues the district court erred in holding that Chalienge

Stamping was controlling precedent for this case. We

agree.

In January 1981, PBGC issued its initial determination

advising Roscommon Financial that under 29 U.S.C.

§ 1362, (1) the plan sponsor and all members of its con-

trol group were liable for pension plan underfunding upon

plan termination; (2) on the date of plan termination, the

Roscommon Group constituted a controlled group with

East Dayton as defined under Title IV; and (3) that each

company in the Roscommon Group was jointly and sev-

erally liable to PBGC for $326,362.00.

On appeal, disregarding argument of actual control,

PBGC’s Appeals Board applied PBGC’s 80% control test

to the uncontested facts regarding ownership and con-

cluded:

East Dayton, Roscommon, Dayton, Casting, Ad-

vance Foundry, . . . and Roscommon Realty were,

on the date the Plan terminated, members of a com-

monly controlled group under ERISA § 4001(b) and

therefore constitute the ‘employer’ that maintained

the Plan.

Additionally, the Appeals Board noted Roscommon Fi-

nancial filed federal income tax returns on its own behalf

and on behalf of the members of the Roscommon Group.

In the tax returns Roscommon Financial stated it owned

100% of East Dayton’s stock. The tax returns also in-

dicated Roscommon Financial and East Dayton consti-

tuted a controlled group under the Federal Tax Code,

and therefore, was entitled to approximately $2 million in

tax deductions.

The district court, however, decided as a matter of law,

Challenge Stamping was the controlling law in this case.

In Challenge Stamping, this court reasoned that:

There is no support for a view that Congress’ chief

intent in employing this test in ERISA was to invade

the deepest pocket in a business failure, regardless of

its responsibility to “continue funding” a pension plan

of a controlled company. The purpose of the 80%

regulation is obviously to find the party in control.

When, by operation of bankruptcy law, a party is

actually denied control, there is no reason to apply

the regulation.

719 F.2d at 151. This court stated the conclusion in

Challenge Stamping did not invalidate the 80% control

test or establish a per se rule for all bankruptcies. /d.

Instead, this court merely concluded the “stock did not

provide any measure of control over [the corporation] at

the date of termination, and thus, the regulation did not

apply.” Jd. The district court opined that this case fell

directly within the parameters of Challenge Stamping’s

facts stating:

The allegation that [Challenge Stamping] applies

only in bankruptcy contexts is without merit. In

[Challenge Stamping], the Sixth Circuit did not limit

its pronouncement to bankruptcy scenarios. Rather,

the [Challenge Stamping] court looked to the totality

of the circumstances surrounding corporate opera-

tions and actual control over the owned company

or over the pension plan to determine whether or

not the 80% stock ownership rule accurately defined

the party with a controlling interest. In this Court's

opinion, the means by which corporate control is lost

is not relevant. Regardless of the means that ef-

fectuate the loss of control, the same result is

achieved—the loss of control over the company op-

erations and the pension plan. Thus, whether a

company is stripped of its control by a bankruptcy

court or by a secured creditor, as in this case, is in-

significant; it is a distinction without a difference.

We review district court conclusions of law de novo.

Feldpausch v. Heckler, 763 F.2d 229, 230 (6th Cir.

1985). After a de novo review of the record, we disagree

with the district court’s conclusion Challenge Stamping

controls the instant case. In Challenge Stamping, a bank-

ruptcy case, the stock purchaser never had actual control

over the company involved or over its pension plan. Here,

Roscommon Financial actually controlled East Dayton

and its Plan for two and a half years. In applying Chal-

lenge Stamping, the district court ignored the purposes of

ERISA by not imposing liability on Roscommon Financial

and its controlled group for East Dayton’s unfunded bene-

fit liabilities. Because the Roscommon Group controlled

East Dayton and its Plan for over two and a half years,

Challenge Stamping’s reasoning is inapplicable. Thus, the

district court erred in not applying ERISA’s brightline

80% control test.

Under ERISA, when a single employer pension plan is

terminated, an employer is liable for the total amount of

unfunded benefit liabilities on the plan termination date.

29 U.S.C. § 1362(a) (Supp. 1993). ERISA provides “all

. . . trades or businesses . . . under common control shall

be treated as . . . a single employer.” 29 U.S.C. § 1301

(b)(1). Pursuant to the statute, the PBGC defined “com-

mon control” as “one or more chains of organizations

conducting trades or businesses connected through owner-

ship of a controlling interest... .” 26 C.F.R. § 11.414

(c)-(2)(1). PBGC further defined a controlling interest

in the case of a corporation as:

ownership of stock possessing at least 80 percent

of the total combined voting of all classes of stock

entitled to vote of such corporation or at least 80

percent of the total value of shares of all classes of

stock of such corporation.

26 C.F.R. § 11.414(c)-2(b) (2) (a).

The parties do not dispute the Roscommon Group en-

tities qualify as businesses under ERISA. Here, the in-

dividual Appellees equally owned Roscommon Financial

and Roscommon Realty. The parties agreed on the termi-

nation date Roscommon Financial owned: (1) 100% of

East Dayton stock; (2) 88% of Dayton Casting Com-

pany, Inc. stock; and (3) 90% of Advance Foundry

Company, Inc. stock. Thus, all the busineses were con-

nected through common ownership. Additionally, because

the ownership exceeds 80% of the total value of stock in

each business, it qualified as a “controlling” interest un-

der ERISA. Therefore, PBGC’s Appeals Board correctly

concluded the Roscommon Group was a group of busi-

nesses connected through a controlling interest which qual-

ificd as an employer under section 1301(b). Conse-

quently, we REVERSE the district court’s judgment and

find the members of the Roscommon Group are jointly

and severally liable for East Dayton’s unfunded benefit

liabilities.

PBGC argues the district court erred in approving the

mag’strate’s recommendation and granting the individual

Appellees’ motion to dismiss. Specifically the magistrate

found “PBGC has not requested a judgment against Gran-

10a

zow, Sherman and Tormey as individuals, and therefore,

a dismissal should be granted to Defendants. The Court

also notes that even if a demand is made in the Com-

plaint as against those Defendants, a dismissal would still

be in order since their liability, if any, would have to

be derivative from the liability if the organizational De-

fendants and they should be granted Summary judgment.”

We disagree.

We review a district court’s grant of a Rule 12(b) (6)

motion de novo. Meador v. Cabinet for Human Re-

sources, 902 F.2d 474, 475 (6th Cir.), cert. denied, 498

U.S. 867 (1910): Dana Corp. v. Blue Cross & Blue

Shield Mutual, 900 F.2d 882, 885 (6th Cir. 1990). Here,

the district court erroneously concluded PBGC’s complaint

failed to request judgment against the individual Appel-

lees. Rule 54(c) provides “every final judgment shall

grant relief to which the party in whose favor it is ren-

dered is entitled, even if the party has not demanded such

relief in the party’s pleading.” Fed. R. Civ. P. 54(c).

If a pleading provides a defendant notice of the plaintiff's

claims and the grounds for the claims, Conley v. Gibson,

355 U.S. 41, 47 (1957), omissions in a prayer for relief

do not bar redress of meritorious claims. Holt Civic Club

v. Tuscaloosa, 439 U.S. 60, 66 (1978).

The complaint named the partnership Roscommon

Realty as a Defendant. Both Ohio law and ERISA pro-

vide joint and several liability for partners where partner-

ship debts exist. Ohio Rev. Code Ann. § 1775.14(B)

(Anderson 1992); see 46 Fed. Reg. 9520, 9522-23 (Mar.

1, 1981); Central States, Southeast & Southwest Areas

Pension Fund v. Skyland Leasing Co., 691 F. Supp. 6

(W.D. Mich. 1987), aff'd mem., 892 F.2d 1043 (6th

Cir. 1990). In its complaint, PBGC explicitly sought re-

covery for the unfunded benefit liabilities from each of

the Roscommon Group members including the partnership

Roscommon Realty. The complaint, therefore provided

individual Appellees notice of PBGC’s claims and the

grounds for those claims. Additionally, PBGC’s com-

lla

plaint contained a general prayer for relief “requesting

such other legal or equitable relief as may be just and

proper.” Other legal or equitable relief implicitly includes

relief from individual partners where the partnership as-

sets prove insufficient. Thus, we find PBGC’s complaint

States a course of action against the individual Appellees.

Before a creditor can seek partners’ individual assets,

Ohio law requires a specific determination that partner-

ship assets are insuffiicent to mect partnership debts. See

Wayne Smith Constr. Co. v. Wolman, 65 Ohio St. 3d

383, 391, 604 N.E.2d 157, 163 (1992). That issue,

however, is not before us. The determination of the suf-

ficiency of the partnership assets is a finding of fact and is

properly determined by the district court. We, therefore,

REVERSE the district court’s grant of individual Appel-

lees’ Motion to Dismiss and REMAND for reconsidera-

tion consistent with this opinion.

iff.

For the reasons stated above, we REVERSE and RE-

MAND.

12a

[Filed July 5, 1985]

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF OHIO

WESTERN DIVISION AT DAYTON

Case No. C-3-82-228

(Judge Rice)

(Magistrate Merz)

PENSION BENEFIT GUARANTY CORPORATION,

Plaintiff,

-VS-

THE EAST DAYTON TOOL AND Diz COMPANY, ef al.,

Defendants

REPORT AND RECOMMENDATIONS

OF UNITED STATES MAGISTRATE

Plaintiff. Pension Benefit Guaranty Corporation

(“PBGC”), brought this action to enforce a final deter-

mination assessing liability against the Defendants East

Dayton Tool and Die Company, Inc., (“East Dayton”),

Dayton Casting Company, Inc., (“Dayton Casting”),

Advance Foundry, Inc., (“Advance”), Roscommon Realty

Company (“Roscommon Realty”), Paul H. Granzow

(“Granzow”), Charles F. Sherman (“Sherman”), and

Robert M. Tormey (“Tormey”). This action arises under

Title IV of the Employee Retirement Income Security Act

of 1974 (“ERISA”), 29 U.S.C. § 1301 et seg. (1976)

(amended by Pub. L. No. 96-364, 94 Stat. 1208 (1980)).

Jurisdiction is founded upon 29 U.S.C. § 1303(e)(3).

Venue is based upon 29 U.S.C. § 1303(e) (2).

13a

Presently before the Court are four motions. Chrono-

logically, they are Defendants’ Motion to Dismiss as to

Granzow, and Tormey; Defendants’ Motion for Judgment

on the Pleadings as to East Dayton, Roscommon, Dayton

Casting, Advance, and Roscommon Realty; Plaintiff's Mo-

tion for Protective Order; and Defendants’ Motion to

Compel Discovery.

Defendants East Dayton, Roscommon Financial, Dayton

Casting, Advance, and Roscommon Financial are seeking

a judgment of dismissal on the pleadings under Fed. R.

Civ. P. 12(c) for failure to state a claim upon which relief

can be granted, or in the alternative, a trial de novo.

Defendants base their request on the following grounds.

First, they allege that the application to them of ERISA

constitutes an unconstitutional taking of property in vio-

lation of the due process clause of the 5th Amendment to

the United States Constitution. Defendants allege that the

“taking” occurred when the Defendants (other than East

Dayton), who did not maintain the East Dayton Plan

were held liable for the alleged East Dayton Plan defi-

ciency. Second, the Defendants assert that the denial by

the Appeals Board of a hearing as to the “control” issue

and as to the amount of the liability is a violation of both

5S U.S.C. § 556(d) and a violation of Defendants’ right to

procedural due process under the Sth Amendment to the

United States Constitution.

Rule 12(c) provides that “If on a motion for judgment

on the pleadings, matters outside the pleadings are pre-

sented to and not excluded by the Court, the motion shall

be treated as one for summary judgment and disposed of

as provided in Rule 56.” Upon review of the Administra-

tive Record, and in light of the holding of In Re Challenge

Stamping and Porcelain Co. v. Dickens, 719 F.2d 146

(6th Cir. 1983), this Court finds there is no genuine issue

of material fact, and these Defendants are entitled to judg-

ment as a matter of law on the record as it now stands.

Therefore, there is no need to address Defendants’ argu-

ments. The decision of the Appeals Board that Roscom-

l4a

mon Financial, Dayton Casting, Advance, and Ros-

common Realty are liable to the PBGC for the deficiency

of $326,362, arising under 29 U.S.C. § 1362(a) should

be set aside and the Complaint dismissed. The liability of

East Dayton should be affirmed, but the amount of the lia-

bility determined by the PBGC under 29 U.S.C. § 1382(b)

should also be set aside.

Defendants Granzow, Sherman, and Tormey are seek-

ing a dismissal under Fed. R. Civ. P. 12(b)(6) for Plain-

tiffs failure to state a claim upon which relief can be

granted. These Defendants base their motion on the follow-

ing grounds. First, the individual Defendants assert that

they have not had a final agency action made in regard

to them as to the East Dayton deficiency, as required by

5 U.S.C. § 704. Second, these Defendants assert that no

judgment has been secured against Roscommon Realty

(or any of the corporate defendants) and that there has not

been a showing that Roscommon Realty is insolvent. This

Court finds, based upon the body of the complaint, that

the PBGC has not requested a judgment against Granzow,

Sherman and Tormey, and therefore, a dismissal should

be granted to Defendants. The Court also notes that even

if a demand had been made in the Complaint as against

those Defendants, a dismissal would still be in order since

their liability, if any, would have to be derivative from the

liability of the organizational Defendants and they should

be granted summary judgment.

A review of the administrative record reveals the follow-

ing undisputed facts. (Numbers in parenthesis refer to

page numbers in the administrative record.) PBGC is a

wholly-owned United States Government corporation estab-

lished under 29 U.S.C. § 1302 to administer the pension

plan termination insurance program created by Title IV of

ERISA. The purposes to be carried out by PBGC are:

“(1) to encourage the continuation and maintenance

of voluntary private pension plans for the benefit of

their participants,

l5a

(2) to provide for the timely and uninterrupted pay-

ment of pension benefits to participants and bene-

ficiaries under plans to which this subchapter applies,

and

(3) to maintain premiums established by the corpora-

tion under section 1306 of this title at the lowest level

consistent with carrying out its obligations under this

subchapter.”

29 U.S.C. § 1302(a).

When a pension plan is terminated with insufficient

assets to pay benefits to participants, the PBGC imposes

liability upon the employer who maintained the plan on

the date the plan terminated. 29 U.S.C. § 1362(a). The

amount of the liability is calculated under 29 U.S.C.

$ 1362(b). Under Title IV, the applicable definition of

“employer” in terms of the issues presented is:

“. . . All employees of trades or businesses (whether

or not incorporated) which are under common con-

trol shall be treated as employed by a single employer

and all such trades and businesses as a single em-

plover.”

29 U.S.C. § 1301(d).

Any employer who is liable to the PBGC under 29

U.S.C. § 1362 who neglects or refuses to pay,-after de-

mand, the amount of the liability shall have a lien in favor

of the PBGC placed upon all property and rights to prop-

erty, whether real or personal, belonging to such em-

ployer. 29 U.S.C. § 1368(a). In addition, 29 U.S.C.

§ 1302(b)(1) and (b)(8) permit the PBGC to bring suit

in order to fulfill the purposes of ERISA under Title IV.

East Dayton is an Ohio corporation formed September

21, 1928. (1020). East Dayton was engaged in the manu

facture, design, and sale of tools and dies for industrv.

Mrs. Dorothy Darrow, the daughter of the founder. Wil-

liam Schlman, eventually inherited all the stock in East

l6a

Dayton and held 100% of the stock until the initial sale

of August 23, 1973. (1020). Mrs. Darrow’s husband,

Herman Darrow, was employed by East Dayton during

both his father-in-law’s and his wife’s ownership. (1021).

East Dayton established a qualified retirement plan for

its salaried employees on January 1, 1959. The East Day-

ton Tool and Die Company Retirement Plan for Salaried

Employees (“East Dayton Plan” or “Plan”) was funded

through a trust with the Third National Bank and Trust

Company of Dayton, Ohio (“Third National”). The plan

was revised effective January 1, 1966 (163) and restated

and amended effective January 1, 1969 (132).

On August 23, 1973, Mrs. Darrow sold common shares

of East Dayton to Granzow, Sherman, Tormey, and Clif-

ton '". Hawkins, for an aggregate price of $150,000. Gran-

zov, and Tormey each held 8.42 shares. Hawkins held

2.08 shares. (829).

On August 23, 1973, the owners of all of the outstand-

ing stock of East Dayton, including Mrs. Darrow, elected

Granzow, Sherman, Tormey and Hawkins as directors of

East Dayton. (1025).

On August 28, 1973, Dorothy Darrow redeemed the

balance of her East Dayton stock for $1,350,000. She

received $150,000. cash at the closing and the remaining

$1,200,000. in the form of a promissory note. (433).

Three instruments were executed at the time of the sale.

These instruments included an Agreement for Sale of All

of the Stock of Dorothy Darrow, a $1,200,000. Promissory

Note, and an Escrow Agreement. (1025, 432). Hawkins

and Tormey executed the Agreement for Sale and the Note

on behalf of East Dayton. (1026). As a result of this

transaction, Granzow, Sherman, Tormey and Hawkins be-

came the sole shareholders in East Dayton. (830).

Under the terms of the note, the principal amount due

was secured by all of the common stock of East Dayton,

including the common shares held by Granzow, Sherman,

17a

Tormey, and Hawkins. (1086). The shares were pledged

to Dorothy Darrow and escrowed with the Escrow Agent,

Third National. Mrs. Darrow then subordinated her claim

against East Dayton on the note in favor of any present

or future claim by Third National. (1095). The Escrow

Agreement provided:

“2. So long as company shall well and truly pay the

promissory note according to its terms and tenor, the

said stock certificates shall be held by the Escrow

Agent, and Shareholders shall continue to have all the

rights of ownership, except possession and transfer

rights. At such time as the said promissory note has

been fully paid, the executed assignment form and

related certificates shall be redelivered to Shareholders

and this Escrow Agreement shall be void and of no

further force and effect.

3. Upon written notice given to Escrow Agent by

Darrow of a default in the payment of any installment

of interest or principal due according to the terms of

said promissory note, then Escrow Agent shall either

(1) cause the shares to be sold as hereinafter set forth,

or (il) shall cause the immediate election to the Board

of Directors of the Company, of not less than two

persons chosen by Darrow or her executors or assigns;

said directors to continue in office until the Company

cures the default, or, in the event the default cannot

be cured in the opinion of the two directors, then

Escrow Agent shall... .”

Subparagraphs and stated a procedure for selling ithe East

Dayton stock. (1088-89). East Dayton was further bound

to Mrs. Darrow by the language of paragraph 5:

“5. Company, during the period that this agree-

ment remains in effect, agrees to take such action as

will cause the undertakings of the company to be

performed as follows:

..@. It will not permit consolidated working cap-

ital at any time to be less than an amount equal to

18a

twenty percent (20% ) of the unpaid balance of the

note outstanding to Darrow.” (1091).

After the August 28, 1973 transaction, the following offi-

cers were elected by the shareholders: Robert Tormey,

Chairman of the Board: Clifton C. Hawkins, Jr., President

and Chief Executive; Charles Shertnan, Treasurer; Paul H.

Granzow, Secretary; and Michael Hennessey, Assistant

Treasurer and Assistant Secretary. (1028). During the

tenure of Granzow, Sherman and Tormey as owners and

officers, East Dayton was managed by James Nick and

Clifton Hawkins. (1030).

Roscommon Financial Corporation was incorporated on

March 22, 1973, with Granzow, Sherman, and Tormey

each owning 33% % of the stock. They were elected di-

rectors on January 22, 1974. (830). In later acquisitions,

Roscommon Financial came to own 100% of East Dayton

stock and 88% of the stock of Dayton Casting Company.

Dayton Casting Company held 90% of the stock of Ad-

vance Foundry Company.

Granzow, Sherman, and Tormey were also partners in

three other business ventures. Granzow, Sherman, Tormey

and Westendorff each owned 25% of Fillmore Leasing

Company, a partnership. Granzow, Sherman, Tormey and

Watson each owned 25% of Southwest Insurance Agency,

a partnership. Finally, Granzow, Sherman, and Tormey

each owned 3343 % of Roscommon Realty, a partnership.

Of these partnerships, only Roscommon Realty and the

individual partners, Granzow, Sherman, and Tormey are

Defendants in this action.

On February 8, 1974, Granzow, Sherman, and Tormey

transferred their East Dayton Common Stock to Roscom-

mon Financial. (870). Cliff Hawkins retained his 10%

interest separate and distinct from Roscemmon.

On August 20, 1975, Roscommon Financial transferred

2.525 shares of its East Dayton stock to James G. Nick.

who became President and General Manager of East

Dayton. (1232).

19a

On April 14, 1976, James G. Nick transferred his 2.525

shares of East Dayton back to Roscommon, and Clifton

Hawkins, Jr. transferred his 2.8 shares of East Dayton to

Roscommon, making Roscommon Financial the record

holder ot 100% of the shares of East Dayton since that

date. (1232).

Between August, 1973 and December, 1975, East Day-

ton’s business continued to decline. (1031). Attempts to

secure additional financing were futile. Finally, on Janu-

ary 26, 1976, Dorothy Darrow informed the Escrow

Agent, Tormey, Granzow, Sherman, Hawkins, and East

Dayton that the Escrow Agreement of August 28, 1973,

had been breached:

“I. Pursuant to paragraphs 3 and 6b thereof, in

that the interest due December 1, 1974, of $18,381.55

has not been paid,

2. Pursuant to paragraph Se consolidated working

capital has been permitted to be less than 20% of the

unpaid principal balance of the Promissory Note

owing to Dorothy Darrow.

3. Pursuant to Paragraph 2, shareholders have

transferred rights of ownership in the escrowed stock

certificates to Roscommon Financial Corporation, on

February 8, 1974, contrary to the provisions of this

paragraph.”

On February 6, 1976, a special meeting of East Dayton

shareholders was held. At that time, Granzow, Sherman

and Tormey resigned as officers and directors of East Day-

ton. (1099). Mr. Schaeffer (Mr. Darrow’s attorney) and

Mr. Darrow were elected as directors of East Dayton pur-

suant to Mrs. Darrow’s right in the Escrow Agreement to

cause the election of not less than two directors. (1032).

Hawkins and Nick continued as directors subject to the

direction of Mr. Darrow and Mr. Schaeffer. (1032).

On February 7, 1976, another meeting was called by

Herman Darrow. At that time, Mr. Darrow and Mr.

20a

Schaeffer announced that East Dayton would discontinue

its business operations, fulfilling only those orders which

had already been placed. Hawkins, Nick, Herman Darrow,

and Schaeffer would share the liquidation duties. As soon

as the orders were completed, the machinery, equipment,

and real estate of East Dayton were to be sold to satisfy

creditors. Additionally, the East Dayton Plan would be

terminated. (1033-34). At that time, Paul Granzow

offered to effect a formal transfer of the East Dayton shares

from the escrow account to Mrs. Darrow. (1039). Mrs.

Darrow refused to accept the stock. (1035),

East Dayton ceased all active plant operations on or

about March 31, 1976. (831). On April 25, 1976,

PBGC was sent notice by Clifford Hawkins of East Day-

ton’s intent to terminate their retirement plan. (120).

This notice was received by the PBGC on May 4, 1976.

(831). On May 3, 1976, a special meeting of the Board

of Directors of East Dayton was held. At that meeting,

Herman Darrow, Cliff Hawkins, and James Nick voted to

terminate the Plan. (1211). The East Dayton Retirement

Plan was officially terminated by the PBGC on May 15,

1976. (1232).

On April 27, 1977, the PBRGC was appointed Trustee of

the Plan by written agreement executed and effective that

date. The Trusteeship Agreement was signed by the Act-

ing Executive Director, PBGC, and by the President of

East Dayton. (1232).

After appointment as Trustee, the PBGC began investi-

gation of the Plan as early as June, 1977. At that time.

East Dayton and Roscommon provided PBGC with infor-

mation relating to East Dayton and the East Dayton Plan,

but refused to permit PBGC investigators to have access

to documents relating to Roscommon Financial or its

other subsidiaries. (1300).

Subsequent requests by the PBGC for information re-

llating to Roscommon and its subsidiaries were also met

21a

with refusal by Roscommon and East Dayton. (1300).

On March 17, 1978, the PBGC mailed a formal, written

request to Roscommon, asking for the production of cer

tain documents by March 29, 1978. This date was later

extended to April 10, 1978. Upon Roscommon’s failure to

honor the PBGC’s written request, the PBGC issued an

administrative subpoena duces tecum on April 10, 1978,

demanding the production of specified documents by May

2, 1978. Roscommon refused to comply with the sub-

poena, and on April 26, 1978, Roscommon and East Day-

ton filed a complaint in this Court in case C-3-78-99. They

asked the Court to grant a declaratory judgment negating

the liability of Roscommon and East Dayton to the PRGC

and enjoining the enforcement of the PBGC subpoena.

(1277).

On December 5, 1979, the PBGC instituted case number

C-3-79-425 requesting the Court to order Robert Tormey

to appear before the PBGC and produce certain documents

demanded by the subpoena of April 10, 1978. 1687).

Case numbers C-3-78-99 and C-3-79-425 were consolidated

on December 27, 1979. (1730). The consolidated com-

plaint was dismissed without prejudice on January 25,

1980. (1748). Pursuant to that Order, Roscommon

agreed to produce certain documents for the PBGC.

(1749).

On January 22, 1981, the PBGC finalized determination

of the alleged asset insufficiency under the East Dayton

Plan. The PBGC concluded that the East Dayton Plan

had insufficient assets in the arnount of $326.362.. and

that East Dayton, Roscomon, Dayton Casting, Advance,

Fillmore Leasing. Southwest Insurance, and Roscommon

Realty were all members of the same controlled group as

defined by 29 U.S.C. §$ 1301(b). and as such were jointly

liable for the entire $326,362. (811-13). On Mav 5,

1981, these same parties filed an appeal with the PBGC.

requesting an opportunity to appear at the Appeals hear-

ing. (823-24). On February 11. 1982. the Appeals Board

denied Appellants’ request to appear at the hearing. (906).

22a

A modified determination was issued on April 28, 1982,

Which dismissed Southwest Insurance as a member of the

“commonly controlled” group, left open an opportunity

for further consideration of the status of Fillmore I easing,

and affirmed the balance of the initial determination.

(1229). Appellants requested reconsideration of the status

of Fillmore Leasing on April 29, 1982, and on May 5.

1982. the Appeals Board dismissed Fillmore Leasing from

liability to the PBGC. (1265). Formal demand for pay-

ment was made to the remaining parties on April 29, 1982.

(1266-67). Payment was not made to the PBGC. and on

May 13. 1982, the PBGC broueht this action to enforce

the final agency determination of liability.

The PBGC is an agency as defined under the Adminis-

trative Procedure Act (“APA”). 5 U.S.C. § 701(b)(1).

PBGC v. Hathaway Machinery Co., 566 F. Supp. 1223

(1983). A final determination of this Agency is subject

to the narrow scope of review prescribed in 5 U.S.C.

$ 706(2). Id at 1224. 5 U.S.C. § 706(2) provides that:

“The reviewing court shall

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

ings. and conclusions found to be—

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

otherwise aot in accordance with law. . . .”

In reaching a conclusion, this Court was required to

consider two issues: the definition of “control” used in

finding responsibility for the underfunded pension plan and

the method used to find the amount of the liability in light

of the scope of review set out in 5 U.S.C. § 706(2).

29 U.S.C. § 1362(a) sets out who is liable for any plan

deficiency:

“. .. any employer who maintained a plan (other than

a multiemployer plan) at the time it was terminated.

23a

“Employer” as defined under 29 U.S.C. § 1301(b):

“. . . For purposes of this subchapter, under regula-

tions prescribed by the corporation, all employees of

trades or businesses (whether or not incorporated)

which an under common control shall be treated as

employed by a single employer and all such trades

and businesses as a single employer.

The PBGC had adopted, pursuant to statute, Treasury

Regulation 26 C.F.R. § 11.414(c)-2(b)(1) which defines

“parent-subsidiary group of trades or businesses under

common control”

“The term ‘parent-subsidiary group of trades or busi-

nesses under common control’ means one or more

chains or organizations conducting trades or busi-

nesses connected through ownership of a controlling

interest with a common parent organization

26 C.F.R. § 11.414(c)-2(b)(2)(A) defines controlling

interest for purposes of paragraphs (b) and (c):

“In the case of an organization which is a corporation,

ownership of stock possessing at least 80% of the

total combined voting power of all classes of stock

entitled to vote of such corporation or at least 80%

of the total value of shares of all classes of stock of

such corporation.”

26 C.F.R. § 11.414(c)-2(c)(1) defines “brother-sister

group of trades or businesses under common control”:

“The term ‘brother-sister group of trades or businesses

under common control’ means two or more organiza-

tions conducting trades or businesses if (1) the same

five or fewer persons who are individuals, estates, or

trusts own (directly and with the application of

11.414(c)-(4), singly or in combination, a controlling

interest of each organization, and (11) taking into ac-

count the ownership of each such person, only to the

extent such ownership is identical with respect to each

24a

such organization, such persons are in effective con-

trol of each organization.”

26 C.F.R. § 11.414(c)-2(c)(2) defines “effective control”

for purposes of paragraph c:

“(i) In the case of an organization which is a cor-

poration, such persons own stock possessing more

than 50 percent of the total combined voting power

of all classes of stock entitled to vote of such corpora-

tion or more than 50 percent of the total value of

shares of all classes of stock of such corporation.

(iii) in the case of an organization which is a part-

nership, such persons own an aggregate of more than

50 percent of the profits interest or Capital interest of

such partnership.”

29 C.F.R. § 11.414(c)-2(d) defines “combined group of

trades or businesses under common control”:

“The term ‘combined group of trades or business

under common control means any group of three or

more organizations, if (1) each such organization is

a member of either a parent-subsidiary group of trades

or businesses under common control or a brother-

sister group of trades or businesses under common

control, and (2) at least one such organization is the

common parent organization of a parent-subsidiary

group of trades or businesses under common control

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

trades or businesses under common control.”

The Appeals Board found that on the date the East

Dayton Plan terminated, Roscommon Financial held a

100% interest in East Dayton and, by 26 C.F.R. § 11.414

(c)-2(b)(1) constituted a “parent-subsidiary group of

trades or businesses under common control.” (1236).

The Appeals Board also found that Roscommon Finan-

Cial was also in a parent-subsidiary relationship with Day-

ton Casting and Advance Foundry because Roscommon

25a

held 88% interest in Dayton Casting and, in turn, Dayton

Casting held a 90% interest in Advance. (1238).

The Appeals Board also found that Roscommon Fi-

nanical and Roscommon Realty were, on the date the plan

terminated, a “brother-sister group of trades or businesses

under common control” by 29 C.F.R. § 11.414(c)-2(c)

(1). (1241). This finding was based on the fact that

Granzow, Sherman, and Tormey owned, in combination,

stock possessing at least 80% of the total value of shares

of all classes of stock of the two companies, and the

three of them owned stock representing greater than 50%

of the total value of shares of all classes of stock of the

three companies.

The Appeals Board also found that Roscommon Finan-

cial, East Dayton, Dayton Casting, Advance, and Ros-

common Realty constituted a “combined group of trades

or business under common control “by 29 C.F.R. § 11.414

(c)-(2)(d). (1243). Such a finding made Roscommon

an “employer” under 29 U.S.C. § 1301(b) and subject to

liability under 29 U.S.C. § 1362(a).

The Appeals Board of the PBGC looked only to the

“plain meaning” of the statute to impose liability upon

defendants. It considered only the administrative record;

any further explanation as to who “controlled” East Day-

ton on the date of the plan termination was excluded. In

In re Challenge Stamping and Porcelain Co. v. Dickens,

719 F.2d 146 (6th Cir. 1983) the Court looked beyond

the plain meaning of the regulation defining controlling

interest in a terminated company and considered the pur-

pose of Title IV of ERISA:

“The purposes of Title IV are stated expressly in

§ 1302(a): (1) to encourage the operation and con-

tinuation of private pension plans; (2) to protect em-

ployees’ pension benefits; and (3) to keep the in-

surance premiums paid to the PBGC as low as pos-

sible. In addition, the legislative history demonstrates

the congressional purpose of ‘mposing employer li-

26a

ability in order to prevent employers from abusing

the termination insurance program by shifting their

financial burden under penison plans to the PBGC

or by making unrealistic promises to employees.

Dickens, citing A-T-O Inc. v. Pension Benefit Guaranty

Corp., 634 F.2d 1013, 1025 (6th Cir. 1980).

The Court also considered the comments of Senator

Williams, one of the primary draftsman of the legislature:

“Since there would be a possibility of abuse of sol-

vent employers who terminate a plan and shift the

financial burden to ‘®2 insurance program, notwith-

Standing their own financial ability to continue fund-

ing the plan, the conference bill imposes liability on

employers whose plans terminate, to reimburse the

program for benefits paid by the corporation. . . .”

Id., at 150 citing 120 Cong. Rec. § 15737 (daily ed. Aug.

22, 1974) (remarks of Sen. Williams), reprinted in

[1974] U.S. Code Cong. & Ad. News 4639, 5038, 5185.

The Dickens court interpreted 29 U.S.C. § 1301(b) to

be one method Congress used to inhibit the shift of pen-

sion funding to the government by solvent employers. Sec-

tion 1301(b) mandates that “all employees of trades or

businesses (whether or not incorporated) which are un-

der common control shall be treated as employed by a

single employer and all such trades and businesses as a

single employer”, and that the definition of “common

control” in ERISA’s regulations “be consistent and co-

extensive with regulations prescribed for similar purposes

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

of Title 26.” These treasury regulations have been con-

strued by the Supreme Court in United States y. Vogel

Fertilizer Co., 455 U.S. 16 (1982) as an objective test

for determining control. The Court in Dickens interpreted

the regulation to find the party in control.

“It seems apparent that by this objective test to de-

termine common control Congress was seeking to

27a

place responsibility (and liability) upon the party

actually in control so as to insure that control would

be exercised responsibly and for proper reasons; i.e.,

no shifting of pension obligations, no multiple use

of small business tax relief.

There is no support for a view that Congress’ chief

intent in employing this test in ERISA was to invade

the deepest pocket in a business failure, regardless

of its responsibility to ‘continue funding’ a pension

plan of a controlled company. The purpose of the

80% regulation is obviously to find the party in

control. When, by operation of bankruptcy law, a

party is actually denied control, there is no reason

to apply the regulation.”

Id. at 151.

The Dickens court was quick to point out that “this

conclusion neither invalidates the regulation at issue nor

establishes a per se rule applicable to all bankruptcies.”

The Court simply looked to the fact that “CSP stock did

not provide any measure of control over Puffer-Hubbard

at the date of termination, and thus, the regulation did

not apply”. 7d.

Just as in Dickens, the administrative record here re-

veals that Defendants Roscommon Financial, Dayton

Casting, Advance, Roscommon Realty, Granzow, Sher-

man, and Tormey lacked any measure of control over

East Dayton at the time of termination. Upon notice of

the breach from Mrs. Darrow, and then officially at the

February 6, 1976 meeting, Granzow, Sherman and Tor-

mey forfeited their East Dayton control to Mrs. Darrow

under the terms of the August 28, 1973 Escrow Agree-

ment. The breach of the Escrow Agreement resulted in

a total loss of their ownership rights in the East Dayton

stock. During this same meeting, Granzow, Sherman aud

Tormey resigned as officers and directors of East Dayton.

From that day on, Mrs. Darrow had total control over

the operation of East Dayton. She chose a new Board of

28a

Directors which decided to shut down the business, sell

the machinery, equipment and building, and terminate the

East Dayton Plan. Defendants Granzow, Sherman, and

Tormey held only “paper” title, title which had been re-

fused by Mrs. Darrow at the February 6, 1976, meeting.

There is no evidence in the administrative record that

Defendants were attempting to shift liability on to the

PBGC. There is no evidence in the administrative record

that application of the objective test of 1301(b) and CFR

26 § 11.414(c)-2(b)(c)(d) would satisfy congressional

intent. Here, as in Dickens, congressional intent is served

by setting aside the decision of the Appeals Board as to

Defendants Roscommon Financial, Dayton Casting, Ad-

vance, Roscommon Realty, Granzow, Sherman, and

Tormey.

East Dayton, however, remains liable to the PBGC for

any deficiency found.

Therefore, it is necessary to reach the issue of the

amount of the liability.

29 U.S.C. § 1362(b) states that an employee who main-

tained a plan on the date of termination will be liable to

the PBGC in an amount equal to the lesser of two cal-

culations:

“(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 al-

locable to such benefits on the date of termina-

tion, or

(2) Thirty percent of the net worth of the employer

determined as of a day, chosen by the corporation,

but not greater than 120 days prior to the date of

termination, computed without regard to any lia-

bility under this section.”

29a

Based upon the above holding finding that only East

Dayton is liable to the PBGC, and upon the administra-

tive record, the second calculation, 29 U.S.C. § 1362(b)

(2), produces the lesser amount. This lesser amount is

-0- liability. Several documents in the administrative rec-

ord support this conclusion. Granzow, by affidavit, stated

that on December 31, 1975, the shareholders’ equity in

East Dayton was a negative $331,502. (1037). A bal-

ance sheet found on page 465 of the administrative record

supports this statement. In this same affidavit, Granzow

stated that during January, 1976, the financial condition

of East Dayton continued to decline so that by February

6, 1976, the financial condition of East Dayton was worse

then it had been as of December 31, 1975. (1037).

Granzow also stated that on March 31, 1976, the share-

holders’ equity in East Dayton was a negative $379,255.

A balance sheet found on page 475 of the administrative

record supports this statement. Finally, Granzow stated

that a negative shareholder equity in East Dayton existed

in May, 1976, at the time the East Dayton Plan was ter-

minated by Mrs. Darrow and her representatives. (1037).

Additional support for this conclusion is based on the

affidavit of Clifford Hawkins in which Hawkins stated that

at the time of the termination of the East Dayton plan,

there was a negative shareholders’ equity and East Day-

ton’s liabilities far exceeded its assets. (1189).

Finally, the consolidated balance sheet as of 12-31-75

attached to the corporate tax return, Form 1120 of Ros-

common Financial Corporation reveals a negative share-

holder equity in East Dayton of $333,255.96. (653)

The net worth calculation of 29 U.S.C. § 1362(b) (2)

is limited to a day within a period from 120 days prior to

termination until the date of plan termination. Since there

was no net worth at any time during this period, then

the calculation under 29 U.S.C. § 1362(b)(2) is zero

(0) and East Dayton has no liability to the PBGC.

30a

IT IS THEREFORE RECOMMENDED THAT:

Defendants’ motion to dismiss as to Granzow. Sher-

man and Tormey be GRANTED;

Defendants’ motion for judgment on the pleadings

as to East Dayton, Roscommon, Dayton Casting,

Advance, and Roscommon Realty be GRANTED:

Plaintiffs’ motion for protective order is moot.

Defendants’ motion to compei discovery is moot.

July 5, 1985

S/ Michael R. Merz

MICHAEL R. MERZ

United States Magistrate

31a

[Filed Dec. 24, 1992]

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF OHIO

WESTERN DIVISION

Case No. C-3-82-228

Judge Walter Herbert Rice

PENSION BENEFIT GUARANTY CORPORATION,

Plaintiff,

VS. ff

THE East DAYTON TOOL AND

Diz COMPANY, INC., et al.,

Defendants.

DECISION AND ENTRY ADOPTING THE INITIAL

AND SUPPLEMENTAL REPORTS AND RECOM-

MENDATIONS OF UNITED STATES MAGIS-

TRATE JUDGE (DOCS. #39 and #56): MOTION

TO DISMISS OF DEFENDANTS GRANZOW, SHER-

MAN AND TORMEY (DOC. #6) SUSTAINED:

MOTION OF REMAINING DEFENDANTS FOR

JUDGMENT ON THE PLEADINGS (DOC. #7)

SUSTAINED; PLAINTIFF'S MOTION FOR A PRO.-

TECTIVE ORDER (DOC. #22) AND DEFEND-

ANTS’ MOTION TO COMPEL DISCOVERY (DOC.

#26) DEEMED MOOT: JUDGMENT TO BE EN.

TERED FOR DEFENDANTS AND AGAINST

PLAINTIFF; TERMINATION ENTRY

This matter’ is before the Court pursuant to Plaintiff

Pension Benefit Guaranty Corporation’s (“PBGC”) Ob-

' This action arises under Title IV of the Employee Retirement

Income Security Act of 1974 (“ERISA”). 29 U.S.C. § 1301 et. seq.

(1976) (amended by Pub. L. No. 96-364, 94 Stat. 1208 (1980) ).

Jurisdiction is founded upon 29 U.S.C. § 1308(e (3). Venue is

based upon 29 U.S.C. § 1303(e) (2).

32a

jections (Docs. #61 and #68), filed under 28 US.C.

§ 636(b)(1)(C), to the Magistrate Judge's Supplemental

Report and Recommendations which recommended that

PBGC's Objections did not require any modification of

the Recommendations set forth in his original Report

(Doc. #39), and incorporated by reference into the Sup-

plemental Report and Recommendations (Doc. #56). In

the original Report, entered on July 5, 1985, the Magis-

trate Judge recommende1 the granting of the Motion to

Dismiss (Doc. #6) of Defendants Paul H. Granzow

(“Granzow”), Charles F. Sherman (“Sherman”). and

Robert M. Tormey (“Tormey”)? and the Motion for

Judgment on the Pleadings of the other Defendants (Doc.

#7), East Dayton Tool and Die Company, Inc. (“East

Dayton”), Dayton Casting Company, Inc. (“Dayton Cast-

ing”), Roscommon Realty Company (“Roscommon

Realty”), Roscommon Financial Corporation (“Roscom-

mon Financial”) and Advance Foundry, Inc. (“Ad-

vance” )* (Doc. #39).

2 Defendants Granzow, Sherman and Tormey moved this Court

under Fed. R. Civ. P. 12(b) (6) for an Order dismissing PRGC’s

Complaint seeking the enforcement of a final determination by the

PBGC Appeals Board (“Appeals Board’) assessing liability against

Defendants East Dayton, Dayton Casting, Advance, Roscommon

Realty, Roscommon Financial, Granzow, Sherman and Tormey for

an asset deficiency relating to the termination of East Dayton’s

underfunded retirement plan (“Plan”) (IV R. Doc. #17 at 1229-

1248). The Appeals Board found liability for the $326,362.

deficiency in the Plan on the basis that the Roscommon Defendants

were trades and businesses “under common control” with East

Dayton under 29 U.S.C. § 1801 on May 15, 1976, the date the Plan

was terminated.

* Defendants East Dayton, Roscommon Financial. Rescormmon

Realty, Dayton Casting, and Advance moved this Court, under Fed.

R. Civ. P. 12(c), for an Order granting judgment cn the pleadings

and dismissing the Complaint for failure to state a claim upon

which relief can be granted, or in the alternative, a trial de novo.

Although the Magistrate granted East Dayton’s motion for judg-

ment on the pleadings, the text of iie Report states that “the

liability of East Dayton should be affirmed, but the amount of the

liability determined by the PBGC should be set aside.” (Doc #39

at 2).

33a

Under 28 U.S.C. § 636(b)(1)(C), this Court, upon

objections being made to the Magistrate Judge’s Report,

is required to make a de novo review of those recommen-

dations to which objection is made. This Court has re-

examined all the relevant evidence in this case, previously

reviewed by the Magistrate Judge, and has determined.

as did that judicial officer, that the Appeals Board’s de-

cision was not supported by “substantial evidence.” See

Lashley v. Secretary of Health & Human Services, 708

F.2d 1048, 1053 (6th Cir. 1983); Hill v. Duriron Co.,

Inc., 656 F.2d 1208 (6th Cir. 1981). Accordingly,

based on the following reasoning, this Court adopts the

Magistrate Judge’s Reports and Recommendations (Docs.

#39, 56).

A. The Parties’ Arguments

PBGC makes numerous challenges to the Magistrate

Judge’s Report, claiming that: (1) the Magistrate Judge

erred by applying the holding in In Re Challenge Stamp-

ing & Porcelain Co. v. Dickens, 719 F.2d 146 (6th Cir.

1983) (“Dickens’)* (a decision which Plaintiff contends

is limited strictly to the facts of that case). to this case

instead of applying PBGC v. Ouimet Corp., 630 F.2d 4

(Ist Cir. 1980), cert. denied, 450 U.S. 914 (1981)

(“Ouimet’) and the stock ownership test set out in the

*The Sixth Circuit Court of Appeals held that withdrawal

liability for an underfunded pension pian will not be enforced

against a company which purchased stock of the e1 iployer’s parent

company wher the operation of the purchased er mpany was beyond

the purchaser’s control. Dickens, 719 F.2d at 151 The Dickens

court ruled that the 80% stock ownersh p test is not an exclusive

measure of control and looked to equity factors before imposing

employer liability for pension plan shortfalls. Id. at 150-51 In

so holding, the court recognized that “the purpose of the em-

ployer liability provisions . . . [was] to prevent employers from

abusing the termination insurance program.” Jd. at 150. Under

the circumstances of that case, the court refused to apply the

80% regulation, notwithstanding the purchaser’ ownership of all

the acquired company’s stock, because the operation of bankruptcy

law actually denied the purchasing ec mpany control. 7d. at 151.

34a

pertinent ‘tatutory and regulatory provisions® for identi-

fying trades or businesses “which are under common con-

trol” with the retirement plan sponsor; (2) the Magis-

trate Judge exceeded his authorized scope of review under

) US.C. § 706(2)(A)* by making findings of fact and

substituting his own conclusions and judgment for those

of the Appeals Board and by failing to give proper defer-

ence to the Appeals Board’s reasoning and factual find-

ings; (3) even assuming, arguendo, that the Magistrate

Judge's findings are authorized, he disregarded material

evidence on the issue of control; and (4) the Magistrate

Judge erred in dismissing individual Defendants, Granzow,

Sherman and Tormey (Docs. #46, 47, 50, 61, 68) Plain-

tiff's arguments and, therefore, its Objections are not well

taken.

B. Dickens Is Controlling Law

As a preliminary matter, it is important to note that

although several courts outside this circuit have Strictly

applied the statutory criteria at issue in this case, this

Court is bound by Dickens, a decision of the Court of

‘Under regulations prescribed by the PBGC, “trades or busi-

nesses under common control” are treated as a “single employer”

for purposes of ERISA withdrawal liability. 29 U.S.C. § 1301

(b) (1). These regulations are coextensive with rerulations pre-

scribed by the Secretary of the Treasury under 26 U.S.C. § 414(c).

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

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

The regulations define these terms according to the degree and

nature of common stock ownership.

*The Administrative Procedure Act, 5 U.S.C. § 702, authorizes

judicial review of agency action. Section 706(2) provides, in per-

tinent part, that “[tlo the extent necessary to decision and when

presented, the reviewing court shall decide all relevant questions

of law, interpret constitutional and statutory provisions, and de-

termine the meaning or applicability of the terms of an agency

action . .. [and] shall hold unlawful and set aside agency action,

findings, and cenclusio-s found to be arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law. er a

35a

Appeals for the Sixth Circuit. $.D. Ohio R. 4.1.2.7. The

First Circuit Court of Appeal’s decision in Ouimet is not

controlling in this circuit. Based on the following ex-

planation and for the reasons stated by the Magistrate

Judge, this Court holds that the Magistrate Judge’s re-

liance on Dickens was not misplaced. The Dickens hold-

ing, rather than the Ouimet decision, must govern the re-

view of the Administrative Record in this case.

PBGC asserts that the holding of Dickens is inapplicable

to the facts of this case because Dickens is limited only

to bankruptcy cases, where the court, rather than the

stock owner, has control over the operations of the busi-

ness (Doc. #47 at 9-11). PBGC claims that the holding

in Ouimet, requiring strict application of the 80% stock

ownership test to determine a “control group” for purposes

of assessing employer liability under the common control

regulations in 29 U.S.C. § 1301(b). should control. In

support of its position, PBGC points out that the pertinent

ERISA and Internal Revenue Code (“IRC”) rules and

regulations require only a stock ownership test * for de-

7 See, Teamsters Pension Trust Fund ». Central Mich. Trucking,

Inc., 857 F.2d 1107 (6th Cir. 1988) (quoting Dickens); Central

States Pension Fund v. Skyland Leasing Co., 691 F. Supp. 6 (W.D.

Mich. 1987), aff'd without op., 892 F.2d 1043 (6th Cir. Mich.

1990) (same); Tri-State Rubber & Equipment v. Central States

Pension Fund, 677 F. Supp. 516 (E.D. Mich. 1987) (same):

Central Transp. Inc. v. Central States Area Pension, 639 F. Supp.

788 (E.D. Tenn. 1986) (same): Central Transp. Inc. v. Central

States Area Pension, 640 F. Supp. 56 (E.D. Tenn. 1986) (same).

5 The controlling interest test of 26 C.F.R. § 1.414(c) -2(b) (2) (A)

is defined as follows:

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

ownership of stock possessing at least 80 percent of total com-

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

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

shares of all classes of stock of such corporation; .. .

+ * * *

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

interest of such partnership.

36a

termining the members of a controlled group and not an

additional showing of actual control (Doc. #61 at 4-5).

PBGC argues that the Magistrate Judge was bound to

uphold its permissible interpretation of the ERICA statu-

tory framework (/d. at 3-5).

This Court concludes this case falls squarely under the

Dickens precedent.

The allegation that Dickens applies only in bankruptcy

contexts is without merit. In Dickens, the Sixth Circuit

did not limit its pronouncement to bankruptcy scenarios.

Rather, the Dickens court looked to the totality of circum-

stances surrounding corporate operations and actual con-

trol over the owned company or over the pension plan to

determine whether or not the 80° stock ov nership rule ac-

curately defined the party with a controlling interest. In

this Court's opinion, the means by which corporate control

is actually lost is not relevant. Regardless of the means

that effectuate the loss of control. the same end result is

achieved—the loss of control over company operations and

the pension plan. Thus, whether a company is stripped of

its control by a bankruptcy court or by a secured creditor,

as in this case, is insignificant; it is a distinction without a

difference.

What is relevant is whether a particular party had con-

trol. In Dickens, the Sixth Circuit defined the term “con-

trol.” for the purpose of fixing responsibility for under-

funded pension plans, by considering notions of fairness

in order to avoid an unjust result in determining group

responsibility for the pension plan deficit.” Hence, the

equitable theory embraced by the Dickens court seems to

require a showing of actual control over corporate opera-

tions and liability for an underfunded pension plan will not

® Interestingly, the Ouimet court similarly recognized notions

of fairness in holding the Ouimet Group such a group under com-

mon contro] and treating that group as one employer. Ouimet,

630 F.2d at 12. (1st Cir. 1980).

37a

be enforced against a corporate entity when its operation

was beyond that entity’s control.

PBGC’s allegations that the Magistrate Judge rewrote

the statutory and regulatory previsions governing the issue

of “control”, by failing to apply the statutory stock owner-

ship test, is also without merit. A legislative definition does

not always exclude other appropriate meanings that nat-

urally belong to the words and “fi]t will always, therefore,

he presumed that the legislature intended exceptions to its

language, which would avoid [results leading to injustice,

oppression, or absurd consequence].” United States v.

Kirhy, 74 U.S. 482, 486-87 (1868). This Court agrees

with the Sixth Circuit’s application of the well-settled

principles of construction that emphasize the interpretation

of the provisions at issue in this case should not be read

and interpreted “so as to lead to unreasonable or unjust

results.” United States v. American Trucking Ass’ns., 310

U.S. 534, 542-44 (1940). Accord. Steiner v. Mitchell,

215 F.2d 171, 173 (6th Cir. 1954), affd, 350 U.S. 247

(1956) (when aid to construction of meaning of words as

used in statute is available no rule of law forbids its use

ination). Based on the foregoing analysis, this Court con-

cludes that the Appeals Board decision to hold Defendants

liable for the asset deficiency in East Dayton’s retirement

plan. a decision based upon the mechanistic utilization of

the 80% stock ownership test, did not have a reasonable

basis in law. Accordingly, this Court will not reject the

Magistrate’s Report on that basis.

C. The Standard of Review

The gist of PBGC’s argument is that the Magistrate

failed to give the required amount of judicial deference to

the Appeal Board’s interpretation of the law and findings

of fact in this case. PBGC claims that the Magistrate was

only required to determine whether the Appeals Board’s

final decision was based on considerations of the relevant

factors in the case and whether there was a clear error of

38a

judgment. PBGC insists that the Magistrate both ignored

the Appeals Board’s careful examination of the evidence

and contentions presented in the administrative proceed-

ings and made his own factual findings ® without discuss-

ing in what respect the facts or conclusions found by the

Appeals Board were violative of section 706(2)(A).

PBGC further argues that since the Magistrate did not

formally identify or discuss the evidence in the adminis-

trative record which supported the Appeals Board’s final

determination, the Magistrate ignored that record and his

recommendations must, therefore, be incorrect and _ this

Court must, accordingly, affirm the Appeals Board’s find-

ings (Doc. #68 at 8).

Judicial review of administrative actions is governed by

whether or not the review involves legal or factual ques-

tions. Generally, a reviewing court decides all relevant

questions of law and may substitute its judgment for that

of the agency where agency action is not in accordance

with law. Federal Maritime Commission v. Seatrain Lines,

Inc., 411 U.S. 726, 745-76 (1973) (“courts are the final

authorities on issues of statutory construction, and ‘are not

obliged to stand aside and rubber-stamp their affirmance

of administrative decisions that they deem inconsistent with

a statutory mandate or that frustrate the congressional

policy underlying a statute’”) (citations omitted): see

also National Labor Relations Board y. Brown Food

Store, 380 U.S. 278, 291-92 (1965) (same). Factual ques-

tions are afforded greater deference. National Labor Rela-

tions Board v. Hearst Publications, Inc., 322 U.S. 111. 130

(1944) (deference is to be rendered to agency determina-

tions of fact, so long as there is substantial evidence to be

found in the record as a whole). It is of critical impor-

tance, therefore, that this Court determine whether the

matters considered by the Magistrate Judge present factual

or legal issues. The United States Supreme Court has noted

1” PBGC’s maintains that the administrative record did not

support the Magistrate’s factual findings and conclusions.

39a

that courts are provided with little guidance for distin-

guishing questions of fact from questions of law. Pullman-

Standard v. Swint, 456 U.S. 273, 288 (1982) (“The Court

has previously noted the vexing nature of the distinction

between questions of fact and questions of law. [No]...

rule or principle . . . will unerringly distinguish a factual

finding from a legal conclusion) (citation omitted); see

also Baumgartner v. United States, 322 U.S. 665, 670-71

(1944).

PBGC accuses the Magistrate Judge of making factual

findings—that Defendants tacked control over East Day-

ton at the time the pension plan was terminated and that

the notice of default under the Escrow Agreement resulted

in a total loss of Defendant’s ownership rights in East

Dayton stock—independent of and in contradiction to the

facts contained in the Administrative Record and the find-

ings made by the Appeals Board. PBGC cites additional

instances where it believes the Magistrate Judge acted as

an unauthorized factfinder by finding that: (1) Hawkins

and Nick, who continued as East Dayton directors after

February 6, 1976, were thereafter subject to the direction

of Mr. Darrow and Attorney Schaeffer; (2) the Plan was

officially terminated by the PBGC on May 15, 1976; (3)

the Appeals Board denied Appellants’ *’ request to appear

at the hearing held before the Board; (4) from February 6,

1976, on, Mrs. Darrow had total control over the opera-

tion of East Dayton; (5) Dorothy Darrow alone chose a

new Board of Directors which decided to shut down the

business, sell the machinery, equipment and building, and

terminate the East Dayton Plan; (6) since February 6,

1976, Granzow, Sherman and Tormey have held only

paper title to East Dayton; and (7) congressional intent is

served by setting aside the decision of the Appeals Board

11The parties designated as “Appellants” in the Magistrate’s

Report are: East Dayton, Roscommon Financial, Dayton Casting,

Advance, Roscommon Realty, Fillmore Leasing Company (“Fill-

more”) and Southwest Insurance Company (“Southwest”) (IV R.

Doc. 17 at 823, 900).

40a

(Docs. #46, 47, 50, 61, 68). PBGC’s also objects to the

finding and conclusion of the Magistrate Judge that PBGC

failed to request a judgment against Granzow, Sherman

and Tormey, and therefore, a dismissal should be granted

to those defendants (/d.). Finally, PBGC objects to the

Magistrate Judge’s failure to note that the Administrative

Record shows that Roscommon Financial, Dayton Casting

and Advance represented in their 1976 and 1977 federal

income tax returns that they were 100% legal and equi-

table owners of East Dayton and that they did not identify

Mrs. Darrow or anyone else as the holder of any interest

in East Dayton (Doc. #61, at 2-3). Since these objections

appear to focus on indicia of control, this Court agrees

with the Magistrate Judge’s observation that the present

case narrows itself down to the question of what entity was

in actual control of East Dayton when the pension plan

was terminated.

D. DE NOVO EXAMINATION OF FACTS

The Court now turns toward its obligation to examine

the Report and Supplemental Report on a de novo basis.

In so doing, the Court notes that it has examined the entire

record. In addition, the Court has analyzed the legal argu-

ments and factual references raised by PBGC. This review

of the voluminous administrative record and further sub-

missions reflect that the Magistrate Judge employed the

proper standard of review in this action. In this Court’s

view, the Magistrate Judge made no new findings of fact.

Rather, he considered all relevant indicia of control noted

by the Appeals Board and contained in the Administrative

Record, including the undisputed facts. The Magistrate

Judge engaged in a weighing and balancing of the factual

considerations that had developed during the administra-

tive proceedings herein and arrived at the required legal

conclusions. This Court holds, therefore, that the Magis-

trate Judge’s determinations on the issue of control were

legal conclusions. As previously noted, questions of law,

unlike questions of fact, are freely reviewable. This Court

4la

notes that the Magistrate Judge adequately stated the rea-

sons for his legal conclusions, and the record indicates that

they were based upon properly considered facts in the

Administrative Record. In that regard, this Court is con-

fident the Magistrate Judge did not disregard any facts in

the Administrative Record that were relevant to the mate-

rial issue of control.

Upon de novo review, this Court found the record re-

plete with evidence relevant to the particular findings under

attack in this case. Regarding the issue of control, for

example, the record establishes that the East Dayton ter-

mination date was May 15, 1976 (IV R. Doc. #17 at

1229). Other documents in the record support this finding

(I R. Doc. #14 at 43, 79). The record also indicates

that the Appeals Board considered the issue of whether

or not Roscommon was the “beneficial owner” of the East

Dayton stock on the date the Plan terminated (/d. at

1230, 1234). This Court can infer from the following

language contained in the Appeals Board decision that it

considered the same evidence on the issue of control as did

the Magistrate Judge:

In reaching the conclusion that appellant Roscommon

was legal and beneficial owner of the East Dayton

stock, the Board considered all material and argu-

ments submitted by appellants (/d. at 1236 n. 1)

The Administrative Record also reveals that the Appeals

Board denied the request of East Dayton, the Roscommon

Defendants, Dayton Casting, Advance, Fillmore and South-

west for an oral hearing (Jd. at 906). Additionally, vari-

ous documents in the record, such as the three instruments

executed at the time Darrow sold her remaining East

Dayton stock,” the Tormey, Granzow and Sherman letters

12 The three instruments executed by Granzow, Sherman, Tormey

and Clifton C. Hawkins were an Agreement for Sale of All Stock of

Dorothy Darrow, a Promissory Note (“Note”) and an Escrow

Agreement (II R. Doc. #15 at 432-442). Under the default pro-

visions of the Escrow Agreement, in the event the Note was not

42a

of resignation (IV R. Doc. #17 at 1099), and the Notice

of Default (7d. at 1097), are relevant as to whether or not

Granzow, Sherman and Tormey had only paper title after

February 6, 1976. Contrary to PBGC’s assertion, the rec-

ord does indeed reflect that Hawkins and Nick continued

as directors, subject to the direction of Mr. Darrow and

Mr. Schaeffer, after Februray 6, 1976 (Jd. at 1032).

Finally, the record indicates that Mrs. Darrow would not

consent to the execution of a security agreement necessary

to obtain bank financing in order to keep East Dayton

solvent (Doc. #38, Granzow Aff. at 15).

This Court notes that the outcome in this case would

remain unaltered even if this Court were to conclude that

the Magistrate did indeed make independent factual find-

ings. All parties herein concede that § 706(2)(A) is the

proper legal standard of review to be applied in scrutinizing

the agency findings of fact under the circumstances of this

case. Under the § 706(2)(A) standard, “a reviewing

cour’ must conduct a ‘searching and careful’ inquiry into

the record in order to assure itself that the agency has

examined the relevant data and articulated a reasoned

explanation for its actions including a ‘rational connection

between the facts found and the choice made.’” Farmers

Union Cent. Exchange, Inc. v. Federal Energy Regulatory

Comnr'n., 734 F.2d 1486 (6th Cir.), cert. denied, Wil-

liams Pipe Line Co. v. Farmers Union Cent. Exchange,

Inc., 469 U.S. 1034 (1984) (quoting Burlington Truck

Lines v. United States, 371 U.S. 156, 168 (1962)). An

agency’s decision is arbitrary and capricious if the agency

entirely fails to consider the proper law. Labor Board v.

Babcock & Wilcox Co., 351 U.S. 105, 112 (1956)

(courts must set aside administrative decisions which rest

on an ‘erroneous legal foundation’). This Court concludes

paid, the parties agreed that all rights of ownership would revert

to the Escrow Agent and Dorothy Darrow. She could then either

cause liquidation or the immediate election of no less than two

persons to the company’s board of directors (IV R. Doc. #17 at

1088 {/f/ 2, 3).

43a

that its earlier finding, that the Appeals Board decision

was not in accordance with law, would likewise suffice to

demonstrate that the Board’s findings and conclusions in

this case were arbitrary and capricious, since the Board

would be unable to provide a reasoned justification for a

decision resting on an « -roneous legal foundation. Once —

the wrong law is applied to the facts in a particular action,

the correct result cannot be reached.

In accordance with the foregoing analysis, this Court

finds that the Appeals Board decision applied the wrong

test for determining control and therefore reached an

arbitrary and capricious result.

This Court, accordingly ORDERS that:

(1) Defendants’ motion to dismiss as to Granzow,

Sherman and Tormey (Doc. #6) be sustained;

(2) Defendants’ motion for judgment on the pleadings

as to East Dayton, Roscommon Realty, Roscommon Finan-

cial, Dayton Casting, and Advance (Doc. #7) be sus-

tained;

(3) Plaintiff's motion for protective order (Doc. #22)

is moot;

(4) Defendants’ motion to compel discovery (Doc.

#26) is moot.

Judgment will be entered in favor of the Defendants and

against the Plaintiff herein.

The captioned cause is hereby terminated upon the

docket records of the United States District Court for the

Southern District of Ohio, Western Division, at Dayton.

December 23, 1992

/s/ Walter Herbert Rice

WALTER HERBERT RICE

United States District Judge

44a

[Filed Feb. 20, 1990]

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF OHIO

WESTERN DIVISION AT DAYTON

Civil Action No. C-3-82-228

Judge Rice

Magistrate Mertz

PENSION BENEFIT GUARANTY CORPORATION,

Plaintiff,

-VS-

THE East DAYTON Too. & Dig

COMPANY, INC., et al.,

Defendants.

SUPPLEMENTAL REPORT AND

RECOMMENDATIONS OF

UNITED STATES MAGISTRATE

Plaintiff Pension Benefit Guaranty Corporation, the

PBGC, brought this action to enforce a final determina-

tion assessing liability against the Defendants relating to

termination of the retirement plan of East Dayton. On

July 5, 1985, the Magistrate entered a Report and Rec-

ommendations (Doc. #39) recommending that the Mo-

tion to Dismiss of Defendant Granzow, Sherman, and

Tormey, and the Motion for Judgment on the Pleadings

of the other Defendants be granted. The PBGC objected

and on January 11, 1988, the case was recommitted to

the Magistrate for consideration of the Objections.

The Objections do not require modification of the

proposed findings of fact set forth in the original Report,

and they are incorporated herein by 12ference.

45a

In the original Report, the Magistrate found that Jn

re Challenge Stamping and Porcelain Co., 719 F. 2d 146

(6th Cir. 1983), was applicable to this case for reasons

which are set forth at length in the original report. Plain-

tiff argues that Dickens is clearly distinguishable in that

it is applicable only when control of a corporation is lost

in the bankruptcy context and suggests that PBGC vy.

Obiemet Corp., 711 F. 2d 1085 (1st Cir. 1983), cert.

denied 450 U.S. 914 (1983), should control. The Magis-

trate disagrees. Obiemet is not controlling in this Circuit

and other courts in the Circuit have continued to hold

that withdrawal liability will oniy be imposed upon the

entity in actual control upon termination. Teamsters Pen-

sion Trust Fund v. Central Michigan Trucking, Inc., 859

F. 2d 1107 (6th Cir. 1988) (quoting Dickens); Central

Transportation Inc. v. Central States Area Pension, 640

F. Supp. 56, 60 (E.D. Tenn. 1986); Central States Pen-

sion Fund v. Skyland Leasing Co., 691 F. Supp. 6, 12

(W.D. Mich. 1987).

Plaintiff also objects to the standard of review employed

in the original Report, arguing that the Magistrate ex-

ceeded the bounds of 5 U.S.C. § 706(2) by making find-

ings of fact and substituting his own conclusions for that

of the Appeals Board. The objection is not well taken.

5 U.S.C. § 706 provides that a reviewing court shall ex-

amine the entire record or those parts of it cited by a

party. This includes all the evidence submitted by both

parties. Universal Camera Corp. v. N.L.R.B., 340 US.

464, 489 (1951). Under § 706, the Court may set aside

agency findings and conclusions it finds to be arbitrary,

capricious, and abuse of discretion, or otherwise not in

accordance with law. The scope of review under this

section is limited only by statutory preclusion and a con-

gressional grant of agency discretion. § 701a(1)(2).

Reviewing courts are not obliged to stand aside and

rubber-stamp their affirmance of administrative de-

cisions that they deem inconsistent with a statutory

46a

mandate or that frustrate the congressional policy

underlying a statute.

N.L.R.B. v. Brown, 380 U.S. 278, 292 (1965).

The controlling issue in this case is what entity was in

actual control when the pension plan was terminated. In

1973, a sale of all the stock of East Dayton was ne-

gotiated between the controlling shareholder, Dorothy

Darrow, and the individual Defendants. Pursuant to the

sale, an escrow agreement was executed to evidence the

payment procedure and liability on the promissory note

(Admin. Record 1095). The escrow agreement provided

the buyers all ownership rights except possession and

transfer as long as there was no default on the note. In

January, 1976, it became apparent that East Dayton

would require more financing if it were to survive the

recession. Financing could not be obtained without Mrs.

Darrow’s executing a security agreement on the equip-

ment and machinery (Doc. #38, Granzow Aff., p. 15).

Mrs. Darrow refused consent, East Dayton defaulted on

the note, and the escrow agreement was thereby breached.

On February 6, 1976, pursuant to the escrow agreement,

the East Dayton shareholders formally transferred control

of East Dayton to Mrs. Darrow (Jd. at p. 16). From that

date forward, all effective control of East Dayton was

in the hands of Herman Darrow as Dorothy Darrow’s

representative (Doc. #38, Hawkins Aff. at p. 19). The

East Dayton pension plan was terminated pursuant to an

agreement with the PBGC effective May 15, 1976. Id.

Regardless of which entity held legal title to the East

Dayton stock, the entity in actual control of East Dayton

at the termination of the plan was East Dayton itself.

By withholding her consent to additional financing, Mrs.

Darrow denied the buyers the right to participate in the

sale and liquidation of East Dayton and thus any control

at the time of termination of the plan.

The PBGC claims its decision assessing liability was

not arbitrary, capricious, or an abuse of discretion and

47a

should not therefore be overturned. Having decided that

the only party in control at the time of termination was

East Dayton, the Court will discuss the deficiencies in the

procedure the PBGC afforded Defendants.

The PBGC argues its decision was based entirely on

uncontested facts shown by documentary evidence in the

Administrative Record and that no oral hearing was re-

quired in that the procedure was analogous to a sum-

mary judgment motion (Doc. #47). In Defendants’ in-

itial motion, they indicated they had requested and been

denied an oral hearing to present witnesses and cross-

examine the agency’s witnesses. In addition, they had

been denied discovery and had only been permitted to ob-

tain documents from the agency under the Freedom of

Information Act. The PBGC responds iiiat these proce-

dural niceties were unnecessary in that there were no ques-

tions of material fact present in the case.

The PBGC’s position is based on its conclusion that

the control group definition it applied is clearly applicable.

if it were correct on that point, it would appear that the

facts regarding actual control raised by Defendants would

not be material. Since the Magistrate is of the opinion

that the agency’s definition is not the correct law, in light

of Dickens, supra, this Court has the authority to set

aside the agency’s findings and conclusions. N.L.R.B. v.

Hearst Publications, 322 U.S. 111, 131 (1943).

The Magistrate accordingly continues to adhere to the

initial recommendations made in the Report of July 5,

1985.

February 20, 1990.

/s/ Michael R. Merz

MICHAEL R. MERZ

United States Magistrate

48a

[Filed Mar. 9, 1994]

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 93-3185

PENSION BENEFIT GUARANTY CORPORATION,

Plaintiff-A ppellant,

THE East DAYTON Toor &

Dik Co., INC., et al.,

Defendants-A ppellees.

ORDER

BEFORE: KEITH and NORRIS, Circuit Judges; and

ZATKOFF,* District Judge.

The court having received a petition for rehearing en

banc, and the petition having been circulated not only to

the original panel members but also to all other active

judges of this court, and no judge of this court having re-

quested a vote on the suggestion for rehearing en banc,

the petition for rehearing has been referred to the original

hearing panel.

The panel has further reviewed the petition for rehear-

ing and concludes that the issues raised in the petition

wore fully considered upon the original submission and

decision of the case. Accordingly, the petition is denied.

ENTERED BY ORDER OF THE COURT

s’ Leonard Green

LEONARD GREEN

Clerk

* Hon. Lawrence P. Zatkoff, United States District Judge for

the Eastern District of Michigan, sitting by designation.

49a

STATUTORY PROVISIONS

§ 1301. Definitions

(a) For purposes of this subchapter, the term—

(1) “administrator” means the person or persons

described in paragraph (16) of section 1002 of this

title;

(2) “substantial employer” means for any plan

year an employer (treating employers who are memn-

bers of the same affiliated group, within the meaning

of section 1563(a) of Title 26, determined without

regard to section 1563(a)(4) and (e)(3)(C) of

Title 26, as one employer) who has made contribu-

tions to or under a plan under which more than

one employer (other than a multiemployer plan)

makes contributions for each of.

(A) the two immediately preceding plan

years, or

(B) the second and third preceding plan

years,

equaling or exceeding ‘0 percent of all employer

contributions paid to or under that plan for each

such year;

(3) “multiemployer plan” means a plan—

(A) to which more than one employer is re-

quired to contribute,

(B) which is maintained pursuant to one or

more collective bargaining agreements between

one or more employee organizations and more

than one employer, and

as the Secretary of Labor may prescribe by

regulation,

50a

except that, in applying this paragraph—

(i) a plan shall be considered a multicm-

ployer plan on and after its termination date if

the plan was a multiemployer plan under this

paragraph for the plan year preceding such ter-

mination, and

(ii) for any plan year which began before

September 26, 1980, the term “multiemployer

plan” means a plan described in section 414(f)

of Title 26 as in effect immediately before such

date;

(4) “corporation”, except where the context

clearly requires otherwise, means the Pension Bene-

fit Guaranty Corporation established under section

1302 of this title;

(5) “fund” means the appropriate fund estab-

lished under section 1305 of this title;

(6) “basic benefits” means benefits guaranteed

under section 1322 of this title (other than under

section 1322(c) of this title), or under section 1322a

of this title (other than under section 1322a(g)

of this title);

(7) “non-basic benefits” means benefits guaran-

teed under section 1322(c) of this title or 1322a(g)

of this title;

(8) “nonforfeitable benefit” means, with respect

to a plan, a benefit for which a participant has satis-

fied the conditions for entitlement under the plan or

the requirements of this chapter (other than submis-

sion of a forma! application, retirement, completion

of a required waiting period, or death in the case of

a benefit which returns all or a portion of a partici-

pant’s accumulated mandatory employee contribu-

tions upon the participant’s death), whether or not

the benefit may subsequently be reduced or sus-

5la

pended by a plan amendment, an occurrence of any

condition, or operation of this chapter or Title 26;

(9) “reorganization index” means the amount de-

termined under section 1421(b) of this title;

(10) “plan sponsor” means, with respect to a

multiemployer plan

(A) the plan's joint board of trustees, or

(B) if the plan has no joint board of trust-

ees, the plan administrator;

(11) “contribution base unit” means a unit with

respect to which an employer has an obligation to

contribute under a multiemployer plan, as defined

in regulations prescribed by the Secretary of the

Treasury; and

(12) “outstanding claim for withdrawal liability”

means a plan’s claim for the unpaid balance of the

liability determined under part | of subtitle E of this

subchapter for which demand has been made, valued

in accordance with regulations prescribed by the

corporation.

(b)(1) An individual who owns the entire interest in

an unincorporated trade or business is treated as his own

employer, and a partnership is treated as the employer of

each partner who is an employee within the meaning of

section 401(c)(1) of Title 26. For purposes of this sub-

chapter, 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 as a single employer. The regula-

tions prescribed under the preceding sentence shall be

consistent and coextensive with regulations prescribed for

similar purposes by the Secretary of the Treasury under

section 414(c) of Title 26.

52a

(2) For purposes of this subchapter, “single-employer

plan” means, except as otherwise specifically provided in

this subchapter, any plan which is not a multiemployer

plan.

(3) For purposes of this subchapter, except as other-

wise provided in this subchapter, contributions or other

payments shall be considered made under a plan for a

plan year if they are made within the period prescribed

under section 412(c)(10) of Title 26.

(4) For purposes of subtitle E of this subchapter,

“Secretary of the Treasury” means the Secretary of the

Treasury or such Secretary's delegate.

(Pub.L. 93-406, Title IV, § 4001, Sept. 2, 1974, 88 Stat.

1003; Pub.L. 96-364, Title IV, § 402(a)(1), Sept. 26,

1980, 94 Stat. 1296.)

§ 1361. Amounts payable by corporation

The corporation shall pay benefits under a single-

employer plan terminated under this subchapter subject

to the limitations and requirements of subtitle B of this

subchapter. The corporation shall provide financial as-

sistance to pay benefits under a multiemployer plan which

is insolvent under section 1426 or 1441(d)(2)(A) of

this title, subject to the limitations and requirements of

subtitles B, C, and E of this subchapter. Amounts guar-

anteed by the corporation under sections 1322 and 1322a

of this title shall be paid by the corporation only out of

the appropriate fund. The corporation shall make pay-

ments under the supplemental program to reimburse mul-

tiemployer plans for uncollectible withdrawal liability only

out of the fund established under section 1305(e) of this

title.

(Pub.L. 93-406, Title IV, § 4061, Sept. 2, 1974, 88 Stat.

1029: Pub.L. 96-364, Title TV, § 403(f), Sept. 26, 1980,

94 Stat. 1301.)

53a

§ 1362. Liability of employer

(a) Employers covered

This section applies to any employer who maintained

a single-employer plan at the time it was terminated, but

does not apply—

(1) to an employer who maintained a plan with

respect to which he paid the annual premium de-

scribed in section 1306(a)(2)(B) of this title for

each of the 5 plan years immediately preceding the

plan year during which the plan terminated unless

the conditions imposed by the corporation on the

payment of coverage under section 1323 of this title

do not permit such coverage to apply under the cir-

cumstances, or

(2) to the extent of any liability arising out of

the insolvency of an insurance company with respect

to an insurance contract.

(a) Amount of liability

Any employer to which this section applies shall be

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

(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 termi-

nation, 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 lia-

bility under this section.

54a

For purposes of subsection (b)(2) of this section the

net worth of an employer is—

(1) determined on whatever basis best reflects, in

the termination of the corporation, the current status

of the employer’s operations and prospects at the

time chosen for determining the net worth of the

employer, and

(2) increased by the amount of any transfers of

assets made by the employer determined by the

corporation to be improper under the circumstances,

including any such transfers which would be inap-

propriate under Title 11 if the employer were a

debtor in a case under chapter 7 of such title.

(d) Corporate reorganizations

For purposes of this section the following rules apply in

the case of certain corporate reorganizations:

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

reorganization which involves a mere change in iden-

tity, form, or place of organization, however, effected,

a successor corporation resulting from such reorgani-

zation shall be treated as the employer to whom this

section applies.

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

liquidation into a parent corporation, the parent cor-

poration shall be treated as the employer to whom

this section applies.

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

a merger, consolidation, or division, the successor

corporation or corporations shall be treated as the

employer to whom this section applies.

55a

(e) Cessation of operations at one facility

If an employer ceases operations at a facility in any

location and, as a result of such cessation of operations,

more than 20 percent of the total number of his employ-

ees who are participants under a plan established and

maintained by him are separated from employment, the

employer shall be treated with respect to that plan as if

he were a substantial employer under a plan under which

more than one employer makes contributions and the pro-

visions of sections 1363, 1364, and 1365 of this title shall

apply.

(Pub.L. 93-406, Title IV, § 4062, Sept. 2, 1974, 88 Stat.

1029; Pub.L. 95-598, Title III, § 321(b), Nov. 6, 1978,

92 Stat. 2678; Pub.L. 96-364, Title IV, § 403(g), Sept.

26, 1980, 94 Stat. 1301.)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.