Opposition Brief — White Consolidated Industries, Inc. v. Pension Benefit Guaranty Corp.

No. 93-661

In the

Supreme Court of the United States

OCTOBER TERM, 1993

White Consolidated Industries. In

Pe ani Nel

VS

Pension Benefit Guaranty Corporation

Respondent

White Consolidated Industries. Inc.. and John Doe(s)

Petitioners

-agalinstl-

Ihe Blaw Knox Retirement Income Plan. Blaw Kno,

Pension Plan, Blaw Knox IAM Pension Plan. Blaw Knox

Equipment Pension Plan, Blaw Knox Duraloy Pension Plat

tor Salaried Employees, Blaw Knox Duraloy Hour!

Pension Plan and Fiduciaries Dean G. Wilsor

and Richard A. MclIntvre

Respondent

Brief in Opposition To Petition For Writ Of Certiorari

lo The United States Court Of Appeals

For The Third Circuit

Brief In Opposition To Petition For Writ Of Certiorari

J. FRANK McKenna, III, Eso. [PA-1 736]

Counsel of Record

KinnttH R. Bruce, Eso. [PA-41 080]

Babst, Calland, Clements & Zomnir,. P.

{ffornevs for Respondent

Iwo Gateway Center, Eighth Floo

Pittsburgh, Pennsylvania 15222

(412) 394-5401

Dated: November 24, 1993

TABLE OF CONTENTS

I. INTRODUCTION...............

Il. THE OPINION OF THE COURT OF

APPEALS REFLECTS A PRINCIPLED

EXERCISE OF APPELLATE REVIEW ......... 3

A. Following Accepted Principles Of Statutory

Interpretation The Court Of Appeals

’ Properly Held That Each Complaint Stated

A Cause Of Action Under ERISA Section

SOON «sous ed edaneue set iewen:

B. The Court Of Appeals Read The

Of The PBGC Complaint Under

Against This Court’s Precedents On The

Sham Transaction Doctrine And

Held That The PBGC Complaint Stated A

Cause Of Action.............

Ill. THIS CASE DOES NOT PRESENT

IMPORTANT QUESTION OF FEDERAL

LAW WHICH WARRANTS REVIEW BY

REO GPUS 9.6.56 en do oy seca es

rey eer rer 3

Allegations

§ 1362

Properly

Peake 6 eats 4

AN

ee eee 5

IV. THE COURT OF APPEALS’ DECISION DOES

NOT CONFLICT WITH ANY UNITED

STATES SUPREME COURT PRECEDENT..... 7

V. THIS DECISION DOES NOT REQUIRE THE

EXTRAORDINARY EXERCISE OF THIS

COURT’S SUPERVISORY POWER

COINCLUIBIOIN nn cecccccvccvenvevecsues

TABLE OF AUTHORITIES

CASES

Page

Army & Air Force Exchange Service v. Sheehan,

456 U.S. 728 (1962) 5 oc. oe ccc eee 7

Braen vy. Pfiefer Oil Transportation Co.,

361 U.S. 129 CI9S9. on bee a ee 7

Crandon y. United States, 494 U.S. 152 (1990) ............ 4

Diedrich vy. Commissioner, 457 U.S. 191 (1982). ........... 8

In re Doskosil, 130 B.R. 858 (Bankr. D. Kansas 1991)... .6, 8

Gregory v. Helvering, 293 U.S. 465 (1935).............: 8, 9

Hoffa v. United States, 385 U.S. 293 (1966)............65. 9

Knetsch v. United States, 364 U.S. 361 (1960)............. x

Layne & Bowler Corp. v. Western Well Works, Inc.,

261 U.S. 367 C1989 ook ke eedee eee eee 5

Lerman vy. Commissioner, 939 F.2d 44 (3d Cir. 1990),

cert. denied __. U.S. ___,, 112 S.Ct. $90 (1991)....... 8

In re McConnell, 370 U.S. 230 (1962) oc ccccccetrcvccees 10

McNabb vy. United States, 318 U.S. 332 (1943) ........... 10

Patterson v. Lamb, 329 U.S. 539 (1947). ..........0 00 ee. 6

Rice v. Sioux City Memorial Park Cemetery, Inc.,

349 US; FCG Sa as oan ee ee 5

Rothensies v. Electric Storage Battery Co.,

cr Rak Be, Fe. | el er Pe rrr ee 6

Schlude v. Commissioner, 372 U.S. 128 (1963) ............ 7

Scheuer v. Rhodes, 416 U.S. 232 (1974) .........00 0 eae 9

Thiel v. Southern Pacific Co., 328 U.S. 217 (1946) ........ 10

United States v. Hall, 423 U.S. 161 (1976). ............... 5

United States v. Standard Oil Co., 332 U.S. 301 (1947) ..... 5

United States v. Ruzicka, 329 U.S. 287 (1946)............. 6

United States v. Powell, 330 U.S. 238 (1947) ............4.. 6

il

STATUTE RULES AND REGULATIONS

ERISA 29 |

ERISA 29 |

ERISA 29 |

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SUMMARY OF ARGUMENT

This case does_not warrant a writ of certiorari because the

opinion of the United States Court of Appeals for the Third

Circuit reflects a principled exercise of appellate review. Con-

trary to the Petitioner’s belief, the Court of Appeals’ decision

does not present this Court with an important issue of federal

law. In addition, this ruling does not conflict with any precedent

of this Court or any other federal court. Finaily, nothing in the

Court of Appeals’ opinion justifies the extraordinary exercise of

this Court’s power of supervision.

ARGUMENT

I. Introduction

In this case, the United States Court of Appeals for the

Third Circuit reviewed two orders granting motions to dismiss

under Federal Rule of Civil Procedure |12(b)(6). The court held

that the two complaints dismissed by the district court did state

causes of action under particular sections of the Employee

Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1301

et seq.' First, with respect to the counts in both complaints

under Section 1369, the court in conventional fashion inter-

preted undefined words in the statute in view of the statute’s

background and its legislative purpose. Second, in reviewing the

Pension Benefit Guarantee Corporation’s (““PBGC”’) claim

under Section 1362, the court read the allegations of the

PBGC’s complaint in light of pertinent precedent of this Court

and determined that the allegations were sufficient to withstand

a motion to dismiss.

Petitioner, White Consolidated Industries, Inc. (““WCI")

now portrays this routine exercise of appellate review as “peril-

ous and unsound” precedent that will encourage federal agen-

cies to attempt unbridled enforcement of the statutes they

administer. WCI Petition 26, 15. Specifically, WCI’s petition

asserts: |) that the issue of predecessor liability under ERISA 1s

an important question of federal law that should be settled by

this Court; 2) that the decision of the Court of Appeals conflicts

with decisions of this Court; and 3) that this Court should

exercise its supervisory power over the Court of Appeals. WCI

Petition 14. Contrary to WCI’s characterization that the deci-

sion is “unsound, unwise and unfair,’ WCI Petition 15, the

opinion of the appellate court reflects an ordinary, principled

exercise of appellate review, appropriately guided by settled

principles of statutory interpretation and pertinent precedent of

'Two separate complaints were filed in the district court, one by the

Respondent pension plans and the other by the PBGC. Both complaints allege

a cause of aculon under 29 U.S.C. § 1369. Only the PBG:C complaint alleges a

violation of 29 U.S.C. § 1362.

this Court. As such. the Blaw Knox Retirement Plans? (“the

Plans”) respectfully request this Court to deny WCI’s Petition

for Writ of Certiorari.

Il. The Opinion Of The Court Of Appeals Reflects A Princi-

pled Exercise Of Appellate Review

A.

Following Accepted Principles Of Statutory Interpretation

The Cour: Of Appeals Properly Held That Each Complaint

Stated A Cause Of Action Under ERISA Section 1369.

The Court of Appeals interpreted ERISA, Section 1369(a)’,

focusing on the meaning of “becomes effective.” The court fol-

lowed accepted principles of statutory interpretation to deter-

mine the meaning of this term.

The Court of Appeals began by carefully reading the stat-

ute. The court found that two distinct dates were used in the

text of Section 1369(a): 1) the date the transaction was “entered

into,”; and 2) the date the transaction “becomes effective.” The

court observed, “[T]his different terminology within the same

‘Specifically, the Respondents are The Blaw Knox Retirement Income

Plan, Blaw Knox Pension Plan, Blaw Knox IAM Pension Plan, Blaw Knox

Equipment Pension Plan, Blaw Knox Duraloy Pension Plan for Salaried

Employees, Blaw Knox Duraloy Hourly Pension Plan and Fiduciaries Dean

G. Wilson and Richard A. McIntyre. These respondents were plaintiffs in

Civil Action No. 91-01629, The Blaw Knox Retirement Income Plan, et al. \

White Consolidated Industries, Inc., et al., which on appeal was docketed at

No. 92-3612

‘The text of 29 U.S.C. § 1369(a) 1s as follows:

If a principal purpose of any person in entering into any transaction 1s to

evade liability to which such person would be subject under this subtitle and

the transaction becomes effective within five years before the termination date

of the termination on which such liability would be based, then such person

and the members of such person's controlled group (determined as of the

termination date) shall be subject to lability under this subtitle in connection

with such termination as if such person were a contributing sponsor of the

terminated plan as of the termination date. This subsection shall not cause

any person to be liable uncer this subtitle in connection with such plan

termination for any increases or improvements in the connection with such

plan termination for any increases or improvements in the benefits provided

under the plan which are adopted after the date on which the transaction

referred to in the preceding sentence becomes effective

statutory section evidences a congressional intent that a trans-

action need not “become[_] effective” on the same day it is

“enter[ed] into.” App. 11.4

Because “becomes effective” was not defined in the statute,

and in context was ambiguous, the court properly concluded

that interpretation of this phrase “must be analyzed against the

background of the statute as a whole and its legislative pur-

pose.” App. 11. Accord, Crandon v. United States, 494 U.S. 152,

158 (1990). After reviewing the legislative history, the court

determined that Congress’ stated objective in enacting Section

1369 was “to prevent companies from transferring underfunded

plans to a weaker company in order to evade [its pension]

liability.” App. 14. The court reasoned that Congress intended

to relieve the transferor of liability for pension plan obligations

if, for a five year period, the financial strength of the transferee

primarily would sustain the pension plan obligations. App. | 3-

15. To accomplish this intent, Congress established an irrebut-

table presumption that was premised upon the survival of the

pension plans for five years under the financial stewardship of

the transferee. App. 13-15. The court concluded that it was

contrary to the intent of Congress to interpret “becomes effec-

tive” to commence the five year period of the transferee’s finan-

cial viability while WCI was paying approximately 80% of the

annual minimum funding requirements in each of the five years

following the closing date of the transaction. Specifically, the

Court of Appeals held that “becomes effective” means the date

upon which “the company that transferred a pension plan no

longer makes substantial pension contributions.” App. 14.

B.

The Court Of Appeals Read The Allegations Of The PBGC

Complaint Under § 1362 Against This Court's Precedents

On The Sham Transaction Doctrine And Properly Held That

The PBGC Complaint Stated A Cause Of Action

The Court of Appeals next considered the PBGC’s claim

that the transaction between WCI and Blaw Knox Corporation

4All citations to the Court of Appeals’ decision will refer to Pet:tioner’s

Appendix as follows “App. a

was a sham for the sole purpose of avoiding WCI’s termination

liability under Section 1362 of ERISA. App. 18-21. After

observing that the “sham transaction doctrine... dictates that

the substance and not the form of a transaction controls,” App.

18, the Court of Appeals applied the teachings of this Court to

the allegations made by the PBGC in the complaint. After com-

paring the allegations of the PBGC to the arguments of WCI,

App. 19, the court could not, as a matter of law, conclusively

discount the PBGC’s ability to establish that WCI’s sole moti-

vation was to avoid its pension liabilities. Accordingly, the

court held that the complaint sufficiently pled a cause of action

upon which relief could be granted. App. 21.

Ill. This Case Does Not Present An Important Question Of

Federal Law Which Warrants Review By This Court

A writ of certiorari should be issued when a case presents

this Court with an important question of federal law. Supreme

Court Rule 10.1(c). However, this Court does not grant a writ of

certiorari for every academically interesting question. Rather,

important questions of federal law transcend the “‘academic or

episodic.” Rice v. Sioux City Memorial Park Cemetery Inc., 349

U.S. 70, 79 (1955); See also United States v. Standard Oil Co.,

332 U.S. 301, 302 (1947) (“We granted certiorari because of the

novelty and importance of the principal question.’’) In addi-

tion, this Court has stated that it will only grant a writ of

certiorari in cases “involving principles the settlement of which

is of importance to the public, as distinguished from that of the

parties.” Layne & Bowler Corp. v. Western Well Works, Inc.,

261 U.S. 387, 393 (1923). Thus, the issue must be important to

the public at large, and not merely impact the parties to the

litigation.

A variety of factors determine whether a case presents an

important question of federal law. Among these factors are the

number of pending cases dealing with the same issue, the num-

ber of individuals affected by the decision and the affect of the

issue On the administration of a federal statute. See United

States v. Hall, 423 U.S. 161, 167 (1976) (seventy pending cases

in the federal courts dealt with the same tax issue); United

5

States v. Powell, 330 U.S. 238, 239 (1947) (“The cases are here

on petitions for writs of certiorari which we granted because of

the importance of determining the controlling principle for set-

tlement of the many claims of this character against the Gov-

ernment.”); Patterson v. Lamb, 329 U.S. 539 (1947) (claims of

thousands of draftees affected by the decision); United States v.

Ruzicka, 329 U.S. 287, 288 (1946) (““We brought this case here,

327 U.S. 776, because it raises questions of importance in the

administration of the Agricultural Marketing Agreement Act of

1937."); Rothensies v. Electric Storage Battery Co., 329 U.S.

296, 299 (1946) (“The gravity of this holding to the administra-

tion of the tax laws led us to grant certiorari.”) None of these

factors are present in the instant case.

First, WCI did not allege in its petition that there are any

cases pending in any federal courts which address this issue.

This is especially important given that only one other federal

court has interpreted Section 1369(a). See In re Doskosil, 130

B.R. 858 (Bankr. D. Kansas 1991). In Doskosil, the court held

that normal commercial transactions between the transferee

and transferor after the sale of a business and its pension plans

do not amount to transactions to evade pension liability under

Section 1369(a). The court instead defined these transactions as

those that transfer the “responsibility for meeting the funding

requirements of ERISA.” /d. at 868. Thus, the instant case is

the only case decided by, or pending in, any federal court which

challenges a transferee’s direct contributions to pension plans

during the five years after the transfer of those plans.

Second, even though this decision will affect the partici-

pants in the Plans, the PBGC and WCI, the Petitioner has not

stated, and cannot state, that this decision will have any impact

beyond these parties. Section 1369 took effect on January 1,

1986. Since that date, only the Plans, and the PBGC in the

instant case and in Doskosil have sought to enforce predecessor

liability through Section 1369. Given that this statute has not

been applied regularly to enforce predecessor liability, there is

no objective evidence of repeated use of Section 1369 to sup-

port an assertion that this issue will impact the public at large.

Because WCI has not demonstrated that the decision of the

6

Court of Appeals wili have any impact beyond the instant case,

this case does not warrant a writ of certiorari.

Finally, the decision by the Court of Appeals will not sig-

nificantly impact the administration of this statute. The Court

of Appeals’ ruling simply restores the bright line test established

by Congress in Section 1369. Under the reasoning of the deci-

sion, employers contemplating transferring pension plans will

scrupulously avoid any artifice that conceals the transferee’s

true financial viability. The clean break in pension plan finan-

cial support anticipated by Congress, and articulated by the

Court of Appeals, as the basis for the presumptive five year rule,

allows the PBGC to recover monies from predecessors who

should be held accountable when pension plans fail under the

stewardship of a financially weak transferee. Therefore, this

decision will promote the administration of this statute.

[V. The Court Of Appeals’ Decision Does Not Conflict With

Any United States Supreme Court Precedent

In its petition, WCI contends that the Court of Appeals’

decision conflicts with this Court’s decisions which created the

“sham transaction doctrine.” WCI Petition 26-27. For such a

conflict to justify review by this Court, the conflict must be

direct and apparent. For example, in Braen vy. Pfiefer Oil Trans-

portation Co., 361 U.S. 129, 130 (1959), the Court granted certi-

Orari because the court of appeals’ decision conflicted with a

specific holding of this Court on a limited issue of the interpre-

tation of the Jones Act. See also Army & Air Force Exchange

Service v. Sheehan, 456 U.S. 728, 733 (1982) (court of appeals

decision “appeared to be in conflict with our precedents.”’) Sim-

ilarly, in Schlude v. Commissioner, 372 U.S. 128, 129 (1963)

this Court granted certiorari because the court of appeals did

not correctly apply a specific Supreme Court decision. This

Court had previously remanded the case for application of its

decision. However, after receiving a second petition for writ of

certiorari, this Court stated that because the court of appeals’

ruling still “appeared to be in conflict with our precedents, we

granted certiorari.” /d. at 131. No such direct and apparent

conflict exists in the instant case.

7

Here, the Court of Appeals simply applied the sham trans-

action doctrine to WCI’s efforts to avoid plan termination lia-

bility under ERISA, Section 1362. 29 U.S.C. § 1362. Prior to the

enactment of Section 1369, Section 1362 addressed the liability

of contributing plan sponsors upon termination of a pension

plan. Specifically, Section 1362 states that contributing sponsors

at the time of the termination of the plan remain liable for any

outstanding pension liabilities. In these circumstances, the

court held that a transaction designed to hide a plan sponsor’s

contributions to a pension plan could be considered a “sham

transaction” if the complaint alleges that the sole motive of the

transaction was to avoid the statutorily imposed termination

liability. App. 20-21.

The court acknowledged that the sham transaction doc-

trine, which states that the substance and not the form of the

transaction governs, was developed by this Court through a line

of tax cases. See Diedrich v. Commissioner, 457 U.S. 191, 196

(1982); Knetsch v. United States, 364 U.S. 361 (1960). The court

found, after reviewing these cases, that the allegations of the

complaint were sufficient to state a claim premised on the doc-

trine. App. 18-19. Thus, the court held that “the PBGC’s claim

that the transfer was a sham will survive the motion to dis-

miss.” App. 20-21.

To reach this conclusion, the Court of Appeals compared

the definition of a sham transaction defined by its case law to

the definition articulated by this Court. Specifically, the court

compared the Third Circuit’s definition, which states that the

transaction must be “fictitious or... [have] no business pur-

pose or economic effect,” to this Court’s holding in Gregory v.

Helvering. App. 19. Citing Lerman v. Commissioner, 939 F.2d

44, 53 (3d Cir. 1990), cert. denied USS. , 112

S.Ct. 590 (1991). As observed by the Court of Appeals, this

Court in Gregory, “explicitly stated ... that the sole object and

accomplishment of [the transaction] was the consummation of

a preconceived plan, not to reorganize a business or any part of

a business, but to transfer a parcel of corporate shares to the

petitioner.” App. 19-20. Quoting Gregory v. Helvering, 293 U.S.

465, 469 (1935). Concluding that its formulation of the doctrine

8

in Lerman was consistent with this Court’s definition in Greg-

ory, the Court of Appeals proceeded to examine the allegations

of the complaint to determine if they sufficiently alleged a sham

transaction. App. 20-21.

WCI contends that the court, by not crediting its conten-

tion that the transaction had a legitimate business purpose,

misapplied this Court’s holding that a sham transaction cannot

have any business purpose. Specifically, WCI contends that the

motivation for the transaction was to eliminate the losses

incurred by the Blaw Knox divisions. However, as with any

motion to dismiss, the allegations of a complaint are to be

viewed most favorably to the plaintiff. See Scheuer v. Rhodes,

416 U.S. 232 (1974). Thus, the court stated, “[i]t is unclear from

the pleadings, however, whether or not getting rid of these oper-

ating losses was a factor in WCI’s decision to sell the businesses

and pension plans. WCI’s contention that one objective of the

sale was to dispose of an unprofitable operation is undermined

by the allegation that it summarily rejected any offer to buy the

businesses that required it to retain the pension plan liabilities.”

App. 20-21. In conclusion, the court held that “[b]ecause the

complaint alleges that WCI was motivated solely by a desire to

be relieved of pension liabilities, the PBGC’s claim that the

transfer was a sham will survive the motion to dismiss.” App.

21.

In view of the procedural posture of the case and the allega-

tions of the PBGC, the court properly held that the complaint

stated a cause of action. The Court of Appeals did not abridge

this Court’s precedent. Instead, the decision simply applied the

law as announced by the court. Accordingly, WCI’s argument is

unfounded and does not warrant granting a writ of certiorari.

V. This Decision Does Not Require The Extraordinary Exer-

cise of This Court’s Supervisory Power

This Court invokes its supervisory power to oversee the

administration of justice in the federal courts. See Hoffa y.

United States, 385 U.S. 293, 313 (1966). Thus, certiorari on this

9

ground is only appropriate when the Court is reviewing proce-

dural actions taken by federal courts that affect the administra-

tion of justice. See Thiel v. Southern Pacific Co., 328 U.S. 217

(1946) (certiorari granted to review administrative decision by a

district court to exclude hourly wage laborers from its jury

panels); Jn re McConnell, 370 U.S. 230, 232 (1962) (certiorari

granted to assure self-restraint of district judges in the use of

summary power for punishing contempt); McNabb y. United

States, 318 U.S. 332, 341 (1943) (“In the exercise of its supervi-

sory authority over the administration of criminal justice in the

federal courts, .. . this court has, from the very beginning of its

history, formulated rules of evidence to be applied in federal

criminal prosecutions.) Unlike these cases, the decision by the

Court of Appeals does not address any administrative issues or

directly review any similar actions taken by the district court.

Instead, in this case, the Court of Appeals simply rendered a

reasoned decision in an appeal from an order granting motions

to dismiss. The opinion adheres to accepted principles of statu-

tory interpretation and defines an ambiguous term in a statute.

Moreover, the opinion follows the decisions of this Court and

simply applies the sham transaction doctrine to an analogous

Situation to find that the PBGC complaint stated a cause of

action upon which relief may be granted. Nothing in the Court

of Appeals’ interpretation of Section 1369, nor in its application

of the sham transaction doctrine, requires the extraordinary

exercise of this Court’s power of supervision over the adminis-

tration of justice.

10

CONCLUSION

For the foregoing reasons, the Plans respectfully request

this Court to deny WCI’s Petition for Writ of Certiorari.

DATED: November 24, 1993

Respectfully submitted,

BaABST, CALLAND, CLEMENTS & ZOMNIR, P.C.

Two Gateway Center, 8th Floor

Pittsburgh, PA 15222

(412) 394-5400

By: _/s/ J. FRANK MCKENNa«, ESQUIRE

J. Frank McKenna, Esquire [PA-17361 ]*

Kenneth R. Bruce, Esquire [PA-41080]

Attorneys for Respondents The Blaw Knox

Retirement Income Plan, Blaw Knox Pension

Plan, Blaw Knox IAM Pension Plan, Blaw

Knox Equipment Pension Plan, Blaw Knox

Duraloy Pension Plan for Salaried Employees,

Blaw Knox Duraloy Hourly Pension Plan and

Fiduciaries Dean G. Wilson and Richard A.

MclIntrye

* Attorney of Record