:: Employer’s Agreements With Union Ineffectual To Prevent Imposition of Withdrawal Liability

SUPERVALU’s main argument is that § 4212(c) does not apply to bona fide collective bargaining agreements or other transactions that are negotiated at arm’s length. Essentially SUPERVALU is suggesting, and the District Court agreed, that bona fide, arm’s length transactions are exempt. We disagree. Supervalu, Inc. v. Board of Trustees of Southwestern Pa. and Supervalu, Inc. v. Board of Trustees of Southwestern Pa. and Western Md. Area Teamsters and Employers Pension Fund, — F.3d —-, 2007 WL 2429345 (C.A.3 (Pa.)) (August 29, 2007)

In applying ERISA, courts have a nasty predilection for unhinging agreements outside the statutory scheme. Supervalu, Inc. provides an interesting example in the context of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), 29 U.S.C. § 1381 et seq. and a claim for $4,316,996 of assessed withdrawal liability.

In this case, the employer, Supervalue and the Teamsters Local 872 (the “Union”) had CBAs which required the employer to contribute to the Southwestern Pennsylvania and Western Maryland Area Teamsters and Employers Pension Fund (the “Fund”) for employees at a Belle Vernon, Pennsylvania facility.

Decision To Close Facility

At the beginning of 2002, Supervalue decided to close the Belle Vernon facility. On March 14, 2002, it informed its employees of the decision, and that the closure would occur by late summer 2002. The employer and the Union engaged in negotiations from March until May 2002 regarding the effects of the closing.

Withdrawal Liability

The negotiations included discussions of the employer’s potential withdrawal liability to the Fund. If the withdrawal occurred after June 30, 2002, during the 2002-2003 plan year, the employer would incur significant withdrawal liability based on the unfunded vested benefits that would exist at the end of the 2001-2002 plan year.

The Termination Agreement Idea

Supervalu proposed that the CBAs, which were set to expire on January 31, 2003, be terminated and replaced prior to June 30, 2002. The employer evidently anticipated that the early termination would prevent it from being assessed withdrawal liability for the 2002-2003 plan year (estimated at the time to be in the range of $1 to $1.5 million). If the Union agreed to the early termination, SUPERVALU would make additional payments to its employees as consideration for the agreement.

It’s A Deal

In May 2002, the employer and the union signed a new agreement (the “Termination Agreement”), upon these terms:

Under the Termination Agreement, the prior CBAs terminated at 11:59 p.m. on June 29, 2002. The Termination Agreement was identical to the prior CBAs, except that the provisions regarding SUPERVALU’s contributions to the Fund were deleted. Additionally, the new terms provided that employees who were entitled to severance payments would receive a lump sum of $2,600 and that employees that continued working after June 30, 2002, would receive a $2.50 per hour salary

The Fund Disagrees

When the employer submitted its final contributions to the Fund on June 26, 2002, it informed the Fund that its obligations to contribute ceased on June 29, when it would withdraw as a participating employer from the Fund. The deal began to unwind, however, as the Fund took issue with the employer’s position:

As SUPERVALU withdrew during the 2001-2002 plan year, it believed that it would not incur any withdrawal liability. However, in February 2003, the Fund sent SUPERVALU a letter assessing $4,316,996 in withdrawal liability against SUPERVALU because it withdrew during the 2002-2003 plan year. See 29 U.S.C. § 1382. The letter explained that after conducting an investigation, the Fund believed that SUPERVALU entered the Termination Agreement with a principal purpose of evading or avoiding withdrawal liability in violation of ERISA § 4212(c).

According to the Fund, even though the facility did not close until July 27, 2002, the employer on June 29, 2002, in order to avoid its share of the unfunded vested benefits that were expected to exist at the end of the 2001-2002 plan year. Thus, the Fund treated SUPERVALU as having withdrawn during the 2002-2003 plan year and ignored the June 29, 2002 date in the Termination Agreement in accordance with § 4212(c).

The Third Circuit Sides With The Fund

The main issue before the Third Circuit was whether the termination agreements violated ERISA § 4212(c). The Court held that it did.

Section 4212(c) provides that “[i]f a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability shall be determined and collected) without regard to such transaction.” 29 U.S.C. § 1392(c). In reversing the district court’s decision, the Third Circuit opined:

There is no doubt that SUPERVALU had the intent required by the statute. SUPERVALU was aware of the significant withdrawal liability that it would incur by withdrawing during the 2002-2003 plan year when the facility closed and all covered operations ceased. Based on its desire to avoid such liability, SUPERVALU offered enhanced severance benefits and wages to the Union’s members as consideration for the Union’s agreement to enter the Termination Agreement. By entering the Termination Agreement, SUPERVALU withdrew from the Fund during the 2001-2002 plan year, which enabled it to avoid incurring the significant liability that existed for withdrawal during the 2002-2003 plan year. The record indicates that the only reason that SUPERVALU chose to renegotiate the CBAs less than a month before the facility closed was to bring its withdrawal date within the 2001-2002 plan year in order to avoid withdrawal liability for the 2002-2003 plan year.

Thus, “[a]s there was no other reason for SUPERVALU to enter the Termination Agreement, its intention to evade or avoid withdrawal liability was a principal purpose, if not its only purpose.

Note: MPPAA was enacted out of a concern that ERISA did not adequately protect multiemployer pension plans from the adverse consequences that result when individual employers terminate their participation or withdraw from multiemployer plans. Congress intended that the legislation would prevent employers from withdrawing from a multiemployer pension plan without paying their share of unfunded, vested benefit liability, thereby threatening the solvency of such plans.

Statutory Terms Over Agreement - The Court noted:

SUPERVALU’s main argument is that § 4212(c) does not apply to bona fide collective bargaining agreements or other transactions that are negotiated at arm’s length. Essentially SUPERVALU is suggesting, and the District Court agreed, that bona fide, arm’s length transactions are exempt. We disagree. As discussed above, § 4212(c) is unambiguous. The text in no way suggests that it only applies to sham or fraudulent transactions.

The further problem in situations such as this lies in the fact that the employer has presumably already paid monies to employees purportedly in lieu of the ERISA statutory liability – the opinion, of course, leaves unaddressed that aspect of the transaction.

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