Opinion ID: 421651
Heading Depth: 1
Heading Rank: 3

Heading: Reduction of Liability Under Theories of Indemnity and Contribution

Text: 14 The Ouimet Group's indemnity and contribution arguments reflect the same misperception of our earlier holding that commonly controlled entities constitute one employer for the purpose of termination liability. Underlying both of its contentions is the Group's continued assertion that there are two classes of defendants to PBGC's claims in this case, the direct employers of the plan participants and the remaining members of the Group, and that the former class has primary liability while the latter is merely secondarily liable. Thus, the Ouimet Group argues that it is entitled to indemnification to the full extent of the $386,515.32 in the bankrupts' estates. Under what it refers to as a contribution theory the Group offers two other possible allocations of liability. First, it maintains that the bankrupts' estates should be applied first to the liability and that the Group should be jointly and severally liable for the balance. It appears that this approach would result in the same allocation as the indemnity theory: the bankrupts' estates would be fully exhausted before the solvent companies could be held liable. In the alternative the Group argues for an allocation based on the comparative benefits yielded by the plan. It measures the benefits a business realizes from a pension plan by the number of months during which that business was connected with the plan. Given that the plan existed for 190 months and that Avon became affiliated with the Group after 112 of these months, the Group suggests that 112/190 of the liability be allocated to Avon and the remainder to the Group. 15 As often happens, these arguments confuse the concepts of indemnification and contribution. See W. Prosser, Law of Torts 310 (4th ed. 1971). To the extent that the Group seeks an allocation which requires each entity to pay its proportionate share of the liability it is requesting a right of contribution. See id. The notions of primary and secondary liability which underlie the Group's claims, however, suggest that it is requesting indemnification. In any event, the real problem here is to allocate a liability which has been created by a federal statute. We find guidance in solving this problem in two recent Supreme Court cases-- Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 101 S.Ct. 2061, 68 L.Ed.2d 500 (1981), and Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 101 S.Ct. 1571, 67 L.Ed.2d 750 (1981). Not surprisingly, these cases suggest that we first determine if the statute, either expressly or by implication, provides the method of allocation. See Texas Industries, 51 U.S. at 638, 101 S.Ct. at 2065 (A right to contribution under the antitrust laws may arise in one of the following ways: first, through the affirmative creation of a right of action by Congress, either expressly or by clear implication; or, second, through the power of the federal courts to fashion a federal common law of contribution.); Northwest Airlines, 451 U.S. at 90-91, 101 S.Ct. at 1580 (similar statement with respect to the question of a right to contribution under the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964). Factors relevant to the analysis include statutory language, legislative history, and policy considerations. Id. at 89, 95, 101 S.Ct. at 1582. 16 The allocation to be made in this case is really one between the solvent members of the Ouimet Group and the creditors of the bankrupt companies, Avon and Tenn-ERO. The creditors' claims significantly exceed the assets available in the bankruptcy estates and to the extent that assets from these estates are used to satisfy PBGC's claim there will be an even smaller amount available to creditors. Hints of a solution to this allocation problem along the lines suggested by the Ouimet Group can be found in our first Ouimet opinion as well as in that of the district court. In an introductory discussion of the controlled group liability issue we stated that if the statute limited liability to the direct employer, Avon, then PBGC [would] recover[ ] nothing and a dividend [would] be paid to the creditors. Ouimet, 630 F.2d at 6. If the statute instead was construed to extend liability to other members of the Ouimet Group, we foresaw that it would be probable that PBGC will receive all of the bankrupts' assets with the creditors receiving nothing. Id. Similarly, the district court speculated that [b]y applying the net worth of the entire controlled group, the bankruptcy estate will probably be exhausted, and the unsecured creditors will receive little or no dividend. Ouimet, 470 F.Supp. at 953 n. 19. 17 Now with the issue squarely before us, we do not think that the statutory provisions treating commonly controlled businesses as one employer should operate--by using the entire Group's net worth in computing the thirty percent ceiling--to increase the liability amount and then allow the Group to pass as much of this increase as possible along to creditors of the bankrupts. It is true that the statute does not explicitly allocate liability among controlled group members which, under section 1301(b), are to be treated as a single employer. Ouimet, 470 F.Supp. at 953-54 n. 20. It is also true that when Congress wanted to allocate liability among employers participating in plans other than single-employer plans it did so explicitly. See, e.g., 29 U.S.C. § 1363 (1976 & Supp. V 1981) (providing a specific formula for allocating liability to the withdrawing employer and stating that this formula may be overridden by an indemnity agreement in effect among all other employers under the plan). These facts, however, do not negate the conclusion that allocation of the termination liability in this case to the creditors of Avon and Tenn-ERO cuts against the language and policies of the statutory scheme. 18 The thirty percent of net worth limitation clearly appears to eliminate the bankruptcy estates as a source of payment to PBGC because the estates have zero, actually negative, net worth. The bankruptcy judge recognized this but apparently could not reconcile it with the special priority status the PBGC claim receives in bankruptcy. The simple answer is that the provisions of 29 U.S.C. § 1368 (1976 & Supp. V 1981), which in essence create a lien similar to a tax lien, evidence the intent of Congress that as between PBGC and the bankrupt employer's creditors the termination liability should be absorbed by the creditors. These provisions do not support the conclusion that as between controlled affiliates who are to be treated as a single employer and the direct employer's creditors the loss is to be absorbed by the creditors. 19 Congress' intent in enacting the net worth ceiling was to avoid imposing extreme economic hardship on employers and driving them to the brink of bankruptcy. Concomitantly, Congress also sought to avoid discouraging the establishment or liberalization of pension plans. H.R.Rep. No. 533, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 4639, 4654; S.Rep. No. 127, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 4838, 4862. The seriousness with which Congress considered these objectives is demonstrated by the fact that the conference committee reduced the ceiling to thirty percent of net worth from the fifty percent originally proposed in the House and Senate bills. There is simply no provision in the statute which authorizes PBGC to impose termination liability on an insolvent entity. The bankruptcy judge's approach of substituting assets for net worth reads more into the statute than we are willing to accept. 20 Furthermore, the conclusion that the solvent members of the Ouimet Group, and not Avon's creditors, should bear responsibility for the liability to PBGC follows from the objectives of imposing termination liability. These objectives, to deter employers from making unrealistic promises to employees and to protect against abuse of the termination insurance program, are illuminated by the following passage from the legislative history: 21 Concern was expressed to the committee that in the absence of appropriate safeguards under an insurance system, an employer might establish or amend a plan to provide substantial benefits with the realization that its funding may be inadequate to pay the benefits called for. Such an employer might, it was argued, rely on the insurance as the backup which enables it to be more generous in promising pension benefits to meet labor demands than would be the case if it knew that the benefits would have to be paid for entirely out of the assets of the employer. 22 S.Rep. No. 383, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 4890, 4971. Instead of relying on the insurance program as a backup, the Ouimet Group is trying to rely as much as possible on Avon's creditors. This conflicts with the congressional intent of holding employers accountable for the pension benefits they promise to ensure that employees can safely rely on these promises in their retirement planning. This type of accountability is central to ERISA's primary goal of protecting employees' benefits. See A-T-O, Inc. v. Pension Benefit Guaranty Corp., 634 F.2d 1013, 1023 (6th Cir.1980); see also Comment, Extending ERISA Liability for Pension Plan Terminations to Controlled Group Members: Pension Benefit Guaranty Corp. v. Ouimet Corp., 61 B.U.L.Rev. 477, 489-502 (1981) (maintaining that holding controlled group members liable for plan terminations fosters the statute's insurance objective and that such seemingly harsh treatment of employers does not produce the disincentives Congress sought to avoid). As we have indicated, the Ouimet Group participated in labor negotiations that resulted in promises of benefit increases and benefitted from Avon's plan at the very least to the extent of deductions on its consolidated income tax returns. Under these circumstances we think the statute clearly requires that PBGC's claim be satisfied out of the Group's net worth, leaving the entire amount of the bankrupts' estates for the satisfaction of creditors. 23 On the surface this result may appear to disregard unduly the legal separateness of the corporate entities involved. 9 There is precedent, however, for piercing the corporate veil in bankruptcy situations. Under its general equitable powers a bankruptcy court may substantially consolidate the assets and liabilities of various entities. Substantial consolidations will usually, but not always, involve only debtors and be granted if absolutely necessary for achieving reorganization or protecting creditors' economic interests. See generally 5 Collier on Bankruptcy p 1100.06 (15th ed. 1979). Some of the facts a court will look for in deciding whether to grant a substantive consolidation include the parent owning a majority of the subsidiary's stock, the entities having common officers or directors, the subsidiary being grossly undercapitalized, the subsidiary transacting business solely with the parent, and both entities disregarding the legal requirements of the subsidiary as a separate corporation. Id. at 1100-35 (quoting Fish v. East, 114 F.2d 177, 191 (10th Cir.1940)); cf. DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 684-90 (4th Cir.1976) (citing similar factors in concluding that officer/shareholder of indebted corporation could be held individually liable on the corporation's debt). 24 There is no need to show that any or all of these factors are present to justify holding the solvent members of the Ouimet Group responsible for the entire liability in this case. Avon's corporate veil was, in effect, pierced by Congress when it enacted the termination liability provisions of ERISA. The corporate form is a creation of state law and states may impose stringent limitations on attempts to disregard it; the factors courts consider in deciding whether to grant substantive consolidations reflect such limitations. These limitations, however, do not constrict a federal statute regulating interstate commerce for the purpose of effectuating certain social policies. See Sebastopol Meat Co. v. Secretary of Agriculture, 440 F.2d 983, 985 (9th Cir.1971) (state limitations on the alter ego doctrine need not be accepted in an agency's application of federal regulatory statutes); Corn Products Refining Co. v. Benson, 232 F.2d 554, 565 (2d Cir.1956) (existence of separate corporate entity may be disregarded when necessary to further the purpose of a federal regulatory statute). Thus, concerns for corporate separateness are secondary to what we view as the mandate of ERISA in this case.