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Uncertain boundaries

Japanese parent company may be responsible for U.S. pension liabilities

By Donalee Moulton

July 20 2012 issue

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The world’s boundaries are shrinking, and a recent decision from south of the border may make them even smaller.

In Pension Benefit Guaranty v. Asahi Tec Corporation, the United States District Court for the District of Columbia found that a Japanese parent company may be legally responsible for the pension-related liabilities of its American subsidiary.

Under U.S. law, if a pension plan is terminated and underfunded, a member of what is legally known as a controlled group, which includes the parent company and subsidiaries, may be held accountable. “What we haven’t seen to date is this being applied to companies outside the U.S. This decision changes that,” said Mark Firman, an associate in McCarthy Tétrault LLP’s pensions, benefits and executive compensation group in Toronto.

“The mere fact that you own or control a U.S. company could put you in reach of this decision. It is very broad-based,” he added.

Although there has been no finding of liability by the court yet, the decision is reason for unease, lawyers say. “Based on prior case law, companies would have thought they were not exposed. Here the court says there is jurisdiction,” said Lynne Lacoursičre, a member of the pension and employment practice group with Torys LLP in New York and Toronto.

“Canadian companies looking to acquire U.S. companies with defined benefit pensions should pay attention to this.”

In this case, the defendant Asahi Tec Corp., of Japan, acquired a U.S.-based firm, Metaldyne Corp., in 2007. Two years later, Metaldyne filed for bankruptcy protection. In the aftermath of the filing, Pension Benefit Guaranty Corp. (PBGC), a U.S. federal government agency created by the Employee Retirement Income Security Act (ERISA) to support private sector defined-benefit pension plans, terminated the pension plan. First, however, it approached Asahi to take over the plan. Asahi said no.

The PBGC then filed a complaint against the Japanese parent in November 2010 for about $175-million (all figures U.S.), seeking recovery of the full amount of the pension plan’s liabilities, termination premiums and litigation costs. Five months later, Asahi filed a motion to dismiss the PBGC’s claim, arguing lack of personal jurisdiction.

PBGC’s position was that, with its purchase, Asahi became a controlled group member of Metaldyne, and was therefore liable for the termination of Metaldyne’s pension plan and its premiums. Asahi contended unsuccessfully that the court cannot exercise jurisdiction over the foreign corporation for the acts of its U.S. subsidiary.

It was an argument that had held up before. In particular, Asahi relied on two cases from the seventh circuit court that found merely being the parent company and, thus, subject to liability under the U.S. Employee Retirement Income Security Act does not necessarily confer jurisdiction. The most recent of those cases, GCIU-Emp’r Ret. Fund v. Goldfarb Corp., 565 F.3d 1018 (7th Cir. 2009), involved Toronto-based Goldfarb Corp.

Justice Amy Jackson was not swayed by the earlier legal reasoning. “[T]hose decisions are not controlling authority here,” she stated, “and the circumstances that gave rise to those opinions are distinguishable from the facts presented in this case.”

For many lawyers on both sides of the border, this will be seen as a surprising conclusion for the court to reach.

“The case law, by and large, was seen to be on Asahi Tec’s side,” Firman said. “However, the court determined Asahi Tec had acquired Metaldyne with its ‘eyes wide open.’ ”

Specifically, Justice Jackson found that “the jurisdictional discovery revealed that [the] defendant undertook the acquisition after probing and then being specifically informed about the possibility of controlled group liability.”

She said that illegal behavior is not an issue in this case, but possession is. “The cause of action here is based on mere ownership of the company at the time of termination — not on any wrongful conduct on the defendant’s behalf — and the alleged liability is a direct, joint and several liability that is imposed under ERISA and that comes about as a consequence of owning a U.S. company that has a tax qualified Pension Plan.

“Since the defendant’s purposeful contacts with the forum include becoming an owner and assuming that liability, and the litigation arises directly out of those specific contacts, the Court finds that plaintiff has made a prima facie showing of specific jurisdiction,” Justice Jackson concluded.

On the road to determining liability, the district court’s decision is a preliminary one, but it sends a clear message. “This will be viewed as giving the PBGC more reach,” Lacoursičre said. “Just by being part of the controlled group will give them more jurisdiction.

“The PBGC has long tried to assert jurisdiction,” she added. “They’re looking to satisfy some of the underfunded [pension] liability.”

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