470 F. Supp. 945

PENSION BENEFIT GUARANTY CORPORATION, Plaintiff, and United Rubber, Cork, Linoleum and Plastic Workers of America, Solomon, Reddix, and Alex Williams, Plaintiff-Intervenors, v. OUIMET CORPORATION, Ouimet Stay & Leather Company, Ouimet Welting Company, Emil R. Ouimet Wareham Trust, Avon Sole Company, Tenn-Ero Corporation and Herbert Kahn, Trustee, Defendants.

Civ. A. Nos. 76-1314-T, 77-2005-T.

United States District Court, D. Massachusetts.

March 22, 1979.

*946Paul F. Ware, Jr., Goodwin, Procter & Hoar, Boston, Mass., Judith F. Mazo, Barry Slevin, Pension Benefit Guaranty Corp., Washington, D. C., for Pension Benefit Guaranty Corp.

*947Sidney Werlin, Friedman & Atherton, Richard E. Mikels, Cohn, Riemer & Pollack, Paul P. Daley, Hale & Dorr, Boston, Mass., for the trustee in bankruptcy.

Richard Maloney, Maloney, Williams & Baer, Boston, Mass., for the Ouimet Group.

Bertram Diamond, Stamford, Conn., Harold B. Roitman, Boston, Mass., for intervenors, URW, Reddix and Williams.

OPINION

TAURO, District Judge.

At issue here is whether the defendants, several business entities under common control,1 may be held jointly and severally liable for the termination of an underfunded pension plan by two of their bankrupt affiliates. The plaintiff is the Pension Benefit Guaranty Corporation (PBGC), a creature of Congress born under the provisions of the Employment Retirement Income Security Act (ERISA), 29 U.S.C. § 1302. The prime purpose of that Act is to insure that workers receive the benefits to which they are entitled under private pension plans established for them by their employers. Congress recognized that workers had been unfairly subjected to the loss of expected benefits when underfunded plans terminated. Under ERISA, Congress gave the PBGC the responsibility of administering terminated pension plans to the end that affected workers receive anticipated pension benefits promised them by their employers. It is the PBGC’s attempt to administer certain terminated pension plans that underlies this litigation.2

I.

PROCEDURAL BACKGROUND

PBGC began this action in April, 1976, pursuant to ERISA, to collect the amount for which the defendant Ouimet companies are allegedly liable as a result of the termination of a pension plan by their two affiliates, the Avon Sole Company (Avon) and the Tenn-ERO corporation (Tenn-ERO). Those two corporations had been adjudicated bankrupt on March 22,1976. On August 20,1976, the case was referred to the Bankruptcy Judge sitting as a Master pursuant to Fed.R.Civ.P. 53.

In his report, the Bankruptcy Judge concluded that section 1362 of ERISA3 permitted the PBGC to obtain reimbursement only from the direct employers, Avon and Tenn-ERO. The other members of the controlled group4 were held to be free from liability arising out of the termination of Avon/Tenn-ERO’s pension plan. The Bankruptcy Judge also determined that *948Avon and Tenn-ERO were not liable to the PBGC because they had no net worth.5

PBGC subsequently appealed the rulings of the Bankruptcy Judge to this court and has also moved to: (1) modify the Master’s Report insofar as it finds no liability on the part of the defendant companies; (2) recommit the case to the Master for findings relative to the net worth of the Ouimet controlled group; and (3) enter partial summary judgment for PBGC.

II.

FACTUAL BACKGROUND

Avon operated a plant in Massachusetts until March, 1975. In 1973, it formed Tenn-ERO, a wholly owned subsidiary. The companies experienced severe operating losses and on March 22, 1976, were adjudicated bankrupts.

As of the time Avon’s Massachusetts plant was closed in 1975, the company was a party to a pension plan agreement, dated May 4, 1959, covering its unionized employees. When Avon shut down its plant, it notified PBGC, as required by ERISA,6 that it would soon discontinue operations in Massachusetts and would be required to terminate its pension plan.

Through no illegal or improper conduct on Avon’s part, its plan was underfunded when terminated. The primary reasons for the underfunding were that the market value had fallen on certain of the investments comprising plan assets and that the amortization of past underfunded liabilities was not yet complete. See 29 U.S.C. § 1082.

III.

THE CONTROLLED GROUP

The ownership picture of the defendant companies, outlined in footnote 1 supra, has significance because of PBGC’s position that each of them may be held to make good the deficiencies of the Avon/Tenn-ERO pension plan.7 PBGC’s theory is that, for purposes of section 1362 liability, the term “employer” includes not only the direct employer of the covered employees, but also all trades or businesses under common control with the direct employer.

At a hearing held before this court on March 6, 1978, the parties agreed that Ouimet, Stay and Welting are a controlled group as that term is defined in the IRC. They also agreed that Brockton should not be so included. They dispute, however, whether the Trust may be considered a member of the controlled group.

Defendants seek to have the Trust excluded from the controlled group on the ground that it is not a trade or business within the meaning of section 4001(b) of ERISA, 29 U.S.C. § 1301(b).8 The Trust, by *949its terms, is a typical Massachusetts business trust, authorizing the operation of a profit sharing enterprise business. See Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 (1935). Indeed, the Trust’s tax returns show it to be engaged in the real estate business, One of its corporate affiliates, Stay, has a five year lease on a parcel of improved real estate owned and managed by the Trust.

Defendants argue further that section 1301(b) applies only to trades or businesses with employees, and because the Trust has no employees, it may not be deemed an employer. That argument depends on tortured statutory interpretation. The first sentence of section 1301(b) makes it clear that the Trust could be included in the controlled group as an employer although it may have no employees:

An individual who owns the entire interest in an unincorporated trade or business is treated as his own employer,

Emil Ouimet, who owns 100% of the Trust, would be considered his own employer. This court therefore holds that section 1301(b) includes all trades or businesses that are under common control, regardless of whether they have employees.

Given the parties’ stipulation that Brock-ton should be excluded, and the fact that Stay owns only 50% of that company,9 this court finds that the Trust, Stay, Welting, Ouimet and Avon/Tenn-ERO are all members of the same controlled group of businesses.

IV.

CONTROLLED GROUP LIABILITY UNDER ERISA

The issue of controlled group liability for termination of underfunded pension plans is one of first impression. Analysis of the statute and review of the legislative history10 leads this court to conclude that when one member of a controlled group terminates an underfunded pension plan, the entire group may be held liable by the PBGC for purposes of reimbursement under section 1362 of ERISA,

A) The Statute

As the governmental agency in charge of administering the statutory plan of ERISA, the PBGC has interpreted section 1362 as imposing liability on all trades and businesses under common control when an employer within the group terminates an underfunded plan. That determination is subject to challenge and judicial review. 29 U.S.C. § 1303(f); 5 U.S.C. §§ 701, 702.11 A *950reviewing court must be guided by the construction given a statute by the agency charged with its execution, unless there are compelling indications that it is wrong. Columbia Broadcasting System, Inc. v. Democratic National Committee, 412 U.S. 94, 121, 93 S.Ct. 2080, 36 L.Ed.2d 772 (1973). Here there are no such indications. Indeed, strong support for the agency’s interpretation can be found on the face of the statute itself.

The second sentence of 29 U.S.C. § 1301(b) states:

For purposes of this subchapter, under regulations prescribed by the corporation, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer (emphasis added).12

The provisions of section 1301 are contained in the same subchapter as are those of section 1362, the section imposing liability for reimbursement upon an employer who maintains an underfunded plan at the time of termination. The PBGC argues that section 1301(b) defines “employer” as that term is used in section 1362. Under this theory, the entire control group would be an employer for purposes of section 1362 liability, regardless of whether each member of the group actually contributed to the pension plan. Thus, all members of the controlled group would be potentially liable, jointly and severally, should an affiliate terminate an underfunded plan.

Defendants urge contrary interpretations of sections 1301(b) and 1362.13 They start by noting that, under section 1362, an employer must “maintain” a plan in order to be held liable. Maintaining a plan is viewed by defendants as being synonymous with contributing to a plan. Defendants conclude, therefore, that because members of the controlled group in this case did not contribute to the terminated plan, they cannot be held liable under section 1362.

This argument hinges upon defendants’ contention that section 1301(b) is not a definition of “employer” for the purposes of section 1362, but was merely intended to supplement a provision in section 1301(a). Defendants’ theory is based upon the following rationale. Section 1301(a)(3) of ER-ISA provides that a “multi-employer plan” means a “multi-employer plan” as defined in section 414(f) of the IRC. That IRC provision defines a multi-employer plan as one to which more than a single employer is required to contribute.14 A significant “special rule” in that section provides, however, that all corporations which are members of a controlled group of corporations shall be deemed to be one employer. 26 U.S.C. § 414(f)(2)(B). Defendants argue that the purpose of section 1301(b) is to modify section 1301(a) by extending the “special rule” enunciated in section 414(f)(2)(B), to the end that all members of a controlled group, whether or not incorporated, are deemed to be one employer.

Under defendants’ theory, therefore, section 1301(b) does not abrogate the section 1362 requirement that a member of a common controlled group must “maintain” a plan in order to be held liable. The controlled group defendants in this case did not contribute to the Avon plan. They argue, therefore, that they did not “maintain” that *951plan and so have no section 1362 termination liability.

Defendants’ interpretations of sections 1301(b) and 1362 fall short for three reasons. First, section 1301, in both the codified and uncodified versions, is labelled as a definitional section. It is difficult to accept the theory that Congress fleshed out the definitions contained in section 1301(a), by adding a separate subsection, 1301(b), rather than simply adding necessary language to section 1301(a).

Second, the definition at issue in 1301(b) is prefaced by the language “For purposes of this subchapter. . . . ” (emphasis added). This clear, unequivocal explanatory phrase supports PBGC’s contention that the definitions of section 1301(b) were intended to apply to the entire subchapter, and not merely as a supplement to a definition in section 1301(a). Defendants read “[f]or the purposes of this subchapter” to mean “[f]or the purposes of this section.” In doing so, they overindulge themselves with poetic license.

Finally, it is by no means apparent that the word “maintain" means only “contribute.” Regrettably, “maintain” is not defined in the statute. Defendants, however, rely upon an earlier version of section 1362, proposed by the House of Representatives, in support of the argument that the terms “maintain” and “contribute” were intended to be interchangeable.

SEC. 414 (a) Subject to subsection (e), where the employer or employers contributing to the terminating plan or who terminated the plan are not insolvent . such employer or employers (or any successor in interest to such employer or employers) shall be liable to reimburse the Corporation [PBGC] for any insurance benefits paid by the Corporation

H.R. 2, 93d Cong., 2d Sess. § 414(a), 120 Cong.Rec. 4733 (1974) (emphasis added).15

Actually, that bit of legislative history cuts the other way. The fact that Congress expressly substituted the word “maintain” for the word “contributing” in the final draft of section 1362 serves to undermine defendants’ claim that the two terms are synonymous. It is reasonable to infer that the substitution was substantive rather than merely cosmetic. This court interprets the substitution as being a recognition by Congress that it would be inconsistent to impose liability on a controlled group under section 1301, while at the same time limiting liability under section 1362 to those who actually contribute to a pension plan.16

Another argument advanced by defendants is that to incorporate by reference the definition in section 1301(b) into section 1362(a) would render superfluous subsection (d) of 1362. The latter subsection extends liability to successor corporations when the direct employer has ceased to exist by virtue of a reorganization, merger, consolidation or liquidation into a parent corporation. Under the view taken by defendants, this subsection is unnecessary if the term “employer,” as used in section 1362(b), already includes both a subsidiary and its parent. Defendants’ argument ignores, however, the fact that the term “parent” is not defined directly in ERISA. Rather, section 1563(a) of • the Internal Revenue Code, which is indirectly referenced in section *9521301(b) of ERISA,17 requires that a parent own at least 80% of the voting stock of a corporation for that combination to qualify as being controlled. Because section 1301(b) and section 1362(b) impose liability only upon controlled groups, and not parents, a parent cannot qualify as a single employer of a controlled group under sections 1301(b) and 1362(b) unless it owns at least 80% of its subsidiary’s stock. Other Treasury regulations, however, specifically define “parent” as an entity which owns as little as 50% of the subsidiary’s stock. See, e. g., Treas.Reg. 1.351-1(c)(4). Thus, section 1362(d)(2) does have independent significance in that it would trigger termination liability if a parent owned less than 80% of a subsidiary’s stock, and the other requirements of that subsection were satisfied. The defendants, therefore, are incorrect in their contention that the PBGC’s interpretation of Title IV would deprive section 1362(d)(2) of any substantial meaning.

A further argument advanced by defendants is that PBGC’s interpretation of section 1301(b) is incompatible with section 1107(d)(7) of ERISA.18 That section limits the percentage of employee pension funds that may be invested in the securities or real property of employer or employer-affiliates. The term employer-affiliate is defined as,

a member of any controlled group of corporations ... of which the employer who maintains the plan is a member.
29 U.S.C. § 1107(d)(7).

This definition, however, does not conflict with the PBGC’s view that the term “employer,” as used in section 1362, includes controlled group affiliates of the direct employer. Section 1301(b) explicitly defines the term “employer” for the purposes of Title IV of the Act, which includes section 1362. Section 1107 is not contained in Title IV. A facially inconsistent definition of “employer” or “employer affiliate” contained in another Title of ERISA has little relevance to the provisions of Title IV which contains its own definitions of those terms.

Defendants assert that it would be unjust to hold them liable for a terminated plan to which they do not individually contribute because the Internal Revenue Code does not permit anyone but the direct employer to take deductions for contributions made to a pension plan.

Section 404(a) of the IRC, provides that, subject to certain limitations, contributions paid by an employer to an employee pension plan are deductible. Subsection (g) of 404 states that,

For purposes of this section any amount paid by an employer under section 4062 ... or 4064, [29 U.S.C. §§ 1362, 1364] of the Employee Retirement Income Security Act of 1974 shall be treated as a contribution to which this section applies by such employer to or under a stock bonus, pension, profit-sharing, or annuity plan.

Although this subsection clearly covers termination liability payments under ERI-SA, defendants assert that this IRC provision does not allow an affiliated employer to deduct contributions made to a pension plan covering the employees of another member of a controlled group. In support of that interpretation they point to Revenue Ruling 69-35, 1969--1 C.B. 117, 118, which states:

[A]mounts contributed under this plan by the corporation that is not the employer of those benefiting from the contribution are not deductible under section 404 of the Code unless they constitute ‘make-up’ contributions within the purview of section 404(a)(3)(B) and then only to the extent therein provided.

This ruling, however, was handed down in 1969, five years prior to the passage of ERISA, and clearly reflects the concern of the Treasury Department that affiliated corporations might vary annual contributions to a pension plan solely to maximize *953favorable tax consequences. Prior to ERI-SA, therefore, the Treasury Department did not allow affiliates to make tax deductible contributions unless they qualified as employers under the relevant provisions of the IRC.

With the enactment of ERISA in 1974, however, the Treasury Department modified its interpretation of section 404 of the IRC. In a letter to the PBGC, the Treasury Department has stated that reimbursement payments required to be made to the PBGC by an affiliate that is considered an employer under sections 1362 or 1364 by application of section 1301(b), may be deducted pursuant to section 404(g) of the Code. The letter notes that section 404(g) is limited by its literal terms to payments made to the PBGC. It goes on to state that the Internal Revenue Service agrees with the Treasury Department’s interpretation of section 404(g). Thus, under the view taken by three government entities, the PBGC, the Treasury Department, and the Internal Revenue Service, payments made by a controlled group affiliate to the PBGC in response to ERISA termination liability are tax deductible. The IRC, therefore, recognizes the potential burden of imposing nondeductible termination liability upon a member of a controlled group, and makes provision to ease that burden.19

B) Legislative History

Although this court finds that the statutory language of ERISA is relatively clear and unambiguous, a review of the legislative history in this case only reinforces the court’s conclusion. ERISA imposes termination liability on all affiliates of a controlled group. Congressional intent is expressed clearly in the Report of the Conference Committee:

In determining the employer who may be liable for the insurance coverage losses of the corporation [PBGC], all trades or businesses (whether or not incorporated) under common control are to be treated as a single employer.

H.Conf.Rep.No.93 1280, 93d Cong., 2d Sess. 376 (1974), reprinted in 1974 U.S.Cong.Code & Admin.News pp. 4639, 5155.

The conferees again emphasized the controlled group concept when they discussed the termination liability provisions of 29 U.S.C. § 1364. Under section 1364, termination liability was extended to multi-employer plans, with the controlled group treated as a single employer for the purposes of determining the liability of each individual employer.20 As the Report noted:

In this regard, it should be noted that the affiliated employer rules are to apply in *954this area. That is, if one member of an affiliated group has employer liability, then that liability is to extend to the entire affiliated group. Also, the 30-per-cent-of-net-assets limit is to apply with respect to the net assets of the entire group.

H.Conf.Rep.No.93-1280 at 380, 1974 U.S. Cong.Code & Admin.News at 5159. There is nothing in the Committee Report that lends support to defendants’ contention that a controlled group employer must “contribute” to a plan in order for termination liability to attach. To the contrary, the Report demonstrates an intention to extend liability unconditionally to the entire affiliated group.

Defendants counter with the argument that because none of the early House and Senate bills mentioned the controlled group liability theory, the Conference Committee violated a congressional rule by considering and including in a report “matter not committed to [it] by either House.” 2 U.S.C. § 190c. 2 U.S.C. § 190c permits the Conference Committee to make “germane modification of subjects in disagreement.” One of the matters assigned to the Committee for mediation was a dispute between the two legislative bodies regarding the scope of employer liability. The House bill made an employer liable for 50% of its net worth. The Senate wanted a liability provision for only 30%. The Conference Committee adopted the Senate version and went on to determine that an employer’s net worth included the assets of all the companies in a controlled group. See H.Conf.Rep.No.931280 at 376, U.S.Cong.Code & Admin.News at 5155. Such a determination was within the scope of matters assigned to the Committee for resolution.

This court holds, therefore, that section 1301(b) defines the word “employer” for the purposes of determining section 1362 liability. Thus, the PBGC may impose termination liability, jointly and severally, on each member of a controlled group, whether or not such member contributed to the terminated pension plan.

V.

CONSTITUTIONAL ISSUES

Prior to ERISA, no federal law required pension plans to be fully funded. Defendants argue that imposing retrospective liability under ERISA on employers who established and maintained pension plans pri- or to its passage violated their Due Process rights under the Fifth Amendment.

It is well established that “legislation readjusting rights and burdens is not unlawful solely because it upsets otherwise settled expectations.” Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16, 96 S.Ct. 2882, 2893, 49 L.Ed.2d 752 (1976). See also Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) (Brennan, J., dissenting). In determining the constitutionality of a statute with retrospective effect, a court must con sider the nature and strength of the public interest served by the legislation. Hochman, The Supreme Court and the Constitutionality of Retroactive Legislation, 73 Harv.L.Rev. 692, 697 (1960). In Turner Elkhorn the Supreme Court upheld mining safety legislation imposing liability on employers for disabilities incurred by employees whose employment had terminated pri- or to the date of the enactment of the statute.21 Finding the statute to be remedi*955al in nature, the Court sustained it on the ground that it was a rational measure which transferred the consequences of employment from the injured employee to the employer who had profited from his labor. 428 U.S. at 18, 96 S.Ct. 2882.

The Court in Turner Elkhorn distinguished Railroad Retirement Board v. Alton R. R. Co., 295 U.S. 330, 55 S.Ct. 758, 79 L.Ed. 1468 (1935), on which defendants rely. The Alton Court had invalidated as arbitrary a statute requiring employers to finance pensions for former employees of the railroads. The Court there found that such a requirement bore no rational relationship to the Act’s underlying purpose of encouraging early retirement, but served only to supplement the salaries of former employees who had already retired.

It is questionable, in any event, whether Alton retains vitality in light of the Court's recent approach to substantive due process analysis.22 Remedial legislation is no longer subject to strict scrutiny. Plaintiffs need not demonstrate a compelling public interest to justify the change in employer responsibility imposed by ERISA.

The Fifth Amendment, in the field of federal activity, and the Fourteenth, as respects state action, do not prohibit governmental regulation for the public welfare. They merely condition the exertion of the admitted power, by securing that the end shall be accomplished by methods consistent with due process. And the guaranty of due process, as has often been held, demands only that the law shall not be unreasonable, arbitrary or capricious, and that the means selected shall have a real and substantial relation to the object sought to be attained.

Nebbia v. New York, 291 U.S. 502, 525, 54 S.Ct. 505, 510-511, 78 L.Ed. 940 (1934).

The Due Process Clause clearly places greater limitations upon Congress’ power to legislate retrospectively rather than prospectively. Congressional acts, however, are presumed constitutional. The party challenging them has the burden of establishing that Congress acted in an arbitrary and irrational manner. Usery v. Turner Elkhorn Mining Co., 428 U.S. at 15, 96 S.Ct. 2882. Defendants here have failed to demonstrate that application of the controlled group liability concept would be arbitrary or unreasonable. ERISA was enacted to remedy a serious social problem, the loss and frustration experienced by employees deprived of vested benefits as a result of a pension plan termination. See S.Rep.No.93-383, 93d Cong., 2d Sess., reprinted in 1974 U.S.Cong.Code & Admin. News at 4902. Cf. Hoefel v. Atlas Tack Corp., 581 F.2d 1, 4 (1st Cir. 1978).

One purpose of ERISA is to supplement and enforce federal labor law by preventing employers from promising more than they can deliver by way of benefits when negotiating collective bargaining agreements. The employer liability provisions of Title IV directly serve the primary goal of the pension reform effort, the voluntary continuation and maintenance of private pension plans. Application of the controlled group liability theory fosters that purpose by preventing employers from using corporate segmentation as a shield from termination liability.23 The statute reflects Congress’ judgment that, without controlled group liability, businesses could juggle their activities to eviscerate the termination liability provisions of ERISA. Such prophylactic legislation is valid when applied indiscriminately on an across-the-board basis.

[A] remedial provision [may require] some individuals to submit to regulation who do not participate in the conduct the legislation was intended to deter or control. [I]n defining a class subject to regulation, “[t]he inclusion of a reasonable *956margin, to insure effective enforcement, will not put upon a law, otherwise valid, the stamp of invalidity.” Nothing else will meet the demands of our complex economic system.

Mourning v. Family Publications Service, Inc., 411 U.S. 356, 374, 93 S.Ct. 1652, 1663, 36 L.Ed.2d 318 (1973) (citations omitted).

The Supreme Court’s decision in Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978), does not undercut the PBGC’s contention that the employer liability concepts of ERI-SA meet due process requirements. In Allied, the Court examined the constitutionality of a pre-ERISA Minnesota statute that imposed a charge on pension plans not funded sufficiently to cover employees who had worked at least ten years. The Minnesota Act was triggered if an employer either terminated a pension plan or closed a Minnesota office. The Court found the Minnesota statute impaired existing employer-employee obligations and, therefore, was unconstitutional under the provisions of the contract clause.24 Allied is at least facially distinguishable, because ERISA is a federal law not subject to the strictures of the contract clause. In any event, the challenged provisions of ERISA meet the substantive tests imposed by Allied.

“ ‘Legislation adjusting the rights and responsibilities of contracting parties must be upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption.’ ” 438 U.S. at 244, 98 S.Ct. at 2722, quoting United States Trust Co. v. New Jersey, 431 U.S. 1, 22, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). The first inquiry under Allied is whether the challenged statute has substantially impaired a contractual obligation.

Here, the provisions of the Avon pension plan gave the company the right to “amend, modify, suspend or terminate the Plan” and limited the benefits payable upon termination of the plan to “the assets then remaining in the Trust Fund.” Public policy requires that pension plans be construed to avoid the forfeiture of rights earned by an employee through years of service.25 Given that policy, this court holds that the imposition of termination liability for vested benefits in this case would not substantially impair the provisions of the Avon plan, certainly not to the degree that impairment was present in Allied. There, Minnesota law imposed employer liability to cover full pension benefits, whether or not vested, for all ten year employees. By contrast, ERISA imposes liability only for those benefits that have vested in accordance with the terms of a plan.26

The difference in contractual impairment between section 1362 of ERISA and the Minnesota statute is a significant one. The First Circuit has recently stated its support for the position that the promise of a pension constitutes an offer which, upon performance of the required services by the *957employee, becomes a binding obligation. Hoefel v. Atlas Tack Corp., 581 F.2d at 4.27 Cf. International Union, United Automobile, Aerospace & Agricultural Implement Workers of America v. Atlas Tack Corp., 590 F.2d 384 at 386 (1st Cir. 1979). Thus, the vesting of benefits becomes a significant event that prevents the employer from revoking the offer. Other courts have also noted that the vesting of benefits changes a revocable offer into a binding obligation, and have refused to enforce disclaimer language similar to that in the Avon plan to deprive employees of vested benefits. See, e. g., Cantor v. Berkshire Life Insurance Co., 171 Ohio St. 405, 171 N.E.2d 518, 522 (1960).

Given this view of the jaw, it seems dubious that the imposition of termination liability for vested benefits would undermine any reliance interest that the defendants may have had in the disclaimer language of the Avon plan. The Minnesota statute in Allied, however, went much farther than ERISA in disrupting settled contractual expectations. As noted above, the statute imposed liability for benefits that had not vested under the terms of a plan. In essence, this meant that the employer was held to his promise before the consideration required by the offer had been rendered. The effect on reliance interests was significant. As the Supreme Court noted:

The company . . . had no reason to anticipate that its employees’ pension rights could become vested except in accordance with the terms of the plan. It relied heavily, and reasonably, on this legitimate contractual expectation in calculating its annual contributions to the pension fund.

438 U.S. at 245-246, 98 S.Ct. at 2723.28

The negligible infringement of employer reliance interests distinguishes ERISA from the Minnesota statute at issue in Allied. It is appropriate, however, to note other differences between the two statutes. First, employer liability could be triggered under Minnesota law solely by a company closing its Minnesota office. The closing of an office was, in fact, the basis of liability in Allied. The statutory scheme of ERISA, however, bears a more substantial relation to the problem of l termination liability. Under its terms, employer liability is triggered only by formal termination of an underfunded plan.29 Second, under the *958Minnesota law an employer was held responsible for the full pensions of all employees if the plan was determined to be insufficient. By contrast, ERISA tempers the financial impact of termination liability by limiting it to no more than 30% of the employer’s statutory net worth and authorizing equitable deferred payment arrangements. 29 U.S.C. §§ 1362(b)(2), 1367. Moreover, during the first nine months after ERISA was enacted, a period applicable to the termination of the Avon plan, the PBGC had the authority to reduce employer liability or waive it altogether in the case of unreasonable hardship. 29 U.S.C. § 1304(f)(4).

This court finds that the termination liability provisions of ERISA upset settled contractual expectations only to a minimal degree. This limited impairment, when balanced against a statutory purpose of protecting against unwarranted and unjust employee deprivation, contrasts sharply with the underlying circumstances in Allied.

Defendants’ final constitutional claim is that the liability imposed by ERISA is in the nature of a tax or penalty. This contention fails in light of the enunciated purposes of ERISA, which show it to be entirely remedial in nature. See 29 U.S.C. § 1001.

For the reasons stated above, this court holds that the termination liability provisions of ERISA meet the Fifth Amendment’s requirement of due process.

VI.

Defendants assert that even if they are collectively liable as a controlled group under ERISA, the PBGC should have waived liability under 29 U.S.C. § 1304(f)(4). That section gave the agency discretion to waive or reduce employer liability for a plan which terminated within the first 270 days after enactment of the statute, provided the agency determined that the employer was not able to continue the plan and that an assessment of liability would result in unreasonable hardship.30

PBGC maintains that the Ouimet group is not eligible for a waiver or reduction of liability under section 1304(f)(4) because it did not request a waiver within the statutory period, although it did notify the agency that the plan would be terminated within that period. Such notification is required. 29 U.S.C. § 1341.

Defendants are correct in observing that the Act does not require an employer to make a formal request for a waiver. They are incorrect, however, in interpreting section 1304(f)(4) to require the agency to issue a waiver merely because it received a notification of termination within the statutory period. The Act specifically grants the PBGC discretion to determine whether liability will be waived.

PBGC’s position is that it received many notices of pending plan terminations within the first 270 days after enactment of ERI-SA. Given the relatively short amount of time available to assess the financial conditions of terminating employers, PBGC relied upon the employers themselves to assess their economic situations and request waivers if needed. PBGC then deployed its limited resources to investigate whether the companies requesting waivers met the statutory conditions. Under the circumstances, such an approach cannot be said to have been unreasonable.

Defendants seek to have this issue remanded to the agency for a determination on the merits of their right to a waiver. Regardless of the equities of such an approach, this court has no power to do so. ERISA empowers the PBGC to absolve em*959ployers of liability “for only the first 270 days” after enactment. 29 U.S.C. § 1304(f) (emphasis added). The time during which the agency had the authority to exercise its discretion has long since passed.31

CONCLUSION

For the reasons stated above, this court ORDERS that PBGC’s motions for partial summary judgment and for relief from the automatic stay in bankruptcy are hereby granted. It is further ORDERED that this case is remanded to the Bankruptcy Court for a determination of the net worth of the defendant controlled group, as it has been defined in this opinion.

An order will issue.

Pension Benefit Guaranty Corp. v. Ouimet Corp.
470 F. Supp. 945

Case Details

Name
Pension Benefit Guaranty Corp. v. Ouimet Corp.
Decision Date
Mar 22, 1979
Citations

470 F. Supp. 945

Jurisdiction
United States

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