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The Renco Group, Inc. v. Steelworkers Pension Trust

United States District Court, W.D. Pennsylvania

September 30, 2019

THE RENCO GROUP, INC., et al., Plaintiffs,

          Patricia L. Dodge, Magistrate Judge.


          Cathy Bissoon, United States District Judge.

         I. MEMORANDUM

         Plaintiffs, The Renco Group, Inc., and its subsidiaries, Ilshar Capital, LLC, Blue Turtles, Inc., Unarco Material Handling Inc., Inteva Products, LLC, the Doe Run Resources Corp. and U.S. Magnesium LLC (collectively referred to as “Renco”) have brought this action under the Employee Retirement Security Act of 1974, 29 U.S.C. §§ 1001-1500 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) against Defendant, Steelworkers Pension Trust (“SPT”) by its chairman, Daniel A. Bosh.

         Renco seeks to vacate a final arbitration award issued in favor of SPT on September 25, 2018 by Arbitrator Ira F. Jaffe (“the Arbitrator”). The Arbitrator held that Renco was responsible for the withdrawal liability claimed by SPT against Renco’s former wholly-owned subsidiary, RG Steel, LLC (“RG Steel”) - when it filed voluntary petitions under Chapter 11 of the Bankruptcy Code and permanently ceased operations on May 31, 2012 - because Renco remained a member of RG Steel’s controlled group. Although Renco sold 24.5% of RG Steel to Cerberus Capital Management, L.P. (“Cerberus”) on January 17, 2012 (“the Cerberus Transaction”), thus removing Renco from RG Steel’s controlled group, the Arbitrator concluded that this transaction had a principal purpose of evading or avoiding Renco’s withdrawal liability, and, thus, should be disregarded pursuant to § 4212(c) of ERISA, 29 U.S.C. § 1392(c).

         Before the Court are Renco’s Motion for Partial Summary Judgment (ECF No. 24), seeking to vacate the Arbitrator’s Final Award; and SPT’s Motion for Summary Judgment (ECF No. 34), seeking confirmation. The Motions have been fully briefed, and oral argument was held on July 31, 2019. For the reasons that follow, Renco’s Motion will be denied and SPT’s Motion granted.


         A. Relevant Procedural History

         On February 22, 2016, SPT commenced an action against Renco in this Court at Civil Action No. 16-190, alleging that Renco was responsible for $86, 181, 976.00 in withdrawal liability incurred by RG Steel to SPT. SPT alleged that Renco had exited RG Steel’s controlled group through a transaction having a principal purpose of evading or avoiding withdrawal liability, and therefore, the transaction must be disregarded pursuant to 29 U.S.C. § 1392(c). Renco filed a motion to dismiss on the ground, inter alia, that SPT’s substantive claims had to be arbitrated in the first instance. On August 22, 2016, a Report and Recommendation (“R&R”) was issued, recommending that the motion be granted and that the parties be directed to arbitrate SPT’s claims. On September 21, 2016, the Court adopted the R&R (Civ. A. No. 16-190, ECF No. 55) and its ruling was affirmed by the Court of Appeals for the Third Circuit on May 31, 2017. (Civ. A. No. 16-190, ECF No. 73.)

         The Court appointed the Arbitrator in June of 2017. (Civ. A. No. 16-190, ECF No. 72). As part of the arbitration, the parties filed extensive pre-hearing and post-hearing briefs, and seven days of hearings were held between September 26, 2017 and March 22, 2018. The record also incorporated facts from a lawsuit commenced by the Pension Benefit Guaranty Fund (“PBGC”) in January of 2013 in the United States District Court for the Southern District of New York against various members of the Renco Group (PBGC v. The Renco Group, No. 13-cv-621) (“the PBGC Litigation”).[1]

         Before the arbitration concluded, SPT filed an action in this Court against Renco, on January 31, 2018, at Civil Action No. 18-142. In that case, SPT sought the imposition of interim withdrawal liability against Renco. The parties eventually stipulated to the amount of interim withdrawal liability and other damages, except for the applicable interest rate, said issue being the subject of a pending motion for summary judgment in 18-142.

         On July 18, 2018, the Arbitrator issued a 76-page Interim Ruling and Award on the merits of SPT’s withdrawal liability claim against Renco. (Compl. Ex. A, Attach. A.) The Arbitrator ruled in SPT’s favor, finding that, under 29 U.S.C. § 1392(c), a principal purpose of the Cerberus Transaction was to evade or avoid withdrawal liability, such that Renco effectively was a member of the RG Steel controlled group on the date RG Steel ceased operations. The Arbitrator concluded that Renco was liable to SPT for the full amount of withdrawal-liability attributable to RG Steel.

         A Final Award was issued by the Arbitrator on September 25, 2018. The Final Award incorporated all prior Interim Rulings, Opinions and Awards. (Compl. Ex. A.) The Arbitrator found that Renco was liable for RG Steel’s withdrawal liability in the amount of $78, 664, 224.00, plus interest.

         Renco then commenced this action, on October 1, 2018, seeking to vacate the Arbitrator’s Final Award. Jurisdiction is based on 29 U.S.C. §§ 1401(b)(2), 1451(a) and 1451(c). (Compl. ¶ 7). The Complaint alleges in Count I that the interim payment rulings should be vacated. In Count II, Renco contends that the Arbitrator’s September 25, 2018 Final Award should be vacated.

         Shortly thereafter, on October 24, 2018, SPT filed an action to confirm the Arbitrator’s Final Award. SPT’s action was docketed at Civil Action No. 18-1429, and it later was consolidated with this proceeding.

         On January 4, 2019, Renco paid SPT $50 million. Shortly thereafter, the parties entered into a Consent Order (Civ. A. No. 18-142, ECF No. 63) - approved by the Court on January 10, 2019 (id. ECF No. 64) - under which Renco agreed to pay the principal balance of $28, 664, 224.00 by May 10, 2019.[2]

         On December 28, 2018, Renco filed a Motion for Partial Summary Judgment (ECF No. 24), seeking to vacate the Arbitrator’s Final Award. On March 15, 2019, SPT filed a Motion for Summary Judgment (ECF No. 34), seeking confirmation of the Award. On July 31, 2019, Magistrate Judge Dodge held oral argument on both Motions, as well as SPT’s motion for summary judgment in No. 18-142, regarding the interest-issue.[3]

         B. The Arbitrator’s Decision

         The Arbitrator began his Opinion and Award with the following observation:

No point would be served by attempting to summarize the entirety of the record evidence in this case (which included over 13, 000 pages of exhibits marked as Fund or Employer exhibits, several hundred thousand pages of exhibits and depositions and transcripts from the PBGC litigation, and additional depositions and exhibits and expert reports and items produced in discovery in this arbitration). Nor will the contentions of the Parties be summarized other than as is relevant to an explanation of the ruling in this case; the post-hearing briefs and reply briefs alone total almost 400 pages. Rather, it should simply be noted that the entire record has been carefully reviewed by the Arbitrator prior to issuing the decision in this matter and that record evidence will be referenced as appropriate and necessary to explain the ruling in this case.

(Id. at 4-5.)[4] As observed by SPT, the Arbitrator was required to state “the basis for the award, including such findings of fact and conclusions of law (which need not be explicitly designated as such) as are necessary to resolve the dispute.” 29 C.F.R. § 4221.8(a)(1). The parties do not contend that the Arbitrator failed to properly state his bas(es) for the award.

         The instant ruling will not be improved by a detailed-recitation of the background facts and events that occurred prior to the negotiations culminating in the Cerberus Transaction. Thus, the Court will restrict its present discussion to a brief summary of the history leading to the relevant events.[5]

         In March 2011, RG Steel, LLC, which was wholly owned by RG Steel Holdings, LLC, and which in turn was wholly owned by Renco, purchased a number of mills and related properties from Severstal U.S. Holdings, LLC, Severstal U.S. Holdings II, Inc., and Severstal Sparrows Point, LLC; including three steel mills in Wheeling, Warren, and Sparrows Point. The Wheeling and Warren operations sponsored single employer, defined-benefit pension plans covered by Title IV of ERISA. RG Steel was a party to collective bargaining agreements that provided for contributions to be made to the Fund on behalf of bargaining unit employees at Wheeling and Sparrows Point.

         As a result of this acquisition, Severstal exited the controlled group and Renco became a member of the controlled group that included RG Steel.

         At the time of Renco’s acquisition, RG Steel was the fourth largest steel company, capacity-wise, in the United States. A group of eleven lenders (“the Bank Group”) provided a revolving line of credit for RG Steel’s use, as needed, in the operations of the business. Ira Rennert, owner and founder of Renco, had prior experience owning and operating steel mills, having purchased WCI (Wheeling) in or around 1988 and operating it until its bankruptcy in 2003. He had excellent relations with the United Steelworkers of America (“USW” or “Union”), and RG Steel negotiated successor collective bargaining agreements with the USW covering the RG Steel facilities.

         C. Relevant Factual Findings and Conclusions of Arbitrator[6]

         1. Renco Seeks Lenders for RG Steel

         As the Arbitrator noted, there is no dispute that Renco was a large and successful entity. It was founded in 1975 by Ira Rennert as a private, family-owned investment holding company that, by 2012, owned and operated eight companies, with consolidated revenues in excess of $5 billion, and a robust balance sheet with significant equity and liquidity. Renco did not have outside partners or investors, and preferred to own and control all of its businesses. (Op. & Award at 31-32.)

         Although Renco initially believed that it could profitably operate RG Steel, the reality turned out to be different: “By the end of 2011 and early 2012, RG Steel was cash-starved, was not paying its creditors, and was on the verge of a forced bankruptcy. By late 2011, RG Steel was losing approximately $30 million a month ($1 million a day).” (Op. & Award at 24.) In late October 2011, at the request of the Bank Group holding RG Steel’s revolving line of credit, [7] Renco hired a financial advisor, who sent out a “teaser” to prospective potential lenders seeking interest in providing a $200 million loan for RG Steel. Given Renco’s preference to solely own its businesses, no equity was offered as part of the teaser. None of the recipients, including Cerberus, expressed interest. (Id. at 26, 27.)

         Another of the potential lenders to whom the initial communication was sent suggested that Renco would need to offer equity in order to obtain the requested funds. Thus, while its initial efforts to obtain loans for RG Steel did not include the prospect of equity, Renco changed its stance when its initial efforts were unsuccessful. Elliot Management Corporation (“Elliott”) then offered to provide a $200 million loan to RG Steel in exchange for various securities, interest and “the issuance to Elliott of warrants entitling Elliott to purchase 75% of the common and preferred [s]hares outstanding at a price per share based on a total equity valuation of $25 million, with the warrants expiring 5 years after the closing date.” (Id. at 28-29.)

         On January 3, 2012, Elliott revised its proposal to provide a $125 million loan for 39% of the equity, with a first lien on non-current assets, and including “the issuance to Elliott of ‘penny warrants’ (i.e., warrants at a price per share of $0.01) in the amount of 39% of the common and preferred shares of RG Steel.” (Id. at 30.) However, on January 11, 2012, Elliott was informed by Renco that it “should not spend significant time or money [pursuing] this opportunity.” (Id. at 31.)

         2. Negotiations Leading Up to the Cerberus Transaction

         After receiving Elliott’s term sheet, Renco approached Cerberus with a mixed-loan equity proposal. (Id. at 32.) Ira Rennert asked his son, Ari, to contact Cerberus and offer it “the opportunity to complete a transaction in which Cerberus loaned RG Steel $125 million in exchange for receiving 49% of the equity of RG Steel.” (Id. at 29.) On January 10, 2012, Renco and Cerberus reached a “handshake” agreement in principle – contemplating a $125 million loan with a 49% “equity kicker” - although many details remained outstanding. (Id. at 49.)

         In examining the evidence regarding the negotiations, the Arbitrator found:

Early in [the] discussions, it became clear that Renco and Cerberus had different expectations as regards the type of equity that was to be part of the transaction. Cerberus wanted penny warrants – i.e., warrants/options to purchase membership units that could be exercised for one penny each – and did not wish to receive direct equity (i.e., membership units in RG Steel Holdings LLC). Renco wanted Cerberus to take direct equity on day one.

(Id. at 50.) Michael Ryan, a partner with Cadwalader, Wickersham & Taft LLP (“Cadwalader”), who initially was outside counsel for Renco and later became Renco’s General Counsel, repeatedly sought to persuade Cerberus and/or its counsel, Schulte, Ross and Zabel (“SRZ”), to have the equity component consist of membership units[8] rather than warrants, at least with respect to the “permanent” warrants (which represented 24.5% of the equity of RG Steel Holdings LLC). Mr. Ryan testified that his request was to “ensure that the PBGC could not assert ‘some crazy argument’ that the warrants were insufficient to remove Renco from the controlled group that included RG Steel.” (Id. at 50-51.)

         On January 10, 2012, Mr. Ryan advised Larry Goldberg, an attorney with SRZ who represented Cerberus, that Renco wanted Cerberus to be an owner of 24.5% of the membership units of RG Steel Holdings LLC when the transaction closed. Mr. Ryan explained that Cerberus would get its full $125 million in “sub debt” and that it would be a 24.5% owner immediately with warrants for another 24.5%. (Id. at 51-52.)

         Although Mr. Goldberg did not object, Daniel Wolf, the CEO of Cerberus, had a different reaction. In a January 12, 2012 e-mail, in which he identified a number of issues with the proposed transaction that were problematic to Cerberus, he stated in pertinent part: “We have always discussed warrants. We are a lender and we should [not] be forced to hold direct equity. That was always the discussion.” (Id. at 52.)

         On January 13, 2012, Cerberus concluded that the negotiations were at a standstill, and directed SRZ attorneys to stop work on the proposed transactions. However, Renco instructed its counsel to continue in the hope that the transaction might nonetheless go forward. At Renco’s request, a dinner meeting took place on the evening of January 14, 2012, at Ira Rennert’s residence, attended by many of the principals for Renco and Cerberus. The primary obstacles to reaching a deal were disputes over the capital call provisions and the credit support provisions. However:

At some point towards the end of the meeting, Mr. Ryan raised to [Cerberus co-founder and CEO Stephen] Feinberg the question of whether Cerberus would agree to take direct equity instead of the first tranche of warrants (i.e., the “Permanent” warrants). Mr. Ryan did not indicate the reason for that request nor did Mr. Feinberg ask Mr. Ryan why that item was important to Renco. Mr. Feinberg replied that he was agreeable to direct equity in lieu of warrants, if the SRZ attorneys approved and indicated that taking direct equity would not result in additional obligations for Cerberus.

(Id. at 53-54.)

         The following morning, Mr. Ryan followed up regarding this issue with Stuart Freedman, an SRZ attorney who was working on the equity components of the Cerberus Transaction, who in turn called Ronald Richman, an SRZ attorney specializing in ERISA matters, and asked if the receipt of membership units by Cerberus would create any risk under ERISA for Cerberus. “Upon being told that the answer to that question was no, Mr. Freedman gave SRZ’s approval to the change from warrants to membership units.” (Id. at 54.) On January 17, 2012, the Cerberus Transaction was finalized. (Id. at 55.)

         On May 31, 2012, RG Steel filed for bankruptcy and permanently ceased operations. (Id. at 4.) As a result, SPT assessed both RG Steel and Renco with withdrawal liability. Renco disclaimed withdrawal liability on the ground that, following the Cerberus Transaction, it was no longer part of RG Steel’s controlled group.

         3. Renco’s Interactions with the PBGC During the Same Time Frame

         As explained in the Interim Opinion and Award, the provisions of 29 U.S.C. § 1343 require plan administrators and sponsors to provide at least 30 days’ notice to the PBGC[9]of various reportable events, including a transaction that will result in one or more persons ceasing to be members of the controlled group of a Title IV covered pension plan.

         “On December 16, 2011, Renco filed an Advance Notice of Reportable Events (Form 10) with the PBGC notifying the PBGC that a reportable event may be occurring – i.e., that Renco might enter into a transaction that could result in its exiting the RG Steel controlled group.” (Id. at 38.) As the Arbitrator acknowledged, this form was filed in connection with several of RG Steel’s single employer defined benefit pension plans, not the SPT, which is a multiemployer plan. The Arbitrator found, however, that “some of Renco’s behavior and its motivations relative to the single employer plans and the Cerberus Transaction [nevertheless are] relevant evidence with respect to the issues in this case.” (Id. at 39-40.)

         On January 6, 2012, Charles Cann, a financial analyst who was Renco’s primary contact at the PBGC, advised Ari Rennert that the PBGC was “deeply concerned” about a proposed transaction by which Renco intended to transfer some of its equity interest in RG Steel out of its controlled group. Mr. Cann communicated that the PBGC had “significant doubts” about RG Steel’s ability to support the plans in the future if Renco was removed from RG Steel’s controlled group. (Id. at 40.) If Renco did not offer a guarantee to protect the plans, Mr. Cann advised, the PBGC would move to terminate the plans to protect its interests. (Id.)

         Several days later, on January 9, 2012, when Mr. Cann inquired as to the status of the negotiations, Ari Rennert responded that “nothing was imminent.” As the Arbitrator noted: “No mention was made during the call or in any written communications with the PBGC prior to the closing of the Cerberus Transaction of the fact that Renco was in negotiations with Cerberus with respect to a possible loan and equity deal.” (Id. at 41.) Moreover, “[d]espite the commitment of Ari Rennert to keep the PBGC apprised of developments, there [is] no evidence that Renco advised the PBGC of the progress in the negotiations with Cerberus prior to advising that the Cerberus Transaction had closed.” (Id. at 42-43.)

         On January 10, 2012, Mr. Cann sent Renco a document that outlined “broad terms for a settlement agreement structured around a guarantee for the RG Steel pension plans.” Ari Rennert responded that Renco would review it. When Mr. Cann had not heard back from Renco by January 12, 2012, he wrote to Ari Rennert asking to talk that afternoon. (Id. at 43-44.) Mr. Cann testified that he and others were preparing Notices of Termination for the Wheeling and Warren single employer plans, and by Friday, January 13, 2012, the PBGC was ready to implement them. But that day, Mr. Cann spoke to Ira and Ari Rennert and was left with the impression that Renco was amenable to signing a “standstill agreement.” For this reason, and because the Rennerts told him that no transaction was imminent and “equity was off the table, ” Mr. Cann felt less urgency about proceeding with the plan-terminations. Ari Rennert indicated that he would send the proposed standstill agreement to Renco’s counsel and get back to him. (Id. at 44.)

         The Martin Luther King holiday fell on Monday, January 16, 2012. On the morning of January 17, 2012 (the first business day after the 30-day notice period), Mr. Cann contacted Ari Rennert to schedule a telephone call. Ari Rennert responded that he had a meeting out of the office in the morning and would be available after 2 p.m. An afternoon call was scheduled, at which point:

Ari Rennert advised Mr. Cann . . . that Renco had closed the Cerberus Transaction earlier that day. He described the infusion of capital, including for the first time that the lender would be Cerberus and Abeleco, a Cerberus-related company. When asked . . . whether Renco would stand behind the pension plans, Mr. Rennert replied that Renco now owned only 74.5% of RG Steel and was out of the controlled group and consequently did not have to do so.

(Id. at 45.)

         In a January 17, 2012 communication to Ari Rennert, Mr. Cann accused Renco of “‘having made representations [that] were false’ and noting that the PBGC intended to pursue all available legal rights.” Ari Rennert responded several days later, denying that any false representations had been made, and asserting that as of the January 13th telephone conversation, no transaction was “imminent” because several contentious points had caused Cerberus to go “pencils down.” Mr. Rennert also advised Mr. Cann that Renco had worked through the weekend, made significant concessions, revived the parties’ discussions and completed a deal with Cerberus that saved RG Steel and preserved thousands of jobs. (Id. at 46.) According to Mr. Rennert, while Renco previously had indicated a willingness to consider a standstill agreement with the PBGC, Renco was concerned with the PBGC’s “overreaching demands and apparent inflexibility.” Renco made no offer to provide the PBGC with any guarantees relative to the single employer plans should RG Steel not have a secure future. (Id.)

         On November 13, 2012, the PBGC and the plan administrators terminated the Warren and Wheeling single employer plans, effective August 31, 2012.

         The PBGC subsequently commenced an action in the United States District Court for the Southern District of New York in January 2013 against various members of the Renco Group. The Complaint alleged, in essence, that by entering into the Cerberus Transaction with a principal purpose to evade or avoid liability, Renco violated the provisions of Section 4069 of ERISA, 29 U.S.C. § 1369, and had engaged in fraudulent conduct. (Id. at 47.) A bench trial was conducted in December of 2015, but prior to the issuance of a decision, Renco and the PBGC entered into a settlement agreement effective March 2, 2016. The agreement required Renco to restore the single employer plans, to pay participants in accordance with the terms of the plans, to fund them at certain minimal levels and to provide ongoing financial and other reporting to the PBGC. Renco did not admit any wrongdoing as part of the settlement. (Id. at 47-48.)


         A. Standard of Review

         In the present context, “the district court presumes that the arbitrator’s factual findings are correct unless they are rebutted by a clear preponderance of the evidence. The arbitrator’s legal conclusions are reviewed de novo.” Crown Cork & Seal Co. v. Central States Se. & Sw. Areas Pension Fund, 982 F.2d 857, 860 (3d Cir. 1992) (citing 29 U.S.C. § 1401(c)). A court should overturn a finding of fact only if it is “left with the definite and firm conviction that a mistake has been committed.” Concrete Pipe & Prod. of Calif., Inc. v. Construction Laborers Pension Trust for S. Calif., 508 U.S. 602, 622 (1993) (citation omitted). “Our judicial system affords deference to the finder of fact who hears live testimony of witnesses because of the opportunity to judge the credibility of those witnesses.” Hill v. Beyer, 62 F.3d 474, 482 (3d Cir. 1995). This same principle applies when the fact finder’s opinion contains implicit credibility determinations. Id.[10] In reviewing mixed question of fact and law, “we apply a clearly erroneous standard to findings of fact and conduct plenary review of conclusions of law, applying the appropriate standard to each component.” Crown Cork at 861 (citation omitted).

         B. Withdrawal Liability Under ERISA

         “The 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.” SUPERVALU, Inc. v. Board of Trustees of Sw. Pa. & W. Md. Area Teamsters & Employers Pension Fund, 500 F.3d 334, 336 (3d Cir. 2007). Pursuant to ERISA, when a contributing employer to a multiemployer pension plan withdraws from the plan, the plan may seek to recover from the employer the amount of any unfunded vested benefits attributable to the employees of the withdrawn employer. 29 U.S.C. § 1381(a). Withdrawal liability extends to any trade or business under “common control” with the withdrawing employer. 29 U.S.C. § 1301(b). Congress extended liability to all entities in common control with the withdrawing employer, because the legislation prior to the MPPAA “did not adequately protect plans from the adverse consequences that resulted when individual employers terminate[d] their participation in, or withdr[e]w from, multiemployer plans.” Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 722 (1984).

         Thus, when withdrawal liability is imposed on an employer, all other commonly controlled trades or businesses – that is, those entities within the withdrawing employer’s “controlled group” – are liable as well. Doherty v. Teamsters Pension Trust Fund, 16 F.3d 1386, 1388 (3d Cir. 1994). MPPAA extends membership within a “controlled group” to entities owning at ...

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