Appeal from the United States District Court for the Northern District of Ohio at Cleveland. No. 94-00493--Donald C. Nugent, District Judge.
Before: Kennedy and Batchelder, Circuit Judges; Hull, District Judge. *fn1
The opinion of the court was delivered by: Alice M. Batchelder, Circuit Judge.
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 24
In this case, we must decide whether the district court was correct in affirming the arbitrator's decision that Plaintiff-Appellant Sherwin-Williams's sale of a wholly-owned subsidiary subjected it to withdrawal liability under section 4212(c) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., as amended by the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"), 29 U.S.C. § 1392(c). For the reasons that follow, we affirm the judgment of the district court.
In 1987, Sherwin-Williams, a national manufacturer and distributor of paint and paint-related products, paid $14,204,765.79 to purchase 100% of the stock in Lyons Transportation Lines, Inc., a less than truckload ("LTL") carrier. Apparently, Sherwin-Williams was having trouble competing with local and regional paint manufacturers, who enjoyed the advantage of conveniently located service facilities. Sherwin-Williams planned to use Lyons to cut its own transportation and distribution costs by developing a sort of "rolling warehouse" where inventory could be maintained in trucks so as to be immediately available for delivery to local customers.
The plan was less than successful, however, partly because Lyons incurred massive losses in all but a few months of its operation and partly because the trucking company never adequately met Sherwin-Williams's expectations in terms of developing a rolling warehouse. During each year of ownership, Sherwin-Williams had to subsidize Lyons in order to keep the trucking concern afloat. By 1990, these subsidies were as much as $500,000 each month. Sherwin-Williams recognized that it needed to stop the bleeding, either by turning Lyons into a profitable concern or by getting rid of it.
During 1988 and 1989, Sherwin-Williams received several unsolicited offers to purchase Lyons's stock. At meetings during this period, Sherwin-Williams's executives discussed the possible sale of Lyons to one of the unsolicited bidders, but those who were concerned over the problem of withdrawal liability repeatedly counseled against liquidating or just selling the company. For example, Thomas Stout testified:
And again, it was brought up several times through the year of 1988, the end of the year of `88 . . . and I know it was my understanding at the time, and it was, I'm sure, Sam Hanania's understanding, that our withdrawal liability at that time was 13 or 14 million dollars . . . And we said if you liquidate the company or you sell the company, and that would be initiated, the withdrawal liability is larger than the company, and there would be no benefit from doing it, and those are the kinds of things we talked about. . . .And Sam said, you've got to worry about unfunded liability, it's there, it will raise its head. . . . and Bob [President and General Manager of Sherwin-Williams Transportation Services Division, Robert Kinney] would make the statement, if it happened once it won't happen again. Sherwin-Williams is a large corporation, and we have the wherewithal to fight any litigation that we come up against . . . .
Moreover, Robert Kinney testified that he was aware during 1988 and 1989 that the withdrawal liability associated with Lyons "could be in the neighborhood of 5 to 16 million dollars." In fact, Kinney spearheaded the original move at Sherwin-Williams to acquire a trucking concern in 1986. In a report he prepared specifically for the acquisition of a common motor carrier, Kinney stated that the issue of withdrawal liability was "one of the most significant financial considerations facing the trucking industry today," but also predicted that "the odds for repeal [of the ERISA provisions on withdrawal liability] are better than even." Kinney's report also listed six main strengths and four main weaknesses of acquiring a trucking concern; two of the four weaknesses listed were "union" and "E.R.I.S.A. obligation."
In May 1989, Kinney commissioned a report on possible ways of turning Lyons around to make it profitable. The report predicted that such a turnaround would take at least three years, during which time Sherwin-Williams would be required to continue to subsidize Lyons. In October 1989, the Sherwin-Williams Board of Directors decided against the time and expense required to make Lyons profitable, and, instead, authorized the sale of Lyons.
About seven months later, Kinney received a letter dated January 12, 1990, from J.R.C. Acquisition Corporation ("JRC"), submitting a proposal to acquire Lyons from Sherwin-Williams. JRC had no assets, no financial backing, and no corporate affiliations, but the proposal identified it as a company formed by Jonathan M. Tendler and Robert M. Castello, the principal officers of Common Brothers, Inc., one of the largest distributors of pharmaceuticals in the tri-state New York metropolitan area, with sales in excess of $200 million. Sherwin-Williams checked with Dunn & Bradstreet, but that firm had no information regarding JRC in the state of New York. Furthermore, Sherwin-Williams knew that JRC was not a subsidiary of Common Brothers, the identification in the proposal of Tendler and Castello notwithstanding.
Sherwin-Williams also received proposals from other potential purchasers. R.J.M. Associates offered to buy Lyons for $6 million-an offer that was later amended to $8 million. Baytree Investors, Inc., offered to buy all outstanding shares of Lyons's stock for $8.5 million ($2 million cash and the balance as preferred stock, redeemable in 24 months). Arrow Carrier Corporation, a large northeastern motor carrier headquartered in New Jersey, also made a bid.
Despite these other offers, Sherwin-Williams chose to negotiate with JRC. As part of its due diligence, JRC requested a schedule of current pension liabilities as of December 31, 1989, and Lyons sent letters to the Teamsters Fund requesting information on withdrawal liability. *fn2 On February 22, 1990, JRC and Sherwin-Williams executed a letter of intent outlining a transaction in which JRC would purchase all issued and outstanding stock of Lyons for $7.85 million, contingent on verification that the unfunded ERISA liability of Lyons did not exceed $7 million. Although it approached more than 40 banks and real estate investors, JRC apparently was unable to secure the financing necessary to execute a straight stock-for-cash deal. Stout testified that investors expressed a number of reasons for their reluctance to finance the deal:
[T]he worst thing was that it was into the trucking industry and they weren't interested in lending any more money into that industry. Number two, it was too highly leveraged . . . and the operational losses incurred from the first of the year to that point in time had been too high.
In spite of its knowledge of JRC's difficulties, Sherwin-Williams did not consider the other offers, but instead chose to continue its negotiations with JRC. On May 17, 1990, the parties executed an agreement which called for a down payment of $1.6 million, with the balance of $6.25 million payable on a promissory note over the next six years. The promissory note was secured by mortgages on Lyons's real property. Moreover, Sherwin-Williams agreed to contribute approximately $18 million to the paid-in capital of Lyons in order to eliminate certain intercompany accounts between Lyons and Sherwin-Williams. Finally, the agreement contained a warranty on the part of JRC that it had not encumbered or agreed to encumber or grant any lien on Lyons's assets to anyone other than Sherwin-Williams.
The sale closed on June 1, 1990. Prior to that time, on or about May 25, 1990, before it had the authority to do so, and, so far as this record demonstrates, without the knowledge of Sherwin-Williams, JRC and its principals had executed in the name of Lyons an accounts receivable factoring and security agreement with Allstate Financial Corporation. JRC used the proceeds from the Allstate security agreement to make the $1.6 million cash payment to Sherwin-Williams on June 1, 1990. In short, JRC had no capital or assets of its own with which to subsidize Lyons's monthly losses and it could not obtain financing ...