In recent years, we have seen an unsettling trend with courts disregarding the terms of parties’ corporate asset purchase agreements and holding purchasers liable for their target’s multiemployer pension contribution and withdrawal liability under the theory of successor liability. A recent decision by the US Court of Appeals for the Seventh Circuit, Indiana Electrical Workers Pension Benefit Fund v. ManWeb Services, Inc. (ManWeb II), building on the court’s 2015 decision in Tsareff v. ManWeb Services, Inc. (ManWeb I), suggests that the reach of successor liability for multiemployer pension contributions and withdrawal liability may still be expanding.
As reported in our August 2015 blog, in ManWeb I, the Seventh Circuit held that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had notice of the seller’s “contingent” withdrawal liability that would be triggered by the sale. In ManWeb I, the Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable. On remand, the district court granted summary judgement for ManWeb, concluding that the pension fund had not shown sufficient continuity of business operations to support successor liability for the withdrawal liability. The pension fund again appealed. On appeal, the Seventh Circuit addressed the continued operations issue and, based on the totality of relevant facts and circumstances, reversed the district court’s decision and remanded the case.
In ManWeb II,the Seventh Circuit explained that the district court erred in analyzing the continued operations issue by looking at the impact that ManWeb’s purchase of the assets of Freije (or the “target”) had on ManWeb. Instead, the Seventh Circuit explained that the district court should have looked at the impact that the purchase of the target’s assets had on the operations of what would have been the target’s business, absent the sale. Otherwise, the Seventh Circuit warned that a “big buyer” loophole for successor liability will occur, where continuity of operations will be defeated “even where a large buyer in essence swallows a smaller seller whole and continues its business as part of the buyer’s business.”
In addition to foreclosing the “big buyer” loophole, the Seventh Circuit emphasized that ManWeb’s use of the target’s goodwill and reputation to attempt to convince the target’s customers to purchase services from ManWeb weighed heavily in favor of a finding of continuity of operations. Similarly, ManWeb’s retention of target’s key employees because of their reputation in the relevant industry weighed in favor of finding continuity of operations.
Further, the Seventh Circuit was not persuaded by the fact that ManWeb failed to actually retain any of the target’s customers. The mere fact that ManWeb attempted to capture the target’s customers was sufficient to show that there was continuity of customers (which weighs in favor of finding successor liability). As the Seventh Circuit put it, “Based on ManWeb’s treatment of Freije’s customers as its own through assumption of work and warranties as well as its aggressive attempts to use Freije’s goodwill and senior management to maintain connections with Freije’s former customers, we find that ManWeb’s objective actions soughtto maintain continuity with Freije’s customers. That factor weighs substantially in favor of finding successor liability.”
In his concurrence, Judge Daniel Anthony Manion disagreed with the Seventh Circuit’s conclusion that ManWeb’s attempts to treat the target’s customers as its own weighed in favor of finding continuity of customers. As ManWeb did not successfully retain any of Freije’s customers, Judge Manion argued that ManWeb did not harm the fund by acting as Freije’s successor. Specifically, he explained that “[i]f a company buys another company’s assets, tries to carry on the business, and succeeds, then equity may demand the imposition of successor liability. But it is difficult to imagine a scenario where imposing liability on a company that has not created or sold a product or service under the continued business in the market previously serviced by the plan participants could be equitable. In such a situation, the alleged successor has taken nothing from the plan, so it should owe nothing to the plan.”
When read together, the Seventh Circuit’s ManWeb decisions greatly expand the reach of withdrawal liability claims under the successor theory of liability. Companies considering purchasing targets with contingent withdrawal liability obligations should be aware of this thorny issue, and should continue to monitor the evolving case law in this area.