Recent court decisions suggest that parties engaged in corporate asset sale transactions involving potential multiemployer pension plan liability should give extra consideration to the structure and terms of their transactions, especially where a transaction could be considered in the Third or Seventh Circuits.
Several federal courts have ruled in recent years that purchasers in asset sale transactions are liable as “successors” for the sellers’ delinquent multiemployer pension plan contributions under the Employee Retirement Income Security Act (ERISA), as amended. Most recently, the US Court of Appeals for the Seventh Circuit, in Tsareff v. ManWeb Services, Inc., has considerably expanded the potential for such successor liability, finding that successor liability for multiemployer pension plan withdrawal liability may exist if a purchaser has knowledge that a seller’s contingent withdrawal liability could be triggered by the sale.
Generally, under corporate common law, a company that purchases the assets of another is not responsible for the seller’s liabilities, absent an express or implied assumption of the liabilities. Contribution and withdrawal liability under multiemployer pension plans typically have been treated the same as other liabilities. However, in recent years, a number of cases have found successor liability where such liability would not ordinarily apply.
Beginning in 1990, in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac, the US Court of Appeals for the Seventh Circuit borrowed from federal labor law and held that a purchaser of assets could be liable under ERISA for delinquent pension contributions owed by the seller to a multiemployer pension plan, provided that there was sufficient evidence of continuity of operations and the purchaser knew of the seller’s liability.
In 2011, the US Court of Appeals for the Third Circuit joined the Seventh Circuit and held that a purchaser of assets from a seller obligated to contribute to a multiemployer plan may be liable for the seller’s delinquent contributions where there was a continuity of operations and the purchaser knew of the delinquency.
In ManWeb, issued in July 2015, the Seventh Circuit took an additional step to expand potential successor liability. It 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 known that the seller’s “contingent” multiemployer pension withdrawal liability would be triggered by the sale. The US District Court for the Southern District of Indiana originally found that the seller in ManWeb, a privately owned, unionized engineering and construction contractor, was liable for the withdrawal liability because it failed to initiate required arbitration contesting the withdrawal liability assessment and that the purchaser, a nonunionized electrical company, was not liable as a successor because it did not have proper notice of the claim prior to the asset sale. The seller did not withdraw from the pension plan until after the sale, and the district court found the purchaser’s pre-acquisition notice of a contingent pension liability to not be sufficient.
The Seventh Circuit reversed and found that the purchaser was aware of the seller’s potential withdrawal liability owed to the plan because it engaged in due diligence and prepurchase negotiations and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The court reasoned that “equity” mandated imposing common law notions of successor liability to multiemployer pension plans for the seller’s withdrawal liability; otherwise, a “liability loophole” would exist in this context if the notice requirement excluded contingent liabilities. The Seventh Circuit stated, “Shielding a successor employer from liability when the company had knowledge of the potential liability and still had bargaining power with regard to the transaction runs counter to the policies underlying the doctrine of successor liability.”
The court also found that the purchaser could not challenge the underlying withdrawal liability assessment because the seller had waived its right to the arbitration required by law.
The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the purchaser to be a “successor,” and hence, liable for the withdrawal liability.
The cases described above—the ManWeb decision in particular—raise many issues for purchasers and sellers to consider in asset-based transactions where the seller (or a member of its controlled group) has a contribution obligation to a multiemployer pension plan. Would-be asset purchasers, especially if contemplating transactions under the potential purview of the Third and Seventh Circuits, may want to think carefully about how best to structure their asset acquisition. In particular, purchasers may wish to consider structuring all asset purchases under ERISA section 4204, under the statutory provisions that balance the interests of multiemployer pension plans, sellers, and purchasers.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Craig A. Bitman
Amy Pocino Kelly
. 2015 US App. LEXIS 12924 (7th Cir. July 27, 2015).
. In contrast, where there is a stock acquisition or merger, the surviving entity is liable for the debts of the predecessor.
. 920 F.2d 1323 (7th Cir. 1990). The Seventh Circuit relied on the Supreme Court’s decision whereby the Court applied successor liability in an unlawful discharge claim in Golden State Bottling Co. V. NLRB 414 US 168 (1973).
. Einhorn v. M.L. Ruberton Construction Co., 632 F.3d 89 (3d Cir. 2011).
. The multiemployer pension plan sued both the seller and purchaser in the transaction for the payment of the withdrawal liability with the claim against the purchaser based on the theory of successor liability.
. The underlying purchase agreement included an express exclusion of liability for the multiemployer pension fund obligations.