Successor Withdrawal Liability — an “Unsuccessful” Outcome for Asset Purchasers

Most business owners expect that when they purchase the assets of another business, as opposed to purchasing the shares of a corporation, they are shielded from most, if not all, of the selling business’s existing liabilities. Those liabilities — accounts payable, any existing legal claims against the business, etc. — should remain with the selling business, if the “asset sale” is structured properly.

Potential Buyer Liability
ERISA does not expressly impose liability on a purchaser in an asset sale for the seller’s withdrawal liability. But under federal common law, a seller’s debts may be imposed on the purchaser in an asset sale if the purchaser is determined to be a “successor employer” as a result of a “substantial continuity” between the previous and new enterprise. Historically, there have been numerous factors examined by federal courts to determine if continuity of enterprise existed, including whether the new employer used the same plant, employed substantially the same workforce under the same working conditions, used the same machinery and equipment, and manufactured the same product as the previous company.

Federal courts have shown a willingness to apply the successor employer doctrine to transfer an employer’s multiemployer plan withdrawal liability (as well as liability for delinquent contributions) under ERISA to another entity when appropriate. In one recent Northern District of California case, the court acknowledged the validity of the “substantial continuity” test and applied it to a complex fact pattern involving two related companies — one union and one non-union, but ultimately concluded that the buyer was not a successor employer under the test. It did, however, find the non-union employer liable for the union employer’s withdrawal liability obligations under an alter ego theory.1 A Utah federal court did find a buyer liable for withdrawal liability on a successor employer theory,2 and a number of courts have made clear that the doctrine may be used when necessary to effectuate the public policies underlying ERISA and the Multiemployer Pension Plan Amendment Act of 1980, which established the legal framework for withdrawal liability.3

Most recently the Third Circuit Court of Appeals held that successor employer liability could be imposed on the purchaser of assets for the seller’s delinquent contributions “to vindicate important federal policy,” 4 where:

  • the purchaser had notice of the liability for the contributions prior to the sale; and
  • there existed sufficient evidence of continuity of operations between the purchaser and seller.

The court held that a continuity of operations could be proven through factors like the continuity of the workforce, management, equipment and location, completion of work begun by the predecessor, and constancy of customers. Furthermore, the court held that the purchaser must be aware of the debt, as opposed to being aware that the pension fund intended to seek recovery.

Conclusion
So what should a buyer do to avoid winding up with a seller’s withdrawal liability under a successor theory? As with so many issues under ERISA, each case would depend on its particular facts and circumstances. But buyers who are purchasing assets from a company that has or had an obligation to make pension contributions to a multiemployer pension plan should carefully consider the extent to which its post-sale operations might be viewed as “substantially continuous” of the seller’s business. Factors such as the similarity of the workforce, management, equipment, location and customers should all be considered (ideally, with ERISA counsel), and buyers might also want to include provisions in the sale documents protecting them (e.g., a holdback or escrow account) in the event that successor employer status is ultimately established.

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1 See Resilient Floor Covering Pension Fund v. M&M Installation, Inc., 2012 WL 669765, (N.D. Cal. 2012).

2 Trs. of the Utah Carpenters & Cement Masons Pension Trust v. Daw, Inc., 2009 WL 77856 (D. Utah 2009).

3 See Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1326 –1327 (7th Cir. 1990) (furniture manufacturer that purchased assets of another furniture manufacture held liable for seller’s delinquent multiemployer plan contributions); see also Central States, Southeast and Southwest Areas Pension Fund v. Hayes., 789 F.Supp 1430 (7th Cir. 1992) (relying on Artistic Furniture of Pontiac to impose withdrawal liability under ERISA on successor employer).

4 See Einhorn v. M.L. Ruberton Construction Co., 632 F.3d 89 (3rd Cir. 2011).

 

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