General Publications September 29, 2015

“Summer, Circuit Courts and Successor Withdrawal Liability,” Law360, September 29, 2015.

Extracted from Law360

As unionized employers know, one of the major financial risks they face is the potential of owing withdrawal liability to multiemployer, defined benefit pension plans. When an employer withdraws from a plan, it is liable to pay its allocable share of the plan’s unfunded vested benefits. A withdrawal can take one of two forms: (1) a complete withdrawal, which occurs when the employer no longer has any obligation to make contributions to the plan; or (2) a partial withdrawal, which can occur, for example, when the employer’s contributions to the plan have significantly declined over time.

Historically, it has only been employers that are actually signed to collective bargaining agreements that are subject to withdrawal liability. Controlled groups have been the most common exception. Title IV of the Employee Retirement Income Security Act defines an employer to include the members of the signatory employer’s controlled group (such as parent-subsidiary or brother-sister companies). Under the controlled group doctrine, withdrawal liability imposed against one controlled group member generally creates joint and several liability for the entire group.

On the other hand, withdrawal liability has not typically been extended to entities outside of the signatory employer’s controlled group. More precisely, absent specific agreements to assume withdrawal liability,[1] withdrawal liability has traditionally not been extended to a purchaser of the signatory employer’s assets.

The use of the successor liability doctrine in the withdrawal liability context is not altogether new. The Seventh Circuit first applied the doctrine in the 1995 case Chicago Truck Drivers, Helpers & Warehouse Workers Union (Independent) Pension Fund v. Tasemkin Inc.[2]. In that case, the court noted that, under federal common law, the doctrine of successor liability “allows lawsuits against even a genuinely distinct purchaser of a business if (1) the successor had notice of the claim before the acquisition; and (2) there was ‘substantial continuity in the operation of the business before and after the sale.’”[3]

Applying those standards in the withdrawal liability context to the facts before it, the court found “both notice and continuity.” With respect to notice, the court referenced that the buyer’s owner was the daughter-in-law of the seller’s owner and that the buyer’s president and secretary was the former registered agent of the seller. With respect to continuity, the court referenced the fact that the buyer “operated the same business (albeit from fewer locations), employed largely the same staff and relied primarily on the same suppliers,” and that the buyer assumed the seller’s name. Significantly, in Tasemkin, the court did not allow an intervening bankruptcy proceeding — which resulted in the sale of the company — to preclude using the doctrine of successor liability to impose the bankrupt company’s withdrawal liability upon the buyer that purchased the assets of the company in bankruptcy.

While the potential application of the successor liability doctrine in the withdrawal liability context is not new, its use has been relatively limited, at least outside of the Seventh Circuit.[4] However, two cases decided this summer have breathed new life into the doctrine and have expanded it in a manner that suggests this is a growing risk for companies that may purchase the assets of a unionized employer.

First, in another Seventh Circuit case, Tsareff v. ManWeb Services Inc., decided on July 27, the court appeared to significantly lower the bar as to what triggers the notice requirement under the successor liability doctrine. In that case, the district court held that “because the Plan did not assess the amount of [the seller]’s withdrawal liability until after the asset purchase, it was impossible for [the buyer] to have notice of any existing withdrawal liability prior to acquisition.”

The Seventh Circuit disagreed, holding that it is not necessary to ascertain the precise amount of potential withdrawal liability because “whether or not the precise amount of withdrawal liability is ascertainable prior to the employer’s asset sale depends on whether withdrawal occurs before or after the asset sale takes place.” The court based this upon the fact that the amount of withdrawal liability is not determined until the withdrawal takes place. Thus, if the withdrawal does not take place until after the sale, the buyer would never have notice of the precise amount of withdrawal liability at the time of sale. The court held that, under this standard, “a liability loophole would exist: multiemployer plan sponsors would be foreclosed in some situations (but not others) from seeking withdrawal liability from asset purchasers who would otherwise qualify as successors, and the plans would be left ‘holding the bag.’”

Instead, the court focused on whether “the buyer has notice that the seller may be contingently liable for withdrawal liability.” In finding that the buyer in that case had notice, the court focused on certain evidence, including that: (1) the buyer “conducted pre-purchase negotiations and performed the due diligence necessary to evaluate the asset sale”; (2) the buyer was “aware that [the seller] was a union-affiliated employer”; and (3) the buyer had discussed unfunded pension liabilities with the seller and was generally aware of the concept of withdrawal liability. The court held that “this demonstrates that [the buyer]’s key decision-makers were aware of [the seller]’s union obligations and shared concerns related to unfunded pension plan liabilities.”

Indeed, the court also found notice from the fact that the asset purchase agreement referenced the seller’s potential withdrawal liability and that the agreement “provided that [the buyer] was not obligated to assume and did not agree to assume any liability or obligation ‘arising out of or related to union related activities, including without limitation pension obligations. ...’” Rather than enforcing the parties’ intention that the buyer would not be liable for the seller’s withdrawal, the court held that “[t]hese sections of the APA, coupled with [the buyer]’s knowledge of unfunded pension liabilities, establish that [the buyer] had sufficient preacquisition notice of [the seller]’s contingent withdrawal liability to satisfy the federal successor liability notice requirement.”

This case should be very troubling for potential buyers of unionized companies. It suggests that, at least in the Seventh Circuit, having a general awareness that a seller contributes to a multiemployer pension plan may be sufficient to put the buyer on notice that it could be subject to a claim for successor liability of any withdrawal liability assessment. Indeed, this case suggests that affirmatively absolving the buyer for the seller’s withdrawal liability can create the conditions necessary for a finding of notice, notwithstanding the well-documented, clear intent of the parties to the transaction.

Perhaps even more troubling for potential buyers is that successor liability may no longer be limited to the Seventh Circuit. On Sept. 11, the Ninth Circuit issued what is believed to be the first appellate decision outside of Seventh Circuit approving the use of successor liability in the withdrawal liability context in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering Inc.[5]

In that case, the court found “no reason why the successorship doctrine should not apply to MPPAA [Multiemployer Pension Plan Amendments Act] withdrawal liability just as it does to the obligation to make delinquent ERISA contributions.” The Ninth Circuit rejected arguments by the buyer that other provisions of Title IV, such as the asset sale rules in ERISA Section 4204 and the requirement under ERISA Section 4212(c) that transactions whose principal purpose is to evade or avoid withdrawal liability are to be ignored in assessing such liability, evinced an intent by Congress to avoid successor liability. Rather, the court held “that a bona fide successor can be liable for its predecessor’s MPPAA withdrawal liability … so long as the successor had notice of the liability.”

The Ninth Circuit remanded the case to the district court to examine what it considered to be “the primary question” and “the most important consideration[] in assessing whether an employer is a successor,” namely whether there is “substantial continuity” between the buyer and seller. The Ninth Circuit focused primarily on whether the buyer “captured its predecessor’s market share” and whether there was “workforce continuity” — with the latter determination based upon “whether a majority of the new workforce once worked for the old employer” — as considerations for the district court on remand.

Thus, the use of successor liability in the context of withdrawal liability appears to be growing, both in terms of the number of courts adopting the theory and the type of evidence that can be used to support a finding of successor liability. This warrants significant caution for those who may consider buying the assets of a business that contributes to a multiemployer pension plan. Based on these cases, if the buyer intends to continue the seller’s business, merely being aware of such an obligation could expose the buyer to a claim for successor liability.

There are steps that buyers can take to reduce these risks. For one thing, ERISA entitles contributing employers to obtain an annual estimate of its potential withdrawal liability. It may be advisable to obtain such an estimate prior to consummating a purchase and, thereafter, make it a condition of the sale that the seller will place at least that amount — and perhaps even more because the final assessment may be higher than an earlier estimate — into escrow pending a final withdrawal liability assessment by the plan, with the escrowed funds to be used to pay that assessment.

Additionally, because the Seventh Circuit’s holding in Tsareff suggests that an express provision that the buyer does not assume the seller’s withdrawal liability may not prevent a successor liability claim, it would also be advisable to seek greater guarantees that only the seller will be liable for its withdrawal liability. For example, it may be advisable to include an indemnification provision in the asset purchase agreement that obligates the seller to pay any of its withdrawal liability that may be imposed upon the buyer. If such an indemnification provision is included, it would be advisable to include the seller’s principals, parents and/or affiliates among the indemnifying parties, particularly if the seller company will cease to exist after the sale.

The growth of the successor liability doctrine in the context of withdrawal liability creates significant risk for any company considering purchasing a unionized company or its assets. Buyers can no longer assume that they will avoid the seller’s withdrawal liability, even if purchasing a company out of bankruptcy. These recent cases likely foreshadow an increase in successor liability claims by multiemployer plans. While it will be important to track any new cases to see whether the doctrine continues to expand, buyers should consider the potential risk of assuming the seller’s withdrawal liability in any transaction.


[1] For example, ERISA Section 4204, 29 U.S.C. Section 1384, provides a measure whereby a purchaser can assume the seller’s withdrawal liability but not trigger a withdrawal resulting solely from the sale.

[2] 59 F.3d 48 (7th Cir. 1995).

[3] See, e.g., Central States Se. & Sw. Areas Pension Fund v. Ehlers Dist. Inc., No. 11 C 2691, (N.D. Ill. July 9, 2012) (granting summary judgment to a pension fund seeking to impose a withdrawal liability assessment issued to the seller against the buyer under the successor liability doctrine).

[4] 794 F.3d 841 (7th Cir. 2015).

[5] No. 12-17675 (9th Cir. Sep. 11, 2015).

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