Buyer Beware – Court Lowers Hurdle to Make Claim for Withdrawal Liability Under the Successorship Doctrine
In Tsareff v. ManWeb Services, Inc.,1 the U.S. Court of Appeals for the Seventh Circuit held that an asset purchaser’s pre-closing knowledge of a seller’s potential multiemployer plan withdrawal liability could be sufficient to obligate the purchaser for the seller’s withdrawal liability even where (a) the amount of the withdrawal liability was not determined until after the sale and (b) such liability was not assumed by the purchaser under the asset purchase agreement. The Tsareff decision likely will impact the way asset purchasers approach transactions involving companies that contribute or contributed to multiemployer plans, with an increased focus on protecting against these liabilities.
The Successorship Doctrine
The general common law rule of successor liability holds that, except in very limited situations, where one company sells its assets to another company, the buyer is not liable for the debts and liabilities of the seller, absent an express contractual assumption. However, the United States Supreme Court and several Circuit Courts of Appeal have imposed liability upon successors beyond the bounds of the common law rule in a number of different employment-related contexts when (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.2 This doctrine, based in equity, is often referred to as the “successorship doctrine.”
The Seventh Circuit previously applied the successorship doctrine to delinquent pension fund contributions owed by a predecessor and to withdrawal liability owed by a Chapter 7 debtor.3 However, prior to Tsareff, the Seventh Circuit had not ruled on whether the notice element of the successorship doctrine can be satisfied if the withdrawal liability is only contingent (because no withdrawal had occurred) at the time of the acquisition.
Tsareff v. ManWeb Services
In Tsareff, Tiernan & Hoover (“Tiernan”), an electrical contractor and union employer, sold all of its assets to ManWeb Services, Inc. (“ManWeb”), a non-union employer. Prior to the sale, Tiernan was party to a collective bargaining agreement, in accordance with which it was required to make contributions to a multiemployer pension fund (the “Plan”) on behalf of its union employees. Following the sale, Tiernan ceased operations and no longer contributed to the Plan. ManWeb also did not make any contributions to the Plan.
Shortly after the sale, the Plan attempted to inform Tiernan that the sale had resulted in Tiernan’s complete withdrawal from the Plan, and assessed withdrawal liability against Tiernan in the amount of $661,978. Pursuant to a mail forwarding instruction, the notice of withdrawal liability was forwarded to ManWeb. Neither ManWeb nor Tiernan sought review of the withdrawal liability assessment, or requested arbitration to contest the imposition of withdrawal liability as required by law. When Tiernan failed to satisfy its withdrawal liability, the Plan filed an ERISA collection action against Tiernan, adding ManWeb as a defendant under a theory of successor liability.
On summary judgment, the district court ruled in favor of the Plan as against Tiernan. However, on the question of successor liability, the district court found that ManWeb was not liable because the notice requirement of the successorship doctrine was not satisfied. The court found that pre-acquisition notice of contingent liabilities was not sufficient to satisfy the notice requirement, and that because the Plan did not assess the amount of withdrawal liability until after the asset purchase—since, under ERISA, withdrawal liability is assessed only after withdrawal—ManWeb did not have sufficient notice. Thus, the successorship doctrine could not apply and ManWeb could not be liable.
The Court of Appeals reversed as to ManWeb, finding that the notice requirement can be satisfied even if the liabilities were only contingent at the time of the asset sale. Key to the Court’s conclusion was its analysis of the policy goals underlying the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”)—the federal legislation establishing multiemployer pension fund withdrawal liability. The Court determined that in order to further the MPPAA’s goal of “ensuring that the responsibility for a withdrawing employer’s share of unfunded vested pension benefits is not shifted to remaining employers,” it would be equitable to apply the successorship doctrine even where the pre-acquisition notice of liability was for only contingent liabilities. The Court reasoned that if pre-transaction notice of contingent liabilities was insufficient to satisfy the notice requirement, a “liability loophole” would exist in the context of multiemployer plans. Multiemployer plans would be foreclosed from relief in some situations, such as where withdrawal liability was triggered after the sale, but not others, such as in the context of a bankruptcy, where withdrawal liability is triggered prior to the sale.
After the Court determined that notice of contingent liabilities could be sufficient to sustain a claim of successor liability, it concluded that ManWeb had sufficient notice of the contingent withdrawal liability. For example, representatives of ManWeb indicated that they had experience with unions and were aware of the risks associated with underfunded multiemployer plans (the record demonstrates that ManWeb representatives did not specifically want to do an asset transaction because of the associated multiemployer plan risks). In addition, Tiernan’s financial statements, which were reviewed by ManWeb, referenced multiemployer plan liabilities. Finally, the purchase agreement provided that pension liabilities were an excluded liability, and that ManWeb would be indemnified by Tiernan for such liabilities.
The Court remanded the case to the district court to address whether ManWeb sufficiently continued the business of Tiernan to support a claim for successor liability.
Takeaways
Prior court decisions going back over 40 years have established that the successorship doctrine is applicable to employment-related liabilities. However, as Tsareff demonstrates, in the context of multiemployer plan liabilities, courts may be more willing to find successor liability in order to further the MPPAA’s policies of protecting remaining contributors to a multiemployer plan. This desire to further the MPAA’s policies has been cited by other circuits as well, as a recent decision by the U.S. Court of Appeals for the Ninth Circuit held that the successorship doctrine could be used to impose withdrawal liability on a newly formed business that continued some of the operations of a liquidated business owned by different individuals if there was a sufficient continuity between the customers of the new and liquidated businesses.4
Purchasers should take heed and carefully review a target’s potential multiemployer plan liabilities before undertaking a transaction, and ensure sufficient protection through purchase price reductions and indemnification, including the use of specific escrows.
Dechert’s Employee Benefits and Executive Compensation Group has extensive experience in these matters and can assist you in navigating through multiemployer plan issues.
Footnotes
1) Tsareff v. ManWeb Services, Inc., Case No. 14-1618 (7th Cir. July 27, 2015). 2) Golden State Bottling Co., Inc., 414 U.S. 168 (1973); see also Einhorn v. M.L. Ruberton Constr. Co., 632 F.3d 89, 93-96 (3d Cir. 2011); Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1326-28 (7th Cir. 1990); Haw. Carpenters Trust Funds v. Waiola Carpenter Shop, Inc., 823 F.2d 289, 294-95 (9th Cir. 1987); Stotter Div. of Graduate Plastics Co., Inc. v. Dist. 65, United Auto Workers, 991 F.2d 997, 998-99, 1002 (2d Cir. 1993).
3) Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323 (7th Cir.1990); Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Tasemkin, Inc., 59 F.3d 48 (7th Cir.1995).
4) Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., Case No. 12-17675 (9th Cir., Sep. 11, 2015).
