Buyer Beware! Purchasers in Asset Sales Liable for Multiemployer Pension Plan Withdrawal Liability
Author, Mark Kelly, Atlanta, +1 404 572 2755, [email protected]
Two recent appellate court decisions have made it easier for multiemployer pension plans to impose withdrawal liability on a purchaser in an asset deal. In Tsareff v. ManWeb Services, Inc., the Seventh Circuit expanded its existing successor liability doctrine, holding that successor liability may be imposed on a buyer, even if withdrawal liability is contingent and the amount was not known to the buyer before the sale. Perhaps more troubling for potential buyers is that the Ninth Circuit has joined the parade—successor withdrawal liability in an asset sale was upheld in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michaels Floor Covering, Inc.
In Tsareff v. ManWeb Services, Inc., a unionized electrical contractor (“Tiernan”) was required to make contributions to a multiemployer pension fund (the “Fund”). After selling its assets to a non-union employer (“ManWeb”), Tiernan ceased operations and all contributions to the Fund. The Fund determined that the asset sale resulted in Tiernan’s complete withdrawal from the Fund and assessed withdrawal liability against Tiernan. Neither Tiernan nor ManWeb sought review or arbitration of the withdrawal liability assessment. The Fund’s trustees filed suit to collect the assessment, and added ManWeb as a defendant under a successor liability theory.
Under Seventh Circuit precedent, successor liability may be imposed in an asset sale with respect to the seller’s multiemployer pension plan withdrawal liability, where (1) the purchaser 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. The district court found that pre-acquisition notice of contingent liabilities was not sufficient to satisfy the notice requirement. Since the Fund did not assess the amount of withdrawal liability until after the asset purchase, ManWeb did not have sufficient notice and was not liable under a successor liability theory.
The Seventh Circuit reversed, finding that notice of either existing or contingent liabilities is sufficient to satisfy the notice requirement, and that ManWeb’s notice of contingent liability could be both reasonably inferred and directly proven by evidence in the record. Because the asset purchase agreement showed that ManWeb was aware of the seller’s contingent withdrawal liability and knew about the risk of withdrawal liability, the Seventh Circuit remanded the case to the district court to determine whether there was “substantial continuity” in the operation of the business before and after the sale sufficient to support a claim for successor liability.
In Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michaels Floor Covering, Inc., a construction industry employer named Studer’s Floor Covering, Inc. ceased doing business on December 31, 2009 and stopped making contributions to a multiemployer pension fund (the “Plan“). As Studer’s was winding down, one of the company’s longtime salesmen incorporated a new company, Michael’s Floor Covering, Inc., and began bidding directly on projects. Michael’s leased the Studer’s storefront and warehouse, took over Studer’s business telephone number and hired five of Studer’s former employees. At auction, Michael’s purchased about 30 percent of Studer’s’ tools, equipment and inventory. Studer’s did not sell or otherwise assign its customer lists or customer information to Michael’s. Rather, Michael’s used existing business relationships developed over the course of the owner’s 19 years as a salesman for Studer’s. Michael’s never made any contributions to the Plan because it was a non-union employer.
In general, when an employer withdraws from a multiemployer pension plan, it will be liable to the plan for withdrawal liability. However, under a special exception applicable to the construction industry, no withdrawal liability is imposed on construction businesses that close and do not resume operations within the jurisdiction of the bargaining agreement for at least five years. The dispute in this case concerned whether or not the construction industry exception applied. The Plan argued that the exception did not apply because Michael’s essentially took over the work Studer’s would have done, and therefore was Studer’s successor. After a bench trial, the district court held that Michael’s was not liable for Studer’s withdrawal liability under the successorship doctrine.
On appeal, the Ninth Circuit reversed, holding for the first time that a successor employer in an asset sale can be liable for a seller’s multiemployer pension withdrawal liability. The Ninth Circuit found that the district court did not properly identify or weigh the successorship factors. First, and most significantly, the district court did not give prime consideration to “market share capture” (i.e., the portion of Studer’s business or body of customers that Michael’s retained). The Ninth Circuit agreed with the Plan that the focus should be on the relative amount of revenue generated by Studer’s former customers, rather than a simple headcount of customers. The Ninth Circuit also found that the district court erred when it analyzed workforce continuity; it held that the appropriate test is whether “a majority of the new workforce once worked for the old employer”, not whether Michael’s employed a majority of Studer’s former workforce. In addition, the Ninth Circuit stated that the workforce continuity test should only include those employees as to whom pension fund contributions would be due. The Ninth Circuit remanded the case to the district court to reconsider whether there was substantial continuity in the operation of the business before and after the sale in light of the successorship factors discussed by the appellate court.
Given that two circuit courts now agree that buyers in an asset sale can be liable for the seller’s multiemployer pension plan withdrawal liability, multiemployer plans will be emboldened to assert successor liability claims in other jurisdictions. Buyers need to be aware that this area of law is developing. To reduce the risk that they could be saddled with a seller’s withdrawal liability, buyers should consider one or more of the following actions when negotiating an asset purchase agreement:
- Negotiate a purchase price reduction based on the anticipated withdrawal liability.
- Require the seller to retain funds in escrow pending final assessment by the multiemployer plan.
- Include an indemnity provision that obligates the seller (and/or seller’s affiliates) to pay any withdrawal liability imposed on the buyer.
- Require seller to notify buyer of any multiemployer plan withdrawal liability assessment so that the opportunity to contest the assessment is not unintentionally waived.
- Where available, consider pursuing the asset purchase in bankruptcy; Bankruptcy Code Section 363 may provide some protection against successor liability claims since debtors can sell property “free and clear” of certain claims, subject to court approval.