Multiemployer pension plans (MEPs) have a deceptive simplicity for many employers: Contributions are paid to the MEP for hours worked in accordance with the labor agreement, and employees accrue pension benefits without the employer incurring actuarial, tax, legal or other administrative expenses. Unfortunately, current contributions are just the beginning of the employer’s liability to the MEP.
An employer withdrawing from an MEP may incur substantial withdrawal liability for the MEP’s unfunded vested benefits. This withdrawal liability can impact not only the immediate employer, but also its affiliated businesses, its owners, and even purchasers of the employer’s assets.
In recent years, MEPs have aggressively pursued unpaid withdrawal liability claims against the purchasers of a withdrawing employer’s assets, even where traditional criteria of “successor liability” are not present.
Under the general rule of successor liability, a purchaser acquires assets free of the seller’s liabilities unless: (1) the purchaser expressly or impliedly assumes a liability; (2) the transaction amounts to a consolidation, merger or similar restructuring; (3) the purchaser is a “mere continuation” of the seller; or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping the liability for the seller’s debts. Unfortunately, some courts have followed a rule for determining successor liability for labor and pension liabilities that is more expansive than this general rule. They hold the purchasers of assets from an employer with withdrawal liability responsible for such liabilities, upon a finding that the buyer is the seller’s successor and that the buyer had notice of the seller’s liability at the time of the sale.
Two recent cases illustrate the issues that a prospective asset purchaser must consider in evaluating whether it may face withdrawal liability claims as a “successor” to an employer who withdraws from an MEP.
Ninth Circuit Adopts Constructive Notice Standard for Successor Liability
In Heavenly Hana LLC v. Hotel Union & Hotel Indus. of Haw. Pension Plan, the U.S. Court of Appeals for the Ninth Circuit held that constructive notice is sufficient to impose successor withdrawal liability. There, a private equity group purchased the assets of a company that operated a hotel. Pursuant to collective bargaining agreements (CBAs) between the seller and the hotel workers’ union, the seller was obligated to contribute to an MEP. Post-closing, the buyer continued operating the hotel. However, instead of adopting the seller’s CBA with the union, it negotiated its own benefit plans without continued MEP participation. The MEP assessed the seller’s $757,981 withdrawal liability on the buyer as the seller’s successor, and the buyer filed suit to contest its responsibility for the withdrawal liability.
Since the buyer continued operating the hotel, the first requirement for successor liability (i.e., sufficient continuity of operations) was not in dispute. Instead, the parties argued over whether the buyer needed “actual notice” of the withdrawal liability, or whether “constructive notice” was sufficient. Based on the purpose and history of the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA), the Ninth Circuit reasoned that such laws were intended to be liberally construed in favor of protecting participants, and that a constructive notice requirement was consistent with this approach.
The court explained that under a constructive notice standard, purchasers are deemed to have notice of any facts that “one using reasonable care or diligence should have.” It then concluded that the buyer was on constructive notice because, based on the underlying facts, a reasonable purchaser would have discovered the withdrawal liability. In this instance, the buyer previously operated a hotel that participated in an MEP; it had employed a four-person team to conduct due diligence on the seller; the purchase agreement clearly disclosed that the employees were unionized and that the seller contributed to an MEP; and the MEP’s annual funding notices, which indicated its underfunding, were publicly available online.
MEP Must Obtain Stay of Sale in Bankruptcy to Assert Successor Liability
In a bankruptcy case, a debtor may sell its assets free and clear of claims and interests under Section 363(f) of the Bankruptcy Code, which seeks equality of distribution among similarly situated creditors and to maximize the value of assets being sold for the benefit of creditors. Bankruptcy courts have held that a sale free and clear of claims and interests under Bankruptcy Code Section 363(f) protects an asset purchaser from successor liability claims arising under various employment, labor and benefit laws.
In Chi. Area I.B. of T. Pension Fund v. Central Grocers, Inc. (In re Ctr. Grocers, Inc.), No. 17-cv-05808, 2018 U.S. Dist. LEXIS 105479 (N.D. Ill. Jun. 25, 2018), Chapter 11 debtors received an order under Bankruptcy Code Section 363(f) permitting the sale of assets, including the sale of a distribution center whose unionized employees participated in an MEP. The MEP had a claim of $5 million in unpaid withdrawal liability and intended to pursue successor liability claims against the purchaser. It appealed the sale order to challenge the provisions in such order negating the withdrawal liability, but, importantly, it did not move for a stay of the sale pending appeal.
The district court granted the debtors’ motion to dismiss the appeal as moot because the MEP did not obtain a stay of the sale pending appeal. Observing that Section 363(f) bankruptcy sales are intended to be final, the court noted that an appeal of a bankruptcy court’s order approving the sale of assets to a good faith purchaser is moot unless it obtains a stay of that order pending appeal. Since the MEP failed to obtain a stay of the sale, its appeal was moot. The court was unpersuaded by the MEP’s arguments that ERISA and MPPAA principles should apply and that the purchaser should bear the consequences of the sale’s premature closing.
Lessons from Heavenly Hana and Central Grocers
Heavenly Hana and Central Grocers are important reminders about the expanded successor liability doctrine used by MEPs to seek and collect unpaid withdrawal liability. Transactions in which a purchaser buys assets of an employer participating in an MEP must be carefully structured so the purchaser does not face unexpected liabilities.