By Carol Buckmann
Are you purchasing assets of a business in financial trouble? Does or did it have union employees? Multiemployer pension plans and the PBGC are looking for deep pockets, and failure to investigate seller’s pension liability can be expensive. Buyers and their counsel need to be vigilant because recent court decisions make clear that simply providing in the purchase agreement that pension liabilities are not assumed by the buyer is not a magic bullet.
Asset Purchaser Not Required to Have Actual Notice.
In Part 1, I wrote about a Ninth Circuit decision (Heavenly Hana Hotels) https://cohenbuckmann.com/insights/2018/12/6/stepping-into-the-sellers-shoes-can-you-have-successor-withdrawal-liability in which a buyer who purchased a hotel inherited seller’s multiemployer plan withdrawal liability. The buyer was found to have constructive notice of the seller’s withdrawal liability because the buyer was familiar with multiemployer plans and a diligent investigation, rather than simply relying on the seller’s representations, would have revealed the liability. I wrote at that time that other courts might follow Heavenly Hana Hotels, and we have just had a decision in another circuit that did so.
Ohio District Court Adopts the Constructive Notice Rule.
In a case involving the Toledo Area UAW Retirement Income Plan, the court refused to accept the buyer’s argument that successor liability could not be imposed because the buyer did not know about the withdrawal liability. The court determined that the buyer should have known that the sellers had already withdrawn from the plan and were obligated to make withdrawal liability payments pursuant to a written agreement. In this case, there was testimony regarding the review by the buyer’s attorneys, who had not identified this liability exposure even though they had an attorney identified as an ERISA expert advising the corporate lawyer on the deal.
Sellers Also Held Liable.
Going a step beyond the Heavenly Hana court, the court in Ohio also found the sellers liable under a provision of ERISA that permits the court to ignore transactions intended to evade withdrawal liability. They had kept cash from the sales of the business’ assets, which they used for personal expenses, and taken possession of cars used in the business rather than repaying the plan. The sellers were required to repay that money to the withdrawn employer for payment to the plan.
But Did the Buyer Continue the Business?
Continuity of business operations is a separate element that must be proved to establish successor liability. However, the Ohio court didn’t rule at this time on whether the buyers continued the business. Factors such as the extent to which the buyer hired the employees and management of the business and whether customers were retained will be reviewed at trial. The Seventh Circuit in its Man Web decision, discussed in Part 1, found continuity of operations even when the purchased assets were used in a business that formed only a part of the buyer’s operations, and the Ohio court faces this issue as well.
PBGC v. Findlay Industries.
While most of the successor liability cases have been issued regarding multiemployer plan liability, in Findlay, the PBGC succeeded in holding family members and a trust liable for single employer plan termination liability under an expanded definition of “trade or business”. Following a business shutdown, the founder created an irrevocable trust run by his sons to which he transferred assets which were then leased back to him. The court determined that even passive leasing is a trade or business responsible for liability under Title IV of ERISA. The founder’s son created successor businesses that were also liable because they took over the same land, hired many of the same employees, and sold to Findlay’s largest customer. The court found that ERISA required looking at substance over form.
While Findlay did not involve arms’ length transactions (which might have entitled the PBGC to pursue sellers under Section 4069), it provides ammunition for plaintiffs seeking to rely on the common law of successor liability.
How Can Buyers Protect Themselves?
· Thoroughly investigate potential Title IV liabilities prior to the closing. Will seller be terminating a plan or have a withdrawal at closing because it will no longer contribute to the plan? (Note that a reduction in multiemployer plan contributions can result in liability for a partial withdrawal)
· With an actuary’s help, review the plan’s funding notices and status and any available liability estimate from the plan.
· Investigate the seller’s financial situation to assess the likelihood that seller will not pay any pension liability assessment.
· Consider special purchase agreement provisions: a covenant that sellers will pay withdrawal liability assessments, broad indemnification rights, and purchase price adjustments. It may be appropriate to establish an escrow account to cover potential liability.
· Be cautious about using ERISA Section 4204 to avoid a withdrawal on the sale. This will obligate the buyer to continue to contribute to a multiemployer plan and can result in higher liability if the buyer withdraws from the plan after the closing.
· Investigate whether protective insurance is available.