Asset Sale Results in Unanticipated Pension Liabilities for Purchaser

February 2011Newsletters For Your Benefit

In January 2011, the Third Circuit Court of Appeals expanded the circumstances under which a purchaser in an asset sale can be liable for the seller’s employment-related obligations. The court held that such a purchaser can be liable for the seller’s delinquent contributions to a multiemployer benefit plan, if the buyer had notice of the delinquency prior to the sale of assets and if there is sufficient evidence of continuity of operations between the buyer and the seller to justify imposing such liability. The holding, in Einhorn v. ML Ruberton Construction Company, follows similar rulings in four other federal appellate courts.

The seller in Einhorn was party to a collective bargaining agreement that required it to contribute to multiemployer pension and welfare plans on behalf of its unionized workforce. Prior to the asset sale, the purchaser negotiated with the union and agreed to hire the seller’s employees, observe the existing collective bargaining agreement on an interim basis and negotiate a new union contract that would cover all of its employees. The purchaser was aware the seller owed the plan $600,000 in delinquent contributions, and this fact was discussed during the pre-sale negotiations with the union. However, the resulting agreement was silent as to what responsibility, if any, the seller would bear for those delinquent amounts.

Following the asset sale, the purchaser took over several of the seller’s existing projects and subcontracted with the seller to provide labor on other projects retained by the seller. The purchaser leased, and later bought, real estate from the seller. The purchaser also began contributing to the multiemployer pension and welfare plans on behalf of employees who now were covered by its agreement with the union.

When the seller failed to pay its delinquent contributions to the benefit plans, the plan administrator filed suit alleging the purchaser was a successor in interest to the seller and, therefore, liable to the plan for the delinquency. The district court dismissed the suit and granted summary judgment in favor of the purchaser. However, the Third Circuit reversed, holding that the purchaser in an asset sale may be liable for the seller’s delinquent ERISA fund contributions if the buyer had notice of the liability prior to the sale and provided there is sufficient evidence of continuity of operations between the buyer and the seller.

Noting that the inquiry regarding continuity of operations must be made on a case-by-case basis, the Court of Appeals sent the case back to the district court to apply the “substantial continuity test” and determine whether there was sufficient evidence of continuity of operations between the buyer and seller to justify imposition on the purchaser for delinquencies incurred by the seller prior to the sale of assets. In applying the substantial continuity test, the factors to be considered include continuity of the workforce, management, equipment and location, completion of work orders begun by the predecessor, and constancy of customers. Commonality of ownership is not required.

Although the court determined that imposition of such liability is necessary to vindicate important federal statutory policy as reflected in ERISA, there is no specific provision in ERISA that requires such a result. To the contrary, the statute implicitly acknowledges the traditional common law rule that an entity purchasing the assets of another is responsible for the seller’s liabilities only if the buyer expressly or impliedly assumes those liabilities. The court invoked its authority under ERISA to develop a federal common law of employee benefit plans, noting a central policy goal underlying the law’s enactment was the protection of plan participants and their beneficiaries. It concluded this remedial legislation should be construed liberally in order to protect these participants and beneficiaries from the harm that would result from the seller’s failure to pay contributions.

Federal courts have modified the traditional common law rule in other circumstances in which it was deemed necessary in order to effectuate national labor policy. It has long been the case that liability for a predecessor company’s unfair labor practices could be imposed on a subsequent purchaser of its assets under certain circumstances because the successor company “is generally in the best position to remedy” the violation of its predecessor. More recently, federal courts have expanded the potential liability of a successor employer to include employment discrimination claims under Title VII and analogous state and local laws prohibiting discrimination in employment. Thus, the holding in Einhorn and in other federal appellate cases reaching similar results can be seen as a further expansion of the willingness of federal courts to modify the traditional common law rule regarding allocation of liabilities in connection with the sale of assets by businesses in order to effectuate national labor policies.

Einhorn holds that a purchaser cannot be found liable for the seller’s delinquent contributions unless the purchaser is aware of the delinquency prior to the sale. Thus, the issue here is not due diligence in discovering the liability, but rather, determining prior to the sale, what steps, if any, the prospective purchaser can take to insulate itself from such liabilities. Employers that are party to multiemployer pension plans already face potential exposure for circumstances often beyond their control, such as withdrawal liability, mass withdrawals and liability resulting from rehabilitation plans and surcharges imposed pursuant to the Pension Protection Act of 2006. Businesses considering transactions that will result in their becoming contributors to a multiemployer plan should fully investigate the actuarial and financial condition of the plan and the ramifications of becoming a contributing employer.

For more information regarding this topic, please contact Brian D. Sullivan at 973.994.7525 or [email protected].