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July 27 — An employer's corporate successor may be responsible for its $661,978 in multiemployer pension fund withdrawal liability under a theory of successor liability, even though the employer withdrew from the fund after it sold its assets, the U.S. Court of Appeals for the Seventh Circuit ruled July 27.
The U.S. Supreme Court and the Seventh Circuit have imposed successor liability in employment-related contexts when the successor had notice of the claim prior to the acquisition and there was “substantial continuity in the operation of the business before and after the sale.”
The Seventh Circuit held that notice of contingent—not just existing—withdrawal liability satisfies the successor liability notice requirement. The plan trustees showed that the decision makers of successor company ManWeb Services Inc. knew about Tiernan & Hoover Inc.'s labor contract obligations during pre-purchase negotiations and that the contingent withdrawal liability was explicitly included in the asset purchase agreement.
In an opinion by Judge William Bauer, the court found that ManWeb had sufficient notice, but it remanded the case to the district court to address the successor liability continuity requirement.
According to the case record, ManWeb acquired Tiernan in August 2009 pursuant to an asset purchase agreement. Tiernan was a privately owned engineering and construction company that did business as the Freije Company and participated in a multiemployer pension fund sponsored by the Indiana Electrical Workers. After the acquisition, ManWeb, which was a non-unionized company, began doing business as Freije.
In 2010, the fund sent a letter to Freije demanding payment of withdrawal liability in the amount of $661,978. The fund didn't receive any payments, and it sued under the Multiemployer Pension Plan Amendments Act.
The U.S. District Court for the Southern District of Indiana found that Tiernan was liable for the withdrawal liability because it failed to initiate arbitration contesting the assessment. But it found that ManWeb wasn't liable as a successor because it didn't have proper notice of the claim prior to the acquisition.
Tiernan didn't withdraw from the fund until after the sale, and the district court held that pre-acquisition notice of “contingent” liabilities isn't sufficient.
On appeal, the plan argued that “in the narrow context of multiemployer pension fund withdrawal liability, the successor liability notice element encompasses both existing and contingent liabilities.” The Seventh Circuit agreed.
Under the MPPAA, an employer that withdraws from multiemployer pension plans must pay its share of “unfunded vested benefits” or withdrawal liability, the court explained.
A “liability loophole” would exist if the notice requirement excluded contingent liabilities in this context, the court said, because plan sponsors wouldn't be able to seek withdrawal liability from some asset purchasers who would otherwise be considered successors and the plans would be left “holding the bag.”
The court rejected ManWeb's argument that its decision in Upholsterers' Int'l Union Pension Fund v. Artistic Furniture, 920 F.2d 1323, 13 EBC 1138 (7th Cir. 1990), held that “successor liability arises only when the purported successor ‘knows the precise extent' of the liability.”
It would be inequitable to impose liability on a successor that didn't have an opportunity to protect itself with an indemnity clause or by negotiating a lower purchase price, the court said. But a successor may take these measures to protect itself even if the withdrawal liability is contingent.
In this case, ManWeb conducted pre-purchase negotiations and performed due diligence, the court said. The trustees produced evidence that during this process, ManWeb's key decision makers became aware of Tiernan's union obligations and were concerned about withdrawal liability. Additionally, the asset purchase agreement referenced attached financial statements that included the potential withdrawal liability, the court said.
The appellate court also found that the lower court abused its discretion in finding that it would be inequitable to impose liability on ManWeb. ManWeb could have—and did—protected itself against liability through an indemnity clause, the court said. Additionally, ManWeb could have required Tiernan to obtain an estimate of its liability in order to negotiate a lower purchase price, it said.
“Shielding a successor employer from liability when the company had knowledge of the potential liability and still had bargaining power with regard to the transaction runs counter to the policies underlying the doctrine of successor liability,” the appellate court said.
Judges Ilana Diamond Rovner and Ann Claire Williams joined the opinion.
The fund was represented by Rachel R. Parisi of Ledbetter Parisi Sollars LLC in Miamisburg, Ohio. ManWeb was represented by James H. Hanson and James T. Spolyar of Scopelitis Garvin Light Hanson & Feary PC in Indianapolis.
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Text of the opinion is available at http://www.bloomberglaw.com/public/document/JAMES_TSAREFF_et_al_Plaintiffs_Appellants_v_MANWEB_SERVICES_INC_D.
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