Successor Liability for Pension and
Other ERISA Obligations
49
Compensation Planning Journal No. 9 p. 32
Charles C. Shulman, Esq.*
One of the murky but interesting aspects of ERISA law —
which has been revisited from time to time by the federal courts — has been the
extent to which liability under ERISA will carry over to successors who
purchase the assets rather than the stock of the business. This article
explores the current state of the law regarding successor liability under
ERISA.
GENERAL COMMON-LAW RULES OF
SUCCESSOR LIABILITY - CONTINUITY OF OPERATIONS AND CONTINUITY OF OWNERSHIP [S2]
[UC]
The general common law rule is that a company that
purchases assets of another company is not automatically responsible for the
seller’s liabilities.[1] There are generally four exceptions—where successor
liability will apply to a purchaser of all or substantially all of the assets
of a seller.
Express or Implied Assumption of Liabilities
The first exception is where the purchasing company
expressly[2] or impliedly[3] agrees to assume the selling company’s liabilities.
De Facto Merger
The second exception is where the transaction amounts
to a “de facto merger”—i.e., buyer’s existing business and target business are
deemed like a merger ̶ looking to four factors which favor such a
finding: (i) continuity of ownership (e.g., purchaser company pays for the
assets with stock of the purchaser), (ii) continuity of the business
enterprise, evidenced by continuity of management, personnel, physical
location, assets and general business operations, (iii) dissolution of seller,
and (iv) purchaser assuming obligations necessary for uninterrupted
continuation of normal business operations of seller.[4] Many cases require the continuity-of-shareholders prong
to find a de facto merger.[5]
Mere Continuation of Seller Entity.
The third exception is where the purchaser corporation
is a “mere continuation” of the seller, i.e., merely a restructured or
reorganized form of seller’s corporate entity and not simply a continuation of
the business operation. This exception is aimed at owners and directors who
may dissolve one company and begin another to avoid debts and liabilities.
Factors include: (i) common identity of officers, directors and shareholders in
the selling and purchasing corporations (continuity of ownership or corporate
structure), (ii) continuity of business operations, (iii) cessation of ordinary
business by seller, and (iv) inadequate consideration paid for assets.[6] Common identity of officers, directors and shareholders
is the key element to finding mere continuation.[7] This “mere continuation” exception is very similar to the
“de facto merger” exception and they are sometimes treated together in case
law.[8] Note that the “de facto merger” and “mere continuation” tests
above are narrower than the “continuity of operations” condition for pension
successor liability under the Artistic Furniture line of cases
discussed below, in that de facto merger and mere continuation generally
require continuity of ownership, which is not the case in the pension successor
liability cases, where continuity of operations typically suffices.
Fraudulent Transfer
The fourth exception is where the transfer of assets is
for the fraudulent purpose of escaping liability for the seller’s debts.[9]
Product-Line Exception
A small number of jurisdictions, including California
and New Jersey, recognize an additional, more expansive exception under which
successor liability might attach to an asset purchaser—the so-called “product
line” doctrine.[10]
Tax Liability on Successor
Section 6901[11] sometimes imposes tax on a successor. Specifically §6901
allows the IRS to assess and collect taxes from the transferee of
property in the same manner as it does in the case of the transferor entity
that originally incurred the tax liability.[12]
Free and Clear Bankruptcy Asset Sale
Bankruptcy Code §363, 11 U.S.C. 363, allows a
bankruptcy trustee to sell the property of the bankruptcy estate “free and
clear” of any interest in the property.[13]
BROADENED APPLICATION OF
SUCCESSOR LIABILITY IN ERISA MULTIEMPLOYER PENSION OBLIGATIONS
Broadened
Application of Successor Liability for ERISA Obligations
Minimum funding pension obligations, Title IV
termination liability, multiemployer withdrawal liability and other pension
liabilities would seem to be treated like any other preexisting obligation that
unless assumed by the buyer — or unless the common law exceptions for successor
liability apply — the buyer of assets would not be liable for the seller’s
obligations.
However, case law has expanded successor liability for
certain obligations under ERISA in certain circumstances. Specifically, a
number of cases have found successor liability for pension obligations if there
is continuity of operations, as well as knowledge, even if this is no
continuity of ownership, while in the non-ERISA context successor liability
also requires continuity of ownership.
A number of cases — including circuit and district
court decisions in the Seventh, Sixth, Second, Third, and Ninth Circuits — have
found successors in asset purchases to be liable for the predecessors’ pension
obligations under ERISA even where the general common law exceptions for
successor liability would not ordinarily apply.
Most of the cases discussed below are in the
multiemployer pension withdrawal liability contexts, but other cases expand
successor liability in the context of single-employer pension plan termination
liability, executive retirement plans, retiree health liability, ERISA
fiduciary liability (according to some courts), labor law and unfair labor
practices, and employment discrimination contexts.
ERISA
Successor Liability— Seventh Circuit 1990 Artistic Furniture Case Regarding
Unpaid Contributions to Multiemployer Pension Plan— Continuity of Business
Operations and Notice.
In Upholsterers’ International Union Pension
Fund v. Artistic Furniture of Pontiac, the Seventh Circuit held that
under ERISA a purchaser of assets could be liable for delinquent pension
contributions owed by the seller to a multiemployer pension fund maintained by
the union even when the common-law successor liability exceptions do not apply;
provided, that: (i) there is sufficient evidence of continuity of operations
and (ii) the purchaser had knowledge of the liability of the seller.[14] There would be no requirement for continuity of
ownership, as there are under the common law exceptions for successor
liability.
In Artistic Furniture, the old employer,
Pontiac Furniture, ceased making contributions to a multiemployer pension fund
when it had severe financial difficulties beginning March 1984. Eventually, the
main creditor of Pontiac foreclosed on Pontiac and sold its assets to Artistic
Furniture, an unrelated company, in August 1985. In connection with the
purchase, the buyer - Artistic Furniture - negotiated a new collective
bargaining agreement with the union including the obligation to contribute to
the multiemployer pension fund. However, the buyer did not specifically assume
liability for the delinquent pension fund contributions that were not paid by
the seller between March 1984 and August 1985. The pension fund sued both
parties for delinquent pension contributions. There was apparently no claim for
any withdrawal liability since the buyer bargained to continue in the pension
fund.
The Seventh Circuit cited Supreme Court in Golden
State Bottling Co. v. N.L.R.B.,[15] in finding, that liability of asset purchaser for unfair
labor practice (unlawful discharge) under the NLRA could be imposed on the
successor who continued the predecessor’s operations and who had notice of the
pending unfair labor practice charge at the time of the transaction, even
though there was no continuity of ownership (and therefore no de facto merger
or mere continuation). This protects Congressional intent under the National
Labor Relations Act of avoidance of labor strife and fee exercise of the
employees’ rights under the NLRA, and are achieved at a relatively minimal cost
to the bona fide successor, with minimal economic cost because the buyer is
aware of the obligation. Similar conclusions have been reached for other labor
law obligations and employment discrimination laws. Artistic Furniture applied
the rationale of Golden State Bottling Co. to multiemployer
pension liability under ERISA.[16]
ERISA §515, which requires employers to honor their
obligations under the plan or the labor agreement to make the contributions to
the pension fund, should be imposed on successors as well since ERISA’s purpose
is to protect other employers in the fund and the PBGC (and presumably
employees if their benefits are affected), which applies when delinquent
contributions are made. However, this successor liability will only apply where
there was sufficient evidence of (i) continuity of operations, and (ii) prior
knowledge by the buyer of this liability.
The Seventh Circuit held that there was sufficient
evidence of continuity of operations since Artistic Furniture: (i)
employed substantially all the workforce, (ii) operated from the same location,
(iii) used predecessor’s machines, (iv) produced the same products, (v)
completed open work orders, (vi) honored the predecessor’s warranties, and
(vii) two of its officers remained with the successor. The owners, officers and
directors were all different (except for one CFO who stayed on). The court
stated that it did not matter that there was no continuity of ownership. The
case was remanded to district court, though, to determine if there was
sufficient knowledge of the liability.
Comment
on Artistic Furniture Case — Are ERISA Laws Like Unfair Labor Practices &
Employment Discrimination Laws?
The rationale for broadened successor liability for
labor law obligations and employment discrimination is that these statutes were
enacted to protect employees, and where there is continuity of operations,
employees should be able to expect to retain these protections from their
current employer. Artistic Furniture expands this rationale to
ERISA liability for delinquent contributions to multiemployer plans because
ERISA is intended, among other purposes, to protect other employers and the
PBGC. Query whether this is a good analogy—unfair labor practice rules and
nondiscrimination laws are intended to protect the employee vis-Ã -vis the
employer. But for multiemployer pension contributions the parties protected are
primarily other employers in the fund and the PBGC and they should be like any
other contractual obligation that is subject to the common law successor
liability rules. There are some benefits to employees also, by avoiding the
plan becoming bankrupt and employees losing a portion of their benefits, as
stated below.
A similar question is raised by Einhorn v. M.L.
Ruberton Const. Co.,[17] which is one of the few cases to disagree with the Artistic
Furniture broadened successor liability, although this holding was
subsequently overturned by the Third Circuit in Einhorn v. M.L.
Ruberton Construction Co.,[18] as noted below. The district court in the above case
disagreed with Artistic Furniture and held that ERISA
obligations are different than unfair labor practice or employment
discrimination laws because the unfair labor practice and nondiscrimination
rules are designed to protect the employees, while successor liability for
delinquent contributions or withdrawal liability to multiemployer funds is a
corporate debt to multiemployer fund and is not a law directly protecting the
employee. A counter-argument to Einhorn is that ERISA rules,
while enforcing the union’s pension fund, indirectly protect employees from
losing benefits if the multiemployer plan does not have enough assets to meet
its obligations, and the PBGC guarantees are not sufficient.[19] In any event, the district court ruling was overturned
by the Third Circuit.
It Does Not Matter That a Collective Bargaining
Agreement Imposed the Obligation for the Contribution
Note that finding successor liability in the Artistic
Furniture could not have been based entirely on the fact that a
collective bargaining agreement required the contribution to the fund, because
under labor law successors are generally not bound to the specific provision of
the collective bargaining agreement—although they do have a duty to bargain in
good faith—unless the contract was specifically assumed or the successor is
found to be the alter-ego of the predecessor (see below).
Other
Seventh Circuit Cases Finding Expanded ERISA Successor Liability
Several other Seventh Circuit decisions have found
expanded successor liability in ERISA withdrawal liability cases. See,
e.g., Moriarty v. Svec,[20] holding that where the son of the owner took over
operations and had knowledge of liability, there was successor liability to the
multiemployer pension and welfare fund).[21] Similarly, a 2014 Seventh Circuit case, Sullivan
v. Running Waters Irrigation, Inc., held that where a son's businesses
contained a substantial continuity of operations of the father’s irrigation
business, and the son had knowledge of the multiemployer pension obligations
there would be successor liability.[22]
A 2015 Seventh Circuit case, Tsareff v. ManWeb
Services, Inc., held that in an asset sale where the buyer had notice of
contingent withdrawal liability to the multiemployer pension plan, even though
the asset purchase agreement specifically excluded plan liability assumption,
and the notice was only contingent (no withdrawal had occurred), successor
liability could nevertheless apply to the purchaser, and therefore the court
denied summary judgment which the buyer had sought, and the court remanded the
case to the district court to determine if there was a continuity of
operations, which is the other prong for successor liability.[23]
A 2016 Seventh Circuit case, Board of Trustees
of Automobile Mechanics’ Local No. 701 Union and Industry
Pension Fund v. Full Circle Group, Inc., held that multiemployer withdrawal
liability could be imposed on an asset purchaser even though the purchaser may
not have had knowledge about the possibility of withdrawal liability before
signing the purchase agreement because the purchaser certainly knew that the
company was unionized and would have almost certainly known that the company
was required to contribute to a union pension fund.[24]
A 2018 Seventh Circuit case, Indiana Electrical
Workers Pension Benefit Fund v. ManWeb Services, Inc., held that there
could be successor liability for ERISA withdrawal obligations n an asset buyer
with notice and substantial continuity of operation, even though it was a
"big buyer," i.e., the seller's business was only a small portion of
the purchaser's operations.[25]
Expanded ERISA Successor Liability in Other Circuits
Ninth Circuit [S3]
Ninth Circuit cases (some of which predate and are
cited in Artistic Furniture) have extended successor liability
concerning ERISA pension and welfare obligations under collective bargaining
agreements where there is a successor with substantial continuity between the
old and new operations (even without continuity of ownership).[26]
A 2015 Ninth Circuit caseheld that an asset purchaser
of a floor covering business could have successor liability for the seller’s
withdrawal liability as long as there was continuity of operations and the
buyer had notice of potential liability. In addition, the court held that the
successor employer could continue to be liable despite the “building and construction
industry” exception of ERISA §4203(b)[27] since if there is a common-law successor liability the
business and construction industry employer will be viewed as if it had
continued and there will be no ERISA §4203(b) exception.[28]
A 2018 Ninth Circuit case, held that there was
successor liability on a private equity group that purchased a Hawaiian hotel
in an asset purchase for the seller's multiemployer withdrawal liability to a
multiemployer pension plan because of constructive notice of the seller's
pension liability.26
Second Circuit
In Stotter Division of Graduate Plastics Co.
Inc. v. District 65, UAW,[29] the Second Circuit ruled that an asset purchaser could
be liable for the predecessor’s unpaid contributions to a multiemployer plan in
accordance with the bargaining unit contract, and it upheld an arbitrator’s
decision to that effect.[30]
Sixth Circuit [S3]
A 2008 district court decision in the Sixth
Circuit, Schilling v. Interim Healthcare of Upper Ohio Valley, Inc.,
applied broad successor liability in ERISA contexts such as multiemployer
withdrawal liability, like the Seventh Circuit Artistic Furniture case.[31] In addition, the Sixth Circuit 2018 case of PBGC
v. Findlay Industries, Inc., et al.,[32] discussed below, has expanded successor liability even
to single-employer pension termination liability.
Third
Circuit –District Court case disagreed with Artistic Furniture but was
Overturned by the Third Circuit
A New Jersey 2009 district court casewas one of few
cases and perhaps the only federal case to specifically disagree with Artistic
Furniture. The district court held that ERISA is different than labor law
unfair labor practice claims or employment discrimination laws because those
laws are designed with Congressional intent to directly benefit the employees,
while successor liability to a multiemployer fund for delinquent contributions
or withdrawal liability is a corporate debt to the multiemployer fund and is
not a law directly protecting the employee.[33]
However, the Third Circuit in a 2011 decisionoverturned
the district court decision and held that a purchaser could be held liable for
successor liability for the predecessor employer’s delinquent multiemployer pension
contributions because of continuity of operations (continuity of workforce,
management, equipment and location, completion of work orders begun by
predecessor, constancy of customers, and notice of the liability before the
sale) even without continuity of ownership.[34]
There are also other district course cases in the Third
Circuit cases providing for expanded successor liability.[35]
Other
Circuits
It is unclear whether any other circuits would disagree
with Artistic Furniture’s ERISA successor liability rule.
Why
Should Asset Sale Trigger Withdrawal Obligation if Buyer Has Successor
Liability?
Note that even though there may be successor liability
on the withdrawal liability or other liability to the fund, the asset sale
itself would appear to still be treated as a withdrawal under ERISA (unless an
ERISA §4204 contract is entered into). This result is puzzling: If the asset
sale is disregarded by having the buyer pick up liability as a successor, why
should a sale of assets be treated as a withdrawal under ERISA? It would appear
that by operation of law there is a withdrawal (and the parties may be bound to
the form they have chosen), and although equity dictates that there should be
recourse against successors this does not change the basic nature of the asset
sale.
SUCCESSOR LIABILITY IN OTHER
ERISA CONTEXTS
Successor
Liability for Single-Employer Plan Termination Liability
A 2018 Sixth Circuit case, PBGC v. Findlay
Industries, Inc.,[36] has applied broad successor liability for
single-employer Title IV termination liability. In that case, Findlay
Industries folded in 2009 and its assets were indirectly sold to companies
owned by the son of the founder. The business in hands of the son's companies
soon began to run the same plants, hiring many of the same employees, and
selling to the former company's largest customer. The Sixth Circuit,
overturning the lower court, ruled that the expanded successor liability should
be applied to ERISA obligations, such as single-employer pension plan
termination liability under ERISA, since there was a continuation of the
business since this broadened successor liability services fundamental ERISA
policies. The Sixth Circuit did note that several circuits have broadened successor
liability in ERISA MPPAA withdrawal, for example, the Seventh Circuit and Ninth
Circuit cases cited above.[37]
Successor Liability for Retiree Health and Other
Welfare Obligations
Regarding successor liability for retiree health or
other welfare obligations in an asset sale, common-law successor liability
exceptions would apply (i.e., express or implied assumption, de facto merger,
mere continuation of seller or transfer for fraudulent purposes).
However, several cases have applied broadened successor
liability for retiree health or other ERISA welfare benefits where there is
continuity of operations and notice of liability (even if there is no continuity
in ownership), and ERISA’s broadened successor liability is not limited to
pension liability.[38]
Successor Liability for Top-Hat Supplemental Pension
Obligation
In Brend v. Sames Corp.,[39] the court applied the expanded ERISA successor liability
of Artistic Furniture to obligations under a top-hat executive
retirement plan since top-hat plans are generally subject to ERISA.[40] The court noted that while top-hat employees need less
protection than rank and file employees, ERISA nevertheless found it
appropriate to offer the protections of ERISA to all employees.
Whether
ERISA Fiduciary Obligations Have Expanded Successor Liability [S2]
[UC/LC]
Concerning ERISA fiduciary liability, a 2009 district
court case has held that ERISA fiduciary liability would not have broadened
successor liability.[41] However, another 2003 district court case stated in
dictum that ERISA fiduciary duties could have broadened ERISA successor
liability.[42] Where a buyer specifically assumes the ERISA obligation,
the buyer will have successor fiduciary liability.[43]
BROADENED SUCCESSOR
LIABILITY IN LABOR LAW AND EMPLOYMENT DISCRIMINATION CONTEXTS
As stated above, the Supreme Court in Golden
State Bottling Co. v. N.L.R.B., 414 U.S. 168 (1973), held that liability of
asset purchaser for unfair labor practice (unlawful discharge) under the NLRA
(where a union member was discharged for allegedly engaging in protected union
activities) could be imposed on successor who continues predecessor’s
operations and who had notice of the pending unfair labor practice charge at
the time of the transaction, even though there was no continuity of ownership
(and therefore no "de facto merger" or "mere
continuation"). This protects This protects Congressional intent under the
National Labor Relations Act of avoidance of labor strife and fee exercise of
the employees’ rights under the NLRA, and are achieved at a relatively minimal
cost to the bona fide successor, because buyer is aware of the obligation.
Similar conclusions have been reached for other labor law obligations and
employment discrimination laws.[44]
Similarly, the courts have imposed broadened successor
liability in cases involving employment discrimination.[45]
The National Labor Relations Act of 1935, which deals
with the establishment of collective bargaining relationships, imposes an
obligation on an employer and union to bargain in good faith.[46] When a corporation is taken over by a new employer
in an asset sale with substantial continuity of operations and workforce, there
is an obligation on the new employer to bargain in good faith with the existing
union representatives.[47] However, unless the buyer specifically assumes the
contract or is found to be the alter-ego of the predecessor, the new employer
is not bound by the specific terms of the existing collective bargaining
agreement.[48]
OTHER ERISA ISSUES WITH ASSET
SALES
Emergence
from Bankruptcy Like an Asset Sale [S2] [UC/LC]
With regard to a stock sale or merger, the purchaser
should in the ordinary course step into the shoes of the seller for any
termination liability even if they resulted from termination of the plan when
it was with the seller.[49] However, where a purchaser in a stock sale or merger
acquires a bankrupt corporation with its pension plan, courts have held that
the purchaser would not have controlled group liability because the ownership
interests have been extinguished in the bankruptcy, and there would not be
successor liability.[50] In a case where successor liability would apply to an
asset purchaser, the purchaser from the bankruptcy could also have successor
liability.[51]
Alter-Ego
Theory as Applied to Asset Purchases [S2] [UC/LC]
As discussed above, on occasion courts have found a
shareholder liable for ERISA and other liabilities of the corporation under the
doctrine of piercing the corporate veil (alter ego), for example, where there
is fraud, disregard by the owner of the separate character of the corporation
or shareholders undercapitalize the corporation. Courts have sometimes used
alter ego theory to apply successor liability.[52]
ERISA §4069(b) and §4218 Successor Liability for Mere
Changes in Form [S2] [UC/LC]
To avoid controlled group liability, companies
sometimes attempt to remove themselves from the controlled group.
ERISA §§4069(b) and §4218 provide that for purposes of termination
liability and withdrawal liability, respectively, if an entity ceases to exist merely
because of a change in identity or form, a liquidation into the parent
corporation or a merger, consolidation or division, the successor will remain
liable for the liability. This provision would not, however, cover ordinary
asset sales. Successor liability in asset sales would be subject to the case
law discussed above.
ERISA §4069(a) Liability [S2]
[UC/LC]
To avoid controlled group liability, companies
sometimes attempt to remove themselves from the controlled group. Typically,
this takes the form of a company selling or spinning off a subsidiary or
division and transferring severely underfunded pension plans with those sold
subsidiaries or divisions. The PBGC has been successful in certain cases in
having a court declare such a transaction as a sham.[53] In addition, the PBGC was successful in having ERISA §4069
enacted in 1986 as part of SEPPAA.
ERISA §4069(a) provides that if a person enters into a
transaction with a principal purpose of evading liability under Title IV, the
PBGC can assert liability on such person as if it was still a member of the
controlled group for any plan termination that results within five years of
the transaction.[54]
ERISA
§4212(c)
If a principal purpose of a transaction is to evade or
avoid liability, withdrawal liability is imposed as if the transaction had not
occurred (i.e., even if the entity left the controlled group in the
transaction).[55] Several cases have applied ERISA §4212(c) to impose
withdrawal liability. Other cases have held that ERISA §4212(c) did not apply
despite the avoidance of withdrawal liability. Courts have on occasion found
individuals liable under ERISA §4212(c) for participating in a scheme to evade
or avoid liability even though multiemployer withdrawal liability generally
only applies to the employer. ERISA §4212 does not have the five-year limit
that ERISA §4069 has (regarding attempt to evade termination liability).
Successor
liability [S2] [UC/LC]
In a corporate transaction, assuming there was no
intent to evade liability and ERISA §4069 and §4212(c) are not applicable, the
general successor liability rules should apply, i.e. the ordinary common law
exceptions to lack of successor liability and the broadened successor liability
rules for ERISA obligations under the Artistic Furniture line
of cases.
ASSET SALE AS WITHDRAWAL AND
ERISA §4204 AGREEMENTS
Asset
Sale as a Withdrawal
An asset sale will result in a withdrawal from the plan
by the seller. This may be advantageous to the buyer, as the buyer will not be
liable, absent some successor liability theory. For the seller, however, a
stock sale would be preferable, as there would be no automatic withdrawal from
the multiemployer plan. Another option is an ERISA §4204 contract discussed
below.
ERISA
§4204 Contracts to Avoid Multiemployer Liability in Asset Sales
As discussed above, where an asset sale occurs there
has by definition been a complete withdrawal by the target since it ceases to
exist, and even if the buyer continues to make required contributions, members
of the controlled group of the target, e.g., the seller, could be liable for
withdrawal liability. There is a statutory exception, however, in ERISA §4204,
under which a complete or partial withdrawal will not occur solely because,[56] as a result of a bona fide arm’s-length sale of assets
to an unrelated party, the seller ceases covered operations or ceases to have
an obligation to contribute for such operations, provided that the following
are met: (i) the purchaser obligates to contribute a similar amount as the
seller (i.e., substantially the same number of base contribution units) (ERISA
§4204(a)(1)(A)); (ii) for a period of five plan years after the sale, the
purchaser posts a bond or escrow equal to one year of the Seller’s
contributions, i.e., the average annual contribution required based on the
greater of the previous three years or the annual contribution required over the
last year, and the bond or escrow will be paid to the plan if the purchaser
withdraws or fails to make contributions to the plan during the five year
period (ERISA §4204(a)(1)(B)); and (iii)the contract of sale must provide for
the seller to be secondarily liable if the buyer withdraws within a five-year
period and does not make payment (ERISA §4204(a)(1)(C)). Such an arrangement is
referred to as a ERISA §4204 contract.
If the purchaser withdraws before the end of the fifth
year after the sale and fails to make withdrawal liability payments, the seller
must pay the plan the amount that it would have been obligated to pay absent
the ERISA §4204 contract.[57] There may also be a seller bond/escrow requirement in
the following situation: if the seller sells substantially all of its assets or
liquidates within the five-plan year period after the sale, the seller must
post a bond or escrow for the amount that the seller would be liable absent the
ERISA §4204 contract.[58]
If the above requirements are met so that the seller
has no liability, the buyer inherits the five-year contribution history of the
seller.[59] An advantage to ERISA §4204 is that if the seller has a
long contribution history, taking the liability of only the last five years of
contributions can shed a company of a significant portion of potential
withdrawal liability.
The PBGC has the authority to waive the purchaser
bond/escrow requirement and contractual seller secondary liability requirement
of ERISA §§4204(a)(1)(B) and §4204(a)(1) (C). ERUnder this authority, PBGC
regulations enacted in 1984 contain a class variance of the bond or escrow requirement
and of the contractual requirement for the seller to be secondarily liable if a
buyer notifies the plan of its intention that the sale is to be covered by
ERISA §4204 and demonstrates to the satisfaction of the plan that one of the
following exceptions apply: (i) the bond or escrow would not exceed the lesser
of $250,000 or 2% of the average total annual contributions made by all
employers to the plan for the three most recent plan years; (ii) the
purchaser’s average net income after taxes for the most recent three years
equals or exceeds 150% of the amount of bond or escrow required; or (iii) the
purchaser’s net tangible assets as defined in PBGC Reg. §4204.2 equal or exceed
the otherwise allocable share of unfunded vested benefits. PBGC Reg. §4204.11-4204.13.
The request for a variance must contain financial or other information
sufficient to establish that one of these exceptions are met, and pending the
plan’s decision as to whether the variance is met, the purchaser cannot be
required to post the bond or escrow. PBGC Reg. §§4204.11(b), PBGC Reg.
§4204.11(c), PBGC Reg. §4204.11(d). An individual exemption is also
available pursuant to ERISA §4204(c) under PBGC Reg. §§4204.21 and §4204.22.
ERISA §4204 and PBGC Reg. §4204 do not
specifically state that seller and purchaser are each determined on a
controlled group basis, but based on ERISA rules generally, seller and
purchaser should be interpreted as each being determined on a controlled group
basis.
Where there is no ERISA §4204 contract, purchasers of
assets are generally not held liable. However, see generally above regarding
successor liability for pension obligations. Also, the Seventh Circuit has held
that even where there is no §4204 contract the purchaser of assets may be
liable under the provisions of a particular collective bargaining agreement for
withdrawal liability.[60]
CONCLUSION
Successor liability in ERISA contexts—such as multiemployer
withdrawal liability—would, according to case law, be applicable if there is a
continuity of operations and notice to the buyer even if there is no continuity
of ownership. This expanded successor liability has been applied by courts not
just to withdrawal liability, but also to other ERISA contexts, such as
single-employer plan termination liability, top-hat plan, retiree health and
welfare plan obligations. In addition, case law has applied broad successor
liability for labor law obligations to bargain in good faith and employment
discrimination claims. Care must be taken by buyers in asset acquisitions to
account for possible broadened successor liability.
* Charles C. Shulman, Esq., Teaneck, NJ. If you
have any questions or comments, feel free to contact Charlie at
cshulman@ebeclaw.com or 201-357-0577.
[1] See, e.g., Dayton
v. Peck, Stow and Wilcox Co. (Pexto), 739 F.2d 690, 692 (1st
Cir. 1984) (successor not liable in product liability action since the purchase
of assets did not meet any of the four exceptions to the general rule); Murray
v. Miner, 74 F.3d 402 (2d Cir. 1996) (based on New York law, shareholders
of successor corporation not liable for breach of employment contracts where
there was no employer-employee relationship between employees and successor at
the time of alleged wrong); Berg Chilling Systems, Inc. v. Hull Corp.,
435 F.3d 455 (3d Cir. 2006) (buyer of manufacturer’s assets had no successor
liability). See generally 15 Fletcher Cyclopedia of the Law of
Private Corporations, §7122, §7124, §7124.10, §7124.20, §7124.50, and
§7125.
The successor liability rules are generally applicable
whether the successor is a corporation or another entity. Graham v.
James, 144 F.3d 229, 240 (2d Cir. 1998) (traditional rule of corporate
successor liability and the exceptions to the rule are generally applied
regardless of whether the predecessor or successor organization was a
corporation or some other form of business organization; citing 63 Am. Jur. 2d
Products Liability §117 (1984)).
[2] See,
e.g., Florom v. Elliott Mfg., 867 F.2d 570 (10th Cir. 1989)
(conduct of successor corporation shows that it specifically assumed the
liability); Hudson Riverkeeper Fund, Inc. v. Atlantic Richfield Co.,
138 F. Supp. 2d 482 (S.D. N.Y. 2001) (corporation that expressly assumed
alleged polluter’s liabilities could be liable under Resource Conservation and
Recovery Act even though its subsidiary was current site owner).
[3] See,
e.g., Philadelphia Elec. Co. v. Hercules, Inc., 762 F.2d 303
(3d Cir. 1985), cert. denied 474 U.S. 980, 106 S.Ct. 384 (implied assumption of
liability where language of assumption agreement is broad); Harbison v.
Garden Valley Outfitters, Inc., 69 Wash. App. 590 (1993) (implied
assumption of liability where acquiring company agrees to assume seller’s
obligations to its customers).
[4] See,
e.g., Philadelphia Electric Co. v. Hercules, Inc., 762 F.2d
303, 310 (3d Cir. 1985), cert. denied 474 U.S. 980 (successor
liable for predecessor’s negligence as express assumption of liability as well
as de facto merger, where: (i) the purchaser exchanged its stock as
consideration for the seller's assets so that the shareholders of the seller
corporation become a part of the purchaser corporation, (ii) predecessor’s
management and personnel became part of successor, (iii) predecessor was
required to transfer right to use its corporate name, and (iv) successor
continued to operate predecessor’s plants and produced same products as
predecessor); U.S. v. General Battery Corp., Inc., 423 F.3d 294 (3d
Cir. 2005) (acquisition of privately-held battery manufacturer part for
cash and part for stock constituted a de facto merger so that purchaser and its
successor would be responsible under the Comprehensive Environmental Response,
Compensation and Liability Act —Superfund law —for liability of battery
manufacturer); U.S. v. Sterling Centrecorp Inc., 960
F. Supp. 2d 1025 (E.D. Cal. 2013) (U.S. Environmental Protection Agency and
Calif. Dept. of Toxic Substances Control brought action against successor
corporation for liability of predecessors who operated gold mine causing
arsenic releases; district court held that the successor expressly and
impliedly assumed predecessor corporation's liabilities relating to the arsenic
release, and in addition, the acquisition by the successor was a de facto
merger since there was continuity of
business enterprise and continuity of shareholders, seller ceased its
operations right after the sale and purchaser took over the operations upon the
asset acquisition); Lehman Brothers. Holdings, Inc. v. Gateway Funding
Diversified Mortgage. Services, L.P., 785 F.3d 96 (3d Cir. 2015) (court
denied a summary judgement dismissal of action by purchaser of home mortgage
loans action against seller's successor in interest under de facto merger
theory; there was a continuity of enterprise with same personnel and business
operations in the same location, some continuity of ownership with seller's
shareholders retaining an ownership interest in the successor by reason of
contractual profit sharing entitlements, possibly cessation of business by the
seller company and there was assumption of ordinary business liabilities by the
purchaser).See in contrast, New York v. National Service
Industries, Inc., 460 F.3d 201 (2d Cir. 2006) (company that bought assets
of dry cleaning business was not liable for actions of seller under de facto
merger theory because there was no continuity of ownership; some evidence of
continuity of ownership is necessary to find a de facto merger).
[5] E.g., Arnold
Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38,
42 (2d Cir. 1985) (to find that a de facto merger has occurred there must be
continuity of shareholders); Louisiana-Pacific Corp. v. Asarco, Inc.,
909 F.2d 1260 (9th Cir. 1990) (there was no continuity of shareholders, which
is a prerequisite for finding de facto merger); New York v. National
Service Industries, Inc., 460 F.3d 201 (2d Cir. 2006) (cited above; some
evidence of continuity of ownership is necessary to find a de facto merger).
Some cases, however, have held that no one of these factors is either necessary
or sufficient to establish a de facto merger. Bud Antle, Inc. v.
Eastern Foods, Inc., 758 F.2d 1451, 1457-8 (11th Cir. 1985), reh’g
denied 765 F.2d 154 (11th Cir. 1985) (successor not liable; based on
totality of circumstances the court did not find a de facto merger).
[6] See,
e.g., Medicine Shoppe Intern., Inc. v. S.B.S. Pill Dr., Inc.,
336 F.3d 801 (8th Cir. 2003) (pharmacy was successor of franchisee; for “mere
continuation,” factors include: (i) common identity of officers, directors and
stockholders; (ii) incorporators of successor also incorporated predecessor;
(iii) business operations are identical; (iv) transferee uses same trucks,
equipment, labor force, supervisors and name of the transferor; and (v) notice
has been given of the transfer to employees or customers). Other cases
formulate the factors as stated in the text.
See in contrast, Grand Laboratories, Inc.
v. Midcon Labs of Iowa, 32 F.3d 1277 (8th Cir. 1994) (successor
corporation that purchased predecessor’s assets was not “mere continuation” of
predecessor under Iowa law where companies had no common shareholders or
directors; in determining whether one corporation is a continuation of
another, the test is whether there is a continuation of the corporate entity of
the transferor, not whether there is a continuation of the transferor’s business
operation); Mickowski v. Visi-Trak Worldwide, LLC, 415 F.3d
501 (6th Cir. 2005) (a corporation is not a “mere continuation” of the
corporation whose assets it has purchased for purposes of successor liability
just because it continues to provide the same services (continuation of
business operation), but rather the key element in the mere continuation theory
is the continuation of the corporate entity such as when one corporation sells
its assets to another corporation with the same people owning both corporations
— common identity of stockholders, directors, and stock).
[7] See,
e.g., Dayton v. Peck, Stow and Wilcox Co. (Pexto), 739
F.2d 690, 693 (1st Cir. 1984) (purchase of manufacturing company’s assets for
cash did not constitute a “de facto merger” or “mere continuation”; key element
of continuation is common identity of the officers, directors and stockholders
in the selling and purchasing corporations).
[8] See,
e.g., Berg Chilling Systems, Inc. v. Hull Corp., 435 F.3d 455 (3d Cir.
2006) (where one company sells all of its assets to another company, the buyer
is not normally liable for the liabilities of the seller, though if circumstances
indicate that there was a “de facto merger” of the corporations or that the
purchasing company was a “mere continuation” of the selling company, liability
would attach to buyer; the de facto merger test is similar to the mere
continuation test, except that the mere continuation test focuses on situations
in which the buyer is merely a restructured or reorganized form of the seller).
[9] See,
e.g., Lumbard v. Maglia, Inc., 621 F. Supp. 1529 (S.D. N.Y.
1985) (creditor of liquidated manufacturer adequately alleged successor
liability charging that various defendants had fraudulently created new entity
to carry on manufacturer’s business while avoiding its debts); Raytech
Corp. v. White, 54 F.3d 187, 192 (3d Cir. 1995) (transferee corporation
could be liable for transferor corporation’s liabilities for asbestos exposure
even though transferor’s asbestos-related assets were not part of transaction;
issue was whether transfer was fraudulent attempt to avoid liability); U.S.
ex rel. Bunk v. Gov’t Logistics N.V., 842 F.3d 261 (4th Cir. 2016)
(successor corporation could be liable for claims against the predecessor
corporation’s under False Claims Act for bid-rigging and plaintiffs had offered
sufficient evidence under a fraudulent transaction theory to survive summary
judgment).
[10] Ray
v. Alad Corp., 560 P.2d 3, 19 Cal.3d 22 (Cal. 1977) (non-bankruptcy asset
sale; successor that continues to market a product line purchased from
predecessor assumes predecessor’s liability for defective products); Lefever
v. K.P. Hovnanian Enterprises, Inc., 734 A.2d 290, 292 (N.J. 1999) (asset
sale in bankruptcy case; acquiring a substantial part of manufacturer’s assets
and continuing to market good in same product line exposes purchaser to
successor liability).
[11]
All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or the Treasury regulations promulgated
thereunder, unless otherwise indicated.
[12]
The liability of a transferee that may be enforced under I.R.C.§6901 may be
either at law or in equity. Regardless of whether enforcement is sought at law
or in equity, there are two fundamental elements to transferee liability: (1)
there must be a transfer of the taxpayer’s property to a third-party
transferee, and (2) the taxpayer must be liable for the tax at the time of
transfer and at the time transferee liability is asserted. Note that I.R.C.
§6901 does not impose successor liability, but rather allows a collection
mechanism where there is common law principles of successor liability. The
Supreme Court has ruled that transferee liability is predicated on state, not
Federal, law. C.I.R. v. Stern, 357 U.S. 39, 45 (1958). In general,
the elements of transferee liability in equity in a given state are those found
in that state’s fraudulent conveyance provisions.
[13] See,
e.g., In Matter of Motors Liquidation Company, 829 F. 3d 135
(2d. Cir. 2016) (in 2009 General Motors (Old GM) in a Chapter 11 bankruptcy
sold the bulk of its assets to a new entity (New GM) free and clear of
liabilities against New GM; Second Circuit held that free and clear provisions
could not be enforced to negate all of the ignition switch defect claims
because some of the claimants had not received adequate notice of the sale
order).
[14]
920 F.2d 1323 (7th Cir. 1990). Artistic Furniture in citing a
1987 Title VII case, notes as a factor “whether the predecessor is able, or was
able prior to the purchase, to provide the relief requested.” However, it does
not consider this factor in discussing the successor liability for Artistic
Furniture. The Artistic Furniture case does not emphasis on
this provision. Most of the other cases regarding broadened successor liability
do not mention this factor. Also, as noted in Chicago Truck Drivers, Helpers
and Warehouse Workers Union (Independent) Pension Fund v. Tasemkin, Inc.,
59 F.3d 48 (7th Cir. 1995), availability of relief from predecessor was not
dispositive in successor liability case, but rather was factor to be considered
along with other facts in particular case.
[15] 414
U.S. 168 (1973).
[16] Pub.
L. No.
93-406.
[17] 665
F. Supp. 2d 463 (D.N.J. 2009).
[18] 632
F.3d 89 (3d Cir. 2011).
[19]
The single-employer plan limit is $64,432 a year in 2017. However, the PBGC
generally guarantees a much smaller amount for multiemployer pension plan
benefits, depending on the type of benefit, the dollar amount of the benefit,
and the date on which the benefit provision was adopted.
[20] 164
F.3d 323 (7th Cir. 1998).
[21] Moriarty
v. Svec, 164 F.3d 323 (7th Cir. 1998) (expanded ERISA successor liability;
son who took over funeral home business from father was liable for unpaid
contributions to multiemployer pension and welfare fund because there was
continuity of operations and knowledge of liability).
[22] Sullivan
v. Running Waters Irrigation, Inc., 739 F.3d 354 (7th Cir. 2014) (where a
company went out of business and the son who managed that business set up two
other businesses which bought equipment from the first company and bought
equipment from the first company, there would be successor liability for
multiemployer withdrawal liability since the successors had notice of the claim
before the acquisition and there was a substantial continuity of operation of
the business).
[23] Tsareff
v. ManWeb Services, Inc., 794 F.3d 841 (7th Cir. 2015) (in sale of assets
by a unionized electrical contractor (Tiernan & Hoover) to a non-union
engineering company (ManWeb), multiemployer pension plan brought suit against
the successor, ManWeb; court held that notice of “contingent” liability to the
multiemployer plan was sufficient to be considered notice even though no
withdrawal has occurred; court denied summary judgment for the successor
company; court remanded to the district court to address the successor liability
continuity of operations requirement, which was not addressed previously by the
district court; the Seventh Circuit did not address the district court’s
holding that ManWeb’s continuation of work previously done by Tiernan &
Hoover should nevertheless not be imputed to Tiernan & Hoover in
determining whether Tiernan & Hoover had a complete withdrawal under the
Building and Construction Industry exception of ERISA §4203(b)).
[24] Board
of Trustees of Automobile Mechanics’ Local No. 701 Union and
Industry Pension Fund v. Full Circle Group, Inc., 826 F.3d 994 (7th Cir.
June 24, 2016) (multiemployer pension fund sued asset purchaser, Full Circle
Group (FCG), for withdrawal liability incurred by the target company, Hannah
Maritime Corporation (HMC), when HMC became insolvent; no plan liabilities were
transferred to the buyer; the buyer’s owner (who was the son of the seller’s
owner) knew before signing the purchase agreement that HMC was unionized and
therefore almost certainly knew that the company would be required to
contribute to a union pension fund, which should have alerted buyer to the
possibility of withdrawal liability; ERISA successor liability may be imposed
if there is substantial continuity in the operation of the business before and
after the sale and the asset buyer had notice of the withdrawal liability; the
court held that enough evidence was presented of continuity of operations to
preclude summary judgment in favor of the buyer on grounds of discontinuity,
and enough evidence that buyer had notice of the seller’s pension fund
liability to preclude summary judgment on the ground that buyer lacked notice
of possible successor liability; therefore, the district court’s summary
judgment for the buyer was overturned, and the case was remanded to the
district court for a trial).
[25] Indiana
Electrical Workers Pension Benefit Fund v. ManWeb Services, Inc., 884 F.3d
770 (7th Cir. 2018) (multiemployer pension ERISA withdrawal liability could
apply to the asset purchaser; in determining whether there was continuity of
operations between asset purchaser and seller the district court improperly
focused on dilution of employer's operations in those of larger putative
successor; continuity of intangible assets, workforce, business services and
customers all weighed in favor of finding successor liability).
[26] See,
e.g., Hawaii Carpenters Trust Funds v. Waiola Carpenter Shop, Inc.,
823 F.2d 289 (9th Cir. 1987) (in employee buyout of company there was
substantial continuity between the enterprises (looking at factors such as
whether there is the same basic operation, the same plant, the same workforce,
the same supervisors, the same machinery and the same product), and as a
successor employer the successor was requested to abide by the terms and
conditions of the predecessor’s collective bargaining agreement unless it has
timely bargained to an impasse; in addition, there was an assumption of the
collective bargaining agreement; successor is liable for delinquent
contributions to health and pension trust funds under collective bargaining
agreement; also held with regard to delinquent contributions to a pension plan
that the six-year statute of limitations under ERISA should be used); Trustees
for Alaska Laborers-Construction Industry Health and Sec. Fund v. Ferrell,
812 F.2d 512 (9th Cir. 1987) (member of a joint venture who continued to
operate business with same employees and equipment after joint venture ceased
operations was a successor employer for purposes of multiemployer withdrawal
liability; company is deemed a successor if it hires most of its employees from
the predecessor employer’s workforce and if it conducts essentially the same
business as the predecessor); Board of Trustees of Northwest
Ironworkers Health & Sec. Fund v. Tanksley, NO. CV-07-367-RHW., 2010 BL
37579 (E.D. Wash. 2010) (company taken over in bankruptcy was successor
employer since operated out of same premises, performed same type of work and
used similar assets, and the same officers and partners served on both
entities, and is obligated to collective bargaining agreement as alter ego).
[27] ERISA
§4203(b) provides that a building and construction industry employer (e.g., a
contractor) that ceases to contribute and the employer does not continue to
perform that type of work in that jurisdiction of the collective bargaining
agreement within five years will not incur withdrawal liability.
[28] Resilient
Floor Covering Pension Trust Fund v. Michael’s Floor Covering, 801 F.3d
1079 (9th Cir. 2015) (Studer’s Floor Coverings went out of business and
some of its assets were sold to Michael’s Floor Covering who continued the
business at the same store; Studer’s contributed to Resilient Floor Covering
Pension Trust for its union employees, but that ceased when Studer’s closed;
Michael’s operated at same store front with some of same machines and some of
the same workers, and with many of the same clients as Studer’s; court held
there could be successor liability as long as there is continuity of operations
and notice of the potential liability; the construction industry exception of
ERISA §4203(b) provides that for a business and construction industry employer
there will be withdrawal liability only if the employer continues to perform
the same type of work in the jurisdiction of the union or resumes such work
within five years; broadened successor liability should apply to withdrawal
liability just like previous cases have held for delinquent pension
obligations; for the construction and industry exception if there is a
successor there is a continuation of work and the exception should not apply;
court in footnote noted that no circuit court has held contrary to Artistic
Furniture; court stated that this is the first time a circuit court rules
regarding withdrawal liability successor liability; contrary to the district
court, the Ninth Circuit gave greater weight to the successor taking over the
predecessor’s customer base and less emphasis on continuity of workforce; court
remanded for determination of successorship factors).
See on
rem’d, Resilient Floor Covering Pension Trust Fund
v. Michael's Floor Covering, Inc., No. 11-cv-05200-JSC, 2016 BL 321052(N.D.
Ca. Sept. 28, 2016) (on remand, finding for successor defendant even after
Third Circuit reversal because no notice of liability actually existed, even
though Michael’s Floor Covering owner knew there was a union since that is
insufficient to support a reasonable inference if successor’s knowledge since
successor had no knowledge that the business was potentially liable for closing
down the business and withholding from the pension fund even though it may have
known the business contributed to a pension fund; court distinguished Full
Circle Group 2016 Seventh Circuit case, discussed below, where lack of
familiarity with the concept of withdrawal liability could not be an excuse
since the buyer was aware of the pension fund and he had legal counsel who must
have known that most pension funds are underfunded, while in Michael’s Floor
Covering there was no evidence Michael’s knew of the union pension fund and he
had no counsel).
26
Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, 891
F.3d 839 (9th Cir. 2018) (a 2018 Ninth Circuit case held that there would be
successor liability on a private equity group, Heavenly Hana LLC, which
purchased the Ohana Hotel in Maui, Hawaii from Ohana Hotel Company, LLC for the
seller's multiemployer withdrawal liability when the seller formally withdrew
from a multiemployer pension plan; there was a substantial continuity of
operations of the hotel; although the seller was not given specific notice of
the withdrawal liability and the attorneys advised (incorrectly) that absent an
express assumption of liability the buyer would not assume the withdrawal
liability, there was constructive notice because buyer had previously operated
a hotel that was part of that multiemployer plan, in previous acquisitions that
private equity group had instructed its agents to review any potential
withdrawal liability, the asset purchase agreement indicated that the seller
had contributed to a multiemployer pension plan and the plan's annual funding
notice showing its underfunding was publicly available on the internet).
[29] 991
F.2d 997 (2d Cir. 1993).
[30]
In Stotter, a manufacturer had obligations to a multiemployer
pension plan which it had ceased to make and the union commenced arbitration
pursuant to the collective bargaining agreement. In the meantime, the company
had defaulted on loans and the bank foreclosed on the assets. The successor
continued with the same employees at the same location. The arbitrator ruled
that because the buyer was a successor employer to the seller, it had a duty to
participate in the arbitration and it was jointly and severally liable for any
delinquent contributions. (An arbitrator’s award is generally upheld if
arguably construing the contract and acting within the scope of its authority.)
There was an adequate basis for its decision to hold the purchaser liable for
the delinquent contributions in light of Artistic Furniture and other cases.
See, however, Board of Trustees of Sheet Metal Workers
Local Union No. 137 Insurance, Annuity and Apprenticeship Training Funds v.
Silverstein, No. 92 Civ. 8519 (S.D. N.Y. 1995), where the court held that
liability for unpaid contributions to the Insurance, Welfare, Annuity and
Apprenticeship Funds could not be imposed on an asset purchaser even under the
Stotter and Artistic Furniture rationale, because there was not a sufficient
continuity of identity, where there was no real continuity of workforce and the
businesses were not identical.
[31] See,
e.g., Schilling v. Interim Healthcare of Upper Ohio Valley, Inc.,
44 E.B.C. 1988, (unpublished) (S.D. Ohio 2008; which is in the 6th Circuit)
(also quoting two other district cases in the Sixth Circuit; court found that
under standards of the Seventh Circuit case of Upholsterer’s Int’l
Union v. Artistic Furniture there would be successor liability for
ERISA and therefore the successor in Schilling was liable for the unpaid
medical claims under the ERISA health plan; court looked to Artistic Furniture
test whether buyer had no prior knowledge of the claim and whether there is
continuity at the business operations).
[32] 902
F.3d 597 (6th Cir. 2018).
[33] Einhorn
v. M.L. Ruberton Construction Co., 665 F. Supp. 2d 463 (D.N.J. 2009) (Statewide
Hi-Way Safety, which employed union workers, sold its assets to M.L. Ruberton
Construction Co, a non-union company, for $1.6 million; seller had been
obligated to make contributions to three multiemployer pension plans under
ERISA; Ruberton agreed to take union employees but did not assume the $500,000
outstanding obligation to the Philadelphia Teamsters Pension Trust and Welfare
Trust; district court stated that even with continuity of operations and
notice, there was no continuity of ownership; court found that absent a general
common-law finding of successor liability under the four exceptions above,
there is no special ERISA successor liability; this is in contrast to unfair
labor practices and employment discrimination where unfairly treated workers or
victims of discrimination may have no other practical recourse than to their
current employer, but ERISA plans can collect delinquent contributions from
seller or from proceeds of sale under constructive trust theory; thus, an ERISA
fund does not need the same protections as an individual employee, contrary to
Artistic Furniture; summary judgment for the buyer was granted).
The district court in Einhorn brought
support from a Third Circuit case that indicated that ERISA liability would be
imposed after a merger—but not necessarily after an asset sale—because the
Supreme Court Case of Golden State Bottling Co. applies broadened
successor liability only to unfair labor practices but not to corporate debt
such as pension obligation to union. Teamsters Pension Trust Fund of
Philadelphia & Vicinity v. Littlejohn, 155 F.3d 206, 209 (3d Cir. 1998)
(court notes that parties argue over application of cases re development of
corporate successorship in federal labor law, such as Golden State Bottling Co.
where the Supreme Court held that successor liability is broader when the
obligation involved is a collective bargaining agreement than when an ordinary
debt is involved; in other cases Supreme Court has also stated that employer
may be bound by collective bargaining agreement of predecessor as long as it
had notice of obligation and continued operations of predecessor even if only
assets sold and not a merger; Third Circuit states that those cases are
somewhat distinguishable because they dealt with the application of labor law
concepts and the terms of a collective bargaining agreement, but in this case
only the transfer of a valid and ordinary debt is at issue which just happens
to have its genesis in the terms of a collective bargaining agreement).
The counter-argument to the Einhorn district
court ruling is that ERISA rules, while enforcing the union’s pension fund,
also may lead to loss of benefits by employees if the multiemployer fund does
not have enough assets to meet its obligations and the PBGC guarantees are
limited (single employer limit is $60,136 a year in 2016). Also, as the Third
Circuit in overturning the district court case, at Einhorn v. M.L.
Ruberton Construction Co., 632 F.3d 89 (3d Cir. 2011), noted, absent an
imposition of successor liability, the other employers will be forced to make
up the difference to ensure that workers receive their entitled benefits.
[34] Einhorn
v. M.L. Ruberton Construction Co., 632 F.3d 89 (3d Cir. 2011) (the assets
of Statewide Hi-Way Safety were sold to M.L. Ruberton Construction Company (a
non-union company), and there was continuity of operations and the buyer had
notice of the obligations to the Philadelphia Teamsters pension fund; the Third
Circuit agreed with the Seventh Circuit Artistic Furniture case that labor law
successor rules should be extended to ERISA obligations since failure to pay contributions
can harm plan participants; thus the purchaser of assets would be liable for
seller’s delinquent ERISA fund contributions when the buyer had notice of the
liability prior to the sale and there was a continuity of operations; the case
was remanded to the district court for further proceedings).
[35] See,
e.g., Central Pennsylvania Teamsters Pension Fund v. Beer
Distributing CompanyE.B.C. 1037 (unpublished; E.D. Pa. 2009) (the asset
purchaser was liable as successor for ERISA withdrawal liability; court noted
that Federal courts have expanded successor liability for ERISA; successor and
predecessors are related entities through family ownership, successor assumed
customers, took over facility, rehired nearly all employees, and there may have
been an implied assumption of liability; case on its face supports Artistic
Furniture, and contradicts the M.L. Ruberton district
court case, though it can be distinguished in that in this case all the factors
could, in any event, lead to a general common law exception such as a de facto
merger). See also Teamsters Local 469 Pension Fund v. J.H.
Reid General Contractors, 2020 E.B.C. 401, 387 (D. N.J. 2020) (district
court denied summary judgement for the Pension Fund because a number of issues
remained to be clarified, including (i) whether one of the defendants (Reid
Recycling) was in the same controlled group as the employer that withdrew from
the Pension Fund (Reid General Contractors) at the time of such withdrawal, and
(ii) whether the buyer of Reid Recycling in a transaction that occurred after
the Pension Fund withdrawal could be liable under expanded successor liability
in accordance with the principles set forth in the M.L. Ruberton
Construction Co. Third Circuit decision).
[36] 902
F.3d 597 (6th Cir. 2018).
[37] Findlay
Industries, Inc., et al., 902 F.3d 597 (case deals with two issues relating
to the Findlay Industries pension plan formed in 1964; first, in 1986 Findlay
transferred ownership of the properties on which the plants were operating to a
trust for the benefit of the family of the owner of the company, and the
properties were leased back by the family trust to the company; the Sixth
Circuit, overturning the district court, held that the family trust that leased
properties to the company were engaged in a trade or business and could be
liable for controlled group liability for any pension plan underfunding;
second, in 2009 after Findlay Industries folded the company was indirectly sold
to companies owned by the son of the founder, and the business in hands of the
son's companies soon began running the same plants, hiring many of the same
employees, and selling to the former company's largest customer; the Sixth
Circuit, overturning the district court, ruled that expanded successor
liability should be applied to the Findlay pension plan's termination liability
under ERISA as this broadened successor liability services fundamental ERISA
policies, and there was a continuation of operation).
[38] See,
e.g., Schilling v. Interim Healthcare of Upper Ohio Valley, Inc.,
44 E.B.C. 1988, (S.D. Ohio 2008) (court found that under standards of the
Seventh Circuit case of Artistic Furniture there would be
successor liability for ERISA plans where there was continuity of business
operations and prior notice of the claim, and therefore the successor was
liable for the unpaid medical claims under the ERISA single-employer health
plan); Moriarty v. Svec, 164 F.3d 323 (7th Cir. 1998)
(broadened successor liability under Artistic Furniture applies
to unpaid contributions to multiemployer pension and welfare funds); Bender v.
Newell Window Furnishings, Inc., 681 F. 3d 253 (6th Cir. 2012) (upheld
district court decision that the successor employer, Newell Window, was liable
for retiree health benefits provided for under the collective bargaining
agreement of its predecessor because there was an express assumption of
liability by Newell Window of the prior collective bargaining agreement, and in
addition “there seems to be no question that there was also a substantial
continuation of operations at the plant by Newell Windows and its
predecessors”); Hawaii Carpenters Trust Funds v. Waiola Carpenter Shop,
Inc., 823 F.2d 289 (9th Cir. 1987) (court held that since there was
continuity of operations (looking at factors such as whether: (i) there has
been a substantial continuity of the same business operations, (ii) the new
employer uses the same plant, (iii) the same or substantially the same
work-force is employed, (iv) the same jobs exist under the same working
conditions, (v) the same supervisors are employed, (vi) the same machinery,
equipment, and methods of production are used, and (vii) and the same product
is manufactured or the same service is offered), and in addition there was
assumption of the collective bargaining agreement, the successor is liable for
various multiemployer health and welfare fund obligations based on the
collective bargaining agreement entered into with the predecessor). See
also Grimm v. Healthmont, Inc., 8 Wage & Hour Cas. 2d (BNA)
504, 2002 WL 31549095 (D. Or. 2002) (court cited cases involving ERISA pension
claims that buyer of assets liable for previous employer’s obligations under an
ERISA plan if there is continuity of operations and notice of potential
liability; court applied these broadened successor liability cases to facts in
this case, which involved severance plan (which was an ERISA welfare plan)).
See, in contrast, Board
of Trustees of Sheet Metal Workers Local Union No. 137 Insurance, Annuity and
Apprenticeship Training Funds v. Silverstein, No. 92 Civ. 8519 (S.D. N.Y.
1995) (unpublished) (liability for unpaid contributions to the Insurance,
Welfare, Annuity and Apprenticeship Funds could not be imposed on an asset
purchaser even under the Stotter and Artistic
Furniture rationale, because there was not a sufficient continuity of
identity, as there was no real continuity of workforce (neither the majority of
the seller’s employees nor the majority of the buyer’s employees were involved)
and the businesses were not the same (both involved construction of signs but
the specific nature of the business was different)).
Where the retiree health obligation is provided for in
a collective bargaining agreement and an asset buyer assumes the collective
bargaining agreement the buyer would be obligated with regard to the retiree
health. See, e.g., Bish v. Aquarion Services Co., 289
F. Supp. 2d 134 (D. Conn. 2003) (buyer of assets agreed to assume collective
bargaining agreement which contained retiree health obligations; court held
that buyer would continue to be obligated for the retiree health obligation
under the LMRA and ERISA; court noted that ERISA recognizes such liability on
the successor, for example, regarding ERISA §409 fiduciary liability where
case-law provides that nothing precludes a later fiduciary from assuming by
contract the ERISA obligations of a former fiduciary, and case-law has also
held that where a successor assumed the obligation in the collective bargaining
agreement to contribute to a multiemployer plan the successor would be liable
under the LMRA and ERISA; therefore court denied motion to dismiss claims). See
similarly, cases cited in the beginning of the footnote.
See also Williams v. Wellman
Thermal Systems Corp., 684 F. Supp. 584 (S.D. Ind. 1988) (a buyer who
assumes retiree health liability cannot create in the purchase agreement a
right to amend or terminate the plan that did not otherwise exist under the
plan itself).
[39] 28
E.B.C. 2905 (N.D. Ill. 2002).
[40] Brend
v. Sames Corp. found that an asset buyer may have successor liability
for a top-hat executive retirement contract even though specifically excluded
in the asset purchase agreement, since as an ERISA plan it was subject to the
continuity of operations and notice standards under Artistic Furniture for
successor liability, even though there is no continuity of ownership. In this
case there was notice of the liability and a genuine issue of material fact
whether there was substantial continuity.
See Feinberg v. RM Acquisition, LLC, 629
F.3d 671 (7th Cir. 2011) (asset buyer was not obligated under top-hat plan
because there was no continuity of operations).
[41] In
re Washington Mutual, Inc. Securities, Derivative & ERISA
Litigation, BL 219740, 47 EBC 2505(W.D. Wash. 2009) (whether a company can
be liable based upon an expanded ERISA inherited liability for breach of ERISA
fiduciary duties is a question of first impression, and the court believes that
broad successor liability should not apply in this case, stating that “while
compelling in the context of issues like plan contributions, there is no reason
to think the test encompasses the myriad of concerns present in the context of
liability based on the duties of prudence and loyalty”).
[42] Bish
v. Aquarion Services Co., 289 F. Supp. 2d 134 (D. Conn. 2003) (as discussed
above, Bish involved a seller who had promised retiree health
in a collective bargaining agreement, and an asset buyer; the court held that
the buyer would be subject to the retiree health obligation, since by
continuing the operations the retiree health obligation would continue, and
expanded ERISA successor liability is not limited only to ERISA delinquent
multiemployer contributions or withdrawal liability but applies also to ERISA
fiduciary duties and to promises for retiree health; the court denied the
motion to dismiss claims).
[43] Watson
v. Deaconess Waltham Hospital, 298 F.3d 102, 110 (1st Cir. 2002) (noting
that with regard to the suits for breach of fiduciary duty under ERISA §409(
b), nothing in ERISA precludes a later fiduciary from assuming by contract the
ERISA obligation of the former fiduciary); Bish v. Aquarion Services
Co., 289 F. Supp. 2d 134 (D. Conn. 2003) (a seller promised retiree
discussed above; court noted in dictum that ERISA fiduciary duties under ERISA
§409 apply to a buyer who has assumed the plan obligations in a collective
bargaining agreement).
[44] See
also: EEOC v. MacMillan Bloedel Containers, 503 F.2d 1086 (6th Cir.
1974) (court held that the considerations justifying a successor doctrine to
remedy unfair labor practices in Golden State Bottling Co. would
also apply to unfair employment practices under Title VII, and therefore
successor liability would apply where there was substantial continuity of the
business operations and the successor had prior notice of the claim); Teed
v. Thomas and Betts Power Solutions, 711 F.3d 763 (7th Cir. 2013) (court
imposed successor liability on asset purchaser for seller's FLSA violations for
unpaid overtime despite contractual language excluding the assumption of this
liability.
[45] Musikiwamba
v. ESSI, Inc., 760 F.2d 740 (7th Cir.1985) (broadened successor liability
doctrine was applicable in the case of employment discrimination suits);
E.E.O.C. v. Northern Star Hospitality, Inc., 777 F.3d 898 (7th Cir. 2015)
(expanded successor liability was applied in liability for Title VII employment
discrimination since successor had notice of the pending lawsuit; successor but
not predecessor could provide relief after the sale or dissolution, and there
was continuity of operations and work force of the predecessor and successor).
[46]
NLRA §8, 29 U.S.C.A. §158.
[47] Fall
River Dyeing & Finishing Corp. v. N.L.R.B., 482 U.S. 27, 107 S. Ct.
2225, 96 L. Ed. 2d 22 (1987) (a company that was liquidating sold its remaining
assets and rehired a number of employees; the company refused to bargain with
the union, claiming that it was not a successor; the Supreme Court held that
where a majority of the company’s employees have worked for the predecessor,
and there was a substantial continuity—which depends on whether the business is
substantially the same, the employees were doing the same jobs, and the
business was producing the same products—the new employer has a duty to bargain
in good faith with the union but is not bound to the specific provisions of the
existing union agreement).
[48]
See, N. L. R. B. v. Burns International Security Services, Inc.,
406 U.S. 272, 284, 291, 92 S. Ct. 1571, 1580, 1584 (1972) (even where
successors held to be legal successor for purposes of bargaining, this alone is
insufficient to bind the successor to the substantive provisions of the
predecessor employer’s collective bargaining agreement with the union); Howard
Johnson Co. v. Detroit Local Joint Executive Board, 417 U.S. 249, 258 n. 3,
94 S.Ct. 2236, 2241 n.3 (1974) (not bound to substantive provisions even if it
is a legal successor for purposes of bargaining, even in the presence of a
clause binding successor and assigns to the terms of that agreement).
[49] See,
e.g., Teamsters Pension Trust Fund of Phila. v. Littlejohn, 155
F.3d 206 (3d Cir. 1998) (discussed above; liability for delinquent pension
contribution after a merger).
[50] See,
e.g., In re Challenge Stamping and Porcelain, 719 F.2d 146
(6th Cir. 1983) (corporation that acquired 100% of stock of sponsoring
corporation one month after it filed for bankruptcy was not considered part
controlled group for pension plan’s underfunding because purpose of ERISA
termination liability is to avoid employer abuse of plan termination insurance
and Congress did not intend to extend the liability to corporations that made
contingent purchases of stock that had no practical effect; purchase of stock
during bankruptcy for one dollardoes not make party part of controlled
group since stock is worthless; therefore, a purchase from the bankruptcy estate
does not by itself bring successor liability); PBGC v. Ouimet Corp.,
711 F.2d 1085 (1st Cir. 1983), cert. denied 464 U.S. 961, 104
S. Ct. 393 (1983) (where subsidiary went bankrupt and terminated underfunded
plan after acquisition by controlled group that included another bankrupt
subsidiary, termination liability was allocated only to the solvent group members,
and not bankrupt corporations’ estates, since applying the bankrupt’s assets to
PBGC’s liability would have reduced assets available to their creditors and
inequitably benefited group members; court noted that ERISA provides a lien on
30% of the net worth, not asset value and a bankrupt corporation has negative
net worth). See also Brighton, How Free is Free and
Clear, 21 SEP Am. Bankr. Inst. J. 1 (Sept. 2002).
[51] Chicago
Truck Drivers, Helpers & Warehouse Workers Union Pension Fund v. Tasemkin,
Inc., 59 F.3d 48 (7th Cir. 1995) (Seventh Circuit held that claim by
multiemployer pension fund against successor entity for ERISA withdrawal
liability and delinquent pension contributions to the union’s pension should
not have been dismissed; court notes that it was not absolutely precluded from
finding successor liability against the successor where there was substantial
continuity of operations and notice, despite the fact that company had just
emerged from bankruptcy; successor liability after bankruptcy does not subvert
bankruptcy rules since the property has already emerged from bankruptcy).
[52]
In Plumbers, Pipefitters and Apprentices Local Union No 112 v. Mauro’s
Plumbing, Heating and Fire Suppression, Inc., 84 F. Supp. 2d, 344 (N.D.
N.Y. 2000) the Northern District of New York held that where plumbing company that
signed collective bargaining agreement ceased operations and owners established
a non-union company (Northeast Mechanical) three months later at the same
location, the successor was liable for the predecessor’s multiemployer welfare
contributions as the alter ego of the first company since there was continuity
of ownership and management, and employment of many of the same employees,
similarity of business purposes, overlapping operations, use of office and
plumbing equipment and sharing of customers. (Because it found alter-ego
status, court found it unnecessary to also examine successor liability status).
[53] See,
e.g., Solar v. Pension Benefit Guaranty Corporation, 504 F.
Supp. 1116 (S.D. N.Y. 1981), aff’d, 665 F.2d 28 (2d Cir. 1981)
(holding that a transaction intended to avoid liability should be disregarded
for Title IV liability purposes). See also In Re Consolidated
Litigation Concerning International Harvester’s Disposition of Wisconsin Steel,
681 F. Supp. 512 (N.D.Ill. 1988) (International Harvester) (predecessor that
sold business with principal purpose of evading liability and delegated pension
obligations to purchaser that at time lacked reasonable chance of meeting this
obligation was held liable to the PBGC for the unfunded benefit payments owed).
[54]
One of the transactions that persuaded Congress to enact ERISA §4069 was the
sale by International Harvester of a financially crippled subsidiary, Wisconsin
Steel, which sponsored grossly underfunded pension plans, to a financially weak
buyer. See International Harvester, above. The PBGC brought suit to
preclude International Harvester from avoiding liability for the terminated
plans by reason of that transaction and the court eventually upheld the PBGC’s
claims. Nevertheless, while that case was pending, Congress enacted ERISA §4069
because it felt that such a provision was necessary to deter “abusive schemes”
to avoid liability “which can lead to complex, costly litigation.” H. Rep. No.
99-241, Pt. 2, 99th Cong., 1st Sess., reprinted in 1986 U.S. Code Cong. &
Admin. News 685, 713 (House Report).
ERISA §4069 “incorporates court decisions under current
law by adding explicit statutory language to make clear that transactions, a
principal purpose of which is to evade liability under the statute, are to be
ignored in determining liability.” House Report. It is arguable that if an
entity was not in the controlled group of the plan before the transaction, it
could not be held liable under §4069 since §4069 only operates to ignore the
transaction.
[55] ERISA
§4212(c).
[56] See Central
States Pension Fund v. Georgia-Pacific LLC, 639 F.3d 757 (7th Cir. 2011)
(ERISA §4204 contract will avoid withdrawal liability and sale of one division
was not culmination of withdrawal by stages from multiemployer plan; withdrawal
was solely because of employer’s sale of its last division in which buyer
assumed employer’s liability for contributions in the ERISA §4204
transaction).
[57] ERISA
§4204(a)(2).
[58] ERISA
§4204(a)(3)(A).
[59] ERISA
§4204(b).
[60] Artistic
Carton Co. v. Paper Industry Union—Management Pension Fund, 971 F.2d 1346
(7th Cir. 1992) (arbitrator did not err in finding that a multiemployer pension
plan properly assessed withdrawal liability on a successor employer based on
the predecessor employer’s contributions since ERISA §4204 does not necessarily
imply that there will never be withdrawal liability for asset buyers who do not
sign a ERISA §4204 contract, and the multiemployer plan documents specifically
provided that withdrawal liability would include all service of the employees
including service with the predecessor employer).
