Court Holds Successor Liable for Pension Plan Withdrawal Payment Following Asset Purchase

Authored by Dannae L. Delano, David P. Frenzia

Aug 18, 2015

Many asset buyers have long believed that, as long as they do not agree to ERISA Section 4204’s sale of assets exception to withdrawal liability, the seller’s assets can be acquired free and clear of any prior pension plan contribution history and withdrawal liability that may trigger as a result of the sale. In a new decision that is sure to rock that boat, the Court of Appeals for the Seventh Circuit disagrees. In Tsareff v. ManWeb Services, Inc., No. 14-1618 (7th Cir. 2015), the plaintiff retirement plan attempted to collect withdrawal liability under a successor liability theory. The district court denied collection, but the Seventh Circuit Court of Appeals (the “Court”) reversed and remanded to the district court.

The Court noted that the Supreme Court and this Circuit have imposed liability upon a business successor when the successor had notice of the liability before the acquisition and there was substantial continuity in the operation of the business before and after the asset sale. Tsareff involved the unanswered question of whether the successor liability notice requirement encompasses both existing and contingent liabilities.

The Court held that notice can be satisfied with a contingent liability that is not imposed until after the sale. In this case, prior to finalizing the asset purchase, pre-purchase negotiations and due diligence occurred. During this process, all parties (including the potential successor) were aware of union obligations and unfunded pension liabilities. In addition, the contingent withdrawal liability was explicitly noted in the Asset Purchase Agreement. The Court returned the case to the district court to determine whether there was substantial continuity in the operation of the business before and after the asset sale.

What this means to you – Business owners (especially in the Seventh Circuit) engaging in an asset sale to avoid withdrawal liability continuity should take note, and potential purchasers of such companies should be aware that knowledge of union obligations and contingent withdrawal liability which they become aware of during their due diligence constitutes notice for purposes of determining a successor employer from which to collect withdrawal liability. An asset purchaser that becomes aware during the due diligence period that the seller participates in a multiemployer pension fund and might be assessed withdrawal liability should either: (1) factor the risk of successor liability into the purchase price, or (2) require the seller to place some of the sale price in escrow to insure there are funds to pay for any withdrawal liability triggered as a result of the sale.

If you have any questions regarding withdrawal liability or any other union employee benefits matter, feel free to contact Dannae Delano or Dave Frenzia.

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