Recent Seventh Circuit Decision Finds That Multiemployer Pension Withdrawal Liability Can Automatically Transfer to Asset Purchaser
October 28, 2015
In a recent decision that has important implications for purchasers of assets that come with a multiemployer union pension plan, the U.S. Court of Appeals for the Seventh Circuit held in Tsareff v. ManWeb Services, Inc., 794 F.3d 841 (7th Cir. 2015) that an asset purchaser’s awareness of a seller’s potential withdrawal liability was enough to make the purchaser responsible for the withdrawal liability, even where the asset purchase agreement did not include the withdrawal liability as an assumed liability. The decision is important because it arguably expands the circumstances under which an asset purchaser can be deemed responsible for a seller’s pension withdrawal liability.
Under the federal successor liability doctrine, an asset purchaser is not liable for a seller’s debts and liabilities, subject to certain exceptions. One of the exceptions arises in the context of an asset sale where the seller contributes to a multiemployer pension plan on behalf of a group of unionized employees. When an asset purchaser knows that the seller may become liable for withdrawal liability after the sale, and the purchaser continues to operate the seller’s assets in substantially the same form after the sale, the purchaser may be considered a successor employer and be deemed to have assumed the seller’s withdrawal liability. Chicago Truck Drivers, Helpers, & Warehouse Workers Union (Indep.) Pension Fund. V. Tasemkin, Inc. 59 F.3d 48 (7th Cir. 1995).
Often, an asset purchaser may be aware that the seller is required to contribute to an underfunded multiemployer pension plan, but the specific amount of any potential withdrawal liability is unknown before the parties complete the transaction. If the purchaser does not want to retain the seller’s unionized workforce and associated pension contribution obligation (which, along with a few other requirements, will qualify the seller for the withdrawal liability exception in Section 4204 of ERISA), then the seller will typically be deemed to have withdrawn from the plan due to the sale. And all too frequently, the plan will not assess withdrawal liability until long after the closing date.
The purchaser in Tsareff was a non-union manufacturer that continued to operate the seller’s assets after the sale. Before signing the asset purchase agreement, the purchaser reviewed the seller’s operations and was fully aware that the seller contributed to a multiemployer pension plan on behalf of its unionized workforce. As a result, the purchaser drafted the asset purchase agreement to disclaim financial responsibility for the seller’s obligations to any multiemployer pension plans. The purchaser assumed that it had sufficiently protected itself from the potentially costly obligation associated with the seller’s eventual withdrawal from the plan.
After the sale closed, the multiemployer plan eventually sought to recover the seller’s withdrawal liability from both the seller and the purchaser. The purchaser argued that it was not a successor employer and had not assumed the withdrawal liability obligation because the purchaser was not aware of the specific dollar value of the seller’s withdrawal liability before the parties signed the asset purchase agreement. The Seventh Circuit disagreed, holding that a purchaser’s notice of a contingent withdrawal liability, even before the seller had incurred a withdrawal, was sufficient to make the purchaser a successor employer under the federal successor liability doctrine.
The Tsareff decision has important implications for the parties to an asset sale. For asset purchasers, the decision underscores the importance of assessing (during the due diligence process) the seller’s multiemployer pension plan contribution obligations. If there are multiemployer pension contribution obligations, the purchaser should obtain as many details as possible, and should try to determine whether the seller will incur withdrawal liability following the sale. The purchaser should also work with the seller to obtain a withdrawal liability estimate from the plan(s). Finally, the purchaser should draft the asset purchase agreement to include as many protections as it can. This includes not only the obvious (and now less helpful) exclusion of withdrawal liability from the assumed liabilities, but also more important items such as an indemnification from the seller and a purchase price reduction based on the potential withdrawal liability that may be assessed to the purchaser.