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Retirement Plans - M&A

2018.12.05  Asset Purchasers Beware - Constructive Notice of Union Pension Plan Liability.  A recent 9th Circuit decision called out a common misconception -- in the form of "incorrect legal advice" that the buyer received prior to closing -- that "[a]bsent an express assumption of liability, the Buyer does not assume the [withdrawal] liability" for a multiemployer pension plan.  The decision went on to hold a private equity fund liable for $480,000 of withdrawal liability, even though all parties conceded that the purchaser had no actual notice of the liability.  ​
The 9th Circuit began its analysis in Heavenly Hana v. Hotel Union (filed 7/1/2018) by reciting the federal common law doctrine of successor liability.  Under that well-established doctrine, a purchaser of assets will become subject to the seller’s federal employment, labor, and pension liabilities if the purchaser (1) substantially continues the seller's business, and (2) has notice of the seller's federal liability.  
The 9th Circuit went on to hold first that constructive notice alone could satisfy the notice requirement for successor liability, and then to hold "that Amstar [as the asset purchaser] had constructive notice because a reasonable purchaser would have discovered Ohana’s withdrawal liability."  The 9th Circuit based the latter holding on the following undisputed findings, quoted here from the court's decision:

  1. Amstar previously operated a hotel that participated in a multiemployer pension plan.
  2. [I]n prior acquisitions involving multiemployer pension plans, Amstar had required ts agents to determine whether it could incur withdrawal liability from the transactions. 
  3. The [Asset Purchase Agreement] plainly informed Amstar that the employees at Ohana [as the seller] were unionized and that Ohana had contributed to a multiemployer pension plan. 
  4. Finally, the Plan’s annual funding notices, which indicated a state of underfunding, were publicly available on the internet.

Overall, potential asset purchasers should take precautions -- early in any possible transaction -- against the risk that substantial continuation of the seller's business and workforce may trigger successor liability for its pre-closing employment, pension, and ERISA obligations.  Otherwise their lack of actual notice may not suffice to save them from successor liability.  

  • For discussion of the "advance notice" prong for successor liability under ERISA, see this blog relating to the 7th Circuit's decision in Indiana Electrical Workers Pension Benefit Fund v. ManWeb Servs., No. 16-2840 (7th Cir. 2018), with the blog reporting that the 7th Circuit held: "In the totality of relevant circumstances, ManWeb’s purchase of and use of Freije’s intangible assets—its name, goodwill, trademarks, supplier and customer data, trade secrets, telephone numbers and websites—and its retention of Freije’s principals to promote ManWeb to existing and potential customers as carrying on the Freije business under ManWeb’s larger umbrella, weigh more heavily in favor of successor liability than the district court recognized.")

2018.11.18   Actual Notice  Per Bloomberg:  A company that purchased a 99-bed skilled nursing facility doesn’t have to cover more than $65,000 in union pension payments owed by the facility’s prior owner.
The facility purchaser, 23801 Newhall Avenue LLC, didn’t have actual or constructive notice of the seller’s pension obligations, because the seller said in the purchase agreement that it didn’t sponsor or contribute to any pension plans, a federal judge said Nov. 9.
Nor did Newhall have a duty to further investigate whether pension obligations might exist, the judge said. Although Newhall knew the seller had an agreement with a labor union, Newhall “had no previous experience or familiarity with multi-employer pension plans or the concept of withdrawal liability,” the judge said.
The judge distinguished this case from a recent appeals court decision forcing a private equity firm to pay $385,201 in pension withdrawal liability tied to a Hawaii hotel it purchased. The U.S. Court of Appeals for the Ninth Circuit said the firm had some knowledge of the pension liability during the sale transaction and should have taken additional steps to determine whether withdrawal liability existed.
The Newhall case was different, Judge Robert S. Lasnik of the U.S. District Court for the Western District of Washington said. Newhall didn’t have the prior experience with union plans or the sophistication that the private equity firm in the Ninth Circuit case had, Lasnik said.
In April, Lasnik ordered the facility’s previous owner to pay more than $65,000 in pension withdrawal liability, along with damages, interest, fees, and costs.
The case is Northwest Adm’rs, Inc v. Santa Clarita Convalescent Corp., 2018 BL 416375, W.D. Wash., No. 2:17-cv-01001-RSL, 11/9/18.

2018.09.04 Successor Liability for Single Employer DB Plan - "Trade or Business" for Controlled Group.  In PBGC v. Findlay Industries, the 6th Circuit held that a family trust which leased land to a commonly-controlled plan sponsor was a “trade or business,” and thereby became jointly and severally liable for the controlled group’s pension plan termination liability.  Further, the buyer of the plan sponsor’s assets was held liable, as a successor employer, and therefore for the plan sponsor’s pension plan termination liability. 


2018.03.12  Successor Liability -- "Big Buyer" Defense Fails for Asset Purchaser.  For an asset purchaser to be held liable for withdrawal liability as a successor to a seller's multiemployer plan obligations, the purchaser must - (i) have had notice of the seller’s withdrawal liability, and (ii) “substantially continued” the seller’s operations.  Under what some call the “big buyer” defense, purchasers have argued that they are not substantially continuing the seller’s business when those operations comprise only a small proportion of the purchaser’s post-acquistions operations.  In Ind. Elec. Workers Pension Benefit Fund v. ManWeb Servs., the Seventh Circuit rejected that defense, and held that the proper inquiry focuses solely on the seller's operations, thereby hinging on the extent to which the purchaser continues the seller’s business after the asset purchase.  

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2016.07.22  Merger Agreement Propels Litigation After Post-Closing Benefit Reductions.   In merger and purchase agreements that include post-closing benefit plan commitments, purchasers should consider including a “Halliburton provision” in order to prevent claims that those commitments have created de facto plan amendments that participants may enforce.  In Hunter v. Berkshire-Hathaway, the 5th Circuit applied the reasoning of its 2006 Halliburton decision to a merger agreement executed in 2000, and concluded that pension plan participants  could pursue “their claims against Berkshire because Berkshire caused Acme to amend the Pension Plan and 401(k) Plan in direct violation of Section 5.7 of the merger agreement. The court explained:

  • The facts here are comparable to those in Halliburton. Acme can make any changes to the ERISA plans, but Berkshire can "not cause the Company [Acme] to . . . (ii) reduce any benefit accruals . . . [or] (iii) reduce the employer contribution. . . ." . . .  Additionally, the restrictive provisos here, like the provision in Halliburton, impose no time limit for how long Berkshire is prevented from causing Acme to reduce certain benefits.

Overall, the Hunter case provides a useful reminder that, in their acquisition agreements, buyers should consider including a Halliburton provision if they are making post-closing commitments to employees of the acquired company.  This is the case (due to the Halliburton decision) even if the agreement provides that there are no third party beneficiaries.


2014 April 03  Analogous Authority - Successor Liability under Fair Labor Standards Act 
Law360 reports that "[t]he Third Circuit held in a precedential decision Thursday that a federal common law standard applies for successor employer liability for alleged Fair Labor Standards Act violations in a case involving alleged overtime violations by a mortgage lender and its successor company." The case is Thompson v Real Estate Mortgage Network.

2013.Oct.22   "No Ambiguity" about No Assumption of Pension Plan (WD MI)
In an asset purchase under Bankruptcy Code §363, the "free and clear sale" did not result in the buyer's assumption of plans not listed in the purchase agreement, per the decision in International Union vs. Mahle Engine dismissing claims under ERISA and the Labor Management Relations Act (based on provisions in a collective bargaining agreement), because the sale order expressly provided for no successor liability except for plans being expressly assumed.  

2013.Sept.16   Retirees Lose Challenge to Spin-off of Pension Plan .
A Texas district court has dismissed, claims by former Verizon employees that a spin-off of their pension plan violated ERISA because iplan fiduciaries breached their ERISA duties through . . . continued at M&A Benefits. “the involuntary transfer of retirees from Verizon’s allegedly more financially secure pension plans to Idearc’s allegedly less-secure plans.” See Murphy v. Verizon, ND Texas.

2013.June.19   PBGC to be More Aggressive re Pension Terminations
Although it is well established that the federal common law of successor liability has potential application to a seller’s multiemployer and nonqualified plan liabilities, there is no record of the PBGC acting to reverse its longstanding policy, expressed in a 1978 PBGC Opinion (78-10), to the effect that arms’ length asset sales for fair market value do not trigger successor liability for underfunded ERISA plans. Nevertheless, the PBGC has recently announced more aggressive enforcement activity (see "PBGC bares fangs").   For further information, see the Harvard Governance Blog titled "PBGC Initiates Pension Plan Termination in Leveraged Acquisition."