On Monday, July 27, 2015, in the case of Tsareff v. ManWeb Services, Inc., the Seventh Circuit Court of Appeals (which includes Indiana and Illinois) ruled that an engineering and construction company that entered into an agreement to purchase the assets of another contractor (that was a party to a collective bargaining agreement) may be liable under a theory of successor liability to the pension benefit plan for nearly $662,000 in withdrawal liability. The Seventh Circuit concluded that notice of contingent withdrawal liability, without knowledge of the exact extent of that liability, satisfies the successor liability notice requirement under the Multiemployer Pension Plan Amendment Act (MPPAA) and that the purchasing contractor had sufficient notice under the circumstances.

The imposition of withdrawal liability is a mechanism designed to dissuade employers from withdrawing from participation in multiemployer pension plans. Withdrawal liability is imposed on employers upon their cessation of contributing to a multiemployer defined benefit pension plan, and there is very little subjective application to the process of determining the applicability of withdrawal liability and calculating the amount of the withdrawal liability. Plan fiduciaries are required by statute to determine the amount of liability, notify the employer of the amount of liability and collect the liability.

In 2009, ManWeb, an Indiana-based engineering and construction company, entered into an agreement to purchase the assets of another contractor. ManWeb was a nonunion employer, but the company selling its assets to ManWeb (the “Seller”) was a party to a collective bargaining agreement (CBA) with a local union. Under that CBA, the Seller made contributions to a multiemployer pension fund. The Seller ceased operations after ManWeb’s purchase.  ManWeb did not make any contributions to the plan after the purchase date.

In early 2010, the pension plan sent a letter to the Seller and ManWeb indicating that it had effectuated a complete withdrawal and that it was subject to almost $662,000 in withdrawal liability under ERISA. No payments were made to satisfy the liability and the Seller never sought review of the assessment or initiated arbitration.  The plan subsequently filed a lawsuit against the Seller to collect the withdrawal liability, and added ManWeb as an additional defendant, based on a theory of successor liability.

The district court initially concluded that the Seller had waived its right to dispute assessment of withdrawal liability but that ManWeb was not successively liable to the plan because the MPPAA’s successor liability notice requirement excluded pre-acquisition notice and, because the plan had not assessed the amount of liability until after ManWeb’s purchase of the Seller’s assets, it was impossible for ManWeb to have had pre-acquisition notice.

The plan appealed the ruling, arguing the successor liability notice element encompasses contingent liabilities and that since the record showed that ManWeb had notice of potential liability, the notice requirement was satisfied. The 7th Circuit largely agreed with the plan’s position and reversed the district court’s ruling, finding that imposing successor liability for unpaid multiemployer contributions and withdrawal liability would effectuate Congress’s policies and goals, as the MPPAA’s amendments to ERISA were intended to minimize the adverse consequences of an employers’ termination of participation in multiemployer plans.

The Court of Appeals noted that withdrawal liability is triggered by withdrawal from a multiemployer plan, and whether or not the precise amount of liability is ascertainable prior to the sale depends on whether the withdrawal occurs before or after the sale. In this case, where the employer was found to have withdrawn after the sale, the precise amount was not ascertainable prior to acquisition. The Court of Appeals further explained that to hold that the successor liability notice requirement excludes notice of contingent liabilities in this context would create a “liability loophole” and leave the plans “holding the bag.” As a result, the Court of Appeals held that notice of contingent withdrawal liability satisfies the successor liability notice requirement, and remanded the case to the district court for further proceedings regarding the successor liability continuity requirement.

Historically, multi-employer plans have been very aggressive in pursuing withdrawing employers and their owners or successors, and the Seventh Circuit has frequently ruled in favor of these plans.  In light of the ManWeb decision, it is more important than ever for businesses that are contemplating the purchase of another business or substantially all of that business’s assets to perform proper due diligence in order to ascertain a potential seller’s liabilities. It is crucial that a potential buyer understand exactly what assets and liabilities it is agreeing to take on, and that the resulting purchase contract is carefully drafted to limit the buyer’s potential liability exposure.

For additional information, please contact attorney Steve Theising at stheising@KDDK.com or (812) 423-3183, or contact any member of the KDDK Tax and Employee Benefit Practice Team or Business Law Practice Team.

About the Author

Steve Theising

Steven M. Theising, an attorney at Kahn, Dees, Donovan & Kahn, LLP (KDDK), in Evansville, Indiana, practices primarily in the areas of business, construction, real estate, tax and employee benefits, and collection and creditors’ rights law. Steve utilizes his accounting and financial background to provide both legal and practical business analysis in negotiating, resolving and closing business, construction and real estate transactions and disputes. He also assists clients with addressing and resolving environmental and estate planning issues.

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