Withdrawal Liability – Seller Beware
I previously blogged on a case where a purchaser who did not try to assume withdrawal liability in a purchase transaction learned that it could nevertheless be responsible for that liability as a successor employer. In another recent case, a seller who tried to structure a transaction so that the buyer assumed the withdrawal liability nevertheless learned that the multiemployer pension fund could hold the seller responsible for the withdrawal liability.
Employers who participate in multiemployer pension funds know that if they withdraw from the fund they may be required to pay withdrawal liability if the plan is underfunded. Employers who sell their assets to unrelated buyers can avoid that withdrawal liability if the buyers agree to assume an obligation to contribute to the pension fund for substantially the same number of contribution base units (CBUs) as the seller was contributing and to meet certain other requirements. In the case of HOP Energy LLC v. Local 553 Pension Fund, the seller did just that: In its sale agreement with the buyer the buyer assumed the obligation to contribute to the plan for substantially the same number of CBUs as the seller had contributed and met all the other requirements for that transfer of liability. However, in addition to stating in the asset purchase agreement that the buyer would make contributions for substantially the same number of CBUs as the seller, the asset purchase agreement also stated: “Notwithstanding the previous sentence and except as otherwise provided in Section 12.1, nothing in this Section shall impair or limit the Purchaser’s right to discharge, layoff, or hire employees or otherwise to manage the operations of the Business, including the right to amend, revise or terminate any collective bargaining agreement currently in effect and, as a consequence, reduce to any extent the number of contribution base units with respect to which [buyer] has an obligation to contribute to any plan.”
The U.S. Court of Appeals for the Second Circuit interpreted this provision to mean that despite the previous statement that the buyer would contribute to the fund for substantially the same number of CBUs as the seller had contributed, the quoted language negated the obligation – meaning that the buyer had not in fact assumed the required obligation. Therefore, despite the fact that the buyer continued to contribute to the pension fund, the seller was hit with withdrawal liability in an amount that constituted approximately one-third of the purchase price for the seller’s assets.
One of the judges dissented from the opinion, concluding that the quoted language states the obligation of any participating employer, namely that the employer’s obligation to contribute is always subject to negotiation with the union and to complete or partial withdrawal liability if such negotiation results in a sufficient reduction in the number of CBUs for which contributions are made.
The majority opinion did not discuss the fact that by assuming the obligation, the buyer also assumed part of the contribution history of the seller so that if the CBUs were sufficiently reduced, the buyer would also owe withdrawal liability to the pension fund, based at least in part on the seller’s contribution history. To that extent, the fund was protected in the event that the buyer’s CBUs later declined.
This is another decision that will make selling a business with potential withdrawal liability more difficult.
Contact Benefits Notes for more information.