If an employer withdraws from a multiemployer pension plan such that the employer no longer has an obligation to contribute to the plan, the withdrawing employer is generally responsible for its share of the plan’s underfunding. This is referred to as withdrawal liability.

Typically, in the context of an asset sale transaction, the seller is the entity that has withdrawn from participation in the multiemployer plan, and any withdrawal liability assessment applies to the seller. However, where the seller does not or is unable to pay, the multiemployer plan may seek to recover the withdrawal liability assessment from the buyer on the theory that the buyer is the successor to the employer.

In general, the buyer in an asset purchase transaction might be deemed to be a successor employer — and thus liable for the seller’s withdrawal liability obligation — if the buyer (1) had notice of the liability and (2) substantially continued the business operations.

However, a recent case decided by the United States Court of Appeals for the Ninth Circuit, Heavenly Hana, LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, illustrates that a buyer might be determined to be a successor employer even if the buyer does not have actual notice of the withdrawal liability. In the case, the buyer (Heavenly Hana) agreed to purchase a hotel and related assets owned by the seller. Under the seller’s collective bargaining agreement with the hotel union, the seller contributed to the Hotel Union & Hotel Industry of Hawaii Pension Plan, the multiemployer plan covering the seller’s union workers.

Ten days before the deal closed, the seller ceased contributing to the multiemployer pension plan and on the closing date formally withdrew from the Plan. The seller’s withdrawal from the multiemployer plan triggered withdrawal liability of nearly $760,000. Following the closing date, the multiemployer plan demanded payment from the buyer as successor to the seller.

Because the buyer operated the hotel, used the assets acquired from the seller in the operation of the hotel, and employed the majority of the seller’s employees, the second prong of the successor employer test — continuity of business operations — was satisfied. However, the buyer challenged the plan’s assessment on the grounds that buyer lacked actual notice of the liability. The court rejected this argument and applied a constructive notice standard; that is, the court determined that the buyer should have discovered the seller’s withdrawal liability and thus was deemed to have notice of it.

The court based its determination on the fact that the buyer (1) had previously operated a hotel that participated in a multiemployer plan, (2) was aware of the unionized workforce, and (3) had the awareness to ask legal counsel whether it could incur withdrawal liability in connection with the transaction. (Counsel incorrectly advised that it could not.) In essence, the court determined that the buyer should have known about the potential withdrawal liability.

Due diligence considerations

During the due diligence process, asset purchasers should inquire about the existence of union employees participating in multiemployer plans. If such a plan exists, asset purchasers should review union agreements, plan documents, and any withdrawal liability estimates prepared by the multiemployer plan. Armed with this knowledge, an asset purchaser may negotiate purchase price adjustments, indemnities, or escrow accounts to minimize its financial and legal exposure.

This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.

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