Seyfarth Synopsis: Given the Ninth Circuit's recent holding that successor withdrawal liability is governed by a constructive notice standard, private equity companies and other businesses seeking to acquire other enterprises should be hyper-diligent in determining whether the transaction will expose their organizations to withdrawal liability triggered by the seller.
Under the Employee Retirement Income Security Act ("ERISA"), as amended by the Multiemployer Pension Plan Amendment Act ("MPPAA"), generally, an employer may face withdrawal liability when withdrawing from, or ceasing to make payments to, a multiemployer pension plan. If a successor employer acquires an entity that has unpaid withdrawal liability, then the purchasing entity is potentially responsible for that withdrawal liability if it has notice of the liability. Existing precedent provides that to be liable, the purchaser must "(1) be a successor, and (2) have notice of the withdrawal liability." Withdrawal liability can sometimes be overlooked by successor employers that assume the operations of their predecessor because, broadly speaking, withdrawal liability is an unperfected liability that does not necessarily appear on the seller's financial statements. Said otherwise, purchasing entities must be completely certain of that which they are assuming.
New case law makes clear that acquirers can no longer simply rely on a seller's representation that no withdrawal liability exists. On June 1, 2018, in Heavenly Hana, LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plant, the Ninth Circuit held that a private equity company that purchased a hotel in Hawaii was liable for the seller's unpaid withdrawal liability under the MPPAA. In doing so, the Court overruled the lower District Court's holding that no withdrawal liability was assumed because "actual notice" was missing. The Ninth Circuit held that the private equity company had "constructive notice" of the selling entity's unpaid withdrawal liability, which is a sufficient basis upon which to impose successor withdrawal liability "because a reasonable purchaser would have discovered their predecessor's withdrawal liability." The Court determined that the purchasing entity had constructive notice of the liability because:
- the private equity company had experience with other acquisitions involving multiemployer pension plans, and was familiar with withdrawal liability;
- the private equity company was on notice that the employees at the hotel were unionized and that the seller had previously contributed to a multiemployer plan; and
- the multiemployer pension plan's funding notices were publically available, and clearly demonstrated that the plan was underfunded.
The Court rejected the private equity company's argument that it relied upon the representation of the seller that no withdrawal liability existed. Further, the Court noted that the purchasing entity, rather than the seller or the pension plan, was in the best position to determine whether it will face withdrawal liability because: (1) the seller is incentivized to under-represent any potential withdrawal liability; and (2) the pension plan should not be tasked with keeping track of every sales rumor and identifying all potential purchasers. As the Court stated: "[p]urchasers .. have the incentive to inquire about potential withdrawal liability in order to avoid unexpected post-transaction liabilities."
This decision serves as a helpful reminder to purchasing entities that in the world of acquisitions, acquirers must push deeply on their inquiries into labor agreements and potential withdrawal liability that frequently accompanies a collective bargaining relationship. As made evident by the Court's decision in Heavenly Hana, LLC, a purchasing entity cannot simply claim ignorance as an excuse to be absolved of successor withdrawal liability. Rather, purchasing entities should retain experienced transactional counsel, including traditional labor and benefits counsel, to make sure there are no hidden landmines in the transaction.
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