Asset buyer of electrical contractor business may have liability for seller’s multiemployer pension plan withdrawal charges

The buyer in this case may end up being stuck with a liability of the seller, that the buyer did not assume in the asset purchase agreement, that is 2.5 times the amount the buyer paid the seller for the business.  In the words of the federal appellate court, this is what happened:

(The seller) … was a small contractor specializing in refrigeration and cold-storage engineering for commercial and industrial projects. … (The buyer) … was a larger company offering a wider range of contracting services, with the notable exception, before it acquired … (the seller’s) … assets, of refrigeration projects such as cold-storage warehouses. … (The seller’s) … unionized electricians were covered by a multiemployer pension plan. …

In August 2009, … (the buyer) … paid $259,360 for the assets of … (the seller) … (The seller) … was a party to a collective bargaining agreement with International Brotherhood of Electrical Workers Local 481; … (the buyer) … was non-union. As a union employer, … (the seller) … contributed to … (a multiemployer pension plan) and under the … (federal labor laws) … was required to pay withdrawal liability of $661,978 when it ceased operations. …

Neither … (the seller) … nor … (the buyer) … made … payments to satisfy the withdrawal liability … The assessment therefore became due when the statutory deadline for contesting the liability passed. … (The multiemployer pension plan) … then filed this suit against … (the seller) … and added … (the buyer) … as a defendant based on successor liability …

Thus, buyer’s risk in this circumstance is that buyer would have what is called “successor liability” for seller’s liability; imposed on the buyer by federal labor law. Here is the federal appellate court’s description of this federal law:

The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), establishes withdrawal liability for employers leaving a multiemployer pension plan. … In this case, … (the seller) … withdrew from the Indiana Electrical Workers Benefit Fund (“the Fund”). The Fund assessed withdrawal liability of $661,978 against … (the seller) …. When … (the seller) … failed to pay, the Fund brought this action against both … (the seller) … and … (the buyer) … as a successor in interest to … (the seller) …. Successor liability can apply under the MPPAA when the … (buyer) … had notice of the liability and there is continuity of business operations. …

The buyer had notice of the liability when it closed the transaction. The fight was over whether the buyer continued the seller’s business operations after the closing. The trial court had found that the buyer had no successor liability, noting that the buyer did not use the seller’s physical assets:

(The buyer) … purchased … (the seller’s) … assets for $259,360. Not needing the physical assets, such as vehicles, tools, and office equipment, … (the buyer) …sold most of the property at auction and did not use it in the operation of its business. (The buyer) … also did not use … (the seller’s) … prior location. The district court found these facts weigh against successor liability, and we agree.

But, the appellate court reversed, sending it back and instructing the trial court to rethink whether the buyer continued the seller’s operations; because buyer continued to use the seller’s intangible assets:

(The buyer’s) … purchase of and use of … (the seller’s) … intangible assets—its name, goodwill, trademarks, supplier and customer data, trade secrets, telephone numbers and websites—and its retention of … (the seller’s) … principals to promote … (the buyer) … to existing and potential customers as carrying on the … (the seller) … business under … (the buyer’s) … larger umbrella, weigh more heavily in favor of successor liability than the district court recognized. We vacate the district court’s decision and remand for further consideration of this equitable determination.

This case from the United States Court of Appeals for the 7th circuit, is referred to as Indiana Electrical Workers Pension Benefit Fund V. ManWeb Services, Inc., No. 16-2840, United States Court of Appeals, Seventh Circuit (Decided, March 12, 2018).

Comment. Going forward, an asset buyer that suspects that a seller has a potential multiemployer pension plan withdrawal plan liability should get expertise to assess the risk. In this case, a potential liability that is 2.5 times the purchase price would require the buyer to reassess the deal and consider what changes to the deal, if any, could save it.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email:        jmccauley@mk-law.com

Profile:       http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

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Posted in federal multiemployer pension plan withdrawal liability, successor liability

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