Explore a complex M&A legal case involving a buyer’s struggle against a $58 million pension claim from a seller’s union. Learn how successor liability and careful structuring played a role.
April 3, 2020
Introduction:
When a business asset buyer acquires a company, they typically decide which of the seller’s liabilities they will take on. However, an exception arises when purchasing assets from a unionized business, as the buyer might become liable for the seller’s underfunded union pension plan. This article discusses a case involving a buyer who faced a legal struggle over a $58 million pension claim from a seller’s union.
The Background:
In this case, the seller was a regional grocery business based in the Northeastern United States. The seller owned and operated around 80 retail grocery stores and a wholesale division supplying over 100 independent retail grocery stores. The seller also owned warehouses in New York and Pennsylvania, with a significant number of union employees at the New York warehouse.
The Challenge:
The seller contributed to a union pension fund for its New York warehouse employees. This pension fund was organized under federal law as a multiemployer plan, meaning multiple employers, including the seller, contributed. However, the seller’s portion of the pension plan was severely underfunded. According to federal law, if the seller stopped contributing, they would face substantial withdrawal liability due to the underfunding.
The buyer in this scenario was a wholesale supplier serving grocery businesses across the U.S. They negotiated to acquire the seller’s wholesale distribution division. However, purchasing the seller’s New York warehouse outright would trigger a multi-million dollar withdrawal liability. To minimize this risk, the buyer structured the acquisition carefully.
The Deal:
In December 2008, the buyer entered an agreement to purchase specific assets and liabilities of the seller’s wholesale division for approximately $43 million in cash. They acquired contracts, customers, equipment, records, intellectual property, and nonunion employees. However, the buyer did not take on the seller’s retail store business, facilities, leases, cash, or employee benefit plans. They also did not acquire the New York warehouse lease, vehicles, or hire the union employees.
The Legal Dispute:
After the purchase, the seller continued to employ union workers and contribute to the pension fund until going bankrupt in 2010, leaving a $58 million pension underfunding. The union pension fund pursued the buyer for this amount, claiming successor liability. This legal theory suggests that a buyer could be responsible for a seller’s pension liability if they were aware of the underfunding issue and continued the seller’s business significantly.
The buyer contested the claim, arguing they shouldn’t be liable for the seller’s pension withdrawal under successor liability. Despite this, the court denied the buyer’s motion to dismiss, citing rulings from other circuits and breaking new ground by applying successor liability to pension withdrawal.
Resolution:
In 2020, the court granted the buyer’s motion for summary judgment, ruling that the buyer wasn’t liable for the $58 million pension claim under a successor liability theory. The court determined that the buyer didn’t substantially continue the seller’s business after the 2008 transaction. Factors supporting this decision included the buyer not hiring the union employees or acquiring the New York warehouse lease, vehicles, or equipment.
Conclusion:
This case, known as “New York State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, Inc.,” highlights the evolving legal landscape for asset buyers of unionized businesses. Courts in certain circuits now allow union pension plans to pursue withdrawal liability claims against buyers using the successor liability theory. Buyers of unionized businesses should conduct thorough due diligence to assess potential pension underfunding risks. While the buyer in this case prevailed, the legal environment is shifting, and careful consideration is crucial when facing potential pension-related challenges.
Case Reference:
This case is referred to as New York State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, Inc., No. 5:16-CV-84 (FJS/ATB), United States District Court, N.D. New York (March 17, 2020). Also see May 1, 2017 decision; https://scholar.google.com/scholar_case?case=17818658469781311020&hl=en&as_sdt=6&as_vis=1&oi=scholarr
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291 Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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