Buyer’s purchase price may triple post-closing because of underfunded union pension plan

Seller was a wire-forming company. A collective bargaining agreement with the union representing its workforce obligated Seller to contribute to a multiemployer pension plan on behalf of the employees.

In September 2013, after Seller determined that it could not stay in business, Seller executed a plant closing agreement with the union; which stated that nothing in the plant closing agreement should be considered or asserted to be a waiver by the union of any Seller withdrawal liability that may be determined and imposed in the future by the union.

The plan was underfunded when Seller withdrew. Federal law (commonly known as ERISA) provides that Seller by withdrawing from the union pension plan remains liable for its share of unfunded vested benefits. One month later, the union pension plan notified Seller that it owed $644K in withdrawal liability. Seller did not contest that assessment and continued to make monthly withdrawal-liability payments until October 2014, shortly after the sale to Buyer discussed below.

One of Seller’s former customers, Buyer, purchased Seller’s assets, in September 2014, for $250,000. This was primarily twenty-six pieces of machinery (such as presses, press brakes, benders, and welders), Seller’s customer list, and its goodwill.

It was undisputed that Seller’s owners never disclosed the withdrawal liability to Buyer. But documents provided to Buyer showed that Seller’s workforce was unionized, that Seller had made contributions to a union-sponsored pension plan, that Seller had since withdrawn from the plan, and that the union was not waiving any withdrawal liability that may be determined and imposed against Seller in the future.

In 2015, the union pension plan sued Buyer in an Ohio federal district court to recover Seller’s withdrawal liability, on the theory that Buyer was a successor employer and therefore responsible for the withdrawal liability.

Buyer asked the court relatively early in the litigation to rule that it was not liable for Seller’s union pension plan withdrawal liability because it did not know about the withdrawal liability. The court ruled that although Buyer did not know about the underfunded pension plan it should have known about it based upon the due diligence it had done.

That means that the union can proceed in its lawsuit to recover Seller’s $644K union pension plan liability. The primary question remaining is whether, under the totality of the circumstances, there is substantial continuity between the operation of Seller’s business by Buyer.

To determine continuity of operations, the court will look to: continuity of workforce; management; equipment and location; completion of work orders begun by Seller; and Buyer continuing to service Seller’s customers.

Based on the totality of the circumstances, the court must determine whether Buyer has acquired substantial assets of Seller and continued, without interruption or substantial change, Seller’s business operations.

Buyer argued that the facts produced at in this early proceeding established that Buyer did not continue Seller’s operations without interruption or substantial change. The court concluded that this issue cannot be determined at this stage of the proceeding; concluding that depending on how one views and weighs the evidence, one might reasonably conclude that Buyer did or did not substantially continue Seller’s business.

Perhaps most importantly, the court noted that Buyer hired all of Seller’s employees, in addition to a former Seller plant manager whom Buyer brought on specifically to get the wireforming operation off the ground. Buyer used Seller’s equipment to start forming wire, and Buyer repeatedly reached out to former Seller customers, whether to solicit their business or allay any concerns about Buyer’s competence in the wire-forming business. Thereafter, a very large number of those customers became Buyer customers.

On the other hand, the court noted that Buyer made a number of seemingly important changes after the asset sale. For one thing, it upgraded, as Seller had (or could) not, its wire-forming equipment. As a result, machine fabrication largely, if not entirely, replaced the kind of hand manufacture that Seller employed. This arguably allowed Buyer’s operations to be more efficient. Also, none of the former Seller employees managed operations at Buyer, and their day-to-day job duties changed to some, and perhaps to a significant, degree.

The court also said that it is also possible to draw conflicting inferences from the evidence regarding Buyer’s use, or in some cases non-use, of Seller’s intangible assets.

For example, Buyer claimed that it had no intention to capitalize on Seller’s goodwill because none existed in 2014. Yet, the court noted that Buyer paid $120,000 — 48% of the total purchase price — for the goodwill and Seller’s customer list. In addition, Buyer insisted that Seller change its name.

This case is referred to Members of the Board Of Administration of the Toledo Area Industries UAW Retirement Income Plan v. Obz, Inc., Administration Case No. 3:15CV756, United States District Court, N.D. Ohio, Western Division, (December 26, 2018). https://scholar.google.com/scholar_case?case=11249101925830503209&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment. The Ohio federal district court followed a recent decision of the 9th Circuit of the U.S. Court of Appeals (a federal appellate court that interprets federal law for federal district courts out west), that a buyer does not have to know that a seller has unfunded union pension plan liabilities to be responsible for the liability. All it takes is if for buyer having enough information that buyer should have known about the unfunded liability.

The lesson: Get expert help to determine if a seller with a union pension plan has an underfunded union pension plan liability. Had Buyer done that in this case, it would probably would have concluded that the purchase price was not $250K, but almost $900K ($250K plus $644K).

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

Telephone:      714 273-6291

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Posted in asset purchase agreement, constructive knowledge, distressed business acquisitions, federal multiemployer pension plan withdrawal liability, multi-employer pension plan, successor liability, union liabilities

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