Court says asset buyer of business can sue seller for failure to disclose its union contract obligation

In this post-closing lawsuit, Unions comprised four jointly-managed multiemployer employee benefit plans. Seller was a Nebraska corporation which performed waterproofing, concrete and masonry restoration, and roofing services in Nebraska and the Midwest.

Buyer was also a Nebraska corporation, performing commercial and industrial waterproofing and concrete and masonry restoration services in Nebraska and the Midwest. In November 2014, Seller sold its assets to Buyer.

According to Buyer, during the 2014 negotiations prior to its purchase of Seller assets, Seller’s owner told Buyer that only a few of Seller’s employees belonged to a union. Seller’s owner told Buyer that Seller’s company was non-union, and although there may have been a union contract many years prior, it was no longer valid. Buyer claimed it requested a copy of the union contract, but none was produced.

In April 2016, Unions filed suit against Seller in a Wichita, Kansas federal district court, claiming Seller was obligated by collective bargaining agreement to pay fringe benefits contributions for its employees. Unions alleged Seller insufficiently contributed to the employee benefit plans in violation of certain ERISA]statutes (the federal employee benefits law).

During the course of discovery in this case, Unions realized Buyer may also be liable for Seller’s employee benefit plan contributions. Unions added Buyer to its lawsuit against Seller.

Unions alleged Buyer was a successor to Seller and was therefore liable for Seller’ contractual obligations to Unions. But Buyer, by way of defense, alleged Seller made misrepresentations during the asset purchase negotiations. Buyer contended Seller presented itself as a non-union company, and told Buyer there was no current collective bargaining agreement of any kind in place at the time of sale.

Buyer asked the court to permit it to sue Seller as part of the lawsuit. Essentially, Buyer claimed Buyer made clear to both the sale broker and Seller that it was interested only in purchasing a company without union contracts in place. Buyer maintained Seller did not disclose the then current collective bargaining agreement and misrepresented Seller’s involvement in such a contract.

The court concluded that Buyer’s allegations about Seller’s pre-closing statements in its proposed lawsuit against Seller were plausible on their face and thus permitted Buyer to sue Seller in the litigation.

This case is referred to as BAC Local Union 15 Welfare Fund v. Williams Restoration Company, Inc., Case No. 16-2242-KHV-GEB, United States District Court, D. Kansas (October 26, 2018).

Comment. Buyer is fighting this post-closing claim on two fronts. Buyer is fighting Unions direct claim against it on the grounds that Buyer did not know of the union contract. Unions can recover against a buyer of the assets of a business for the seller’s union obligations, but the union must prove, among other things, that the buyer “knew” about the union liability. What facts amount to a buyer’s knowledge of a seller’s union contract is often a matter of dispute.

Buyer is also suing Seller directly for any loss it suffers for Seller’s alleged failure to disclose its Union obligations.

With 20/20 hindsight, Buyer could have insisted upon seeing the union contract before closing and have an expert on this kind of union liability analyze and review this issue. For Seller, a reminder that full disclosure to a buyer minimizes the risk an expensive, time-consuming and stressful post-closing fight with the buyer.

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



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Posted in due diligence, fraud in business sale, post asset purchase issues, representations and warranties, successor liability, union fringe benefits, union liabilities

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