Explore a recent M&A case where a buyer successfully defends against a union pension plan’s claim for the seller’s unfunded pension liability. Dive into the details of the case, the buyer’s defense strategy, and the court’s decision.
M&A Stories
November 16, 2018
In a recent M&A case, a buyer successfully defended against a union pension plan’s claim for the seller’s unfunded pension liability. The buyer acquired a 99-bed skilled nursing facility in Santa Clarita, California, through an asset purchase agreement that closed on January 5, 2015.
After the transaction, the buyer faced a lawsuit from the union pension plan seeking compensation for the seller’s pension liability. The buyer, however, argued that they had no actual or constructive knowledge of this liability, a claim supported by the federal district court.
The court emphasized that the buyer, unfamiliar with union business, had no prior experience in purchasing, owning, or operating such entities. Additionally, the buyer was unaware that, as an asset buyer, they could be held responsible for the seller’s union pension liability.
While the buyer knew of the seller’s collective bargaining agreement with the Teamsters, the asset purchase agreement explicitly stated that the seller did not sponsor, maintain, or contribute to any pension or benefit plans. The court highlighted that negotiating a broad indemnification provision covering liabilities under federal law (ERISA) did not imply knowledge of a multi-employer pension plan or potential liability for an unfunded union pension obligation.
The union pension plan argued that, upon learning of the collective bargaining agreement, the buyer had a duty to investigate further. However, the court rejected this, stating that given the information available, further investigation was not warranted. Consequently, the court found that the buyer lacked both actual and constructive notice of the potential withdrawal liability at the time of the asset purchase.
The court’s decision underscored the unfairness of imposing the seller’s pension liability on the buyer, balancing the buyer’s lack of knowledge against the congressional interest in preventing underfunding in pension plans.
Comment:
In hindsight, obtaining legal counsel with expertise in union benefits during due diligence would have spared the buyer significant challenges. A thorough review of pension documents and the seller’s records would have revealed the existence of a union pension and the pension liability.
Case Reference:
NORTHWEST ADMINISTRATORS, INC. v. SANTA CLARITA CONVALESCENT CORPORATION, No. C17-1001RSL, United States District Court, W.D. Washington, Seattle (November 9, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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