I recently blogged about a Seventh Circuit Court of Appeals decision that tagged a buyer of the assets of a company contributing to a multiemployer plan with withdrawal liability that the seller had not paid. A recent Ninth Circuit decision reached the same conclusion in a case where an owner shut down its business, which allowed one of the managers to establish a new business that continued to work with a number of the clients of the old business. The new business bought at the public auction approximately 30% of the tools, equipment and inventory of the old business. There was no formal purchase agreement between the owners of the old business and the owner of the new business and no formal transfer of customer lists or business name. The new business did not assume the lease of the old business but entered into a lease for the same space with the landlord. The new business used similar signage but did not use the old business’s name. The new business used independent contractors to install product, some of whom used to work for the old business. According to the district court, the new business did not employ a majority or even a substantial portion of the workforce of the old business, although a majority of the workers (five of eight) of the new business had previously been employed by the old business.

The court of appeals focused on the purpose of the imposition of withdrawal liability, concluding that multiemployer plans needed to be protected. In this case, the court was interpreting the rules surrounding an exception for withdrawal liability that applies in the construction industry. Under this construction industry exception, no withdrawal liability is imposed if a business shuts down and does not start work in the same jurisdiction within the next five years without again contributing to the plan. Because the old business had shut down, the old business relied on this exception to avoid withdrawal liability. However, the multiemployer plan assessed the liability against both the old business and the new business. For whatever reason, only the seller was involved in the lawsuit.

The district court found that the new business was not a successor employer; the court of appeals overturned that decision. The court of appeals focused on the fact that there was substantial continuity in the customers and business location. The case was remanded to the district court to look more closely at the continuity factors. Based on the discussion of the facts by the court of appeals, it is quite likely that the new business will be held liable for this withdrawal liability.

In other successor employer situations, the courts have noted that a buyer who is being tagged with successor liability could protect itself by indemnification or through a reduction in the purchase price. With the successor liability imposed in this case, the owner of the new business had no such opportunity. The owner did not actually purchase assets from the old business other than at public auction. There was no contract between the owners of the old business and the new business relating to the purchase of the assets.

On the other hand, the court noted that certain documents in the case were filed under seal, including the business plan of the new business. The court said that its opinion was based in part on facts contained in documents filed under seal and expressed in a footnote its concern about sealed documents making it difficult for others to determine why courts reached their decisions. It could be that there was some evidence of coordination or collusion between the old business and new business that would otherwise justify the decision. Absent such facts, it would seem the managers of a business that is shutting down who decide to start a similar business servicing the customers of the business that is closing could cause both the closing business and the new business to be responsible for withdrawal liability. Those wishing to start businesses under these conditions would need to be very careful about how they did so.