A recent Seventh Circuit Court of Appeals case highlights a troubling trend of courts finding successor liability for multiemployer pension contributions and withdrawal liability following corporate asset sale transactions.

In 1990, the Seventh Circuit held in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac that under ERISA, a purchaser of assets could be liable for delinquent pension contributions owed by the seller to a multiemployer pension fund, provided that there is sufficient evidence of continuity of operations and the purchaser knew of the liability of the seller.

Subsequently, in 2011, the Third Circuit in Einhorn v. M.L. Ruberton Construction Co. reversed a lower court ruling and held that a purchaser of assets of an employer obligated to contribute to a multiemployer benefit plan may, where there was a continuity of operations and the purchaser knew of delinquency, be held liable for the delinquent contributions.

Recently, in Tsareff v. Manweb Services, Inc., the Seventh Circuit has taken what some may consider a step too far in holding that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had known of the seller’s “contingent” withdrawal liability that would be triggered by the sale. The Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable.

Although the Seventh Circuit acknowledged that the common law of successor liability would not impose liability here, it reasoned that imposing withdrawal liability on the purchaser of assets (where the purchaser knew of the contingent liability and there is a continuity of operations) “. . . would further Congress’s goal of ensuring that the responsibility for a withdrawing employer’s share of unfunded vested pension benefits is not shifted to remaining employers.” Adding insult to injury for the purchaser, the court found that the underlying withdrawal liability assessment could not be challenged by the purchaser because the seller waived its right to arbitrate.

The court’s reasoning that equity mandates imposing common law notions of successor liability to multiemployer pension plans is questionable given the ERISA Section 4204 exception to the general rule that a sale of assets otherwise would trigger a complete or partial withdrawal for the seller. Under Section 4204, the general rule won’t apply if certain conditions are satisfied, including specific contractual provisions that (among others) require the buyer to assume the obligation to contribute to the multiemployer pension plan for substantially the same number of contribution base units as the seller, and for the seller to remain secondarily liable to the multiemployer plan for the withdrawal liability that would have been triggered by the sale if the buyer withdraws within a five plan year period without satisfying its withdrawal liability obligation.

These cases—and the ManWeb decision in particular—raise many issues for buyers and sellers to consider in asset-based transactions.