The US Court of Appeals for the Seventh Circuit recently ruled that RM Acquisition, LLC (RM), which purchased all of the assets of Rand McNally in 2007, was not liable for benefits under Rand McNally’s top hat plan for senior executives. Under the sale contract, RM assumed some, but not all, of Rand McNally’s liabilities. Importantly, RM did not assume liabilities attributable to Rand McNally’s unfunded top hat plan. After the sale, neither Rand McNally nor the plan had assets to pay benefits to the participating senior executives. As a result, the affected participants decided to pursue a nonpayment of benefits claim against RM under Section 502 of the Employee Retirement Income Security Act of 1974 (ERISA). In its decision affirming a district court ruling, the Seventh Circuit noted that the proper defendant in the case should have been the plan itself, but acknowledged that since the asset-less plan and plan sponsor (Rand McNally) were “empty eggshells,” RM was the only viable defendant for the participants. The Seventh Circuit then applied general common law and federal successor liability rules to the facts and determined that RM was not liable for benefits under the top hat plan. The common law standard, which looks for “identity of ownership between seller and buyer” through some sort of fraud or a failure of the seller and buyer to be “meaningfully separate,” was not met in this case. The Seventh Circuit explained that RM did not assume the plan’s liabilities under the sale contract, and the evidence did not demonstrate any attempt on RM’s part to “connive” with Rand McNally to deprive participants of benefits, nor did it demonstrate that RM was merely continuing Rand McNally’s business under another name. The federal standard, which expands the analysis for claims involving a violation of federal rights, looks for “identity of operations between a seller and a buyer that may have been dealing at arm’s length” through evidence of notice of the claim prior to the purchase and “substantial continuity in the operation of the business before and after the sale.” Here, the federal standard could not be met because the participants did not provide any evidence to meet the second element of the standard.

After addressing the successor liability issue, the Seventh Circuit then addressed the participants’ additional claim that RM could be found liable under ERISA Section 510 for interference with their rights under the plan. ERISA Section 510 provides that it is “unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an [ERISA plan] . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.” RM argued that Section 510 only applies to actions taken to intentionally impair an employee-participant’s rights under an ERISA plan by firing the participant or otherwise altering the participant’s employment relationship. The Seventh Circuit disagreed, explaining that although Section 510 does apply to such situations, “[t]here is more to the statute,” and liability under Section 510 can arise from actions taken against participants or beneficiaries who are not employees. As the court noted, “the words ‘suspend,’ ‘expel,’ and ‘discriminate’ denote actions that can be taken against a participant or beneficiary who is not an employee.” Even though the Seventh Circuit rejected RM’s argument, it nevertheless concluded that RM had not attempted to interfere with the participants’ rights in this case. Indeed, “RM had nothing to do with the plan.” In light of all of these considerations, the Seventh Circuit concluded that RM was not liable for benefits under the plan.

The Seventh Circuit’s decision, which provides a useful analysis of successor liability in the context of a deferred compensation plan and clarifies the application of ERISA Section 510 to actions taken against non-employee participants and beneficiaries, is best summed up with the final statement in the court’s decision: “A buyer of assets has, with exceptions inapplicable to this case, no obligation to assume the seller’s liabilities.” (Feinberg v. RM Acquisition, LLC, 7th Cir. 2011)