Unfunded pension withdrawal liability is one of the lesser known types of liability. Some employers are not prepared for the large amounts that can arise, and even worse, others simply do not know it may exist. Recently, courts have also found successor purchasers responsible for their predecessors' withdrawal liability, increasing the need to be aware of and proactively address potential withdrawal liability when engaging in asset purchases.
Under the Multiemployer Pension Plan Amendments Act of 1980, or MPPAA, an employer with an obligation to contribute to an underfunded multiemployer pension plan may incur withdrawal liability if that employer stops contributing. Congress created this liability to address the growing problem of employers fleeing underfunded pension plans, causing other employers to refrain from joining the pension plans, and resulting in pensioners losing the vast majority of the benefits that they were promised.
The U.S. Courts of Appeals for the Sixth, Seventh and Ninth Circuits have now expanded the scope of withdrawal liability through the doctrine of successor liability (the case in the Sixth Circuit -- Pension Benefit Guaranty Corp. v. Findlay Industries Inc. -- was very recently appealed to the U.S. Supreme Court). Successor liability has long been a mainstay in labor law. Initially, to find a successor liable, a claimant was required to prove: (1) the purchaser substantially continued the predecessor's operations; and (2) the purchaser had actual notice of the liability.
However, courts are recognizing that an actual notice standard is not appropriate under MPPAA, and in many cases, impossible to satisfy. Withdrawal liability can only be calculated as of the date of the withdrawal. Actual notice of the withdrawal liability prior to the asset purchase is sometimes unrealistic because the purchase is often the event that gives rise to the withdrawal.
The Seventh and Ninth Circuits have therefore affirmatively shifted to a constructive notice standard, an easier test to satisfy for pension plans claiming successor withdrawal liability. To demonstrate constructive notice in the Seventh Circuit, a buyer must be on notice of contingent withdrawal liability. The court examines whether a purchasing company knew "he was dealing with a union pension fund [and therefore] he was on notice that there was a possibility of such liability." The Seventh Circuit also points to the nation's well-known pension funding crisis as general knowledge and notice. If an employer contributes to a multiemployer pension plan, odds are that the plan is probably underfunded and withdrawal liability will likely occur. The Seventh Circuit also warns litigants that a "lack of familiarity with the concept of withdrawal liability cannot be an excuse[.]"
In the Ninth Circuit, a pension plan must show that if the purchasing company exercised reasonable care and diligence (regardless of the purchaser's actual diligence), the purchaser would have determined that some withdrawal liability will exist when the employer withdraws. The court examines elements such as whether the pension plan published its funding notices demonstrating that the plan is underfunded. Even more basic, the Ninth Circuit asks if the purchasing company had "reached out to the plan directly," could the purchasing company have discovered that the employer would likely incur withdrawal liability? In this author's opinion, the answer is most often "yes."
If your client is contemplating purchasing a preexisting business, you should dutifully research whether collective bargaining agreements exist between the predecessor and any labor organizations. Specifically, you should investigate whether the employer is required to make employee benefit contributions to a multiemployer pension plan. As shown above, payment of these benefits alone is enough to warrant constructive notice and a possible finding of successor liability.
Purchasing employers should therefore be vigilant during their due diligence periods. Closely examine the pension benefits that the employer has in place. If the predecessor employer is required to contribute to a multiemployer pension plan, direct the employer to obtain estimates of withdrawal liability from the pension plan as permitted by statute. If the employer is required to contribute to more than one multiemployer plan, then make certain that the predecessor requests estimates from all relevant pension plans.
The key is not to ignore potential successor withdrawal liability. The pension plan's named fiduciaries have a duty to act in the sole benefit of the participants, including collection of amounts owed. The pension plan will therefore likely seek withdrawal liability, not only against the withdrawn employer, but also from the purchasing company. This potential liability can be accounted for in the purchase price, or through adhering to MPPAA's asset purchase rules that require additional forms of surety. The purchaser must protect itself within the terms of the sale, or else it may be subject to successor liability with no recourse.
In short, a purchaser can likely discover the underfunded status of a pension plan and the employer's estimated withdrawal liability through basic inquiries. The advent of a constructive notice standard in successor withdrawal liability disputes creates a low bar for pension plan claimants to satisfy. Purchasers continuing their predecessor's operations should therefore be extremely diligent in investigating potential withdrawal liabilities, and in obtaining protection during negotiations and the purchase process. The purchaser's ability to recoup successor withdrawal liability from the seller will be greatly limited if it does not act proactively.
Law360, (April 4, 2019)