In 2007, HOP Energy, LLC sold the operating assets of its subsidiary, Madison Oil, to Approved Oil Company. Madison Oil was obligated to contribute to a multiemployer pension plan. Generally, when assets are sold, the employer’s obligation to contribute to the multiemployer plan would end and that would trigger withdrawal liability. After the sale of the assets of Madison Oil, the fund assessed HOP Energy and Madison Oil $1.2 million in withdrawal liability.

HOP Energy had intended to avoid this liability by use of the asset sale exception found in the Employee Retirement Income Security Act of 1974 (ERISA) Section 4204(a)(1) and thus challenged the withdrawal liability assessment in arbitration and in district court. Both the arbitrator and district court upheld the assessment.

On appeal, the U.S. Court of Appeals for the Second Circuit also upheld the assessment of the withdrawal liability in a split decision. The Second Circuit found that the terms of the asset purchase agreement obligated Approved Oil to make contributions to the multiemployer plan at the same hourly rate that contributions were made by Madison Oil. However, the asset purchase agreement provided that Approved Oil was not obligated to continue the same level of hours of employment of union employees after the acquisition. The majority opinion for the Second Circuit found that the failure to obligate Approved Oil to contribute for the same number of hours meant that the statutory requirement for the asset sale exemption had not been met. The dissenting justice strongly criticized the majority opinion, stating that the decision could be read to require that a purchaser of assets must not agree to reduce its contributions at any time in the future. The majority said that the parties had not argued in the case whether there was an appropriate timeframe for continuing the same level of contributions; therefore, that matter was not considered. That Approved Oil had actually made contributions for a similar number of hours after the sale was rejected by the Second Circuit because it found that the obligation under the sale agreement was controlling and not what actually occurs after the sale.

This is a rather new holding for a provision that has been in effect for many years. If the decision does require that there be an unending obligation to contribute at the same rate and level of units, this will make utilization of the asset sale exemption very difficult. Employers should watch further developments in this area to see if courts outside the Second Circuit agree with this decision. (HOP Energy L.L.C. v. Local 553 Pension Fund, 2nd Cir. 2012)