In HOP Energy, LLC v. Local 553 Pension Fund, No. 10-3889-cv, the Second Circuit affirmed a district court’s ruling that Plaintiff HOP Energy, LLC (“HOP”) could not use ERISA’s asset sale exception to avoid $1.2 million in withdrawal liability, because the purchaser was permitted under the purchase agreement to reduce the number of employee hours of pay and, consequently, the purchaser’s pension fund contribution obligation.

 In 2007, HOP sold the operating assets of its subsidiary, Madison Oil (“Madison”), to Approved Oil Company (“Approved”).  HOP and Approved entered into a purchase agreement which stated in relevant part that Approved could “reduce to any extent the number of contribution base units with respect to which [Approved] has an obligation to contribute to any plan.” Madisonand Approved were each signatories to a collective bargaining agreement which provided that the “contribution base units” to the union’s multiemployer pension fund were employee hours of pay. 

 After the sale to Approved, HOP stopped contributing to the pension fund and the fund assessed HOP $1.2 million in withdrawal liability.  HOP challenged the assessment, asserting that theMadisonsale to Approved was exempt from withdrawal liability as a bona fide asset sale under ERISA § 4204(a)(1), 29 U.S.C. § 1384(a)(1).  The fund upheld the assessment, as did the arbitrator and the district court.  HOP appealed. 

 Under the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer that withdraws from a multiemployer pension plan is liable for its aliquot share of the unfunded vested benefits, with certain exceptions.  At issue in HOP Energy was the asset sale exception, which provides that an employer can avoid withdrawal liability if it has sold its assets to another employer, provided that three statutory requirements are met.  See ERISA § 4204(a)(1)(A)-(C), 29 U.S.C. § 1384(a)(1)(A)-(C).  The only issue before the Second Circuit in HOP Energy was whether the sale satisfied the criterion that Approved have a post-sale obligation to contribute “substantially the same number of contribution base units” as HOP.  ERISA § 4204(a)(1)(A), 29 U.S.C. § 1384(a)(1)(A).

 HOP argued on appeal that Approved had an identical obligation as HOP pre-sale to contribute to the pension plan for each Madisonemployee’s hour of pay.  The Second Circuit agreed with HOP on this point.  However, the court went a step further, concluding that HOP’s point addressed only the rate at which Approved had to contribute to the plan, not the number of contribution base units (i.e., hours of employee pay).  Approved had no obligation under the purchase agreement to maintain substantially the same number of hours of employee pay.  As a result, the Second Circuit held that the Madison sale did not qualify for the asset sale exception.

 The Second Circuit explained that for HOP to qualify for ERISA’s asset sale exception, Approved had to assume post-sale substantially the same contribution obligation as HOP, which, according to the court, meant that Approved had to have an obligation to contribute for substantially the same number of hours of employee pay as HOP had contributed for before the sale, not just at the same rate per hour of pay.  Because the purchase agreement made plain that Approved had no obligation to contribute for substantially the same number of hours of pay, the criteria for the asset sale exception were not satisfied. 

 Critically, as the dissent in HOP Energy pointed out, the majority’s interpretation of the sale of assets exception implied that a business asset purchaser would be required to maintain the seller’s historical pension contribution levels into perpetuity.  In the dissent’s view, ERISA § 4204(a)(1)(A)’s requirement that a purchaser contribute “substantially the same number of contribution base units” is a test to be determined only at the time of the sale, and the requirement should not continue into some unknown point in the future. 

 The dissent concluded that Approved undertook substantially the same contribution obligation that HOP had prior to the sale, which was to contribute a particular amount to the pension fund for each hour of employee pay.  HOP had no obligation pre-sale to maintain any particular contribution level and, the dissent reasoned, ERISA § 4204(a)(1)(A) does not require anything more from Approved post-sale.

 The majority recognized that the dissent raised an “issue of concern.”  However, the majority noted that neither party raised on appeal the issue of the duration of the purchaser’s obligation to contribute at the same level as the seller under ERISA § 4204(a)(1)(A) and, further, commented that if the statute impairs the ability of an employer to sell its assets, “the problem lies with the statute and not this Court.”

 Employers who contribute to multiemployer pension plans must be mindful of the HOP Energy decision because it suggests — although it did not hold — that such employers must ensure as part of any business asset sale that the purchaser agree never to materially reduce its contributions to a multiemployer plan.  Therefore, any employer contemplating use of the asset sale exception should consider the risk raised by HOP Energy.  However, HOP Energy is not binding outside the Second Circuit, and no other court has interpreted the law in the manner suggested by the HOP Energy majority.  Hopefully, the Second Circuit will have an opportunity in the near future to rule on the question of the duration of the purchaser’s obligation to contribute at the same level as the seller under ERISA § 4204(a)(1)(A), and thereby provide more clarity to the HOP Energy decision.