On January 21, 2011, in an appeal of a decision by the U.S. District Court of New Jersey, the Third Circuit ruled that a company that purchased the assets of another company may be liable for the acquired company’s delinquent contributions to multiemployer benefit plans as the acquired company’s successor. Einhorn v. M.L. Ruberton Construction Co., No. 09-4204 (3d. Cir. 2011).
In Einhorn, the acquired company, Statewide Hi-Way Safety, Inc. (Statewide), was required, under two collective bargaining agreements, to make contributions to a multiemployer pension trust fund and a multiemployer health and welfare fund (the Funds). Prior to the sale of assets, Statewide was delinquent in making the required contributions to the Funds. The delinquencies, including liquidated damages, totaled close to $600,000. The purchaser, M.L. Ruberton Construction Company (Ruberton), had knowledge of the delinquent contributions at the time of the asset sale.
On December 13, 2005, after the completion of the asset sale, William J. Einhorn, the Funds’ administrator, brought suit against Statewide and Ruberton on the Funds’ behalf. Einhorn alleged that Statewide had liability to the Funds pursuant to the operative collective bargaining agreements and that Ruberton had liability to the Funds as a successor in interest to Statewide. The parties reached a settlement agreement on March 16, 2006, wherein Statewide agreed to pay the delinquent contributions in a series of installments. Statewide breached the settlement agreement and Einhorn filed suit against Ruberton in June 2006.
The District Court, applying the traditional common law rule of successorship liability (i.e., that a sale of assets does not transfer liability to the purchaser unless the purchaser is merely a continuation of the seller), held that Ruberton was not a continuation of Statewide, and thus ruled in Ruberton’s favor. The Third Circuit began its analysis by referencing the Seventh Circuit’s ruling in Upholsterers’ International Union Pension v. Artistic Furniture of Pontiac, 920 F.2d 1323 (7th Cir. 1990), in which the Seventh Circuit held that an asset buyer may be liable for the seller’s delinquent ERISA fund contributions to vindicate important federal statutory policy where the buyer was aware of the liability before the sale and there was a continuity of operations between the buyer and seller. Further, the Third Circuit noted that federal courts, beginning with the U.S. Supreme Court’s ruling in Golden State Bottling Co. v. NLRB, 414 U.S. 168 , “have developed a federal common law successorship doctrine imposing liability upon successors beyond the confines of the common law rule when necessary to protect important employment-related policies.” The Third Circuit also noted that Golden State “laid the foundation for a series of cases in this court and others that expanded successorship liability in the labor field holding that labor policies have superseded the competing interest of fluidity of corporate assets reflected in the common law rule.”
The Third Circuit then noted that expanded succesorship liability has been extended to cases under Title VII and the NLRA and that the court has extended the theory of successor liability after an asset sale to other contexts based on the balance of equities. Moreover, the Third Circuit said that the imposition of a financial burden on a successor has not prevented the imposition of liability and agreed with the Seventh Circuit’s reasoning in Artistic Furniture that the federal policies underlying ERISA “are no less important, and no less compel the imposition of successor liability than do the policies animating the NLRA, Title VII,” or the other statutes to which the doctrine has been extended.
Building on the principles enunciated in these cases, the Third Circuit ultimately held that a purchaser of assets, like Ruberton, may be liable under ERISA for delinquent pension and welfare plan contributions of the seller, where (i) the buyer had notice of the liability for those contributions before to the sale, and (ii) there exists sufficient evidence of continuity of operations between the buyer and seller. The court said that the notice inquiry centers on whether the buyer knows about the debts, not whether the buyer knows that the funds intend to seek recovery. The Third Circuit noted the following relevant factors with respect to the continuing operations requirement: (1) continuity of the workforce, management, equipment and location; (2) completion of work begun by the predecessor; and (3) constancy of customers.
Asset buyers need to be aware of the increasing scope of successor liability in the context of asset sales, and must perform due diligence and assess risk accordingly.