One of the best ways to learn about new drafting and design strategies for plans and agreements is to read a lot of court cases – and learn from the mistakes of others. In Feinberg v. RM Acquisition LLC, the plan drafter did not make a mistake, but we can still learn a few lesson that improve our drafting strategy. In Feinberg v. RM Acquisition LLC, decided by the U.S. Appellate Court of Appeals for the Seventh Circuit (based in Chicago) in January 2011, the plaintiffs were participants in the Rand McNally & Company Supplemental Pension Plan (the "SERP Plan"). The SERP Plan provided benefits in the form of an annuity at the time they reached retirement age and was utilized as a tax-advantaged means of providing deferred compensation.

Many thanks to my associate John Arendshorst for the following summary: Rand McNally had filed for bankruptcy protection in 2003, apparently after failing to adapt quickly enough to the changing world of GPS, MapQuest, etc. Interestingly, for reasons not discussed in either of the federal court opinions, the Rand McNally's obligations under the SERP Plan were not cancelled in the bankruptcy process. In December 2007, Rand McNally entered into an asset purchase agreement with RM Acquisition, LLC. The agreement included a clause stating that RM would not be obligated or responsible for certain specified pre-existing liabilities belonging to Rand McNally. The SERP Plan was an excluded liability under the Agreement.

When one company acquires another by purchasing all of its outstanding stock, the buyer steps into the shoes of the seller and automatically assumes all of its liabilities—including SERP and other non-qualified plan obligations. However, when a company purchases just the assets of another company, as happened in this case, the buyer assumes only those obligations and liabilities (e.g., non-qualified plans) that it explicitly agreed to acquire. Since RM Acquisition purchased only Rand McNally's assets and certain specified obligations, and the purchase price paid to Rand McNally was equal to its outstanding secured debt obligations, the obligation to pay SERP benefits was left the empty shell of the former Rand McNally. Plaintiffs were informed that and that the benefits were terminated.

Accomplished ERISA plaintiffs' lawyer Mark Debofsky gamely argued that RM Acquisition (i) remained liable under the SERP as the successor of Rand McNally, and (ii) interfered with the plaintiffs' rights under ERISA Sec. 510 by attempting to evade its existing and future liability under the Plan. (Plaintiffs did not pursue Rand McNally in the litigation because it was an empty shell.)

First the federal district court and then the Seventh Circuit rejected these claims. The courts held that the plaintiffs could not make a case for successor liability because RM did not:

  • assume the top-hat plan's liabilities,
  • "connive" with Rand McNally to deprive plan participants of their benefits, or
  • appear to be a mere continuation of Rand McNally under another name.

Instead, the court held that the asset purchase agreement specifically excluded the top hat plan as one of the liabilities RM Acquisition would assume, leaving plan participants with only the empty shell corporation of Rand McNally from whom to pursue their benefits. A buyer of assets, with exceptions that were inapplicable in the case, does not have an obligation to assume a seller's liabilities.

For similar reasons, the courts also rejected the plaintiffs' ERISA Section 510 claim ("interference with protected rights") against RM, despite the fact that the asset sale excluded the SERP Plan liabilities and left Rand McNally with insufficient assets to pay benefits under the SERP Plan.

RM wasn't trying to interfere with any rights that the plaintiffs may have had under the top hat plan. RM had nothing to do with the plan. Suppose you bought a $250 lawnmower from a hardware store and the owner of the store told you the store owed a contractor $100 for fixing a hole in the roof and asked would you like to assume that debt and you said no, and later the owner defaulted on his debt to the contractor. Could the contractor sue you for interfering with his right to collect the debt? That would be ridiculous. Feinberg's argument seems less ridiculous only because the defendant bought the store's entire assets. But the principle is the same, and brings us back to Feinberg's claim against RM under ERISA's section 502. A buyer of assets has, with exceptions inapplicable to this case, no obligation to assume the seller's liabilities.

The Seventh Circuit allowed that Rand McNally conceivably may have committed a fraud by paying off most or all of its obligations and debts, other than the SERP, citing Lessard v. Applied Risk Management, 307 F.3d 1020, 9th Cir. 2002, which in turn cited Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1425 (7th Cir. 1993), "However, courts make exceptions for corporate mergers fraudulently executed to avoid the predecessor's liabilities, . . ., or for transactions where the purchaser has specified which liabilities it intends to assume." However, that claim had not been made.

Tomorrow: How can SERP and non-qualified plan participants attempt protect themselves against the loss of benefits in these circumstances?

On March 8, 1817, an organization maintained under the Buttonwood Agreement, drafted a constitution and renamed itself the "New York Stock & Exchange Board." As you probably have read recently, with the merger of the NYSE and the Deutsche Bourse so much in the news, 24 stock brokers founded the NYSE under a buttonwood tree outside of 68 Wall Street on Wall Street on May 17, 1792.