A recent Third Circuit Court of Appeals opinion emphasizes how important it is to have an employee benefits attorney involved in the acquisition of a business. If a buyer purchases the stock of a business, the buyer obtains all of the assets and inherits all of the liabilities of that business, including any hidden liabilities. Therefore, many buyers choose to purchase assets and, sometimes, only liabilities that are specifically enumerated in the deal. In Einhorn v. M.L. Ruberton Construction Company (WL 182131), the Third Circuit Court of Appeals decided in a procedural case that a buyer of assets may be considered a successor in interest and, therefore, liable for the seller's delinquent contributions to a multiemployer defined benefit pension plan and a multiemployer health and welfare plan.
The seller was a construction company with a unionized workforce. The seller was delinquent in making its contributions to the pension and health and welfare plans. As a result of financial difficulties, the company decided to sell its assets and at the same time entered into an agreement with the union to pay all of its delinquent contributions to the pension and health and welfare plans. During the sale process, the buyer was put on notice of the seller's liability for delinquent contributions to these plans. The buyer purchased the assets, entered into a separate agreement with the union and began contributing to the two plans. The buyer hired more than half of the employees of the seller, including its Vice President and 33% shareholder, and took over some of the seller's projects.
Shortly after the asset sale, the seller went out of business and stopped paying its delinquent contributions. The plans sued the buyer for the seller's delinquent contributions. The District Court dismissed the case and found in favor of the buyer.
On appeal, the Third Circuit decided that under these facts and circumstances the buyer may be liable for the delinquent contributions based upon certain successorship concepts that have developed in the labor and employment law context. Under the labor and employment successor in interest line of cases, a successor company could be responsible for the liabilities of a predecessor company if there is a sufficient continuity of operations between the entities.
The Third Circuit decided that these successor liability concepts should also be applicable to cases involving liabilities to ERISA pension and welfare plans. The Court held that the buyer in this case may be liable for the seller's delinquent contributions, based upon the continuity of operations and the fact that buyer had specific notice of the delinquent contributions. The Third Circuit of Appeals reversed the decision of the District Court and remanded the case to the District Court to determine whether the buyer was a successor in interest to the seller.
Comment: The Third Circuit decision emphasizes how important it is to discuss what approach to take in the context of planning and executing an acquisition of a company.