Here’s the scenario: Your company performs engineering and other construction-related services. Another construction industry company is in financial distress and wants to sell its assets. You sense there’s a good deal to be had, so you buy the distressed company’s assets at a great price.
But wait! Six months later, you receive a letter sent to the distressed company by an attorney for the multi-employer pension plan in which the distressed company participated because it was a union shop. The attorney’s letter says that the distressed company, which shut down after the sale of its assets to your company, owes the Plan $661,978.00 in withdrawal liability. The attorney makes a helpful suggestion that the liability can be paid in a lump sum or in 19 quarterly payments. You throw the letter in the trash.
But wait! The Plan sues your company for the liability owed by the distressed company. The Plan argues in federal court that your company is the successor to the distressed company even though you only purchased assets. The trial judge grants your company judgment on a motion holding that you are not the successor and therefore are not liable. Whew, that was close.
But wait! The decision is appealed by the Plan to the U.S. Court of Appeals. And, that court reverses the trial court’s decision and sends it back to the trial court for further proceedings. Its remand to the trial court comes with a multi-page opinion that provides a blueprint for the trial court to determine if your company is the successor and has to pay the distressed company’s whopping bill.
Sound far-fetched? Actually, this scenario really happened. The acquiring company was based in Indianapolis. The roadmap from the U.S. Court of Appeals for the 7th Circuit in Chicago can be found at Tsareff v. Manweb Services,, 794 F.3d 841 (7th Cir. 2015).
Successor liability and its cousin, affiliate liability, are hot areas in the world of ERISA, the federal statute that governs company and union-sponsored pension plans. Pension plans, particularly defined benefit plans that pay a specified monthly amount to retirees based on length of service and recent salaries, are often in trouble. So the unions and in the case of defined benefit plans, the U.S. Pension Benefit Guaranty Corporation, are on the lookout for deep pockets to make up for withdrawing company participants and unpaid contributions. Successors are logical targets.
But all is not lost. If you are looking to purchase a company or its assets find out about its pension plans and any unpaid contributions. If there’s a problem, you can bargain for a lower price. Or you can ask the seller, and its principals, to indemnify the buyer for hidden pension liabilities. Or just maybe it’s not such a great deal and you should keep looking.
As part of my practice, I advise companies, their pension plans and their plan trustees.
If you have any questions about this, please contact us.
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