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Asset Purchasers May Be Liable for Seller's Delinquent ERISA Obligations

March 2011

As the result of a recent appellate decision, those looking to purchase a business through an asset sale transaction must guard against the potential for successor liability associated with the seller’s employee benefit plan contribution obligations. In an unpublished opinion, the United States Court of Appeals, Third Circuit, relying primarily on federal statutory policies under the Employee Retirement Income Security Act (“ERISA”), reversed a lower court’s decision and held that a purchaser of assets may be liable for a seller’s delinquent ERISA obligations if the purchaser had knowledge of the obligations and sufficiently continued the seller’s business.

Background: In William J. Einhorn v. M.L. Ruberton Construction Company, Statewide Hi-Way Safety, Inc. (“Statewide”), which was facing various financial and legal problems -- including $600,000 of liquidated damages for delinquent contribution obligations under two multiemployer benefit plans (the “Plans”) -- began negotiations with M.L. Ruberton Construction Company (“Ruberton”) for the sale of Statewide’s business. The administrator of the Plans, William J. Einhorn, obtained a temporary restraining order enjoining the sale out of fear that Ruberton would not honor Statewide’s collective bargaining agreements (the “CBA”) with the Teamsters Local Union No. 676 (the “Union”), pursuant to which Statewide was obligated to make contributions to the Plans. ,. Statewide, Ruberton and Einhorn then entered into negotiations culminating in two settlement agreements, which provided, among other things, that (i) Statewide would timely make all future contributions to the Plans, and (ii) Ruberton would hire Statewide’s employees subject to the terms of the CBA until a new collective bargaining agreement could be reached between the Union and Ruberton. The settlement agreements did not address Ruberton’s liability for Statewide’s delinquent obligations to the Plans.

Shortly thereafter, Ruberton purchased certain assets of Statewide, leased Statewide’s facility (which was ultimately purchased by an affiliate of Ruberton), and subsequently sold some of the assets to a third party at a profit. Significantly, Statewide retained $5 million of its accounts receivable and continued to operate its business post-closing using subcontractors (including Ruberton) to provide equipment and labor. Statewide then ceased operations and wound down its business. During the transition period after the sale, Einhorn filed suit against Statewide and Ruberton alleging that Statewide owed certain contributions to the Plans and Ruberton was liable as a successor to Statewide. That suit resulted in another settlement agreement wherein Statewide agreed to make installment payments for the delinquent contributions. Although not specified in the Einhorn court’s opinion, that settlement agreement presumably did not address whether Ruberton was liable for Statewide’s contributions. Statewide defaulted once again on its contributions, resulting in another suit by Einhorn against Statewide and Ruberton. The federal district court granted Ruberton summary judgment by applying the traditional common law theory of successor liability, holding that Ruberton purchased Statewide’s assets rather than its stock, was not a continuation of Statewide, and consequently, was not liable for Statewide’s contribution obligations.

Appellate decision: In a unanimous decision, the Third Circuit reversed the lower court’s summary judgment in favor of Ruberton, holding that a purchaser of assets may be liable for the seller’s delinquent ERISA fund contributions if the purchaser (i) had notice of the liability, and (ii) sufficiently continued the seller’s business operations. The court departed from the traditional common law rule that a purchaser of assets does not assume the seller’s liabilities unless (a) the purchaser expressly assumes the liability, (b) the transaction is a de facto merger, (c) the purchaser is a mere continuation of the seller, or (d) the transaction was for fraudulent purposes of escaping liability.

In its reasoning, the court relied primarily on the federal statutory policies underlying the protections afforded employees under ERISA. The court traced the evolution of federal labor law doctrine imposing liability upon successors beyond the limits of the traditional common law rule of successor liability when important employment-related policies should be protected. The court also emphasized the need to balance the equities of the parties in the case and stated that “[t]he record demonstrates that the asset sale has been lucrative for Ruberton’s business. Ruberton’s business acumen serves not as a basis for punishment as it asserts, but rather a factor to be taken into account when balancing the equities”.
The court further opined that delinquent ERISA contributions are more than ordinary contractual obligations and should fall under the federal policy of protecting ERISA benefit funds against “delinquent contributors to a degree greater than that afforded by the common law of contracts.” The court dismissed the notion that imposing successor liability would negatively impact the liquidity of corporate assets, commenting that the requirement of notice would motivate a purchaser to take appropriate steps to protect itself, such as diligent inquiry into the seller’s liabilities, negotiating for a lower purchase price or securing an indemnification from the seller.

Conclusion: Since the Einhorn court ruled that each successor liability inquiry should be determined on a case-by-case basis “balancing the equities of the parties”, a purchaser may not be able to completely insulate itself from successor liability, short of obtaining a release or other covenant not to sue from the benefit plan administrator. In structuring a transaction, purchasers should weigh the factors cited by the Einhorn court in determining whether the purchaser will substantially continue the seller’s business operations through continuity of the workforce, management, equipment and location, the purchaser’s completion of the seller’s existing work, and constancy of customers. Purchasers must obviously take caution in exercising diligent inquiry into the seller’s ERISA obligations, as well as any other employee-related obligations. In negotiating the deal terms, purchasers may also want to consider upfront adjustments to the purchase price and/or escrow funds to cover any potential successor liability for the seller’s ERISA obligations. Asset purchase transactions involving unfunded ERISA obligations should be carefully evaluated and structured based upon these considerations.