It has long been an outstanding general rule that the survivor of a corporate merger inherits the benefit liabilities of the acquired entity, but the buyer in an asset purchase deal assumes only those benefit liabilities expressly set forth in the asset purchase agreement. This general rule has been punctured by a recent decision of the Third Circuit Court of Appeals, which held that under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), a purchaser of assets in certain circumstances may be liable for delinquent employee benefit plan contributions as a successor in interest to the seller of those assets.
Decision Analysis
In Einhorn vs. M.L. Ruberton Construction Co., No. 09-4204 (3rd Cir. 2011), Statewide Hi-Way Safety, Inc. ("Statewide") was obligated under two collective bargaining agreements to make contributions to multiemployer pension and welfare plans. M.L. Ruberton Construction Co. ("Ruberton") purchased the assets of Statewide after it had already become delinquent in making these contributions. Einhorn, the administrator of the plans, filed suit alleging that Ruberton owed the plans contributions as a successor in interest to Statewide. The Third Circuit found that Ruberton would be liable for Statewide's delinquent plan contributions if it had notice of the liability prior to the sale and sufficient evidence confirmed a continuity of operations between the entities.
In reaching its decision, the Third Circuit cited the common law doctrine of successor liability that had been expanded by federal courts to impose liability on successor asset purchasers when necessary to protect important employment-related policies. This expansion began with the Supreme Court's decision in Golden State Bottling Co. v. NLRB, 414 U.S. 168 (1973) (holding that the purchaser of a business may be liable under the National Labor Relations Act for the seller's unlawful discharge of an employee, where the purchaser had notice of the unfair labor practice and continued, without interruption or substantial change, the predecessor's business operations), and was further extended by the Third Circuit to Title VII employment discrimination claims in Brzozowski v. Corr. Physician Servs., Inc., 360 F.3d 173 (3rd Cir. 2004) (holding that the successor employer had ample opportunity to insulate itself from liability during the negotiation process and, in fact, the sales agreement included an indemnity clause disclaiming the successor's liability for certain lawsuits).
In Einhorn, the Third Circuit relied on the analysis of the Seventh Circuit in Upholsterers' Int'l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323 (7th Cir. 1990) (holding that a buyer of assets may be liable for a seller's delinquent multiemployer plan contributions to vindicate important federal statutory policy where the buyer had notice of the liability prior to the sale and there was sufficient evidence of "continuity of operations" between the entities). Also in Einhorn, the Third Circuit noted that a central goal underlying ERISA's enactment was the protection of plan participants and their beneficiaries; that Congress has adopted a strong policy of affording ERISA funds protection against delinquent contributors to a degree beyond that afforded by the common law of contracts; and that a number of plan beneficiaries stood to be harmed by the failure to pay contributions in an asset sale that had been lucrative for Ruberton's business. The Third Circuit further pointed out that, absent the imposition of successor liability, other employers would be forced to make up the delinquent contributions to ensure that participants receive their benefits, and "the requirement of notice and the ability of the successor to shield itself during negotiations temper concerns that imposing successor liability might discourage corporate transactions." See Einhorn at 11.
Finally, as the parties in Einhorn did not dispute Ruberton's knowledge of Statewide's contributions owed to the multiemployer benefit plans, the case was remanded to the District Court to determine whether Ruberton substantially continued Statewide's operations. The Third Circuit provided that a number of factors may be considered in determining whether there is substantial continuity, including continuity of workforce, management, equipment and location, completion of work orders begun by the predecessor and constancy of customers.
Potential Repercussions
It is worth noting that in addition to the Third and Seventh Circuits, the Second, Sixth and Ninth Circuits have expanded the successor liability doctrine in ERISA contexts. For example, in Stotter Division of Graduate Plastics Co. Inc. v. District 65, United Auto Workers, 991 F.2d 997 (2nd Cir. 1993), the Second Circuit held that an asset purchaser could be liable for a predecessor's unpaid contributions to a multiemployer plan in accordance with the governing collective bargaining agreement and an arbitrator's earlier decision to that effect.
Einhorn and other cases may make it more difficult for companies to avoid the assumption of liability for delinquent employee benefit plan contributions in asset acquisitions, at least in the context of multiemployer benefit plans, even when the assumption of such liability is contractually excluded. Companies may no longer be able to purchase the assets of a target in order to avoid taking responsibility for benefit liabilities. A company interested in the purchase of the assets of another company should quantify the target's benefit liabilities, apply the standards in Einhorn for imposing liability, and then consider (i) adjusting the purchase price to reflect adequately the target's outstanding liabilities that may be applied to the purchase, such as liability for any delinquent benefit plan contributions; and (ii) securing an indemnity clause from the seller in the asset purchase agreement.
If you have any questions about successor liability under ERISA, please contact Jim Karas or Amanda Albert of Riker Danzig's Employee Benefits and Executive Compensation Group or a member of the Firm's Corporate Group or Mergers and Acquisitions Group.
