DealLawyers.com Blog

One of the big reasons that deals get structured as asset purchases is that this structure allows the buyer to pick & choose which liabilities it is willing to accept as part of the deal. However, application of successor liability doctrines can sometimes result in an asset buyer being on the hook for a pre-deal liability even if it didn’t sign up for it in the purchase contract.

This McGuire Woods memo reviews recent cases dealing with the application of successor liability to asset buyers for liabilities associated with a seller’s decision to withdraw from multi-employer pension plans.  This excerpt discusses a recent 9th Circuit decision that illustrates the role that policy considerations play when it comes to assessing successor liability under federal statutes:

In Heavenly Hana LLC v. Hotel Union & Hotel Indus. of Haw. Pension Plan, the U.S. Court of Appeals for the Ninth Circuit held that constructive notice is sufficient to impose successor withdrawal liability. There, a private equity group purchased the assets of a company that operated a hotel. Pursuant to collective bargaining agreements (CBAs) between the seller and the hotel workers’ union, the seller was obligated to contribute to an MEP. Post-closing, the buyer continued operating the hotel. However, instead of adopting the seller’s CBA with the union, it negotiated its own benefit plans without continued MEP participation. The MEP assessed the seller’s $757,981 withdrawal liability on the buyer as the seller’s successor, and the buyer filed suit to contest its responsibility for the withdrawal liability.

Since the buyer continued operating the hotel, the first requirement for successor liability (i.e., sufficient continuity of operations) was not in dispute. Instead, the parties argued over whether the buyer needed “actual notice” of the withdrawal liability, or whether “constructive notice” was sufficient. Based on the purpose and history of the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA), the Ninth Circuit reasoned that such laws were intended to be liberally construed in favor of protecting participants, and that a constructive notice requirement was consistent with this approach.

While policy considerations made it easier for a plaintiff to establish successor liability in Heavenly Hana, that isn’t always the case. For instance, the memo also reviews a recent Bankruptcy Court decision refusing to impose MEP plan withdrawal liability on a good faith buyer in a Section 363 sale under the Bankruptcy Code. In that case, the importance of the Bankruptcy Code’s policy to provide a Section 363 buyer with “free and clear” title to the assets acquired overcame competing policy concerns under ERISA & MPPAA.

When dealing with federal statutes, it’s important to keep in mind that because of the prominent role that policy considerations play, analyzing the risk of successor liability under them solely by reference to traditional common law doctrines may not be sufficient.

– John Jenkins