Both buyers and sellers in asset sale transactions should be cognizant of the ongoing erosion of the common law rule that the purchaser is not responsible for the seller’s liabilities absent a contractual assumption of such liabilities, as evidenced by a recent Ninth Circuit case finding that the theory of successor liability may be used to hold an asset purchaser liable for the predecessor’s $2.2 million withdrawal liability obligation to a multiemployer pension plan. Federal courts originally applied successor liability in the context of federal labor law where the successor employer had notice of an unfair labor practice and continued, without interruption or substantial change, the seller’s business operations. Over the years, this “successor liability” rule has been expanded to cover various other statutory liabilities under labor and employment law.

In Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael’s Floor Covering, Inc., 9th Cir., No. 12-17675, 9/11/15 (“Resilient”), the Court of Appeals for the Ninth Circuit has joined the Seventh Circuit (Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. Tasemkin, Inc. 59 F.3d 48 (7th Cir. 1995) and Tsareff v. ManWeb Services, Inc., 7th Cir., No. 14-1618, 7/27/15) to explicitly apply the successor liability rule to a seller’s withdrawal liability from a multiemployer pension plan (withdrawal liability is an employer’s share of any underfunding in the plan following its exit from the plan) so long as the successor had notice of the liability. Consistent with prior labor and employment cases involving successor liability, the Court found that the primary factor in determining if an employer is a bona fide successor is whether, under the totality of the circumstances, there is substantial continuity between the old and new employer. In turn, the Court reasoned that continuity is best judged by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base. Other factors a court may consider are whether –

1. the new employer uses the same plant,

2. the same or substantially the same work force is employed,

3. the same jobs exist under the same working conditions,

4. the same supervisors are employed,

5. the same machinery, equipment, and methods of production are used, and

6. the same product is manufactured or the same service is offered.

The Appeals Court reversed and remanded the case to district court for further consideration, finding that the district court failed to properly identify or weigh the successorship factors.

Two troubling peculiarities in the Resilient case merit mention:

First, the Court gave no consideration to the seeming lack of an asset purchase agreement between the parties. The owner of the alleged successor was a former salesman of the predecessor entity. Once it was announced that the predecessor would be closing operations at the end of the year, the salesman decided to start his own business in the same field – he obtained a lease on the same storefront and warehouse as the predecessor, used the same phone number and similar signage as the predecessor, bought 30% of the predecessor’s tools, equipment and inventory at a public auction, and hired many of the same employees. The predecessor did not sell, give, or otherwise assign its customer lists or any portion of its customer information to the “successor.” However, the Court notes that the “successor” did retain many customers, in large part through his prior personal and business relationships developed while employed as a salesman by the predecessor.

Second, the predecessor probably never would have been assessed any withdrawal liability but for the alleged successor’s actions to start his own company. Under a special rule covering the building and construction industry, the predecessor could have avoided withdrawal liability if he did not return to doing the same type of work covered by the collective bargaining agreement on a non-contributory basis for at least five years. The pension fund took the position that the “building and construction” exception did not apply because the “successor” essentially continued the predecessor’s work without making contributions to the fund. As a result, Resilient represents a disturbing expansion of the successor liability doctrine to both create withdrawal liability (by imputing the purchaser’s actions to the asset seller) and also to hold the purchaser liable for the withdrawal liability created as a successor.

Given the expansion of the successor liability doctrine in cases such as Resilient and the large amounts of withdrawal liability that can potentially be assessed (such amounts can and often do exceed twenty years of annual contributions), those contemplating purchasing assets (or asset sellers who are indemnifying their purchaser) or otherwise continuing the operations of a business that historically has contributed to a multiemployer pension plan should engage legal counsel with specialized knowledge of withdrawal liability to review potential liability and explore possible alternatives for structuring the transaction to minimize or eliminate such liability.