Asset purchases are commonplace in the hospitality industry, where ownership in restaurants, hotels, and country and leisure clubs regularly changes hands via asset purchases. Asset purchases are often favored by an acquiring party as a means to acquire assets, but not the corresponding liabilities, which allows for greater fluidity in the market and enables the owner/operator to keep pace with the industry’s ever-changing demands and trends. For example, in the hotel industry, owner/operators need the financial and operational flexibility to meet the demands of travelers and tourists, and to ensure a vibrant marketplace, which, in turn, encourages other employers to enter, or remain or expand in, the industry.

The benefits of asset purchases, however, come with certain potential legal issues. In recent years, courts have expanded an exception to the common law doctrine of successor liability to such an extent that it now threatens to swallow the general rule that a purchaser of assets is not liable for the debts or liabilities of the seller. While originally limited to states within the jurisdiction of the U.S. Court of Appeals for the Seventh Circuit (which includes Illinois, Indiana, and Wisconsin), the Ninth Circuit (which includes Arizona, Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) has adopted the successor liability doctrine in the context of withdrawal liability claims. In the time since, the Seventh Circuit has loosened the notice component of the doctrine to such a degree that a mere general awareness that a seller of assets has or had a unionized workforce may suffice to make the purchaser liable for any unpaid withdrawal liability of the seller.

For example, last summer, the Seventh Circuit again relied on its so-called “looser approach” in finding an asset purchaser potentially liable for the seller’s withdrawal liability in Board of Trustees of the Automobile Mechanics’ Local No. 701 Union and Industry Pension Fund v. Full Circle Group, Inc., 826 F.3d 994 (7th Cir. 2016). The Seventh Circuit described successor liability as encompassing only two elements: (i) notice of the potential liability prior to the purchase and (ii) substantial continuity in the operation of the business before and after the sale. Of particular concern, the Seventh Circuit articulated a broad concept of notice:

[The purchaser] may never have heard of withdrawal liability or known that the union pension fund was underfunded … but knowing that he was dealing with a union pension fund he was on notice that there was a possibility of such liability. A lack of familiarity with the concept of withdrawal liability cannot be an excuse; he had lawyers to advise him on [his company’s] legal obligations. Further evidence of notice is the fact known if not to him then (again) to his advisers that most union pension funds are underfunded[.]^[1]

Thus, even though there was no evidence that the purchaser was aware of the seller’s withdrawal liability, the Seventh Circuit assumed the purchaser had knowledge of the seller’s unionized workforce. From this assumed knowledge, the Seventh Circuit reasoned that the purchaser should have been alerted to the possibility that the seller contributed to a multiemployer pension fund as part of its contract with the union and, because most such funds are underfunded, the potential for withdrawal liability. Because this sufficed to establish notice, the Seventh Circuit remanded the case to the district court for a trial on the issue of the purchaser’s liability as a successor.

More recently, relying on the Seventh Circuit’s Full Circle decision, a district court in that circuit granted summary judgment in favor of a pension fund seeking to impose successor liability against a purchaser of assets. In Central States, Southeast and Southwest Areas Pension Fund v. Sidney Insulation, Inc., 2017 U.S. Dist. LEXIS 8706, at *16 (N.D. Ill. Jan. 23, 2017), the court asserted that “our Court of Appeals imposes withdrawal liability on a successor who is aware that the predecessor’s workers are unionized yet is ignorant of the fact or concept of withdrawal liability[.]” Because the asset purchaser “must have known” that the seller’s workers were unionized, the purchaser thus had “implied knowledge” of the potential for withdrawal liability and, therefore, had adequate notice sufficient for the court to impose successor liability on the purchaser.

These and similar cases are troubling for potential asset purchasers and suggest that further expansion of the successor liability doctrine is not out of the question. For example, a court could require an asset purchaser to affirmatively inquire as to the seller’s potential withdrawal liability and, in the absence of such an inquiry, find that the purchaser had implicit notice. Under such a standard, notice could be based on a failure of due diligence rather than actual knowledge.^[2]

In light of the significant risk of withdrawal liability, asset purchasers should take affirmative steps to protect themselves against the potential risk of unintentionally assuming a seller’s withdrawal liability. Potential protections include escrow set-asides of an amount sufficient to pay any assessed withdrawal liability, indemnification provisions, and personal guarantees.

Unfortunately, for potential asset sellers and the hospitality industry as a whole, only one thing is certain: as noted by the Seventh Circuit in Full Circle, “if no assets are bought, no liabilities are assumed.” Perhaps Congress should consider the impact of successor liability on the marketability of unionized companies and take steps to rein in the very troubling expansion of the doctrine. Until then, given the significant risks, potential asset purchasers would be well advised to seek the advice of competent counsel to guide them through any contemplated asset purchase.

_{[1] Board of Trustees of the Automobile Mechanics’ Local No. 701 Union and Industry Pension Fund v. Full Circle Group, Inc., 826 F.3d 994, 997 (7th Cir. 2016)(emphasis in original).
[2] For now, asset purchasers can take limited comfort in Heavenly Hana, LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, 2016 U.S. Dist. LEXIS 16466, at *37 (N.D. Cal. Feb. 10, 2016), in which the California district court stated “no court – anywhere – has ever held that a subsequent employer can be held liable for a predecessor’s ERISA obligations that it merely should have known about, unless the employer actually knew at least the factual basis for the liability.” Nevertheless, Heavenly Hana predated both Full Circle and Sidney Insulation, and the clear trend for successor liability in the context of withdrawal liability is towards expansion, both in the number of courts adopting the doctrine and, especially, of the notice sufficient to support a finding of successorship.}