On Tuesday, July 27th, 2015, the United States Court of Appeals for the 7th Circuit closed a successor withdrawal liability loophole it felt existed in the notice aspect of the successor withdrawal liability test. In Tsareff v. ManWebServices, Inc., 14-1618, the 7th Circuit rejected the District Court’s conclusion that pre-acquisition notice of contingent withdrawal liability is excluded from the successor liability notice analysis.
ManWebServices (a nonunion shop) purchased the assets of the withdrawing entity (a union shop) prior to the withdrawal so that the union’s notice of the actual withdrawal liability occurred post asset purchase as is often the case in asset purchases. ManWeb argued it could not have had notice of the actual withdrawal liability prior to the purchase, and therefore it could not be held liable as a successor. The union argued that ManWeb had notice of the entity’s contingent withdrawal liability through ManWeb’s due diligence efforts prior to the purchase. ManWeb was aware that the entity was member to a collective bargaining agreement and that there were pension funding issues.
The 7th Circuit reviewed ERISA, the Multi-Employer Pension Plan Amendments Act, and case law in setting forth the purposes behind withdrawal liability initially and ultimately successor withdrawal liability. The 7th Circuit believed the District Court’s conclusion created a loophole and forced pension plan’s to absorb withdrawal liability whenever the liability occurred post asset purchase since the actual withdrawal liability would not have been determined as of the asset purchase. The 7th Circuit believed this was a result neither contemplated nor supported by the Acts’ purposes. The Court agreed with the union that ManWeb was aware of the potential contingent liability through its pre-purchase due diligence efforts including pension funding issues that existed. The Court specifically noted that it was closing this loophole - that otherwise existed in the law – for withdrawals that occur after the asset purchase is completed.
In light of ManWeb, it is difficult to contemplate circumstances where a successor will not have contingent notice of an entity’s withdrawal liability through the successor’s pre-purchase due diligence efforts. The entity’s union involvement will surely be disclosed either in its financial records or in its other corporate records. Arguably, at that time the successor will be on notice of contingent withdrawal liability.
The 7th Circuit noted that ManWeb could have negotiated a lower purchase price based upon the contingent withdrawal liability. Best practices now suggest a request be made to the union for an estimate of the contingent withdrawal liability as part of the asset purchase due diligence efforts so that the purchaser can negotiate a fair purchase price taking into account this contingent withdrawal liability. Union’s may be hesitant to provide a contingent withdrawal liability value since the actual withdrawal liability depends upon the actual withdrawal date. In those circumstances, the purchaser should consider retaining a forensic economist to conduct the withdrawal analysis using the union’s formula for doing so and asking the seller owner(s) to personally indemnify the purchaser for any amounts over that estimated liability.
Please note that ManWeb only addresses the notice aspect of successor withdrawal liability. It doesn’t address the other factors that make up the test. ManWeb has less impact on the successor withdrawal liability analysis to the extent you can prove that there is no continuity of business etc. under the successor test.