Ninth Circuit Joins Seventh Circuit in Holding That Successor May Be Liable for Predecessor’s Withdrawal LiabilityAct Now Advisory March 1, 2016
In Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., 801 F.3d 1079 (9th Cir. Sept. 11, 2015), the U.S. Court of Appeals for the Ninth Circuit joined the Seventh Circuit in finding that an asset purchaser can be liable as a successor for withdrawal liability triggered as a result of the sale, under the Multiemployer Pension Plan Amendments Act (“MPPAA”) amendments to the Employee Retirement Income Security Act (“ERISA”).
Like the Seventh Circuit, the Ninth Circuit adopted a broad view of “successor liability” for purposes of employment law—broader than the traditional four tests under state law—and found that a successor employer can be liable for its predecessor’s MPPAA withdrawal liability, so long as the successor: (1) had notice of the liability, and (2) substantially continued the operation of the business. In so doing, the Ninth Circuit shifted the focus and further expanded the successorship doctrine by sidestepping the traditional rule that an asset purchaser is not liable for liabilities of the seller, unless one of four traditional exceptions to the rule of no successor liability is met. In the future, the reverberations of this case may be felt by unwary asset purchasers and employers, particularly those in the construction industry.
Studer’s Floor Covering, Inc. (“Studer’s”) sold and installed floor covering materials to commercial and residential customers. Studer’s collective bargaining agreement with the Linoleum, Carpet, and Soft Tile Applicator’s Union Local 1236 required it to contribute to the Resilient Floor Covering Pension Trust Fund (“Fund”). In late 2009, Studer’s owner informed his staff that Studer’s would close at the end of the year.
Shortly thereafter, a former staffer with Studer’s incorporated his own floor covering entity, Michael’s Floor Covering, LLC (“Michael’s”). Michael’s obtained a lease on the same store and warehouse that Studer’s had long occupied and purchased signs similar to those Studer’s had used. At a publicly advertised sale, Michael’s purchased about 30 percent of Studer’s tools, equipment, and inventory. Michael’s used its knowledge of Studer’s existing business relationships in developing its business. Michael’s outsourced much of its installation work to independent contractors, but, in its first two years, directly employed eight installers, five of whom had previously worked for Studer’s. A substantial portion of the work carried out by Michael’s during its first two years was performed for former Studer’s customers.
Believing Michael’s to be Studer’s successor, the Fund assessed the two companies more than $2 million in withdrawal liability and eventually sued Michael’s to recover on this claim. Michael’s argued no withdrawal liability could be assessed, pursuant to the “construction industry exemption” embodied in 29 U.S.C. § 1383(b)(1). That section provides a general exemption from withdrawal liability for construction companies that close and do not resume operations within the jurisdiction of the labor agreement for at least five years.
The District Court Opinion
The U.S. District Court for the Northern District of California in the Resilient Floor Covering case held a bench trial and issued findings of fact and conclusions of law. As had many courts in prior successorship labor and employment law situations, in determining whether Michael’s was a successor the district court analyzed whether the would-be successor: (1) employed the same supervisors; (2) maintained substantial continuity in the workforce; (3) used the same machinery, equipment, and methods of production; (4) conducted business from the same location; (5) offered the same service; and (6) maintained the same jobs under the same conditions.
Weighing continuity of the workforce as the most important factor, the district court found that Michael’s was not liable as a successor employer.
The Ninth Circuit Opinion
On appeal, the Ninth Circuit reversed and remanded to the district court, instructing it to appropriately weigh the successorship factors. In this regard, the Ninth Circuit held that the most important factor in making a successor determination is whether there exists “substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.”
Addressing the construction industry exemption specifically, the Ninth Circuit opined that focusing on whether the alleged successor “deliberately takes over basically the same body of customers dovetails more precisely” with the exemption’s underlying rationale, namely “that an employer’s complete withdrawal and cessation of work usually does not harm the plan because other contributing employers will pick up the construction jobs (i.e., the customers) that would have gone to the withdrawing company.”
Accordingly, the Ninth Circuit stated that “focusing the successorship inquiry on business retention through exploitation of the predecessor’s contacts, public presentation, and good will effectuates the purposes” of the construction industry exemption. For the Ninth Circuit, the proper focus “must be on whether the successor is threatening the plan’s funding base by successfully leveraging factors pertinent to obtaining its predecessor’s market share.”
Implications for Potential Successors
The Resilient Floor Covering decision appears to be one of the first dealing with the construction industry exemption in a successorship situation. The Ninth Circuit’s holding—that the exemption does not automatically overcome any successor status asserted by an assessing fund—will likely have reverberations beyond the construction industry.
In that respect, the decision certainly broadens and redirects the potential focus of a court making a successorship determination, even outside the construction industry. One hopes the principal holding will not be stretched so far as to ensnare even established non-contributing companies that merely acquire a closing entity’s customer base through natural reallocation, but that remains to be seen. In this respect, the Ninth Circuit stated the following:
It is possible, of course, for a new employer to inherit a substantial portion of a prior employer’s customer base without making any deliberate attempt to do so. Where that is the case, the entrepreneurial interests of putative successor employers predominate, just as they do in the [National Labor Relations Act] successorship context when there is no intention to take advantage of the trained workforce of their predecessors.
This would seem to suggest a limiting principle to the holding, consistent with the obvious notion that a new employer that purchases the assets of a seller entity should not normally be burdened with the liabilities of the seller, unless one of the “traditional” tests for successor liability are met, where (1) the liability in question is expressly or impliedly assumed under the asset purchase agreement; (2) the transaction results in a merger or consolidation of the buyer and seller under the “de-facto merger” exception); (3) the buyer is treated as a “mere continuation” of the seller; or (4) if the asset sale was purposefully structured to defraud and defeat creditors of the seller (and, in certain states that apply a strict liability approach, (5) if a defective “product line” that created pre-sale liabilities for the seller was continued by the buyer). The Ninth Circuit also cautioned, however, that where “objective factors indicate the new employer made a conscious decision to take over the predecessor’s customer base, the equitable origins of the successor liability doctrine support the conclusion that the successor must pay withdrawal liability.” This language could create further mischief in the application of the successorship doctrine.
Notice remains one of the crucial factors in successor liability situations. The successorship doctrine rests on the notion that a buyer, worried about being treated as an alleged successor, may, with notice of possible liability, factor that knowledge into structuring the subject transaction and either reduce the purchase price or seek indemnification from the seller. As the Seventh Circuit stated in a recent successor case, “[s]hielding a successor employer from liability when the company had knowledge of the potential liability and still had bargaining power with regard to the transaction runs counter to the policies underlying the doctrine of successor liability.” Tsareff v. ManWeb Services, Inc., 749 F.3d 841, 849 (7th Cir. 2015). Notably, the Tsareff decision held that notice of even a potential or contingent liability is enough to trigger application of the doctrine. It remains to be seen whether courts might be willing to further expand the successorship doctrine to encompass allegations of constructive notice.
In any event, the Resilient Floor Covering decision constitutes not just another court of appeals applying the successor liability doctrine in the withdrawal context but also the doctrine’s continued expansion. This is troubling for employers, especially those interested in purchasing assets of another company.
What Employers Should Do Now
Potential asset purchasers should be mindful of the successorship doctrine and its recent expansion as they structure and enter into asset purchase transactions and conduct business in the wake of a competitor's closing. Specifically, they should:
- perform careful due diligence regarding a target company’s MPPAA withdrawal liability and multiemployer plan obligations, and
- structure any transaction to account for any withdrawal liability, either through indemnification provisions or a reduction of the purchase price, or through use of ERISA’s Section 4204 asset sale provisions (under which, upon compliance with the statute, complete or partial withdrawal of the employer from the multiemployer plan does not immediately occur by virtue of the purchase transaction itself).
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 See e.g. Vernon v. Schuster, 688 N.E.2d 1172, 1175 (Ill. 1997) (noting that the general rule protecting buyers in asset purchase transactions from successor liability for claims against the seller arose from “the need to protect bona-fide purchasers from unassumed liability and was designed to maximize fluidity of corporate assets”).
 The four traditional exceptions to the rule of no successor liability following an asset purchase are (1) if the buyer expressly or implicitly assumed the subject liability as part of the purchase transaction; (2) if the transaction resulted in a merger or consolidation of the buyer and seller; (3) if the buyer was a “mere continuation” of the seller; or (4) if the transaction was structured to defraud the creditors of the seller, looking to, among other things, the adequacy of consideration and how the transaction was structured and disclosed. For purposes of the second and third tests, courts look to, among other things, the continuity of equity ownership, continuity of management, continuity of physical location, personnel and assets, whether the seller quickly liquidated, whether the buyer assumed seller liabilities needed to continue operations, and if adequate consideration was paid. If there is no continuity of equity ownership, some courts will find that neither the second nor the third exception is met. See e.g. Douglas v. Stamco, 363 Fed. Appx. 100 (2d Cir. 2010) and Ruiz v. Blentech Corp., 89 F.3d 320 (7th Cir. 1996).
 Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., 801 F.3d 1079, 1084 (9th Cir. 2015).
 Id. at 1096.
 Id. at 1097.
 Id. at 1096.