Asset Purchasers Beware – Constructive Notice of Seller’s Union Pension Liability

A recent 9th Circuit decision called out a common misconception — in the form of “incorrect legal advice” that the buyer received prior to closing — that “[a]bsent an express assumption of liability, the Buyer does not assume the [withdrawal] liability” for a multiemployer pension plan. The decision went on to hold a private equity fund liable for $480,000 of withdrawal liability, even though all parties conceded that the purchaser had no actual notice of the liability.

The 9th Circuit began its analysis in Heavenly Hana v. Hotel Union (filed 7/1/2018) by reciting the federal common law doctrine of successor liability. Under that well-established doctrine, a purchaser of assets will become subject to the seller’s federal employment, labor, and pension liabilities if the purchaser (1) substantially continues the seller’s business, and (2) has notice of the seller’s federal liability. The 9th Circuit went on to hold first that constructive notice alone could satisfy the notice requirement for successor liability, and then to hold “that Amstar [as the asset purchaser] had constructive notice because a reasonable purchaser would have discovered Ohana’s withdrawal liability.”

The 9th Circuit based the latter holding on the following undisputed findings, quoted here from the decision:

1. Amstar previously operated a hotel that participated in a multiemployer pension plan.
2. [I]n prior acquisitions involving multiemployer pension plans, Amstar had required its agents to determine whether it could incur withdrawal liability from the transactions.
3. The [Asset Purchase Agreement] plainly informed Amstar that the employees at Ohana [the seller] were unionized and that Ohana had contributed to a multiemployer pension plan.
4. Finally, the Plan’s annual funding notices, which indicated a state of underfunding, were publicly available on the internet.

Overall, potential asset purchasers should take precautions – early in any possible transaction – against the risk that their substantial continuation of the seller’s business and workforce may trigger successor liability for its pre-closing employment, pension, and ERISA obligations. Otherwise, their lack of actual notice may not suffice to save them from successor liability.