In what should serve as a clear warning to buyers acquiring assets involving multi-employer pension plans (MEPs), the Ninth Circuit Court of Appeals’ June 1 decision put the onus on buyers to ensure that withdrawal liability is accounted for during an asset sale.
In a Transaction, Think of Withdrawal Liability As Termites
Multiemployer plan withdrawal liability is one of the most complicated and potentially expensive problems that can surface in an M&A transaction.
The condensed version of this case is that a private equity group under the parent company Amstar-39 (Amstar) entered into a purchase and sale agreement (Agreement) with Ohana Hotel Company LLC (Ohana) for a hotel in Maui in 2009.
The Agreement noted that Ohana’s employees were members of Local 5 of UNITE HERE (Union) and covered by the Hotel Union & Hotel Industry of Hawaii Pension Plan (Plan). The Agreement did not disclose that the Plan had been underfunded for several years. But, important to this case, this was not the first hotel Amstar had purchased with union employees and a union pension plan. And the Plan’s funding status notices were publicly available on the internet.
Ohana halted contributions to the Plan ten days before the deal closed and formally withdrew from the Plan on the day the deal closed. At closing, the unfunded vested liabilities triggered withdrawal liability for Ohana under the Multiemployer Pension Plan Amendment (MPPAA) to ERISA.
Amstar continued to employ a majority of Ohana’s former employees and recognized Local 5 as the employees’ bargaining unit. But it developed its own employment terms and employee benefit plans rather than adopting the Union’s Collective Bargaining Agreement. In 2012, the Plan notified Amstar that it had inherited Ohana’s $758,000 withdrawal liability as Ohana’s successor.
Amstar made $373,000 in payments to the Plan before filing suit to contest its responsibility for the withdrawal liability.
In February 2016, the lower court had concluded that, for purposes of the Plan, Amstar qualified as a successor employer to Ohana – Amstar had continued to use the purchased assets and employees in largely the same way Ohana had. However, it concluded that Amstar did not have “actual notice” of the withdrawal liability, rejecting the Plan’s argument for application of a “constructive notice” standard. The Plan’s appeal then hinged on whether the constructive notice standard should apply to withdrawal liability.
On appeal, the Ninth Circuit decided that the constructive notice standard should apply to withdrawal liability. The court reasoned that Congress intended ERISA and MPPAA to be interpreted in a way that favors protecting plan participants and that constructive notice is consistent with such interpretation.
In applying the constructive notice standard to this case, the court’s decision was tipped by a lack of due diligence on Amstar’s part.
The Ninth Circuit acknowledged that Ohana had failed to provide Amstar with the Plan funding deficiency notices required by the Agreement and that Ohana’s representatives had stated that “to their knowledge” the Plan was not underfunded. But it concluded that a seller’s conduct does not absolve a purchaser from taking simple steps to “gain knowledge of the withdrawal liability.”
And this is where termites enter the picture. The court wrote:
“Notably, Amstar had a four-person due diligence team undertake various investigations prior to the sale’s closing. The team ‘hired engineers … to look at the roofs, look at the termites, look at the condition of all structural [features] and give estimates on what it will take to fix it.’ As the Plan notes, Amstar ‘did not rely on the seller’s representation regarding termites’ but surprisingly did ‘rely on the seller’s representation over a multimillion-dollar issue like withdrawal liability.’ This reliance is unreasonable.”
Any asset buyer of a company with a union pension plan that intends to continue using the assets in essentially the same way the seller did, could be saddled with the seller’s withdrawal liability even if the buyer has no actual notice that such liability exists.
In the Ninth Circuit, at least, the buyer will be deemed to have had notice of that liability if it has enough information to warrant an investigation that, if reasonably diligent, would reveal the liability. It is not clear how much information is enough to warrant an investigation into the seller’s withdrawal liability. But any time the buyer knows the seller has union employees, it should consider digging deeper into the status of the union pension plan.
If the buyer wouldn’t accept the seller’s promise that there are no termites without further investigation, it certainly shouldn’t accept a promise that there is no withdrawal liability.