Over the past several years, there has been a significant increase in multiemployer pension funds relying upon the successor liability doctrine in seeking to recover unpaid withdrawal liability from asset purchasers. The circuit courts that have adopted the successor liability doctrine have generally held a purchaser liable where it was on notice of the seller’s withdrawal liability, and there is a substantial continuity in the operations between the seller and buyer.

Constructive Notice Test

Several circuits have held that actual notice is not required. The Ninth Circuit in Heavenly Hana LLV v Hotel Union and Hotel Industry of Hawaii Pension Plan adopted a constructive notice standard and stated, “a reasonable purchaser would have taken additional actions to determine if withdrawal liability existed.” In Tsareff v. ManWeb Services, the Seventh Circuit similarly found that the notice prong was satisfied because the purchaser’s notice of withdrawal liability could have been reasonably inferred.

The substantial continuity prong is a multi-factor test, and generally considers six factors: 1) ownership; 2) physical assets; 3) intangible assets; 4) management and workforce; 5) business services; and 6) customers.

In many cases, substantial continuity is an undisputed element as the purchaser has hired the seller’s employees, retained key management, acquired the seller’s assets and purposefully taken over the seller’s customer base.

Exception Recognized

But a recent decision from the Northern District of New York is an exception and may chart a course for purchasers to structure transactions in a way that reduces risk.

In 2008, C&S Wholesale Grocers entered into an asset purchase with Penn Traffic. C&S purchased Penn Traffic’s relationships and contracts with wholesale customers and hired 30 Penn Traffic employees who supported the wholesale business – none of whom performed work covered by the Teamsters bargaining unit for which contributions were required to the New York State Teamsters Conference Pension and Retirement Fund.

C&S did not acquire Penn Traffic’s retail stores, the lease for a warehouse facility Penn Traffic operated, nor the trailers, trucks or forklifts used at the warehouse.

Instead, C&S entered into a separate agreement with Penn Traffic in which C&S paid Penn Traffic for the warehousing services it provided.

Penn Traffic later filed for bankruptcy and closed its facility. The closure of the facility effected a withdrawal from the Fund, and it paid only a portion of its withdrawal liability.

The New York State Teamsters Conference Pension and Retirement Fund sued C&S alleging it engaged in a transaction to evade or avoid withdrawal liability, was the successor to Penn Traffic, or was a joint employer, and liable for the unpaid $60 million in withdrawal liability. In an earlier ruling, the court dismissed the evade or avoid, common control and joint employer liability causes of action.

In NY State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, Inc., the court analyzed the substantial continuity factor of the successor liability claim. Notably, the court placed particular weight on the fact that C&S did not acquire the warehouse workers – the bargaining unit members on whose behalf contributions were required to the Fund – as its own; they remained employees of Penn Traffic.

No Continuity of Workforce and Management

The court also concluded that C&S had not acquired Penn Traffic’s facilities and equipment because, although it purchased certain inventory, relationships and contracts, it did not acquire any assets related to the warehouse operations.

On balance, the court found that despite there being a constancy of customers, there was not a substantial continuation between C&S and Penn Traffic’s operations because there was neither continuity of the workforce and management, nor facilities and equipment.

Even though C&S had notice of Penn Traffic’s liability, because the substantial continuity element was not satisfied the court ruled that C&S was not a successor and not liable for Penn Traffic’s $58 million in unpaid liability.

In this developing area of the law, where decisions are highly fact sensitive, and purchasers are more often than not held liable as successors, this ruling establishes a potential framework for structuring transactions to mitigate the risk to purchasers.

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