In a decision handed down by the Seventh Circuit on June 24, 2016, the court warned that a lack of familiarity with the concept of withdrawal liability cannot be used by a buyer of business assets as an excuse to avoid liability for the seller’s underfunded union pension plans.
The opinion written by Judge Posner acknowledges that “the general [federal] common law rule of successor liability holds that where one company sells its assets to another company, the latter is not liable for the debts and liabilities of the other.” However, in dealing with liabilities under a collective bargaining agreement a “similar but looser” approach applies. According to the court, that approach focuses on the continuity between the predecessor’s and successor’s businesses and on the latter’s notice of the former’s acts.
In reversing summary judgment in favor of the buyer, the court seemed to find that a buyer could have actionable knowledge of potential withdrawal liability simply by knowing that the seller was unionized because, after all, most union pension funds are underfunded.
Purchasers of businesses assets should exercise caution in pre-closing diligence, especially when they receive information that the seller may have unionized employees. Further investigation may be appropriate to determine the extent of any potential withdrawal liability followed by consideration of strategies to protect against the possibility of successor liability.
The court’s opinion is here
