Ouch!: ERISA Successor Liability Despite Contractual Exclusions

Federal courts continue to adopt the use of criteria much more expansive than the traditional common law criteria to determine if a purchaser of assets is responsible for the seller’s ERISA liabilities’ despite language in the Asset Purchase Agreement (“APA”) excluding the liability. The courts are saying that there are certain types of ERISA liabilities which will follow the assets no matter what the parties may say contractually to exclude or limit the seller succeeding to the ERISA liability.

The criteria used by the federal courts which have adopted this expanded view of when an obligation of the seller becomes the obligation of the buyer despite provisions in the APA to the contrary has but two elements: (1) notice of the liability (actual or constructive) and (2) continuity of the operations (how closely are the assets purchased used by the buyer in the same way they were used by the seller). Common ownership is not part of the criteria.

Under this expanded definition of when successor liability attaches, the buyer cannot escape the liability by disclaimers or exclusionary provisions in the APA. The courts say that once the buyer is on notice of the liability, the most the buyer can do is negotiate a lower purchase price and/or require the seller to provide an indemnity. Needless to say, neither of these options to mitigate or offset the ERISA liability are necessarily available or practical in a given transaction. Courts generally refuse to enforce contractual indemnity provisions for violations of employment protective statutes, such as Title VII and the FLSA, on public policy grounds. Equal Rights Center v. Arch Stone, Smith Trust v. Niles Bolten Associates, Inc., 602 F.3d 597 (4th Cir. 2010); Gibbs-Alfano v. Burton, 281 F.3d 12, 21-23 (2nd Cir. 2002). The Third and Sixth Circuits have enforced ERISA withdrawal liability indemnification contractual provisions. See, Pittsburgh Mack Sales & Services v. Int’l. Union of Operating Engineers Local Union No. 66, 580 F.3d 185 (3rd Cir. 2009); Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, 2012 WL 880601 (6th Cir., March 16, 2012).

Thus far, the kinds of ERISA liability to which the relaxed successorship criteria has been applied has involved delinquent pension plan contributions and multiemployer pension fund withdrawal liability. However, the stated criteria of notice of liability and continuity of the business has the potential to permit a court to find the buyer being responsible for being obligated to continue a seller’s defined benefit pension plan, 401(k) plan, health plan or severance plan.

Just what kinds of ERISA obligations the relaxed successorship criteria will encompass depends on whether the courts will consider imposing the ERISA liability to be a more important federal concern than permitting the parties to contractually determine which obligations are assumed and which are not. This is what activist’s court do all the time.

Although exclusionary and exculpatory provisions in an APA have no effect once the court decides the liability is the type it wants the buyer to bear, until the courts are finished with making the rules in this area, the prudent buyer should spell out in detail in the APA what, if any, ERISA obligations/plans/liabilities of the seller it is assuming and what ERISA obligation/plans/liabilities it is not assuming. Where appropriate, conditions to closing can include actions by the seller to terminate or amend ERISA plans to reflect what is being assumed by the buyer and what is not. The specific identification and pre-closing actions can be in addition to what purchase price adjustments and indemnity provisions might also be negotiated. Illustrative court decisions: Einhorn v. M.L. Ruberton Construction Co., 632 F.32d 89 (3rd Cir. 2011), Upholsterers’ Union Pension Fund v. Artistic Furniture, 920 F.2d 1323 (7th Cir. 1990); Feinberg v. R.M. Acquisitions LLC, 629 F.3d 671, 674 (7th Cir. 2011), Brend v. Sames, __ F.Supp.2d ___, 2002 WL 1488877 (N.D. Ill. July 11, 2002), R.P. Bakery LLC v. Bakery Drivers and Salesmen Local 194, ___ F.Supp.2d ___, 2012 WL _____________, CA. No. 10-3819 (D.N.J. 3/30/2012), Bd. Trustees of Unite Here Local 25 v. M.R. Watergate LLC, 677 F.Supp.2d 229, 231 (D.D.C. 2010), Battino v. Cornelia Fifth Ave. LLC, ___ F.Supp.2d ___, 2012 WL 1871070 (S.D. N.Y. May 24, 2012), Bd. Trustees Plumbers Local 172 v. Matrix Plumbing & Heating,___ F.Supp.2d ___, 2012 WL __________. CA No. 2:09-cv-414 TLS (N.D. Ind. 2/6/2012).


Posted by Carl H. Hellerstedt, Jr. Mr. Hellerstedt is Counsel with Spilman Thomas & Battle, PLLC. His primary areas of practice are labor and employment and ERISA law.

Carl H. Hellerstedt, Jr.


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