Ninth Circuit's Expansion Of Successor Liability May Make Asset Purchases More Costly

On June 1, 2018, the U.S. Court of Appeals for the Ninth Circuit ruled that an asset purchaser that was deemed a successor was liable to pay the seller's withdrawal liability even though the purchaser did not have actual knowledge of the liability. The Ninth Circuit found that constructive notice of the liability was sufficient to impose withdrawal liability on the asset purchaser. This ruling raises the hurdles that a successor must overcome to avoid withdrawal liability in an asset sale transaction.

Background

In Heavenly Hana v. Hotel Union & Hotel Industry of Hawaii Pension Plan, No. 16-15481 (June 1, 2018), a private equity group purchased a hotel and related assets. The hotel (the acquired entity) had participated in an underfunded multiemployer pension plan, but the hotel stopped making contributions to the plan shortly before the acquisition closed. The plan had knowledge of the hotel's withdrawal, but did not formally assess withdrawal liability (in the amount of $757,981) until after the acquisition closed. The district court concluded that even though the private equity group was a successor (i.e., there was sufficient continuity of business operations), it was not liable because it lacked actual notice of the seller's withdrawal liability obligation. The district court also held, in the alternative, that no constructive notice existed because the private equity group had acted diligently and reasonably under the circumstances and still had not discovered the existence of the seller's withdrawal liability obligation.

The Ninth Circuit's Decision

The Ninth Circuit reversed the district court's conclusions and held that successor liability requires only constructive notice, reasoning that the statutory structure should be interpreted liberally to protect participants in employee benefit plans. (Note that on appeal, the purchaser conceded its status as a "successor," so the only element for successor liability in dispute was whether the asset purchaser had notice of withdrawal liability.) The Ninth Circuit further held that a reasonable purchaser in this particular situation would have discovered the seller's withdrawal liability obligation since one of the members of the private equity group had prior experience with a hotel that participated in a multiemployer pension plan, the plan's annual funding noticesshowing that the plan was underfundedwere publicly available on the plan's website, and the hotel's employment of unionized...

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