No Give Backs: Ninth Circuit Outlines Test For Determining Successor Liability

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07/24/2017

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No Give Backs: Ninth Circuit Outlines Test For Determining Successor Liability

By: Greg Blueford

In the case Resilient Floor Covering Pension Trust Fund v. Michael’s Floor Covering, Inc., the Ninth Circuit recently reversed a lower court’s ruling and outlined a test for determining successor liability for contributions to pension plans. The Multiemployer Pension Plan Amendments Act (“MPPAA”) states that if an employer completely withdraws from a multiemployer pension plan, the employer is liable for the amount of unfunded benefits that have already vested. This is known as withdrawal liability.

The Ninth Circuit held that a successor employer, like Defendant Michael’s Floor Covering, Inc. (“Michael’s”), can be subject to withdrawal liability under the MPPAA so long as: 1) the successor took over the business with notice of the liability; and 2) there is “significant continuity in the business operations” between the original company and its successor. The second factor is by far the most important factor to the analysis. However, the MPPAA provides an exception from liability for employers in the building and construction industries if they have ceased operations entirely for at least five years.

 The predecessor employer, Studer’s, was in the construction industry, selling and installing floor products to commercial and residential customers. At the end of 2009, Studer’s told its sales staff that it would close at the end of the year. Michael’s, a salesman at Studer’s and the namesake of the new business, informed Studer’s that he planned to bid for projects under a new company name. The day after Studer’s closed, Michael’s obtained a lease in the same storefront that Studer’s occupied, purchased signs that looked the same as Studer’s, hired five former Studer’s employees and purchased about 30% of Studer’s tools and equipment. While Michael’s did not buy Studer’s customer information, Michael’s developed its business through old contacts gained from Studer’s. Prior to closing up shop, Studer’s was a party to a collective bargaining agreement (“CBA”), subject to MPPAA, with a local union that required payments to a pension fund.

However, as Michael’s was not a party to the CBA, it did not make any payments due to the pension fund under the CBA.

The union brought a lawsuit against Michael’s claiming that it was a successor to Studer’s and therefore, responsible for Studer’s withdrawal liability in excess of $2 million or unpaid contributions to the pension plan. The Ninth Circuit overruled the District Court, ruling that the most important factor is whether there is “substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” The Ninth Circuit reasoned that the purpose of the MPPAA is to protect funding, which is based on the amount of work available in a certain area. Ultimately, the more a successor models itself after the predecessor, such as using the same location, same phone number and similar signs, the more likely a court will find the successor took over the predecessor’s market share. 

COUNSEL TO MANAGEMENT:

Taking over a company’s business operations when they close up shop may seem advantageous at first: getting their book of business, worksite, assets, equipment, etc. However, there are many unforeseen consequences that may not be as obvious, such as liability for the old company’s debts. A successor company, regardless of whether the name is changed and other business formalities are technically different, should perform an extensive audit to ensure it is aware of all potential issues facing the predecessor company before opening shop. Please contact The Saqui Law Group if you have any questions regarding successor liability in business operations.

 


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