Ninth Circuit’s Expansion of Successor Liability May Make Asset Purchases More Costly
The U.S. Court of Appeals for the Ninth Circuit (AK, AZ, CA,
HI, ID, MT, NV, OR, WA, Guam) has ruled that an asset purchaser that was deemed
a successor was liable to pay the seller’s pension fund withdrawal liability
even though the purchaser did not have actual knowledge of the liability. The circuit
court found that constructive notice of the liability was sufficient to impose
withdrawal liability on the asset purchaser. The ruling raises the hurdles that
a successor must overcome to avoid withdrawal liability in an asset sale
In Heavenly Hana v. Hotel Union & Hotel Industry of Hawaii
Pension Plan, a private equity group purchased a hotel and
related assets. The hotel (the acquired entity) had participated in an
underfunded multiemployer pension plan but 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 seller
disclosed that it employed unionized employees and contributed to a
multiemployer plan, and the plan’s annual funding notices—showing that the plan
was underfunded—were publicly available on the plan’s website.
The decision in Heavenly Hana significantly
raises the bar for purchasers trying to avoid successor liability for
withdrawal liability. Purchasers can no longer rely on the representations of
sellers regarding the funded status of multiemployer pension plans and whether
withdrawal liability exists. Under a constructive notice standard, asset
purchasers are deemed to have knowledge of facts which reasonable care or
diligence would disclose. Examples of such reasonable care and diligence would
- reviewing publicly available plan documents;
- asking for copies of all plan notices (rather than
relying on summaries); and
- requesting a plan provide an estimate of withdrawal
The Ninth Circuit, citing equitable considerations, qualified
its decision by stating that successor liability would “only be imposed when it
is fair to do so,” but the court did not elaborate on the constructs of this limitation.
Although alarming, but perhaps not surprising, entities must
assume the worst-case scenario for what the legal standard for successor
withdrawal liability might be in the future. The parties in Heavenly
Hana signed the purchase agreement in 2009, nearly six years before
the first case in the Ninth Circuit—following the Seventh Circuit—applied
successor liability in the context of withdrawal liability (Resilient
Floor). In fact, the
private equity group in Heavenly Hana had received a legal
opinion that, absent an express assumption, no withdrawal liability would be
assumed, but the Ninth Circuit rendered this opinion incorrect with its Resilient
In light of the decision in Heavenly
Hana, asset purchasers hoping to avoid successor withdrawal liability may
wish to consider the following points:
- Avoid being a successor employer, in the first place,
if business rationale(s) permit.
- If successor employer status cannot be avoided,
investigate the funded status of any multiemployer pension plan to which
the seller contributes and the amount of any potential withdrawal
liability—ideally requesting withdrawal liability estimates.
- Analyze whether any exceptions may apply to the
imposition of withdrawal liability, such as the construction industry exemption
or ERISA Section 4204.
- Seek relief and financial protection from the seller
in the asset purchase agreement—for example, through purchase price
adjustments, indemnities or escrow accounts.
The decision in Heavenly Hana certainly
underscores the wisdom of caveat emptor.
Editor’s Note: This article was written by guest authors Thomas Vasiljevich and Grace H. Ristuccia of
the law firm Ogletree Deakins and reprinted with permission. Tom is a former chairman of the AGC Labor and
Employment Law Council and frequent speaker on multiemployer benefit issues at
the Council’s Annual Construction Labor Law symposium.
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