Ninth Circuit Expands Liability Exposure to "Successor"

If an employer withdraws from participation in an underfunded multiemployer pension plan, the employer can be assessed withdrawal liability based on its allocated share of the plan's unfunded vested benefits.

Of course, there are exceptions.

Withdrawal liability will not apply to an employer in the building and construction industry who ceases all operations.  Of course, there is an exception to this exception: if within 5 years after the cessation, the employer returns to operations in the area covered by the CBA, withdrawal liability may be assessed.
 
Now there is a new exception: even if an employer ceases all operations, it is possible to assess withdrawal liability against a “successor” employer.  The Seventh Circuit, and recently the Ninth, have held that a bona fide successor employer can be subject to withdrawal liability, so long as the successor took over the business with notice of the liability.

And that raises the key issue: how do we determine if a business is a successor subject to withdrawal liability?

Here is the fact pattern in the case recently (Sept 2015) addressed by the Ninth Circuit (Resilient Floor Covering Trust Fund Board of Trustees v. Michael's Floor Covering Inc.).

Toward the end of 2009, after 50 years in operation, the president and chairman of  Studer’s Floor Covering informed his sales staff that Studer’s would close at the end of the year. Shortly after that announcement, one of those staff members, Michael Haasl, formed his own company, Michael’s Floor Covering, (“Michael’s”) to perform work similar to what Struder’s had done.
 
Michael’s obtained a lease on the same storefront and warehouse Studer’s had long occupied. That lease’s term began on January 1, 2010, the day immediately after  Studer’s’ lease terminated. Michaels bought outdoor signs very similar to those that Studer’s used.With  Studer’s authorization, Michael’s arranged  to take over Studer’s’ business telephone numbers at the end of 2009.

Studer’s sold most, though not all, of its tools, equipment, and inventory at a publicly advertised liquidation sale in the fall of 2009. At that sale, Michael’s purchased about 30% of
the tools, equipment and inventory.

Although “Studer’s did not sell, give, or otherwise assign its customer lists or any portion of
its customer information to Michael’s,  Mike Haasl knew the identity of many of Studer’s customers and suppliers through his work over the course of 19 years as a salesman
for Studer’s.” Michael’s used those existing business relationships in developing its business.

In Michael’s’ first two years of operation, it employed eight installers; otherwise, Michael’s outsourced installation work to independent contractors. Of the eight employee installers, five had previously worked for Studer’s at one time or another.

The proportion of Studer’s customers retained by Michael’s depends on the mode of calculation used. The district court found that “many of Studer’s customers became Michael’s customers.” The Fund asserts that Michael’s obtained the bulk of its business during its start-up phase from Studer’s’ customers, largely business customers.  For example, all but seven of Michael’s’ business customers in its first three months of operation had been Studer’s customers during Studer’s last year of business. Michael’s counters that only 80 or so of the 868 customers Michael’s served in its first two years were former Studer’s clients.

How Would You Rule?

Is Michael’s a “successor” to Struder’s, and therefore liable for Struder’s withdrawal liability?

The District Court said no, based on the small number of Struder’s employees later employed by Michael’s.   The Appeals Court said this approach was wrong, the employee count was backwards: you need to measure how many installers at Michael’s had previously worked for Struder’s.   And the Appeals Court decided that continuity of the customer base was a more important factor to be considered. So the case was remanded to District Court for reconsideration.

What does this mean for you?

This case reminds us that the construction industry exemption is not absolute. Employers leaving an underfunded plan can still be assessed, either by returning to activity within five years, or by operating a business that is substantially a continuation of the old business.

Even in the building and construction trades, you should be evaluating all employer withdrawals for potential assessment of withdrawal liability.

Test your participating employers regularly for partial withdrawals.

Devise procedures to monitor for the full five years of nonactivity

Be aware that it may be possible to assess successor liability, so design procedures to identify any potential successor business.

Hold regular discussions on the topic with your fund’s attorney.

We just weathered a prolonged economic downturn that undoubtedly impacted your employer census. As conditions begin to improve, some of the departed may  return to business. Consider a special study to review contribution data over the last decade, to search for potential complete or partial withdrawals, estimate the potential allocated liability, and  test for violations of the exemption. How far back you can go depends in part, on state law, but there is a limit, so starting the process as soon as possible makes sense. 

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