February 02, 2022

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Withdrawal Liability Under ERISA as a Successor

By Michael Enright

Buyers of assets in distressed transactions typically consider the risk of successor liability under common law. It is notable that federal labor law policy has led courts to apply a different standard for successor liability than in other areas of the law. For example, under the NLRA and FLSA, courts have held that successor liability can exist where (1) a successor has notice of its predecessor’s liability, and (2) there is a substantial continuity of identity in the business enterprise. It is less widely accepted that successor liability under the “substantial continuity” standard can be applied to hold the purchaser of the assets of a business responsible for the prior owner’s pension plan withdrawal liability under ERISA, and more particularly the MPPAA. These obligations can be enormous in the case of an underfunded pension plan, and are of keen interest to anyone acquiring the assets of a business, particularly a distressed business. Recently the Court of Appeals for the Second Circuit joined the Seventh and Ninth Circuits in holding that successor liability under the “substantial continuity” standard can be applied to withdrawal liability. New York State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, Inc., Case No. 20-1185-cv (2d Cir. Jan. 27, 2022). Fortunately for the defendant in that case, the Court of Appeals also affirmed the lower court’s ruling that the defendant’s actions did not come within the type of conduct that would satisfy the “substantial continuity” standard for liability, because the employees covered by the underfunded plan were not employed by the portions of the business acquired by the defendant in the underlying transaction. As the court put it “one overriding fact is ultimately decisive: C&S did not purchase the Syracuse warehouse or employ the Union members who worked there” (emphasis in original). Anyone acquiring the assets of an operating business with potential withdrawal liability may be interested in the details of the transaction described in the decision, and the factors considered in reaching a positive result for the buyer. Failing to take heed of the potential that the withdrawal liability could follow the purchased assets could lead to unexpected and potentially disastrous results.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.