On January 27, 2022, the U.S. Court of Appeals for the Second Circuit issued an opinion in New York State Teamsters Conference Pension and Retirement Fund, et al. v. C&S Wholesale Grocers, Inc., No. 20-1185-cv, 2022 U.S. App. LEXIS 2620 (2d Cir. Jan. 27, 2022), holding that the theory of successor liability can be applied to collect withdrawal liability from employers under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In doing so, the Second Circuit joined the Courts of Appeals for the Seventh and Ninth Circuits that have also concluded that successor liability can be applied to collect withdrawal liability under ERISA.
At issue in the case was a dispute between C&S Wholesale Grocers, Inc. (“C&S”) and the New York State Teamsters Conference Pension and Retirement Fund (“Fund”) regarding withdrawal liability owed as a result of Penn Traffic Company’s withdrawal from the Fund. Penn Traffic employed members of Teamsters Local 317 at its Syracuse warehouse and, pursuant to its collective bargaining agreement with the union, was required to make contributions to the Fund. In 2008, C&S purchased certain portions of Penn Traffic’s business, but it did not purchase the Syracuse warehouse or employ Penn Traffic employees that were members of the Teamsters Local 317.
Penn Traffic subsequently declared Chapter 11 bankruptcy and closed the Syracuse warehouse, triggering a complete withdrawal from the Fund and the Fund assessed withdrawal liability against Penn Traffic in the amount of $63.6 million. The Fund filed a claim for the withdrawal liability in Penn Traffic’s bankruptcy proceeding but was able to recover only $5 million. The Fund then pursued C&S for the remaining $58 million in withdrawal liability on four theories of liability, including the doctrine of successor liability.
The district court dismissed the Fund’s claims on three of the four theories of liability, leaving the Fund’s claim of successor liability as the only viable claim. The court ultimately granted C&S’s motion for summary judgment finding that C&S was not responsible for Penn Traffic’s withdrawal liability under the theory of successor liability based on the facts of the case. The Fund appealed the district court’s ruling on the successor liability claim, as well as the dismissal of its other theories of liability, to the U.S. Court of Appeals for the Second Circuit.
Under the general common law, a company that purchases the assets of another company does not generally assume the seller’s liabilities. However, the U.S. Supreme Court has recognized that a successor company may be deemed to have assumed the liabilities of its predecessor company, if (1) the successor had notice of the predecessor’s liability, and (2) there is substantial continuity of identity in the business enterprise.
Prior to its decision in C&S Wholesale, the Second Circuit had only recognized the application of the successor liability theory in delinquent contributions cases and had not addressed whether successor liability can be applied in the context of withdrawal liability. However, when directly presented with the question in C&S Wholesale, the Second Circuit firmly held that “the theory of successor liability is applicable to withdrawal liability under ERISA.” U.S. App. LEXIS 2620 at *27 (citations omitted).
C&S argued that successor liability should not be applied to collect withdrawal liability because it would amount to prohibited federal common lawmaking and thus deviate from the general common law rule of no successor liability. The Second Circuit disagreed and pointed out that the theory of successor liability exists in labor law in the context of collective bargaining under the National Labor Relations Act; accordingly, the doctrine can be extended to pursue the payment of withdrawal liability under ERISA, which also carries out the goals of federal labor policy and ERISA by protecting participants and their pensions.
Although the Fund prevailed on its argument that the theory of successor liability should be applied to claims for withdrawal liability, it ultimately lost the case on the facts because it was not able to prove that C&S was a successor to Penn Traffic. In this regard, the Second Circuit upheld the district court’s finding that there was not a “substantial continuity of identity” in the business operations of Penn Traffic and C&S. The Second Circuit found it very persuasive that C&S did not purchase the Syracuse warehouse as part of its 2008 transaction or employ any of the employees there who were members of the Teamsters Local 317.
As the Second Circuit noted in C&S Wholesale, both the Seventh and Ninth Circuits addressed this same question previously and have held that successor liability can be applied to withdrawal liability under ERISA. In reaching these holdings, the Seventh and Ninth Circuits, like the Second Circuit, relied on the federal labor law policy concerns underlying ERISA and the fact that prior case law applied successor liability to ERISA delinquent contributions cases.
In Tsareff v. Manweb Servs., the Seventh Circuit required that, for successor liability to apply, “(1) the successor had notice of the claim before the acquisition; and (2) there was ‘substantial continuity in the operation of the business before and after the sale.’” 794 F.3d 841, 845 (7th Cir. 2015) (citation omitted). Applying these general successor liability requirements to the withdrawal liability context, the Seventh Circuit concluded that notice of contingent withdrawal liability was sufficient to meet the notice requirement for successor liability. Id. at 847. The case was remanded to the district court to address the “substantial continuity” prong of the successor liability analysis. Id. at 850.
In Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael's Floor Covering, Inc., the Ninth Circuit followed similar reasoning to hold that a successor could be held liable for the withdrawal liability of its predecessor, so long as the successor had notice of the withdrawal liability. 801 F.3d 1079, 1095 (9th Cir. 2015). However, the Ninth Circuit placed more emphasis on the substantial continuity of business operations between the predecessor and 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.” Id. at 1084. The Ninth Circuit’s emphasis on continuity of customer base in Resilient Floor differs from the Second Circuit’s approach in C&S Wholesale, where the court found insufficient continuity of business operations because the purported successor did not purchase the warehouse or employ the predecessor’s union employees.
Although the Fund ultimately did not prevail in its attempt to hold C&S responsible for Penn Traffic’s withdrawal liability, the Second Circuit’s holding on the applicability of successor liability to withdrawal liability claims under ERISA makes it clear that the doctrine is available to plans seeking to collect withdrawal liability from successor employers in the Second Circuit. Whether a claim for successor liability will ultimately result in a favorable judgment for a plan depends on the specific facts and circumstances of each case.
