Ninth Circuit Holds That Constructive Notice is Sufficient to Impose Withdrawal Liability on Successor Employer Under MPPAA | Practical Law

Ninth Circuit Holds That Constructive Notice is Sufficient to Impose Withdrawal Liability on Successor Employer Under MPPAA | Practical Law

In Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, the US Court of Appeals for the Ninth Circuit held that a successor employer incurred withdrawal liability under the Multiemployer Pension Plan Amendment Act (MPPAA) because the successor employer had constructive notice of the predecessor's withdrawal liability. The Ninth Circuit reasoned that constructive notice is sufficient to impose successor withdrawal liability on an asset purchaser.

Ninth Circuit Holds That Constructive Notice is Sufficient to Impose Withdrawal Liability on Successor Employer Under MPPAA

by Practical Law Employee Benefits & Executive Compensation
Published on 05 Jun 2018 • USA (National/Federal)
In Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, the US Court of Appeals for the Ninth Circuit held that a successor employer incurred withdrawal liability under the Multiemployer Pension Plan Amendment Act (MPPAA) because the successor employer had constructive notice of the predecessor's withdrawal liability. The Ninth Circuit reasoned that constructive notice is sufficient to impose successor withdrawal liability on an asset purchaser.
In Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, the US Court of Appeals for the Ninth Circuit held that a successor employer under the Multiemployer Pension Plan Amendment Act (MPPAA) incurred the predecessor employer's unpaid withdrawal liability ( (9th Cir. June 1, 2018)). The Ninth Circuit held that:
  • Constructive notice is sufficient to impose successor withdrawal liability on an asset purchaser.
  • The successor employer in this case had constructive notice of the predecessor's withdrawal liability.
To learn more about multiemployer plans and withdrawal liability, see:

Background

Heavenly Hana, LLC and Green Tree Management, which are part of a private equity group owned by Amstar-39 (Amstar), purchased the Ohana Hotel (Ohana) in Hawaii in 2009. Under the terms of a collective bargaining agreement with UNITE HERE Local 5 (Local 5), Ohana had contributed to the Hotel Union & Hotel Industry of Hawaii Pension Plan (Plan), a multiemployer pension plan for hotel workers in Hawaii. Amstar:
  • Had prior experience with multiemployer pension plans, including:
    • owning and operating a hotel that participated in a multiemployer pension plan; and
    • inquiring about potential multiemployer plan liability in previous business transactions.
  • Delegated a due diligence team to inspect and investigate the Ohana Hotel, which included reviewing relevant documents and the hotel's condition. Following this process, the purchase price fell from $17 million to $14.5 million to account for deferred maintenance costs.
Furthermore, Amstar's purchase and sale agreement with Ohana stated that:
  • The employees at the Ohana Hotel were unionized and that Ohana had previously made contributions to a multiemployer pension plan.
  • Ohana was required to provide Amstar with notice of Plan funding deficiencies (however, Ohana never provided Amstar with this notice).
Amstar also received incorrect legal advice before closing. Amstar was told by its counsel that, absent an express assumption of liability, it does not assume withdrawal liability.
Ohana stopped contributing to the Plan 10 days before the deal with Amstar closed, and it formally withdrew from the Plan on the closing date. As a result of unfunded vested liabilities on the day it withdrew from the plan, Ohana incurred withdrawal liability.
The Plan had been underfunded for each plan year since 2006-2007, and the Plan's administrator notified Ohana of the underfunding in 2008 and 2009. The funding notices provided by the administrator were publicly accessible on the administrator's website and Local 5's website.
After closing:
  • Amstar continued to use the same buildings, grounds, and equipment as Ohana had used to operate the Hotel.
  • A majority of the 77 employees that worked for Amstar, including the general manager, previously worked for Ohana, and their responsibilities largely remained the same as before closing.
  • Amstar recognized Local 5 as the employees' bargaining unit, but developed its own employment terms, including benefit plans, rather than adopt the collective bargaining agreement that Ohana had negotiated with Local 5.
  • Amstar changed the Hotel's name a year after the purchase.
The Plan sent its first demand letter to Amstar in December 2012, requesting $757,981 in withdrawal liability paid in a single lump sum or quarterly installments of $74,566. In response, Amstar made five quarterly payments totaling $372,780 before filing a lawsuit in the US District Court for the Northern District of California to contest its responsibility for Ohana's withdrawal liability.
The district court held that Amstar was not responsible for the Plan's withdrawal liability because the two requirements for successor withdrawal liability in the Ninth Circuit were not met. Although the MPPA does not directly address successor withdrawal liability, the US Court of Appeals for the Ninth Circuit in Resilient Floor Covering Pension Trust Fund Bd. of Trustees v. Michael's Floor Covering, Inc., held that successor withdrawal liability exists if the asset purchaser:
  • Is a successor.
  • Has notice of the withdrawal liability.
(801 F.3d 1079 (9th Cir. 2015). To learn more about Resilient Floor Covering, see Article, Expert Q&A on Trends in Successor Liability for Multiemployer Plans.)
The district court held that there was sufficient continuity in hotel operations for Amstar to qualify as Ohana's successor, but Amstar lacked actual notice of the withdrawal liability, and therefore Amstar was not responsible for Ohana's withdrawal liability.
The district court rejected the Plan's proposed constructive notice standard for successor withdrawal liability, but even if a constructive notice standard applied, the court held that Amstar lacked constructive notice because it acted diligently and reasonably under the circumstances and still did not discover the withdrawal liability. The court directed the Plan to return the $372,780 in withdrawal liability payments, plus interest, to Amstar. The Plan appealed to the Ninth Circuit.

Outcome

On appeal, since Amstar did not dispute that it is a successor, the Ninth Circuit addressed whether:
  • Constructive notice of withdrawal liability is sufficient to impose successor withdrawal liability.
  • Amstar was placed on constructive notice of Ohana's withdrawal liability.

Constructive Notice Standard

Under a constructive notice standard, purchasers are deemed to have notice of any facts that one using reasonable care or diligence should have. The Ninth Circuit held that constructive notice of withdrawal liability triggers successor withdrawal liability under the MPPAA, and it came to this conclusion based on:
  • The text and intended purpose of the MPPAA. Reviewing the legislative history of the MPPAA, the Ninth Circuit found that Congress intended to protect multiemployer plans from the adverse consequences of employer withdrawals from the plans. Congress had found that a significant number of multiemployer plans were experiencing financial hardship.
  • The liberal remedial construction of the MPPAA adopted in previous cases. ERISA and the MPPAA are remedial statutes. Therefore, courts have construed them liberally in favor of protecting benefit plan participants.
  • The adoption of a constructive notice standard by the Ninth Circuit and other Circuits in other contexts, such as labor and employment cases.
  • The practical realities of asset purchases. Purchasers are in the best position to account for withdrawal liability in an asset sale because they have a financial incentive to inquire about potential withdrawal liability. A constructive notice standard, which requires purchasers to make reasonable inquiries into the existence of withdrawal liability, advances the congressional interest in preventing underfunding in multiemployer pension plans.
The Ninth Circuit rejected Amstar's argument that a constructive notice standard would create a strict liability standard for asset purchasers. Constructive notice would only exist when:
  • The purchaser qualifies as a successor.
  • The relevant pension plan is underfunded.
  • A purchaser using reasonable care or diligence would have discovered the withdrawal liability.
According to the Ninth Circuit, successor liability would only be imposed when it is fair to do so.

Constructive Notice in This Case

The Ninth Circuit held that Amstar was on constructive notice of Ohana's withdrawal liability because a reasonable purchaser would have discovered Ohana's withdrawal liability. The Ninth Circuit identified three relevant facts to support this holding:
  • Amstar previously operated a hotel that participated in a multiemployer pension plan, and, in earlier acquisitions involving multiemployer pension plans, Amstar had sought to determine whether it could incur withdrawal liability.
  • The purchase and sale agreement stated that the employees at Ohana were unionized and that Ohana had contributed to a multiemployer pension plan.
  • The Plan's annual funding notices, indicating that the Plan was underfunded, were publicly available on the internet.
Based on these facts, Amstar should have determined that, like most withdrawing employers, Ohana would incur withdrawal liability. A reasonable purchaser would have taken one or more additional reasonable actions to determine if withdrawal liability existed, such as:
  • Reviewing Plan documents publicly available on the internet.
  • Asking Ohana to provide all Plan notices rather than rely on Ohana to determine whether the notices revealed unfunded liabilities.
  • Reaching out to the Plan directly.
  • Requiring Ohana to request from the Plan the estimated amount of Ohana's withdrawal liability.
Amstar could not avoid successor withdrawal liability even though Ohana failed to provide Amstar the Plan funding deficiency notices required by the Agreement and Ohana's representatives stated that, to their knowledge, the pension plan was not underfunded. A purchaser does not escape responsibility for withdrawal liability when it can take simple steps to learn of it. Considering the circumstances of the sale, Amstar's reliance on Ohana's representations over withdrawal liability was unreasonable. Nor could Amstar avoid withdrawal liability even though it received incorrect legal advice regarding the possibility of withdrawal liability.

Practical Implications

Parties to asset purchase agreements in the Ninth Circuit, especially asset purchasers, should be aware of the Ninth Circuit's decision in Heavenly Hana LLC because it increases the likelihood that the purchaser will incur successor withdrawal liability. Since many multiemployer plans have a funding shortfall, purchasers of businesses that are participants in multiemployer pension plans could be responsible for paying very large sums to the plans.
Asset purchasers in the Ninth Circuit and their counsel should be mindful that the purchaser in Heavenly Hana LLC was deemed to have constructive notice of the withdrawal liability even though it received incorrect legal advice and the seller had represented that there would be no withdrawal liability. Therefore, it is imperative that those asset purchasers do not rely on the sellers' representations regarding withdrawal liability but take reasonable actions to determine if withdrawal liability exists.