Hotel owner had constructive notice of predecessor’s withdrawal liability

A corporate hotel owner incurred withdrawal liability for the predecessor owner’s unpaid multiemployer plan contributions because the new owner had constructive notice of the withdrawal liability, the U.S. Court of Appeals in San Francisco (CA-9) has ruled. The appeals court reversed the district court’s determination that the new owner had no actual notice and constructive notice didn’t apply, finding instead that constructive notice was consistent with the Multiemployer Pension Plan Amendment Act’s (MPPAA) purpose and legislative history.

Hotel purchase

In December 2009, a private equity group purchased a hotel in Hawaii. The predecessor company, pursuant to a collective bargaining agreement with the hotel workers union, contributed to a multiemployer pension plan for its employees.

The purchase agreement indicated that the employees were unionized, and that the predecessor company had previously made contributions to a multiemployer pension plan. The predecessor company did not provide the equity group with notice of any funding deficiencies, even though the agreement required it to do so.

Ten days before closing, the predecessor company stopped contributing to the pension plan, and formally withdrew from the plan upon closing. The plan had been underfunded for years before the predecessor company withdrew, and the plan issued annual funding notices to the predecessor company in 2008 and 2009, indicating the plan was underfunded for each plan year since 2006-07. Because there were unfunded vested benefit liabilities on the day the predecessor company withdrew from the plan, the predecessor company had withdrawal liability under ERISA Sec. 4201.

In December 2012, the plan sent a demand letter to the equity group, requesting over $750,000 in withdrawal liability. The equity group paid a little over half, and then sued, contesting its responsibility for the withdrawal liability.

An asset purchaser may be liable for its predecessor’s withdrawal liability if the purchaser is a successor and has notice of the withdrawal liability. The equity group acknowledged it was a successor, but the federal district court concluded that the equity group was not responsible for the withdrawal liability because it lacked “actual notice.”

The plan appealed. The appellate court reversed and remanded the district court’s decision, finding that the equity group had constructive notice of the withdrawal liability, and so was liable as a successor for the full amount owed to the plan.

Constructive notice

The appeals court first determined that, contrary to the district court’s holding, a constructive notice standard was consistent with the MPPAA. Although the legislation did not explicitly address successor withdrawal liability, its purpose and legislative history demonstrated that Congress’ legislative intent was to protect multiemployer pension plans from the adverse consequences resulting from employers terminating their participation, and to protect employees from the loss of their pensions. Consequently, the MPPAA was a remedial statute that should be liberally construed in favor of protecting plan participants, and a constructive notice requirement was consistent with the MPPAA’s intended purpose and liberal construction.

The court rejected the equity group’s contention that a constructive notice standard would effectively create a strict liability standard for asset purchasers. Rather, constructive notice would apply only when the purchaser qualified as a successor, the pension plan was underfunded, and the purchaser would have discovered the withdrawal liability if it used reasonable diligence.

The court next determined that the equity group had constructive notice because a reasonable purchaser would have discovered the predecessor company’s withdrawal liability. The equity group was experienced in such transactions, having previously operated a hotel that participated in a multiemployer pension plan, and had conducted due diligence concerning withdrawal liability in its prior acquisitions involving multiemployer pension plans. The purchase agreement explicitly informed the equity group that the employees were unionized and contributed to a multiemployer plan. The plan’s annual funding notices, which indicated underfunding, were available on the Internet.

The equity group could have discovered the withdrawal liability by reviewing publicly available plan documents, asking the predecessor company to provide all plan notices, contacting the pension plan directly, or requiring the predecessor company to request from the plan the estimated withdrawal liability amount. That the predecessor company did not provide the equity group with the deficiency notices as the purchase agreement required, and made misrepresentations regarding liability, did not absolve the equity group of responsibility to conduct its own due diligence.

Source: Heavenly Hana LLC, DBA Travaasa Hotel Hana v. Hotel Union & Hotel Industry of Hawaii Pension Plan (CA-9).
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