Employer No Longer Contributing to Multiemployer Plan Cannot Use Sale of Assets Exemption under MPPAA: Second Circuit | Practical Law

Employer No Longer Contributing to Multiemployer Plan Cannot Use Sale of Assets Exemption under MPPAA: Second Circuit | Practical Law

On May 3, 2012, the US Court of Appeals for the Second Circuit held in HOP Energy, L.L.C. v. Local 553 Pension Fund that an employer that stopped contributing to a multiemployer pension fund after it sold the assets of one of its divisions cannot use the Multiemployer Pension Plan Amendment Act (MPPAA) sale of assets exemption to avoid withdrawal liability under the Employee Retirement Income Security Act of 1974 (ERISA) when the purchaser did not assume substantially the same post-sale obligation to contribute as the seller had pre-sale.

Employer No Longer Contributing to Multiemployer Plan Cannot Use Sale of Assets Exemption under MPPAA: Second Circuit

by PLC Employee Benefits & Executive Compensation
Published on 07 May 2012 • USA (National/Federal)
On May 3, 2012, the US Court of Appeals for the Second Circuit held in HOP Energy, L.L.C. v. Local 553 Pension Fund that an employer that stopped contributing to a multiemployer pension fund after it sold the assets of one of its divisions cannot use the Multiemployer Pension Plan Amendment Act (MPPAA) sale of assets exemption to avoid withdrawal liability under the Employee Retirement Income Security Act of 1974 (ERISA) when the purchaser did not assume substantially the same post-sale obligation to contribute as the seller had pre-sale.

Key Litigated Issues

On May 3, 2012, the US Court of Appeals for the Second Circuit issued a decision in HOP Energy, L.L.C. v. Local 553 Pension Fund. The key issue was whether an employer that stopped contributing to a multiemployer pension plan after it sold the assets of one of its divisions to another company can use the sale of assets exemption under the Multiemployer Pension Plan Amendment Act (MPPAA) to avoid the obligation to pay withdrawal liability. In considering this issue, the Court analyzed whether the purchaser had assumed substantially the same post-sale obligation to contribute to the multiemployer plan as the seller had pre-sale.

Background

In 2007, HOP Energy, LLC, an oil and heating company, sold 100% of the operating assets of its Madison Oil operating division to Approved Oil Company. Both Approved and Madison were signatories to the Teamsters Local 553 2004-07 Master Collective Bargaining Agreement (2004-07 CBA). Teamsters Local 553 participated in a multiemployer pension plan under ERISA. The 2004-07 CBA based pension plan contributions on the number of hours respective employees worked.
To effectuate the sale of Madison, HOP and Approved entered into an Asset Purchase Agreement (APA). The APA stated that:
Approved shall make contributions to the Local 553 Pension Fund (the "Teamsters Fund") for substantially the same number of contribution base units for which [HOP] had an obligation to contribute with respect to the operations covered by the Teamsters Fund ... nothing in this Section shall impair or limit the Purchaser's right to ... manage the operations of the Business, including the right to amend, revise or terminate any collective bargaining agreement currently in effect, and, as a consequence, reduce to any extent the number of contribution base units with respect to which [Approved] has an obligation to contribute to any plan.
Following the sale, HOP ceased operations in New York City and stopped its contributions to the Local 553 Pension Fund. The sponsor of the Local 553 Pension Fund assessed HOP's withdrawal liability at $1,204,007. HOP asked for this assessment to be reconsidered and claimed that the sale was exempt from withdrawal liability because the Madison sale satisfied ERISA Section 4204(a)(1) as a bona fide asset sale. However, the fund upheld its assessment and HOP commenced arbitration.
Before arbitration, HOP and Local 553 stipulated that the asset sale satisfied:
  • ERISA Section 4204(a)(1)(b) (bond requirement).
  • ERISA Section 4204(a)(1)(c) (requirement that the seller remain secondarily liable for five years after the sale).
The issue for the arbitrator was whether Approved had a post-sale obligation to contribute "substantially the same number of contribution base units as HOP" as required under ERISA Section 4204. The arbitrator concluded that the sale did not satisfy ERISA Section 4204(a)(1)(A) because the APA specifically disclaimed the ongoing contribution obligation. The district court upheld the arbitrator's conclusion and HOP appealed.

Outcome

In a split 2-1 decision, the Second Circuit upheld the district court's holding that the sale of Madison was not a bona fide asset sale under ERISA Section 4204(a)(1).
The court explained that a sale of assets is only exempt under the MPPAA if the purchaser assumes substantially the same post-sale obligation to contribute to the multiemployer plan as the seller had pre-sale. Before HOP sold Madison, it had a year-to-year ongoing obligation under ERISA to maintain a threshold level of contribution base units (CBUs), which were measured in hours of employee pay. HOP was obligated to contribute to the pension fund based on the hours of pay Madison employees worked.
The court rejected HOP's argument that Approved had an identical post-sale obligation to HOP's, stating that this argument confuses:
  • CBUs.
  • Contribution base unit rates.
Although Approved was obligated to contribute to the fund at the same rate under the APA, there was no obligation to maintain substantially the same number of hours of pay. According to the court, this was clear because:
  • The APA specifically disclaimed this obligation.
  • There is no language in the 2004-07 CBA or any other CBA or applicable labor management relations law to obligate Approved to contribute substantially the same number of hours of pay as HOP had contributed pre-sale.
The court also reasoned that it made no difference that Approved may have contributed substantially the same number of hours of pay as HOP had contributed pre-sale. What matters, according to the statute, is the purchaser's obligation at the time of the sale. In this case, Approved was not obligated to contribute substantially the same number of CBUs, and its actions after the fact are irrelevant.
The dissent asserted that the majority opinion could be read to imply a buyer must maintain historical contribution levels indefinitely into the future. However, the majority rejected the dissent's assertion, stating that ERISA Section 4204:
  • Does not address the duration of a purchaser's obligation to contribute.
  • Only asks whether a buyer had the same obligation to contribute as the seller at the time of the sale.

Practical Implications

This decision interprets the statute and clarifies the applicability of the sale of assets exemption under ERISA and the MPPAA. Practitioners drafting APAs should consider the terms and cost implications of both selling and purchasing companies when allocating withdrawal liability responsibilities.

Court Documents