Indiana Electrical Workers Pen v. Manweb Services, Inc.

Citation: 884 F.3d 770Docket: 16-2840

Court: Court of Appeals for the Seventh Circuit; March 12, 2018; Federal Appellate Court

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In the case before the United States Court of Appeals for the Seventh Circuit, the plaintiffs, Indiana Electrical Workers Pension Benefit Fund, appeal a decision regarding whether ManWeb Services, Inc. is liable as a successor to Tiernan. Hoover, also known as Freije, which left its multiemployer pension plan and incurred a withdrawal liability of $661,978. The Fund is pursuing ManWeb for this liability based on successor liability principles under the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA).

The district court initially ruled in favor of ManWeb, stating it had no notice of Freije's withdrawal liability. However, the Seventh Circuit previously remanded the case, indicating that ManWeb had sufficient notice of Freije’s potential liabilities prior to the acquisition. On remand, the district court again ruled for ManWeb, claiming insufficient continuity of operations to establish successor liability. 

The appellate court disagrees with the district court's assessment, highlighting that ManWeb's acquisition and utilization of Freije's intangible assets—including its name, goodwill, trademarks, and operational data—demonstrated a continuity of business operations that favored successor liability. Consequently, the appellate court vacated the district court's ruling and remanded the case for further consideration on this matter. 

In summary, the key issues revolve around the notice of withdrawal liability, the continuity of business operations post-acquisition, and the assets acquired by ManWeb from Freije, which the appellate court believes warrant a reevaluation of successor liability.

Freije and ManWeb failed to make payments for withdrawal liability, with Freije not contesting the assessment through review or arbitration. Consequently, the assessment became due after the statutory contesting period expired. The Fund initiated a lawsuit against Freije and included ManWeb under successor liability provisions. Cross-motions for summary judgment were filed, resulting in the district court ruling that Freije was fully liable for the assessment, but ManWeb was not held responsible for successor liability. The court determined that ManWeb lacked notice of Freije's withdrawal liability, which negated the successor liability claim without assessing business continuity.

On appeal, it was concluded that ManWeb did have notice of Freije's contingent withdrawal liability, as indicated in the Asset Purchase Agreement and financial statements, despite ManWeb's attempt to disclaim this liability. The appellate court reversed the district court's decision and remanded it for a continuity analysis. 

On remand, the district court again ruled in favor of ManWeb, finding no substantial continuity of operations from Freije to ManWeb after evaluating five continuity factors: business processes, facilities, workforce, management, and customers. The court determined that ManWeb did not continue Freije’s business without significant change. It also weighed the equities, concluding they favored not imposing successor liability.

The analysis section emphasized that summary judgment is appropriate when there are no genuine material fact disputes, and the appellate review of the district court's decision is de novo. The policy goals of the Multiemployer Pension Plan Amendments Act (MPPAA) were highlighted, indicating that the financial burden of one employer's default impacts remaining employers and threatens the stability of pension plans, ultimately risking beneficiaries' pension benefits.

The Multiemployer Pension Plan Amendments Act (MPPAA) was enacted to amend the Employee Retirement Income Security Act (ERISA) and shield multiemployer plans from the negative effects of employer withdrawals. Key objectives included alleviating the financial strain on remaining contributors, encouraging new employers to join, and preventing funding deficiencies. Employers that withdraw from a multiemployer plan incur withdrawal liability, representing their share of unfunded vested benefits. This mechanism aims to protect plans from declines in the contribution base.

Successor liability may be enforced to ensure that companies which continue operations after acquiring a predecessor's assets are held accountable for the predecessor's pension liabilities. The general rule in asset purchase agreements is that buyers do not assume sellers' liabilities; however, exceptions exist under the successor liability doctrine when a new employer effectively adopts a predecessor’s operations and assets. This doctrine is consistent across federal employment law, aiming to uphold federal policies and rights.

Determining successor liability requires careful consideration of specific facts and legal obligations. A new employer may be deemed a successor for certain purposes while not for others, as illustrated by various court rulings. Decisions on successor liability necessitate a balance of competing national policies and the interests of involved parties.

Successor liability under the Multiemployer Pension Plan Amendments Act (MPPAA) requires notice of potential liability and substantial continuity of the business. Previous findings established that ManWeb had notice; therefore, the focus shifts to determining continuity. Courts evaluate the totality of circumstances, including business activities, workforce, working conditions, and customer base, to assess continuity. ManWeb contends there is a lack of continuity because it did not previously offer certain services, only a small fraction of its workforce were former Freije employees, and minimal revenue came from Freije's contracts. The Fund argues these points create a "big buyer" loophole that undermines MPPAA policies, suggesting large buyers should not evade liability due to size alone. The court agrees, emphasizing that analysis should focus on how much of the predecessor's business continues post-sale, rather than the proportion to the buyer's overall business. A hypothetical example illustrates that even if the seller's contributions constitute a small percentage of the buyer's operations, the continuity of the seller's business should still be recognized. The court concludes that the district court’s analysis was flawed and that continuity factors require reevaluation.

Continuity of business operations is evaluated through six categories: ownership, physical assets, intangible assets, management and workforce, business services, and customers. 

1. **Continuity of Ownership**: There was no shared ownership between ManWeb and Freije, leading to a consensus that this factor does not support successor liability.
  
2. **Continuity of Physical Assets**: ManWeb purchased Freije’s assets for $259,360 but sold most of these physical assets at auction and did not use Freije’s previous location. This supports the district court's finding against successor liability.

3. **Continuity of Intangible Assets**: ManWeb acquired Freije's trademark, supplier lists, trade secrets, customer data, and other intangible assets, which facilitated its marketing as a continuation of Freije’s business. ManWeb redirected internet traffic from Freije's website to its own and forwarded Freije’s telephone lines and mail. It used joint letterhead to retain customers and filed a business name certificate for “The Freije Company.” ManWeb's owner anticipated gaining a competitive edge from the Freije name, highlighting the significance of reputation in the industry. A press release described the transaction as an acquisition and merger, suggesting continuity. Fourteen months post-purchase, ManWeb began operating as Freije Engineered Solutions, which it still does, and has incorporated the history of Freije into its own narrative on its website.

Overall, while ownership and physical asset continuity are absent, the acquisition of intangible assets and branding indicates a strategic intent to present continuity with Freije’s legacy.

ManWeb acquired Freije's assets primarily to project itself as a continuation of the Freije company, emphasizing the importance of goodwill and reputation. The analysis of business continuity post-acquisition reveals significant findings regarding the workforce. 

1. **Continuity of Management**: Three senior managers from Freije—Dick Freije, Michael Hoover, and Gregory Taylor—joined ManWeb, assuming key roles and utilizing their established reputations to retain existing customers and attract new ones, thereby indicating strong continuity in management.

2. **Continuity of Supervisors**: Although three former supervisors from Freije were hired, there is insufficient evidence regarding their integration into ManWeb's supervisory structure. Consequently, this aspect reveals minimal continuity.

3. **Continuity of Employee Workforce**: Freije had 40 employees at the time of the sale, with 13 (33%) hired by ManWeb, resulting in these employees constituting 5% of ManWeb's total workforce of 238. The district court viewed this as minimal continuity; however, this approach was criticized for not adequately reflecting the relevant continuity of Freije's operations. The retention of a third of Freije’s workforce is significant, especially given the unique skills and knowledge of the retained management team, which helped ensure continuity of service for customers. 

The district court's focus on union membership among former employees was also deemed insufficient, as it did not consider that ManWeb had opted for a non-union structure, further complicating the assessment of workforce continuity.

The MPPAA cautions against employers who switch to non-union operations and stop contributing to pension plans. In this case, one-third of Freije's employees, including key personnel, remained with the company, indicating significant workforce continuity. Prior to acquiring Freije's assets, ManWeb had a diverse range of engineering services but struggled with industrial refrigeration projects, an area where Freije specialized. After the acquisition, ManWeb successfully incorporated refrigeration services into its offerings. The district court viewed the limited overlap in refrigeration services as a factor against successor liability, but this decision was contested. The argument against a "big buyer" loophole emphasizes that there was considerable continuity in refrigeration services post-acquisition.

Additionally, as part of the asset purchase agreement, ManWeb took over ongoing Freije contracts and warranties, committing to use its workforce for these projects while Freije’s previous owners covered costs. The district court believed this profit arrangement contradicted the idea of continuity. However, the seamless transition from Freije employees to ManWeb employees for ongoing contracts demonstrated continuity of service. ManWeb's assertion that its involvement was minimal—amounting to only 1.3% of its total electrical work and less than 1% of total revenue—was seen as overlooking the operational continuity of Freije. The more relevant analysis would compare the volume of work handled by ManWeb after the acquisition to what Freije managed prior to the sale, as no evidence suggested ManWeb gained new business from former Freije clients.

ManWeb's intent to retain Freije’s customers and attract new ones was noted, but its failure to achieve this led the court to deem the MPPAA's policy concerns less significant. The court argued that if Freije’s customers sought alternative services, the contribution base would remain unaffected. However, it acknowledged the potential harm posed by new non-union competitors, which could lead union contributors to reduce pricing and revenue, impacting their contributions to pension plans. The court expressed skepticism regarding the idea that unmet expectations should exempt ManWeb from successor liability. It emphasized that capturing a predecessor’s customers is not the sole indicator of continuity, especially considering the economic turbulence around the 2009 acquisition. More crucially, it focused on whether ManWeb treated Freije's customers as its own, citing the importance of actively assuming work and goodwill from Freije.

The court concluded that ManWeb made concerted efforts to maintain customer continuity, thus favoring successor liability. It noted that successor liability is an equitable doctrine, subject to a standard of review for abuse of discretion. The district court's decision could be challenged if based on an incorrect legal understanding. The analysis compared the continuity of business before and after the acquisition, criticizing the district court for potentially creating an exception for larger buyers and neglecting the significance of intangible assets. The overarching MPPAA policy goals—avoiding financial strain on remaining employers and preventing fund insolvency—should guide equitable considerations. Ultimately, the evaluation of successor liability requires a holistic assessment of various factors, with a presumption in favor of liability when successors are aware of their predecessor’s obligations and inability to fulfill them.

ManWeb is deemed "not an innocent purchaser" due to its awareness of Freije's withdrawal liability and inability to pay other debts, which were detailed in the asset purchase agreement. This agreement included an indemnification clause aimed at protecting ManWeb from claims related to Freije, including withdrawal liability. However, since Freije is unlikely to fulfill this indemnification, the Fund faces potential harm from unpaid contributions. The district court acknowledged the tension between the policy objectives of the Multiemployer Pension Plan Amendments Act (MPPAA) and the social interest in asset transfers. Freije's owners had personal debts satisfied through the purchase price paid by ManWeb, which effectively excluded the Fund from these proceedings. While recognizing that successor liability might hinder asset transfers, the court cited Artistic Furniture, indicating that significant fiscal impact on a successor does not prevent liability imposition.

The district court's equitable balancing of these issues is subject to its discretion, and the appellate court found shortcomings in the district court's legal analysis, particularly regarding how it measured continuity in business operations. The court emphasized that to establish successor liability, substantial continuity must exist in the business operation pre- and post-sale. The appellate court concurred with the decision to remand the case for the district court to reevaluate the evidence and apply the correct standards for assessing the successor liability factors. The judgment of the district court was vacated, and the case was remanded for further proceedings.

Imposing $661,978 in withdrawal liability on ManWeb is justified based on the intent to enforce successor liability within multi-employer pension contexts, which aims to prevent a business from evading pension obligations while competing in the market formerly supported by plan-contributing employers. However, the evidence presented does not demonstrate that ManWeb effectively continued Freije's business or maintained its customer base. The court's ruling emphasizes attempts over results, arguing that efforts to treat Freije's customers as its own are sufficient for liability, despite the absence of actual continuity. This reasoning contradicts established Ninth Circuit precedent, which requires that a successor must substantially take over the predecessor’s customer base to incur liabilities. The Ninth Circuit has previously indicated that liability should not arise solely from unsuccessful attempts to acquire customers, as doing so undermines the equitable principles governing successor liability. The ruling risks unfairly penalizing businesses that make unsuccessful attempts to sustain operations, and it raises concerns about imposing liabilities on companies that have not engaged in meaningful market activities. The opinion critiques a potential “deep pocket shakedown,” indicating that the court's stance could unjustly favor the fund without clear justification for imposing liability on a non-plan employer that has not derived any benefit from the prior employer’s operations.

The court posits that a non-plan employer could potentially influence a plan by prompting plan employers to lower rates in competitive response, thereby diminishing their revenues and contributions to the plan. However, the argument is made that plan employers might similarly engage in price competition amongst themselves, leading to equivalent revenue reductions. The Fund fails to provide evidence that such competitive effects occurred in this specific case involving ManWeb, which is assigned a withdrawal liability of $661,978 related to Freije’s customer base—a base it allegedly did not take. The court highlights its own limitation in substituting its judgment for that of the district court regarding the weighing of successor-liability factors. As the district court re-evaluates these factors, it is reminded that differing opinions exist on their significance, and its decision should remain within the scope of its discretion.