Pension & Benefits News New nursing home owner lacked knowledge of predecessor's unpaid withdrawal liability
Wednesday, January 16, 2019

New nursing home owner lacked knowledge of predecessor's unpaid withdrawal liability

By Pension and Benefits Editorial Staff

The new owner of a skilled nursing facility was not liable for its predecessor's unpaid withdrawal liability because it lacked either actual or constructive knowledge that the unpaid withdrawal liability existed, a federal district court in Washington has ruled.

A multiemployer plan administrator filed suit against both the seller and the buyer of a skilled nursing facility to recover the withdrawal liability the seller incurred when it withdrew from an underfunded multiemployer pension plan. The buyer purchased the facility via an asset purchase agreement. While the court entered judgment against the seller for the full amount of the withdrawal liability, the buyer argued that it had no knowledge of the liability and thus should not be responsible for it.

Asset purchaser. The court granted summary judgment to the buyer. The general rule, the court explained, is that the purchaser of assets does not acquire the seller's liabilities related to those assets. However, an exception exists with respect to withdrawal liability under ERISA if (1) there is substantial continuity in the business operations after the sale and (2) the buyer had prior notice of the seller's withdrawal liability.

The purchaser continued to operate a nursing home at the site, so there was continuity of business operations. However, according to the court, the evidence did not support a conclusion that the purchaser had either actual or constructive knowledge of the liability. Regarding actual knowledge, the evidence showed that in the asset purchase agreement, the seller warranted that it did not contribute to any pension plans. While the seller's collective bargaining agreement with the Teamsters was disclosed, that fact alone does not support a finding of actual notice.

Constructive notice. Turning to constructive notice, the district court acknowledged the Ninth Circuit's recent decision in Heavenly Hana LLC v. Hotel Union & Hotel Indus. Of Hawaii Pension Plan, 891 F. 3d 839 (9th Cir. 2018), in which the appellate court held that a corporate hotel owner incurred withdrawal liability for the predecessor's unpaid multiemployer plan contributions because the new owner had constructive notice of the withdrawal liability. The Ninth Circuit's ruling, the lower court reasoned, “clearly and intentionally incentivizes purchasers to identify any potential withdrawal liability and ensure that it is accounted for during an asset purchase.”

That being said, the court continued, a constructive knowledge standard is not the same as strict liability. A purchaser will be liable only if the use of “reasonable care or diligence” would have discovered the liability and imposition of liability “would be fair given the circumstances.”

In Heavenly Hana, the purchaser operated other hotels that participated in multiemployer pension plans and in previous deals had instructed its due diligence team to investigate withdrawal liability. In contrast, the seller in this case had no previous experience of or familiarity with multiemployer pension plans or the concept of withdrawal liability. It only knew that the seller was a party to a collective bargaining agreement. In these circumstances, the court concluded, imposition of liability would be “unfair even when balanced against the protective purposes of” ERISA.

SOURCE: Northwest Administrator's Inc. v. Santa Clarita Convalescent Corporation (DC WA).

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