Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On January 27, 2022, in New York State Teamsters Conference Pension and Retirement Fund v. C&S Wholesale Grocers, Inc., the Second Circuit joined the Third, Seventh, and Ninth Circuits in applying the doctrine of successor liability to claims for withdrawal liability under the Employee Retirement Income Security Act (ERISA). The court did not, however, find successor liability in this case because the acquiring company specifically did not acquire the facility or employees that triggered the liability. The court also held that C&S Grocers (C&S) was not liable for withdrawal liability under an “evade and avoid” theory, as an “employer,” or under a theory of “common control.”
C&S’s Acquisition of Penn Traffic
Penn Traffic Company (Penn Traffic), based in Syracuse, New York, operated a number of retail grocery stores as well as warehouses where it stored wholesale groceries for distribution. Penn Traffic contributed to the New York State Teamsters Conference Pension and Retirement Fund (the Fund) on behalf of its employees, who were members of Teamsters Local 317 at Penn Traffic’s Syracuse warehouse.
In 2008, C&S, a grocery wholesaler, acquired a number of Penn Traffic’s locations and employees. C&S specifically did not acquire the Syracuse warehouse or Penn Traffic’s Teamsters Local 317 unionized employees due to concerns over the potential for withdrawal liability owed to the Fund. Instead, C&S and Penn Traffic entered into an independent contractor relationship by which Penn Traffic retained responsibility for all employees, facilities, leases, material handling, transportation equipment, and contracts associated with the Syracuse warehouse.
In 2009, Penn Traffic filed for Chapter 11 bankruptcy. The Syracuse warehouse closed in May 2010, triggering $63.6 million in withdrawal liability owed by Penn Traffic to the Fund. The bankruptcy estate covered only $5 million of this liability, and so the Fund sought to recover the remaining $58 million from C&S under various theories.
Specifically, the Fund alleged that C&S owed withdrawal liability to the Fund as a successor in interest to Penn Traffic, for engaging in a transaction designed to evade or avoid withdrawal liability, as a joint employer of the Teamsters Local 317 employees with Penn Traffic, and because C&S allegedly shared common control over these employees with Penn Traffic. The U.S. District Court for the Northern District of New York dismissed three of the Fund’s theories as a matter of law after a motion to dismiss. But the district court held that a theory of successor liability was available for withdrawal liability under ERISA and allowed that claim to proceed.
The district court ultimately granted summary judgment to C&S on the Fund’s successor liability claim, holding that while the successor liability doctrine applies in the context of ERISA withdrawal liability, the facts in this case could not support a finding that C&S had substantially continued Penn Traffic’s Syracuse warehouse business.
The Second Circuit’s Analysis
On appeal, the Second Circuit reviewed each of the district court’s findings de novo, and in reviewing the “successor liability” claim, construed all facts in favor of the Fund.
The court held that the district court did not err in dismissing the evade or avoid, joint employer, and common control claims. The Second Circuit reasoned that C&S could not “be said to evade or avoid liability merely by declining to assume that liability in the first place. To hold otherwise would be to paradoxically and imprudently encumber with liability the perfectly sensible business decision precisely not to purchase an encumbered asset.” (Emphasis in the original.) On the joint employer argument, the Second Circuit held that C&S’s decision to reimburse Penn Traffic for certain expenses that Penn Traffic incurred as an independent contractor did not make C&S a joint employer. The Second Circuit also found that the Fund did not adequately plead the common control theory.
The appellate court additionally held that the district court was correct in its determination that successor liability is available for withdrawal liability under ERISA but did not apply in this case as C&S did not acquire Penn Traffic’s Syracuse warehouse or the Teamsters Local 317 employees. As a result, C&S could not be found to have substantially continued Penn Traffic’s business at the Syracuse warehouse.
Addressing the successor liability claim, the Second Circuit highlighted that successor liability is an “equitable doctrine” that “must be considered in light of the facts of each case and the particular legal obligation which is at issue” (citations and quotations omitted). The Second Circuit previously found the successor liability doctrine to be appropriate in ERISA cases, applying the doctrine in claims for delinquent contributions to multiemployer pension plans. After examining decisions from other circuits, the court ultimately found that successor liability could be applied to withdrawal liability claims as well.
But, in its January 27 decision, the court emphasized that in determining whether successor liability is appropriate, the facts of the particular case are vitally important. “[J]ust because successor liability can apply to withdrawal liability,” explained the court, “does not mean that any asset purchaser qualifies as a successor under the substantial continuity doctrine.” Here, the court found “one overriding fact” to be “ultimately decisive: C&S did not purchase the Syracuse warehouse or employ the Union members who worked there.” The court explained, “[t]he substantial continuity doctrine is applied most comfortably when a purchaser acquires the assets of a seller—not when a purchaser fails to acquire those assets” (emphases original). Penn Traffic’s continued relationship with C&S after the acquisition as an independent contractor was a key factor in the court’s decision. Under this set of facts, the court determined that the appropriate inquiry was “whether C&S acquired Penn Traffic’s Syracuse warehouse employees and customers.” It had not.
What This Means for Employers
While this decision may provide comfort to businesses that have purchased assets under similarly narrow circumstances, businesses must be wary of transactions involving unfunded pension plans. ERISA’s withdrawal liability rules can result in high exposures, and courts appear to be coming to a consensus across the country to apply the successor liability doctrine, a fact-dependent inquiry, to ERISA withdrawal liability. Whenever a contemplated transaction involves an unfunded multiemployer pension plan, businesses should consult with legal counsel.