A July 7 ruling from the U.S. Court of Appeals for the Seventh Circuit has potentially created a large loophole in multiemployer welfare and pension plans‘ ability to collect delinquent contributions from successor organizations or to impose withdrawal liability on successors.

Although the case, East Central Illinois Pipe Trades Health and Welfare Fund v. Prather Plumbing & Heating Inc.,[1] involved delinquent contributions rather than withdrawal liability, the court dismissed a claim involving delinquent contributions to multiemployer funds brought against an alleged successor entity based on a claimed absence of subject matter jurisdiction.

On first blush, the ruling seems to be contrary to one of the main purposes behind Congress’ enactment of the Employee Retirement Income Security Act, which was, according to the U.S. Supreme Court’s 1986 decision in Connolly v. Pension Benefit Guaranty Corp., to ensure that employees and their beneficiaries would not be deprived of anticipated retirement benefits by the termination of pension plans before sufficient funds have been accumulated in the plans.[2]

In certain industries, “multiple employers pool contributions into a single fund that pays benefits to covered retirees who spent a certain amount of time working for one or more of the contributing employers,”[3] as expressed by the U.S. Court of Appeals for the Second Circuit in its 2012 Trustees of the Local 138 Pension Trust Fund v. F.W. Honerkamp Co. decision.

According to the Supreme Court’s 1993 ruling in Concrete Pipe & Products of California Inc. v. Construction Laborers Pension Trust for Southern California, an advantage of such an arrangement is that an employee participating in such a plan need not work for one employer for any particular continuous period. Because service credit is portable, employees of an employer participating in the plan may receive such credit for any work done for any participating employer. An employee obtains a vested right to secure benefits upon retirement after accruing a certain length of service for participating employers.[4]

In order to protect the solvency of such plans, federal law obligates employers who participate in multiemployer plans to make required contributions.[5]

And to address plans’ solvency when companies go out of business or are sold, Congress passed the Multiemployer Pension Plan Amendments Act.[6]

As the Supreme Court explained in 1984 in Pension Benefit Guaranty Corp. v. RA Gray & Co., that law amended ERISA to adequately protect plans from the adverse consequences that resulted when individual employers terminate their participation in, or withdraw from, multiemployer plans.[7]

The law does so by imposing so-called withdrawal liability on employers that have ceased making contributions to a pension plan or whose contributions have declined by at least 70%, which, according to the Supreme Court’s RA Gray Opinion, requires the withdrawing employer to pay the fund the employer’s proportionate share of the plan’s “unfunded vested benefits,” calculated as the difference between the present value of vested benefits and the current value of the plan’s assets.[8]

Being able to collect delinquent contributions and to assess withdrawal liability is necessary in order for multiemployer plans to protect the actuarial soundness of plans, and a tool that such plans have developed over the years is their ability to assess successor liability against businesses that have morphed into new operations that no longer contribute to the pension funds.

The concept was derived from labor law and the ruling in Golden State Bottling Co. v. National Labor Relations Board,[9] which established that a successor who acquires assets of a predecessor and continues the predecessor’s business “without interruption or substantial change” can be liable for the predecessor’s unfair labor practices.

The successor doctrine was applied to withdrawal liability in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac,[10] where the Seventh Circuit in 1990 found that a pension fund can pursue a successor for withdrawal liability under the following circumstances:

[T]o hold a successor liable we must find that there exist sufficient indicia of continuity between the two companies and that the successor film had notice of its predecessor’s liability. Continuity of operations is easily established here. Artistic employed substantially all of Pontiac’s workforce and it appears, supervisory personnel as well. It used Pontiac’s plant, machinery, and equipment and manufactured the same products. Work orders not completed by Pontiac prior to its termination were completed by Artistic. Artistic also agreed to honor warranty claims for goods sold by Pontiac. Finally, both Pontiac’s Vice President of Finance, Larry Bork, and Vice President of Manufacturing, Richard Mahon, stayed on in the same positions under Artistic’s management. These facts establish adequate continuity of operations for the purpose of imposing successor liability.

A subsequent ruling on successor liability was issued in 2011 by the U.S. Court of Appeals for the Third Circuit in Einhorn v. ML Ruberton Construction Co.,[11] which acknowledged a general rule in corporation law that bona fide sales of the assets of a corporation insulated both the seller and buyer against liability in relation to debts incurred by the predecessor.

However, Einhorn found there was a “federal common law successorship doctrine imposing liability upon successors beyond the confines of the common law rule when necessary to protect important employment-related policies.”[12]

Deviation from the common law rule was necessary, according to Einhorn, based on ERISA’s purpose and the need to maintain funding when employers withdraw from funds, to assure that the employees who need to rely on such funds are protected.

According to Einhorn, two key factors are necessary: first, that the buyer has notice of the liability prior to the sale, and second, that there is “sufficient evidence of continuity of operations between buyer and seller.”[13]

Einhorn also added three additional factors:

continuity of the workforce, management, equipment and location; completion of work orders begun by the predecessor; and constancy of customers.[14]

The East Central Illinois Pipe Trades case focused on a central aspect of federal civil procedure — subject matter jurisdiction.

Although the case involved a claim for delinquent contributions to benefit funds governed by ERISA, and the stated basis for subject matter jurisdiction was federal common law, the Seventh Circuit determined that “that alone does not suffice to show a claim ‘arising under’ federal law for purposes of establishing federal question jurisdiction.”[15]

The absence of a specific statute supplying a federal cause of action was fatal to the fund’s claim, and relying solely on Title 28 of the U.S. Code, Section 1331 as the basis of federal question jurisdiction without specifying the federal law under which the claim is brought “does not itself create or supply that cause of action here.”[16]

The Seventh Circuit’s ruling involved a family-owned plumbing business started by Robert Prather in 2004.

While he owned the business, a collective bargaining agreement with the plumbers’ union was in effect, which obligated the business to make contributions to multiemployer pension and welfare funds affiliated with the union.

In 2012, one of Robert Prather’s sons formed a new nonunion plumbing company that bought physical assets from the original company and hired some of Robert Prather’s employees, including his two other sons.

Shortly thereafter, Robert Prather closed his plumbing business.

After Robert Prather’s business was shuttered, the funds sued his business for delinquent contributions to the multiemployer funds and secured a default judgment for nearly $300,000.

When the funds attempted to collect on the judgment, they learned of the new Prather plumbing company and filed a new lawsuit against it to collect on the judgment, alleging a theory of successor liability.

Although the district court rejected a challenge to its jurisdiction, it ultimately granted summary judgment to the new Prather company, finding it would be inequitable to impose successor liability of nearly $300,000 when the assets of the original company were purchased for roughly $25,000.

The appeals court began by reviewing its jurisdiction, observing that federal courts are not courts of general jurisdiction that may “exercise judicial power only over those categories of Cases and Controversies authorized in the Constitution and by Congress.”[17]

According to Article III of the U.S. Constitution, federal courts have subject matter jurisdiction over cases “arising under this Constitution” and “the Laws of the United States,” among other categories.[18]

However, the appeals court explained that federal question jurisdiction is limited to federal law and does not encompass federal common law.

The court added that federal subject matter jurisdiction is based on cases arising under federal law either expressly or implicitly[19] from “judicial inferences regarding Congress’ intent,”[20] or where a stated federal issue is necessarily raised.[21]

The Seventh Circuit determined that none of those grounds were met based on guidance from the Supreme Court’s 1996 decision in Peacock v. Thomas,[22] which involved a lawsuit brought against a corporate officer to collect a judgment against a corporation that was entered in an ERISA suit based on mismanagement of pension benefits.

The corporation could not satisfy the judgment; hence, the plaintiff, Thomas, alleged the corporate officer and shareholder, Peacock, siphoned assets out of the corporation to avoid paying the judgment.

Even though an ERISA claim was at the heart of the initial lawsuit, the Supreme Court found an absence of subject matter jurisdiction because the suit against Peacock was not based on a federal question.

The Seventh Circuit also pointed to a case it had previously decided in 2018, McCleskey v. CWG Plastering LLC,[23] which also involved delinquent contributions owed by Gianino Plastering.

Gianno’s business closed suddenly in 2012, and his son opened a new business on the same day a judgement was entered against Gianno’s business. His son’s business used the same employees, serviced the same customers and completed Gianino’s work in progress.

The funds brought a new lawsuit against the son’s business. They alleged successor liability and that the new entity was the “alter ego” of the initial business and violated both ERISA and the National Labor Relations Act by failing to meet its obligations under the collective bargaining agreement.

The court found it had jurisdiction in McCleskey because the complaint alleged ongoing violations of two federal statutes.

Distinguishing the present case, though, the court determined that while the funds’ complaint “implicates federal law … it does not necessarily follow that federal law has also created a cause of action to enforce this doctrine in federal court.”[24]

Although the funds invoked Section 1331 as the basis for subject matter jurisdiction, the court explained that there must first be a federal statute involved in order to invoke that provision.

The court further made it clear that ERISA does not provide an enforcement mechanism for collecting judgments. Although the funds cited ERISA’s enforcement provision[25] and the provision of ERISA requiring contributions to multiemployer plans,[26] neither provision “authorizes a lawsuit to hold a successor liable for a prior ERISA judgment.”[27]

The court distinguished the availability of the successor doctrine to hold a party liable so long as there is an independent federal claim.[28] Thus, the court concluded:

All told, it does not matter that this dispute involves the application of a federal common law doctrine and indirectly concerns obligations under ERISA. The funds have no vehicle to bring their standalone claim for successor liability into federal court, as the claim does not “arise under” federal law within the meaning of § 1331.[29]

This case should serve as a warning to multiemployer funds that courts will strictly police their jurisdiction and exercise a gatekeeper function to ensure the federal court possesses subject matter jurisdiction.

The jurisdictional issue raised in this case creates a challenge for funds since the same defense may be used in future cases as a means of evading contribution obligations and avoiding withdrawing liability. However, there appears to be a solution.

Rather than seeking to enforce the judgment, the funds in this case would have been better served by bringing a separate action against the younger Prather’s business alleging facts as detailed as those made in the McCleskey case.

The court’s ruling made it clear that a direct action seeking recovery under a theory of successor liability can prevail. However, an ancillary action to collect a judgment is highly problematic and would likely not survive a motion to dismiss.


Mark D. DeBofsky is a shareholder at DeBofsky Sherman Casciari Reynolds PC.

This article was first published in Law360 on July 22, 2021.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] East Central Illinois Pipe Trades Health and Welfare Fund v. Prather Plumbing & Heating, Inc., 2021 U.S. App. LEXIS 20083, 2021 WL 2819035 (7th Cir. July 7, 2021).

[2] Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 214, 106 S. Ct. 1018, 89 . Ed. 2d 166 (1986) (internal quotation marks omitted).

[3] Trs. of Local 138 Pension Tr. Fund v. F.W. Honerkamp Co. Inc., 692 F.3d 127, 129 (2d Cir. 2012).

[4] Concrete Pipe & Prod. of California, Inc. v. Constr. Laborers Pension Tr. for S. California, 508 U.S. 602, 606 (1993).

[5] 29 U.S.C. § 1145.

[6] 29 U.S.C. §§ 1001a; 1381.

[7] Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 722, 104 S. Ct. 2709, 81 L. Ed. 2d 601 (1984).

[8] Id. at 725 (quoting 29 U.S.C. §§ 1381, 1391).

[9] Golden State Bottling Co. v. NLRB, 414 U.S. 168, 94 S. Ct. 414, 38 L. Ed. 2d 388 (1973).

[10] Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1329 (7th Cir. 1990).

[11] Einhorn v. ML. Ruberton Constr. Co., 632 F.3d 89 (3d Cir. 2011).

[12] Einhorn, 632 F.3d at 94.

[13] Einhorn, 632 F.3d at 99.

[14] Id ( citations omitted).

[15] East Central Illinois, 2021 U.S. App. LEXIS 20083 *2.

[16] Id.

[17] Citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994).

[18] U.S. Const. art. III, § 2; also see 28 U.S.C. § 1331 (authorizing “federal question” jurisdiction).

[19] Citing iNw. Airlines, Inc. v. Transp. Workers Union of Am., 451 U.S. 77, 90, 101 S.Ct. 1571, 67 L.Ed.2d 750 (1981); Wright & Miller, Federal Practice and Procedure § 3563.

[20] 2021 U.S. App. LEXIS 20083 *9.

[21] Citing Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005); see also Smith v. Kansas City Title & Tr. Co., 255 U.S. 180, 199, 41 S.Ct. 243, 65 L.Ed. 577 (1921).

[22] Peacock v. Thomas, 516 U.S. 349, 116 S.Ct. 862, 133 L.Ed.2d 817 (1996).

[23] McCleskey v. CWG Plastering, LLC, 897 F.3d 899 (7th Cir. 2018).

[24] 2021 U.S. App. LEXIS 20083 *14.

[25] 29 U.S.C. § 1132.

[26] 29 U.S.C. § 1145.

[27] East Central Illinois, 2021 U.S. App.LEXIS 20083 *15.

[28] See, e.g., Artistic Furniture, supra.

[29] East Central Illinois, 2021 U.S. App.LEXIS 20083 *15.

 

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