As the effects of a recent ruling from the US Ninth Circuit Court of Appeals work their way through the industry, owners of construction companies may be in for a surprise when they try to sell or value their business, said John Moellering, a construction law expert at Lewis Rice LLC. Owners may find they can’t get as much money for their companies as they thought.
The ruling that Moellering was talking about came last year in a case called Resilient Floor Covering Pension TrustFund Board of Trustees v. Michael’s Floor Covering, Inc., or Resilient for short.
Under the Multiemployer Pension Plan Amendments Act, if an employer withdraws from a multiemployer pension plan, it is obligated to pay a withdrawal liability. If the owner is considering selling or shutting down the company, he can get an estimate of his withdrawal liability, which is the amount owed to meet the pensions promises made to the employees with vested pensions he is leaving behind.
However, since the 1980s, Moellering said, there has been an exemption to the withdrawal liability for the construction industry. If a construction company that contributed to a multiemployer pension plan left the jurisdiction of that plan for five years, it would not owe any withdrawal liability.
The idea behind the exemption was that if a member of a multiemployer pension fund goes out of business (and from the point of view of a seller that is exactly what the seller is doing), customers would just patronize other contributors to the fund, so the fund itself would not be harmed.
“In Resilient Flooring, the Ninth Circuit said that is not necessarily true,” Moellering said. “This is the first time a court has said a construction industry employer can be responsible even as a successor for withdrawal liability.”
Traditionally, Moellering explained, “when someone buys your business, they are buying the assets; they are not buying the liability. They may even state that in the contract.”
The ninth circuit, he said, decided that if the buyers are aware of the contingent withdrawal liability, they may be responsible for paying it.
As a result of the ruling, “there seems to be multiple definitions of a corporate successor,” he said. The NLRB looks at whether the new company employs the same workers. The Ninth Circuit Court looked at whether the bulk of the customer base of the successor company was part of the customer base of the old company.
“In Resilient Flooring, a former company salesman bought assets of the company, but didn’t keep the employees on. He used independent contractors, but many of the customers of the new company were customers of the old company,” Moellering said.
Because of the underfunding of pension plans, the withdrawal liability is becoming a bigger and bigger potential liability, he said.
“As the Ninth Circuit ruling makes buyers more cautious, they will reduce the purchase prices they are willing to pay or put a part of the purchase price aside in escrow, either way there will be less money going to the seller,” Moellering said.