Guest Article

(From the June 23, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Successor Liability Is Alive and Well in the ERISA Context

Reaffirming the vitality of the "successor liability" theory, the U.S. District Court for the Southern District of Ohio recently held that the purchaser of the business assets of an employer was liable for the unpaid medical claims of the employees. Schilling v. _________, 2008 U.S. Dist. LEXIS 45233 (S.D. Ohio June 9, 2008). The case is a good example of why in corporate transactions ERISA and other benefits need to be identified, quantified and addressed in a heads-up manner.

A Purchase of Assets

Diane Hunter joined the Company ("Company") as an employee in 1993. In 1996, she and her husband purchased 15 percent of the Company for $25,000. Ms. Hunter continued working for the Company through 2003. In 2004, the Company changed its medical plan financing from fully-insured to selfinsured. Premium payments were withheld from the employees' paychecks and deposited into an account which the plan's third-party administrator used to pay claims. When claims exceeded the amount in the account, the Company paid the balance due from its operating funds. In the summer of 2004, the Company ceased paying claims without explanation and, by December 2004, unpaid claims exceeded $340,000.

In the summer of 2004, Ms. Hunter attempted to buy out the Company's owner but he refused. In December 2004, she formed a new corporation (the "Successor Company") and executed an agreement to purchase the assets of the Company for $50,000. The deal was consummated and, effective January 1, 2005, the Successor Company began operations as a virtual continuance of the Company.

The plan participants filed an action against the Company, the Successor Company, Ms. Hunter and others to recover payment of their unpaid health claims. The participants claimed that the Successor Company -- and Ms. Hunter as the sole shareholder and President of the Successor Company -- were liable for the unpaid health claims under a theory of successor liability.

Successor Liability Applies to ERISA Cases

The court agreed that successor liability would apply to ERISA debts. Citing case precedent in the 6th and 7th circuits, the court outlined a 3-part test for determining whether a successor is responsible for the ERISA debts of the predecessor:

The court explained that the 1st and 2nd factors are critical:

With regard to the 1st and 2nd factors, Ms. Hunter had testified in deposition that when the Asset Purchase Agreement was executed in December 2004 she knew the Company had over $340,000 in unpaid medical claims, and knew that the Company did not have the ability to pay those claims. She testified that she also knew that the owner of the Company had unsuccessfully applied for a loan to cover the unpaid medical claims.

With regard to the 3rd factor, the court found that there was sufficient continuity in the business operations from the Company to the Successor Company to establish that the Successor Company was a successor entity. It examined factors such as:

The court concluded that no genuine issue of material fact existed based upon Ms. Hunter's own testimony.

The court entered Summary Judgment on the claim of successor liability against both the Successor Company and Ms. Hunter.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.