Successor Liability Claims Found Insufficient to Establish Federal Question Jurisdiction
As a general rule, an asset purchaser does not assume the seller’s liabilities, including its ERISA obligations. Courts, however, have formulated an exception to this general rule via the doctrine of successor liability. Successor liability is an equitable doctrine requiring a court to “strike a proper balance between on the one hand preventing wrongdoers from escaping liability and on the other hand facilitating the transfer of corporate assets to their most valuable uses.” EEOC v. Vucitech, 842 F.2d 936, 944-45 (7th Cir. 1988).
The doctrine was first applied to labor law obligations, and then to employment law claims. Eventually, its reach was expanded to ERISA obligations, in the form of employer withdrawal liability and contribution delinquencies. Successor liability provides multiemployer funds with a potential second collection target, namely a successor, provided that certain continuity and notice requirements are satisfied. Indeed, as the Seventh Circuit has stated, “a second chance is precisely the point of successor liability.” Chicago Truck Drivers, Helpers and Warehouse Workers Union Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 51 (7th Cir. 1995). Many funds have used this to their advantage by aggressively (often successfully) pursuing claims against putative successors.
However, this federal common law doctrine is not an independent cause of action, as illustrated in E. Cent. Illinois Pipe Trades Health & Welfare Fund v. Prather Plumbing & Heating, Inc., No. 20-2525, 2021 U.S. App. LEXIS 20083 (7th Cir. July 7, 2021) (“Prather Plumbing”), which involved father-son plumbing businesses. The father’s business was unionized, and owed two multiemployer funds almost $300,000, collectively. After working for his father’s plumbing company, the son then started his own plumbing business using approximately $25,000 worth of equipment purchased from his father’s company. The son’s business also hired some of his father’s former employees and serviced some of his father’s former clients. Not surprisingly, when the father’s business closed at the same time as his son’s was being formed, the funds sought to collect from the son’s company on a theory of successor liability.
The district court granted summary judgment for the defendant on equitable grounds, reasoning that a $25,000 acquisition leading to a $300,000 liability would have been patently unfair. The appellate court, however, vacated and remanded, on jurisdictional grounds. The Seventh Circuit found that a claim for successor liability, a federal common law doctrine, was not a cause of action arising under federal law. As a result, it was insufficient to establish federal question jurisdiction within the meaning of 28 U.S.C. § 1331.
The Seventh Circuit reiterated that federal courts are courts of limited jurisdiction; they can “exercise judicial power only over those categories of Cases and Controversies authorized in the Constitution and by Congress.” Congress has implemented this jurisdictional authority via the federal question jurisdiction statute: 28 U.S.C. § 1331. This provision confers jurisdiction over federal questions: the “district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”
In Prather Plumbing, the funds argued that their successor liability claim by definition arose under federal law. After all, a claim arising under federal common law “necessarily presents a federal question.” The Seventh Circuit, however, disagreed.
The Court observed that absent circumstances not present, “a case arises under federal law when federal law creates the cause of action asserted.” Prather Plumbing, 2021 U.S. App. LEXIS 20083, at *8-*9 (quoting Gunn v. Minton, 568 U.S. 251, 257 (2013)). In the absence of such a federal cause of action, § 1331 is not satisfied and the court lacks jurisdiction.
Applying these principles, the Court held that the successor liability claim was not a federal cause of action. Id. at *15-*16 (relying on Peacock v. Thomas, 516 U.S. 349 (1996) (action to pierce corporate veil and collect from corporate officer for ERISA judgment against defunct corporation was not a cause of action under ERISA or any other federal statute)). Accordingly, without any federal statutory right of action for successor liability (under ERISA or otherwise), the claim did not arise under federal law and the Court, therefore, lacked subject matter jurisdiction.
Prather Plumbing demonstrates the procedural and jurisdictional complexities that arise in suits asserting successor liability claims. The case also highlights the risks associated with multiemployer funds desperate to connect the dots between union employers, their successors, and non-union employers, as well as the importance of buyers carefully considering the reach of these funds in M&A transactions.