Successor Liability Claims Found Insufficient To Establish Federal Question Jurisdiction | Jackson Lewis P.C.
As a general rule, a buyer of assets does not assume the seller’s obligations, including its ERISA obligations. However, courts have formulated an exception to this general rule through the doctrine of successor liability. Successor liability is an equitable doctrine that requires a court to strike “a proper balance between preventing offenders from escaping liability and facilitating the transfer of business assets for their most valuable use..” EEOC v. Vucitech, 842 F.2d 936, 944-45 (7th ca. 1988).
The doctrine was first applied to labor law obligations and then to labor law claims. Eventually, the scope was extended to ERISA obligations, in the form of employer withdrawal liability and delinquent contributions. Succession liability gives entrepreneurial funds a potential second collection target, namely a successor, provided that certain continuity and cancellation requirements are met. Indeed, as the Seventh Circuit has stated, “a second chance is exactly the point of successor liability.” Chicago Truck Drivers, Helpers and Warehouse Workers Union Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 51 (7e cir. 1995). Many funds have used this to their advantage by aggressively (often successfully) making claims against alleged 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 USA App. LEXIS 20083 (7th Circ. 7 July 2021) (“Prather Plumbing‘), involving father-son plumbing companies. The father’s company was unionized and owed nearly $300,000 to two multi-employer funds. After working for his father’s plumbing company, the son started his own plumbing business using approximately $25,000 worth of equipment purchased from his father’s company. The son’s company also hired some of his father’s former employees and served some of his father’s former customers. Not surprisingly, when the father’s company closed at the time his son’s was founded, the funds sought to collect from the son’s company based on a theory of successor liability.
The court granted an injunction on equitable grounds to the defendant, arguing that a $25,000 takeover that would lead to a $300,000 liability would have been blatantly unfair. The appeals 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 for action under federal law. As a result, it was insufficient to establish federal 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 powers only over those categories of matters and controversies permitted by the Constitution and by Congress.” Congress has implemented this jurisdiction through the Federal Issues Statute: 28 U.S.C. § 1331. This provision confers jurisdiction over federal issues: The “district courts have the original jurisdiction of all civil actions arising out of the Constitution, laws, or treaties of the United States.” .”
In Prather Plumbing, the funds argued that their legal succession liability claim arose by definition under federal law. After all, a claim arising out of common federal law “necessarily poses a federal question.” However, The Seventh Circuit disagreed.
The Court noted that in the absence of circumstances that are not present, “a case arises under federal law when federal law creates the cause of the alleged action.” Prather Plumbing, 2021 US app. LEXIS 20083, at *8-*9 (quoting Gunn v. Minton, 568 VS 251, 257 (2013)). In the absence of such federal cause of action, § 1331 has not been complied with and the court has no jurisdiction.
Applying these principles, the Court ruled that the successor claim was not a federal claim. ID card. at *15-*16 (rely on Peacock v. Thomas, 516 US 349 (1996) (action to break corporate veil and collect corporate officer for ERISA judgment against defunct company was not cause for action under ERISA or any other federal statute)). Accordingly, without any federal legal action for successor liability (under ERISA or otherwise), the claim did not arise under federal law and therefore the court had no jurisdiction over the subject matter.
Prather Plumbing demonstrates the procedural and jurisdictional complexity that arise in lawsuits in which claims for liability are filed. The case also highlights the risks associated with multi-employer funds desperate to connect the dots between unionized employers, their successors and non-union employers, as well as the importance of buyers carefully considering the reach of these funds in mergers and acquisitions.