Every savvy business owner understands the importance of due diligence when engaging in an M&A transaction, but the Third Circuit issued a ruling that serves to underscore the point that due diligence must be accompanied by a thoughtful risk assessment exercise. On January 21st, 2011, the Third Circuit ruled that a buyer who purchases a seller’s assets may be liable for the seller’s late contributions to certain benefit plans. Einhorn v. M.L. Ruberton Construction Co., No. 09-4204 (3d. Cir. 2011). The court reasoned that interest in federal labor law policy is more important than common-law, “successor-liability” doctrines that normally shield buyers from a seller’s liabilities (unless the buyer is merely a re-organization of the seller).

In Einhorn, the purchaser corporation, Ruberton Construction Co., was aware of the late contributions prior to its purchase of the assets of Statewide Hi-Way Safety, Inc. Shortly after the purchase, the administrator of the benefit plan in question sued Statewide for the delinquencies, plus liquidated damages. Statewide and Einhorn entered into a settlement agreement under which Statewide was to pay the late contributions in a series of installments. Statewide later breached that agreement, and Einhorn sued Ruberton. The Third Circuit ruled that Ruberton was liable for the delinquencies, even though Ruberton was not merely a continuation of Statewide. While the finding that Ruberton was liable for Statewide’s failure to contribute to an ERISA plan can be viewed as a narrow exception to the successor-liability doctrine, it may signal a trend toward expanding the responsibilities of buyers for the liabilities of sellers.

Purchasers and M&A counsel should take note that due diligence is more than reviewing a checklist of documents produced by sellers. In Einhorn, Ruberton knew of the liability prior to purchasing Statewide, which suggests that an open and honest due diligence process was employed. However, risk assessment goes hand-in-hand with due diligence checklist review. While a purchaser may be eager to execute a deal, experienced counsel must understand the implications of each piece of information gleaned from the due diligence process and must take time to outline the associated risks for their client prior to closing the deal.