Godchaux v. Conveying Techniques, Inc.

Decision Date06 June 1988
Docket NumberNo. 87-3398,87-3398
Parties, 9 Employee Benefits Ca 2531 Walter GODCHAUX, Jr., Plaintiff-Appellee, v. CONVEYING TECHNIQUES, INC., Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Robert B. Bieck, Jr., Richard J. Tyler, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, La., for defendant-appellant.

Marian Mayer Berkett, Deutsch, Kerrigan & Stiles, New Orleans, La., for plaintiff-appellee.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before GARZA, HIGGINBOTHAM and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Plaintiff Walter Godchaux, Jr., sold his Louisiana manufacturing business, Nadustco, to Conveying Techniques, Inc. ("CTI"), on December 30, 1982. One year later, on December 31, 1983, CTI withdrew Nadustco from Nadustco's union-negotiated, multiemployer pension plan. By a letter dated May 15, 1984, counsel for the pension plan informed CTI that Nadustco had incurred a $225,753 "withdrawal liability." This withdrawal liability, which 29 U.S.C. Sec. 1381 imposes upon employers who withdraw from a multiemployer pension plan, 1 is calculated according to the unfunded liability of the pension plan existing at the time that the employer withdraws. Shortly after it paid Nadustco's withdrawal liability, CTI stopped payments on a promissory note CTI had executed in Godchaux's favor as part of CTI's agreement to acquire Nadustco.

On January 25, 1985, Godchaux brought this diversity suit seeking $141,913.04 for breach of contract. CTI defended by asserting that Godchaux failed to inform CTI of the unfunded pension liability burdening Nadustco's union pension fund. CTI argued that Godchaux's failure to inform CTI of the unfunded vested liability of the pension plan breached two warranties in Godchaux's contract selling Nadustco to CTI. CTI also counterclaimed against Godchaux under the contract's indemnity provision for $171,086.88, the equivalent of Nadustco's withdrawal liability minus the payments CTI still owed Godchaux.

The district court, which disposed of one issue on summary judgment and the others after a bench trial, ruled that Godchaux had not breached either warranty. Consequently, the district court awarded Godchaux judgment on his breach-of-contract claim and denied CTI its indemnity counterclaim. 660 F.Supp. 220. CTI appeals the district court's judgment. We now affirm.

I.

From 1956 until December 30, 1982, Walter Godchaux, Jr., essentially owned and operated Nadustco, which designed, manufactured, sold and installed pneumatic conveying systems and dust collection systems. In March 1982, Godchaux decided to sell Nadustco and hired William Blaney, a business broker, to find a buyer. Blaney, in early June 1982, contacted Roy Lee, Jr., president of CTI. Apparently Lee expressed CTI's interest in buying Nadustco, because Lee soon began negotiating with Godchaux and Godchaux's attorney for the purchase of Nadustco.

From June 1982 to December 1982, the parties negotiated and settled on several terms relevant to this lawsuit. Under one of those terms, the parties appointed Fried, Rappaport & Co., Nadustco's independent auditors, to prepare an audited financial statement (as of December 31, 1981) and a reviewed financial statement (as of June 30, 1982). Neither the audited statement, the reviewed statement, nor any of Nadustco's previous financial statements mentioned Nadustco's union pension plan or Nadustco's potential liability if it withdrew from that plan. Based upon the information contained in these financial statements, the parties reached an agreement under which Godchaux would sell Nadustco to CTI.

Under the terms of the eighteen-page sales agreement, which Lee and Godchaux signed on December 2, 1982, Godchaux and Nadustco's other shareholders agreed to sell Nadustco to CTI for $600,000. CTI contracted to pay $300,000 in cash and $300,000 in a promissory note bearing 12% interest. 2 The sales agreement also contains several express warranties over which the parties carefully bargained. CTI now claims that two of those warranties 3 required Nadustco's financial statements, at Godchaux's peril, to reveal the financial status of Nadustco's union pension plan, which covered unionized workers under the terms of a collective bargaining agreement between Nadustco and Local 11 of the Sheet Metal Workers International Association (the "Union"). The terms of Nadustco's collective bargaining agreements with the Union continued to govern Nadustco's participation in the pension plan after CTI acquired Nadustco. 4

The collective bargaining agreement, however, was a burden which CTI eventually concluded Nadustco could no longer bear. Consequently, Nadustco ceased doing business on December 31, 1983, and CTI moved Nadustco's operations to Texas. Through this maneuver, CTI succeeded in terminating its relationship with the union and in withdrawing Nadustco from the union pension plan.

CTI's business maneuvers, however, had legal effects which CTI apparently had not anticipated. Specifically, since the dissolution of Nadustco amounted to its withdrawal from the union pension plan, that dissolution triggered the provisions of 29 U.S.C. Sec. 1381. 5 Under section 1381(a), an employer that withdraws from a multiemployer pension plan is liable for a portion of the plan's unfunded vested liability existing at the time of withdrawal. In Nadustco's case, that liability was $225,753, which CTI now claims Godchaux owes to it.

According to CTI, Godchaux breached his warranty that Nadustco did not have any liabilities which Nadustco's financial statements had failed to disclose to CTI. CTI argues that Nadustco's withdrawal liability under section 1381(a) existed from the moment the pension plan first developed an unfunded vested liability. Since Nadustco agreed to indemnify CTI for any liabilities of which Nadustco's financial statements had failed to inform CTI, 6 CTI concludes that Godchaux now owes it the $225,753 which CTI paid to cover Nadustco's withdrawal liability. Consequently, CTI stopped payments on its promissory note to Godchaux, and Godchaux sued CTI for breach of contract.

Godchaux argues that he did not violate either of the warranties and that withdrawal liability does not come into existence until the employer actually withdraws from the multiemployer plan. He also argues that Fried, Rappaport & Co. prepared Nadustco's financial statements in complete accordance with generally accepted accounting principles, as Godchaux warranted the accounting firm would.

II.

We turn first to Godchaux's warranty to disclose all Nadustco liabilities that existed on December 31, 1982. Whether Godchaux breached this warranty depends entirely upon when withdrawal liability first existed as to Nadustco. 7 If withdrawal liability exists as soon as a pension plan develops an unfunded vested liability, then Nadustco's withdrawal liability was present before December 31, 1982, and Godchaux has breached his warranty. However, if withdrawal liability does not exist until the employer actually withdraws from the pension plan, then CTI itself triggered Nadustco's withdrawal liability on December 31, 1983, one year after Godchaux sold Nadustco to CTI. To resolve this question, we turn first to the statutory language.

Section 1381(a), which establishes withdrawal liability, reads: "If an employer withdraws from a multiemployer plan in a complete withdrawal or a partial withdrawal, then the employer is liable to the plan in the amount determined under this part to be withdrawal liability" (emphasis added). If we construe this statute according to its most natural reading, then we must conclude that withdrawal liability does not exist until an employer actually withdraws from a multiemployer pension plan. The word "then" suggests that MPPAA's drafters envisioned a timeline of events leading to the creation of a withdrawal liability. First, an employer would join a multiemployer pension plan. Later, that employer would completely or partially withdraw from the plan. Finally, and only after the employer had joined and withdrawn from the plan, would that employer incur withdrawal liability.

CTI argues that we should modify this reading of section 1381(a) in light of the ERISA statutory scheme, of which section 1381(a) is but a part. According to CTI, the minimum funding requirements which ERISA imposes upon multiemployer pension plans 8 actually create withdrawal liability. Section 1381(a) and ERISA's other withdrawal liability provisions, as CTI reads ERISA, do not define withdrawal liability, but only determine when and to whom an employer must pay withdrawal liability.

ERISA calculates an employer's withdrawal liability according to the employer's proportionate share of the unfunded vested liability of the pension plan from which the employer withdraws. CTI asserts that ERISA does not create a "withdrawal liability" separate and distinct from unfunded vested liability. Instead, CTI argues, the withdrawal liability sections of ERISA merely provide a mechanism to enforce the employer's pre-existing statutory liability to help support the multiemployer pension plan's financial status.

We disagree with CTI's analysis. Although it is true that withdrawal liability is calculated according to the pension plan's pre-existing unfunded vested liability, that unfunded vested liability does not completely define or determine withdrawal liability. ERISA does not impose withdrawal liability on every employer that belongs to a pension plan that has an unfunded vested liability. Moreover, ERISA calculates withdrawal liability according to when the employer withdraws from the pension plan.

The timing of an employer's withdrawal from a multiemployer pension plan can affect the size and even the existence of the withdrawal liability. Here, Nadustco withdrew from the plan on December 31, 1983. Because Nadustco...

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