7th Circuit Holds Successor Liable for FLSA Claims, Despite Buyer’s Disclaimer

Facts

Plaintiffs filed collective actions for overtime pay under the FLSA. The original defendant was JT Packard & Associates (“Packard”). Packard guaranteed a loan by its parent company. When the parent company defaulted, Packard’s assets were placed in a receivership and auctioned off, with the proceeds going to the bank. Thomas & Betts Corporation bought Packard’s assets and placed them in a wholly owned subsidiary, Thomas & Betts Power Solutions, LLC (“Thomas & Betts”). Over Thomas & Betts’ objection, plaintiffs were allowed to substitute Thomas & Betts for the original defendants. Eventually, a judgment of $500,000 was entered against Thomas & Betts in this matter for FLSA violations that occurred when Packard owned the assets.

When Thomas & Betts purchased the assets of Packard, it knew of the pending FLSA lawsuit. One condition specified in the transfer of assets to Thomas & Betts was that the transfer be “free and clear of all Liabilities” and that Thomas & Betts would not assume any liabilities Packard might incur in the FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard much as the previous owner had done and indeed offered employment to most of Packard’s employees.

Application of Federal Common Law Standard of Successor Liability

When a company is sold in an asset sale as opposed to a stock sale, the buyer acquires the company’s assets but not necessarily its liabilities. Most states limit successor liability, in an asset sale, to sales in which a buyer (the successor) expressly or implicitly assumes the liability. In Teed, Wisconsin state law applied to underlying claims based on state law, and Wisconsin follows this general rule. Thus, if Wisconsin state law governed the issue of successor liability, Thomas & Betts could not be held liable.

Judge Posner acknowledged that under state law generally applicable to the sale of assets by the receiver, the purchaser would not be liable for the debts of the seller of the assets, but he held that state law did not apply. Instead, the court applied a federal common law standard of successor liability that is more favorable to plaintiffs than the state law standard. Generally, this federal common law standard involves a multi-factor test:

1. Did the successor have notice of the pending lawsuit when it purchased the assets (here, yes);
2. Was the predecessor able to provide the relief sought in the lawsuit before the sale (here, no);
3. Could the predecessor provide relief after the sale (here, no);
4. Could the successor provide the relief after the sale (here, yes);
5. Was there continuity between the operations and workforce of the predecessor and successor (here, yes).

In Teed, the court concluded that this more favorable successor liability standard was “appropriate in suits to enforce federal labor or employment laws – even when the successor disclaimed liability when it acquired the assets in question – unless there are good reasons to withhold such liability.” One example the court gives as a good reason is lack of notice of potential liability – a reason clearly absent in Teed because there was a pending FLSA lawsuit.

The court rejected the argument that imposing successor liability in such case impedes the operation of the market by increasing the cost to the buyer of a company that may have violated the FLSA. The answer is that the successor will simply pay less for the assets it’s buying.

It also rejected arguments that to allow relief here would enable plaintiffs whose wage claims are unsecured to obtain a preference over a senior creditor, namely the bank, which had a secured claim. Thomas & Betts would have paid less at the auction had it known it would have to pay for the FLSA claims, and so the bank would have obtained less money. The court deemed that this may be a good reason not to apply successor liability after an insolvent debtor’s default, whether its assets were sold in bankruptcy or outside bankruptcy, but that concern was not applicable here: Thomas & Betts did not discount its bid from Packard because of the FLSA claims. Clearly it believed it was not assuming this liability, given that, consistent with state law, it expressly disclaimed any assumption of liability in the purchase agreement.

After rejecting a host of other arguments, including an argument that allowing successor liability provides a windfall to plaintiffs who could never recover from Packard or its parent due to its debt to the bank, the court held that there was “no good reason to reject successor liability in this case – the default rule in suits to enforce federal labor or employment.” In so holding, the court reiterated that “the successor’s disclaimer of liability is not a good reason in such a case.”

Teed thus upends what most believed was a common characteristic of an asset sale: A buyer could acquire the company’s assets without acquiring its liabilities. Careful drafting may not fix this issue, especially in those situations in which the seller will not be able to pay off the liability.

Download: 7th Circuit Holds Successor Liable for FLSA Claims, Despite Buyer’s Disclaimer