Teed v. Thomas & Betts Power Solutions, LLC, (7th Cir., No. 12-2440, Mar. 26, 2013)
The purchaser of a going concern (a company in default of its loan and in receivership) specifically disclaimed liability for the $500,000 settlement reached in the Federal Labor Standards Act overtime suit between the purchased company and its prior employees. While the Court of Appeals for the Seventh Circuit agreed that under Wisconsin law, the purchaser would have successfully disclaimed successor liability, the court held that broader federal common law applied to liabilities under laws such as the FLSA, and that, after the application of federal factors, the purchaser of the going concern was liable as successor to the purchased company’s FLSA liabilities (as it would have been had the liabilities been under Title VII).
The employees of Packard brought a collective action under the Federal Labor Standards Act against their employer, alleging overtime violations. Later that same year, Packard’s parent company defaulted on a $60 million loan obligation, which was guaranteed by Packard. As a result, the parent was placed in receivership, and Packard’s assets were sold at auction to Thomas & Betts, with the sales proceeds going to the bank. The asset transfer agreement contained a general condition that the sale was free and clear of all liabilities, as well as a specific condition that Thomas would not assume any liabilities from the FLSA suit.
Prior to its purchase by Thomas, Packard entered into a settlement agreement pursuant to which the employees agreed to accept $500,000 in damages, subject to the results of the appeal. The employees later substituted successor Thomas as the defendant, to which Thomas objected. The district court rejected Thomas’ objection and found it was liable as successor, and Thomas appealed.
Judge Posner, writing for the panel, stated that the question was "whether Thomas & Betts is, as the district court held, liable by virtue of the doctrine of successor liability for whatever damages may be owed the plaintiffs as a result of Packard’s alleged violations." The court noted that, under Wisconsin law, in a typical asset sale (as opposed to a stock sale), the buyer acquires assets only, and does not assume liabilities, except any liabilities expressly or implicitly assumed. "But when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look."
Because the purchase agreement specifically stated that Thomas was not assuming liability for the FLSA settlement, Thomas would not be liable if Wisconsin law controlled. The court found, however, that "successor liability is 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." As an over-arching principle, the court noted that the imposition of a distinct federal standard applicable to federal labor and employment laws "is that these statutes are intended either to foster labor peace … or to protect workers’ rights … and that in either type of case the imposition of successor liability will often be necessary to achieve the statutory goals because the workers will often be unable to head off a corporate sale by their employer aimed at extinguishing the employer’s liability to them. This logic extends to suits to enforce the Fair Labor Standards Act." Absent extending successor liability to FLSA cases, a violator of the statute could escape liability simply by selling its assets and dissolving.
Thomas argued that federal standards should not be extended to the FLSA, but the court could see no basis to exclude the FLSA from federal standards in light of the application of federal standards to so many other federal labor and employment laws. The court therefore concluded that the federal standard applied in this case.
The court then turned to the question of whether the federal standard was properly applied. Among other factors, the court considered whether the fact that Thomas continued operating Packard as a going concern (it did), and whether it was aware of the suit when it acquired the liabilities (it was). Both factors favored successor liability. The court also considered whether plaintiffs would have received any recovery had the company not been acquired by Thomas (they would not), which factor favored no successor liability. On balance, the court determined that successor liability applied to Thomas and its failure to lower the price of its acquisition based on the FLSA liabilities it was purchasing were, essentially, its own fault.
The court acknowledged that the result would reduce the price of assets both in an out of bankruptcy or receivership, but did not find such concerns sufficient to override the federal policy of protecting employee interests. The court held that trustees or receivers were more than capable of determining whether to sell a company piecemeal (in which there would be no successor liability, even for federal claims), or to sell a company as a going concern (in which case there might be successor liability for federal claims). The court brushed away concerns that such considerations would harm creditors in bankruptcy or receivership, since the majority of companies were more valuable as going concerns, even in the face of potential successor liability for federal claims.
Asset purchasers should look beyond state law when purchasing a going concern, and should not rely on express exclusions of successor liability when determining the price at which to purchase a going concern. This is particularly true in the context of receiverships. Asset sales in bankruptcy cases may provide more protection for purchasers pursuant to section 363(f), which has been held by some courts to override even federal labor policies, but purchasers should seek out the advice of experienced bankruptcy counsel to help determine the risks of such a purchase in light of Judge Posner’s decision, which does not acknowledge or refer to the protections of section 363(f) in such a scenario.