Some bargains are not as they seem. An asset-acquiring Company discovered this the hard way in Teed v. Thomas & Betts Power Solutions. In the case, at an auction, Thomas & Betts purchased the assets of a company in receivership. It knew that a judgment of $500,000 had been entered against the former company in a lawsuit under the Fair Labor Standards Act (FLSA). Therefore, it made the purchase contingent upon the express condition that it be “free and clear of all liabilities.” Under (Wisconsin) state law, that, in combination with the common law principle that an asset purchaser generally does not assume liabilities, would have protected Thomas & Betts.
However, as the Seventh Circuit United States Court of Appeals recognized, federal law is different. The Court concluded that under federal labor law “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 the employer aimed at extinguishing the employer’s liability to them.” Therefore, the Court held that the purchaser of assets will be liable as a successor under federal labor and employment statutes “unless there are good reasons to withhold such liability.” Good reasons include lack of notice of the liability, the predecessor’s ability to pay the judgment, and a lack of continuity between the companies’ operations, but each of these factors supported liability in this case. The court also suggested that successor liability may not be appropriate if the predecessor was insolvent and the FLSA plaintiffs were trying to reprioritize the preferences to jump ahead in line or were otherwise trying to manipulate the bankruptcy process in a way that would scare off potential buyers. The Court considered, but rejected, these potential reasons in finding Thomas & Betts liable.
So, all of the practice points flowing from this decision fall under the ancient maxim “let the buyer beware”:
- Do not assume that state common law rules protecting the buyer will apply to federal labor law liabilities
- Attempt to shift such liability to a solvent party as part of the transaction
- Obtain a complete understanding of the exposure amount and discount the offer price accordingly
- Consider negotiating with the debt holder and arriving at an agreement prior to purchasing the assets
- Carefully analyze under the facts whether there are “good reasons” why successor liability should not apply