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Home » Successor Liability » 2 Recent Decisions Apply Common Law Test for Successor Liability to FLSA Claims and Hold Successor Companies Liable

2 Recent Decisions Apply Common Law Test for Successor Liability to FLSA Claims and Hold Successor Companies Liable

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Andrew Frisch

As previously discussed here, the law regarding successor liability in the context of FLSA claims continues to develop. In two recent decisions, the Seventh Circuit and a District Court from within the Sixth Circuit joined the growing majority of courts on the issue and held that the common law test, applicable to other types of employment law claims, also applies to determine whether a successor corporation is liable for the FLSA violations of its predecessor. Although the cases are fact-specific, they provide some insight into what factors courts will examine to decide whether it is equitable to hold a successor company liable.

M.D.Tenn.: DirecTV Has “Successor Liability” Where Sham Foreclosure Sale

Thompson v. Bruister and Associates, Inc.

In the first case, the court held that DirecTV was liable for the FLSA violations of its predecessor, a company exclusively engaged in the business of performing installations for DirecTV pursuant to sub-contracts with DirecTV, due to the circumstances under which DirecTV “purchased” the prior company. Significantly, following its default on its loan agreement with its bank, BAI had no place to turn for funding. As a result, DirecTV agreed to advance BAI funds to cover payroll and other operating expenses, because it was in DirecTV’s interest to keep its installer running. Shortly thereafter, the companies began discussing a deal whereby DirecTV would purchase BAI outright. However, after performing due diligence of the company via an extensive document review, DirecTV decided not to purchase BAI because it was “so far under water,” and had a “whole book of litigation.” Instead, DirecTV began reviewing other alternatives to acquiring the assets of BAI. Ultimately, representatives of BAI, DirecTV, and BAI’s bank met and tentatively arrived at a preliminary three-way agreement. Under the agreement, BAI would pay MB Financial $4 million; DirecTV would purchase the remaining loan obligations from MB Financial for $4.7 million, and, in exchange, MB Financial would assign DirecTV all of its rights as a secured creditor under the loan agreement. By this time, DirectTV had already advanced $5.5 million to BAI for payroll and other expenses. Ultimately the parties executed a formal agreement and DirecTV acquired BAI’s loan obligations. Thereafter, DirecTV scheduled a foreclosure sale for August 11, 2008. The purpose of the sale was to extinguish claims to BAI’s collateral. A $1 million figure was set as the minimum price for the collateral. No HSPs were invited to the sale, and no other parties bid at the sale. DirecTV purchased the collateral and, while no money exchanged hands, one million dollars was credited against the money BAI owed DirecTV. As of the time of the foreclosure sale, BAI was insolvent, and it remaned insolvent.

Following the foreclosure sale, DirecTV, Inc. conducted business out of BAI’s locations. Further, the team working on the BAI transition post-foreclosure included personnel from DirectTV and its subsidiary. Additionally DirecTV took over BAI’s facilities, including its warehouses, corporate offices, call centers, and storage units, and DirectTV operated out of those facilities. BAI provided DirecTV with the names and addresses of all its employees (as provided for under the HSPs), and the companies worked together to ensure a “smooth” and “seamless” transition for employees who were terminated by BAI and subsequently hired by DirecTV. Before the foreclosure sale, DirecTV sent notices of the impending change to all BAI employees (except those at Gadsden), including: (1) a new hire packet with employment application and payroll forms; (2) frequently asked questions about the transition; (3) an offer letter; and (4) retention bonus information. Additionally, DirectTV set up a live hotline to field BAI employees’ questions, and, during the first week of August 2008, sent human resources employees to each of the 15 primary BAI sites to conduct orientation sessions, respond to questions, help individuals complete forms, conduct new hire orientations, and oversee drug and background testing. Similarly, of the former 1,100 or so employees of BAI, 180 Connect hired 1,005 of them, including a number of management and upper level management employees, and more than 80 of the Plaintiffs in this action. BAI’s principle was hired as a consultant by DirectTV and paid $861,516.16 to serve as a consultant to help with the transition for the first year, working out the same office that he had used while serving as President of BAI. Most of BAI’s installers that were hired by DirecTV continued doing substantially the same jobs. DirecTV did not make any broad changes to jobs and functions, job titles, job responsibilities, or the technicians’ supervisors, and BAI’s hourly scale and current pay status and rates for the employees remained in place. DirecTV also honored vacation time and other benefits employees had accrued during their employment with BAI, and used former BAI employees’ hire dates with BAI as their effective hire date with DirecTV for tenure and benefits purposes.

As a result of the foreclosure sale, DirecTV acquired an interest in the collateral listed in Section 6.1 of the Loan and Security Agreement, including all of BAI’s property, such as accounts, inventory, goods (furniture and fixtures), software, securities, chattel paper, and insurance policies and proceeds. DirecTV was provided access to historical information on personal computers and servers used in BAI’s business, and migrated former BAI computers into its network. DirecTV also assumed BAI’s data and voice circuits and internet domains, and continued to use all circuit that were in place and working. After DirecTV formed a new internet domain for DirecTV Homes services, DTVHS.com, the former BAI locations were transferred to that new domain name.

By separate contract effective August 11, 2008, DirecTV assumed the leases for all field service personnel fleet vehicles, and continued to use the same installation equipment, including the tools and equipment stored on the trucks, set-top boxes, satellite dishes, and other equipment, as well as vehicles acquired from BAI following the foreclosure. BAI also assigned DirecTV various service contracts, including a contract with Total Design Solutions for inventory and personnel services, a contract with ONTOP Systems, Inc. for a Summit financial application, and a contract with Prime Alert for security monitoring. BAI also assigned to DirecTV its rights under all insurance policies for which DirecTV was named as an additional insured in accordance with the terms of the Home Service Provider Agreements.

Significantly, following the foreclosure sale, there was no interruption of the installation and repair services to DirecTV customers. As before, work was assigned to the technicians through the Siebel system, which DirecTV used to process customer accounts and assign work. DirecTV was also provided with access to BAI’s historical customer information.

After discussing the history and reasoning for successor liability in employment law cases, the court laid out the factors:

“[T]he appropriateness of successor liability depends on whether the imposition of such liability would be equitable.” Cobb v. Contract Transp., Inc., 452 F.3d 543, 553–54 (6th Cir.2006). “Courts that have considered the successorship question in a labor context have found a multiplicity of factors to be relevant. These include: 1) whether the successor company had notice of the charge, 2) the ability of the predecessor to provide relief, 3) whether there has been a substantial continuity of business operations, 4) whether the new employer uses the same plant, 5) whether he uses the same or substantially the same work force, 6) whether he uses the same or substantially the same supervisory personnel, 7) whether the same jobs exist under substantially the same working conditions, 8) whether he uses the same machinery, equipment and methods of production and 9) whether he produces the same product.”   MacMillan, 503 F.2d at 1094.

Applying these factors, the court concluded, “[c]onsidering those factors, as well as the overall equities, the Court is persuaded by the evidence which has been presented that DirectTV, as a matter of law, is liable as a successor employer to BAI.”

Click Thompson v. Bruister and Associates, Inc. to read the entire Memorandum opinion on the parties’ cross-motions for summary judgment.

7th Cir.: Common Law Successor Liability Test Applicable; Successor Company Liable

Teed v. Thomas & Betts Power Solutions, L.L.C.

Perhaps of more significance, the 7th Circuit, only the second circuit court to take up the issue recently held the common law test for successor liability to FLSA claims as well. In this case, the court summarized the salient facts as follows:

Packard provided, and continues under its new ownership by Thomas & Betts to provide, maintenance and emergency technical services for equipment designed to protect computers and other electrical devices from being damaged by power outages. All of Packard’s stock was acquired in 2006 by Bray, though Packard retained its name and corporate identity and continued operating as a stand-alone entity. The workers’ FLSA suit was filed two years later.

Several months after it was filed, Bray defaulted on a $60 million secured loan that it had obtained from the Canadian Imperial Bank of Commerce and that Packard, Bray’s subsidiary, had guaranteed. To pay as much of the debt to the bank as it could, Bray assigned its assets—including its stock in Packard, which was its principal asset—to an affiliate of the bank. The assets were placed in a receivership under Wisconsin law and auctioned off, with the proceeds going to the bank. Thomas & Betts was the high bidder at the auction, paying approximately $22 million for Packard’s assets. One condition specified in the transfer of the assets to Thomas & Betts pursuant to the auction was that the transfer be “free and clear of all Liabilities” that the buyer had not assumed, and a related but more specific condition was that Thomas & Betts would not assume any of the liabilities that Packard might incur in the FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard much as Bray had done (and under the same name, as we noted), and indeed offered employment to most of Packard’s employees.

Noting that Wisconsin state law, if applicable, would serve to bar successor liability in the case, the court examined the equity of applying successor liability under federal common law instead. Holding the federal common law test applicable, the court reasoned:

The idea behind having a distinct federal standard applicable to federal labor and employment statutes is that these statutes are intended either to foster labor peace, as in the National Labor Relations Act, or to protect workers’ rights, as in Title VII, 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. “The FLSA was passed to protect workers’ standards of living through the regulation of working conditions. 29 U.S.C. § 202. That fundamental purpose is as fully deserving of protection as the labor peace, anti-discrimination, and worker security policies underlying the NLRA, Title VII, 42 U.S.C. § 1981, ERISA, and MPPAA.” Steinbach v. Hubbard, 51 F.3d 843, 845 (9th Cir.1995). In the absence of successor liability, a violator of the Act could escape liability, or at least make relief much more difficult to obtain, by selling its assets without an assumption of liabilities by the buyer (for such an assumption would reduce the purchase price by imposing a cost on the buyer) and then dissolving. And although it can be argued that imposing successor liability in such a case impedes the operation of the market in companies by increasing the cost to the buyer of a company that may have violated the FLSA, it’s not a strong argument. The successor will have been compensated for bearing the liabilities by paying less for the assets it’s buying; it will have paid less *767 because the net value of the assets will have been diminished by the associated liabilities.

There are better arguments against having a federal standard for labor and employment cases, besides the general objections to multifactor tests that we noted earlier: applying a judge-made standard amounts to judicial amendment of the statutes to which it’s applied by adding a remedy that Congress has not authorized; implied remedies (that is, remedies added by judges to the remedies specified in statutes) have become disfavored; and borrowing state common law, especially a common law principle uniform across the states, to fill gaps in federal statutes is an attractive alternative to creating federal common law, an alternative the Supreme Court adopted for example in United States v. Bestfoods, 524 U.S. 51, 62–64, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998), in regard to the liability of a corporation under the Superfund law for a subsidiary’s violations. But Thomas & Betts does not ask us to jettison the federal standard; it just asks us not to “extend” it to the Fair Labor Standards Act. Yet none of the concerns that we’ve just listed regarding the filling of holes in a federal statute with federal rather than state common law looms larger with respect to the Fair Labor Standards Act than with respect to any other federal labor or employment statute. The issue is not extension but exclusion.

Addressing and rejecting the defendants’ suggestion that enforcing successor liability against the purchaser of an insolvent company would discourage the insolvent company from selling itself (or the successor from making such a purchase), the court explained:

there is no good reason to reject successor liability in this case—the default rule in suits to enforce federal labor or employment laws. (For remember that the successor’s disclaimer of liability is not a good reason in such a case.) Packard was a profitable company. It went on the auction block not because it was insolvent but because it was the guarantor of its parent’s bank loan and the parent defaulted. Had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable; Bray could have found a buyer for Packard willing to pay a good price even if the buyer had to assume the company’s FLSA liabilities. Those liabilities were modest, after all. Remember that the parties have agreed to settle the workers’ suit (should we affirm the district court) for only about $500,000, though doubtless there was initial uncertainty as to what the amount of a judgment or settlement would be; in addition, Thomas & Betts incurred attorneys’ fees to defend against the suit. Nevertheless had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable, and we have not been given an adequate reason why its having been sold afterward should change the result.

Click Teed v. Thomas & Betts Power Solutions, L.L.C. to read the court’s entire Decision.

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