Buyer Beware: Federal Common Law of Successor Liability May Create Unexpected Liability Dechert srl

Key points to remember:

  • The Third, Sixth, Seventh and Ninth Circuit Courts of Appeal have recognized the doctrine of successor liability in federal common law for claims brought under certain federal labor and employment statutes, including the Fair Labor Standards. Act, Title VII, the Family and Medical Leave Act. , and the Employees Retirement Income Security Act, among others.
  • Successor liability in federal common law is broader than traditional state concepts of successor liability in that it does not require community of ownership between a predecessor and a successor corporation; substantial business continuity may be sufficient to support the responsibility of the successor.
  • Thus, structuring a transaction as a sale of assets rather than a merger or equity investment may not necessarily be sufficient for an acquirer to evade liability for certain federal claims if the key personnel, assets and general business operations remain the same or substantially similar after the transaction is closed.
  • In Central Illinois Pipe Trades Health & Welfare Fund v. Prather Plumbing & Heating, Inc., No. 20-252 (7th Cir. July 7, 2021), the Seventh Circuit continued to recognize the federal common law doctrine of successor liability, but rejected the idea that it could provide an independent basis for federal jurisdiction over the matter.
  • Counsel for the plaintiffs and others can be expected to test the limits of the doctrine in seeking to apply it to other federal causes of action that “flow” from federal law.

The United States Court of Appeals for the Seventh Circuit recently delivered a remarkable decision in East Central Illinois Pipe Trades Health & Welfare Fund v. Prather Plumbing & Heating, Inc. on the application of successor liability in federal courts.1 The responsibility of the successor in federal common law is a exception the general rule in virtually all US jurisdictions that the buying company (i.e. the acquirer) in an asset sale transaction does not not assume the liabilities of the selling company (i.e. the acquiree) simply by acquiring ownership of the assets.2 Federal courts of appeal, including the Third, Sixth, Seventh and Ninth Circuits, have provided an exception to this general rule and have recognized that “where liability is based on a violation of a federal labor relations law or employment, a common federal law The law standard of successor liability applied is more favorable to plaintiffs than most state law standards that the court might otherwise consider.3 According to this approach, successor liability can be found even in the context of an actual sale of assets. if (1) the successor has been notified of the claim, (2) there is “substantial continuity in the operation of the business before and after the sale” and (3) the predecessor cannot provide the relief requested.4 Federal courts of appeal have applied this framework to federal labor and employment claims arising from the Fair Labor Standards Act (FLSA),5 Title VII,6 the law on family and medical leave (FLMA),7 and the Employees Retirement Income Security Act (ERISA),8 among others.

As a relevant example, the district court of Prather plumbing held that the availability of successor liability at federal common law was a “close call” for plaintiffs who had obtained a default judgment on the ERISA claims against a target asset-selling company that had ended up with little ‘assets as a result of a sale transaction and brought a separate action against the purchaser of those assets.9 Although the owners of the companies involved in the asset sale transaction were father and son and the son was made aware of the possible liabilities of his father’s company, the district court saw “a grave injustice in imposing a judgment of nearly US $ 300,000 due solely to the purchase of only US $ 25,024 of impaired physical assets ”and ultimately refused to impose successor liability.ten Other courts, however, have balanced the actions the other way around and have imposed successor liability on the buyers of the assets. Indeed, the Seventh Circuit recently underlined that “when the successor company knows the responsibility of its predecessor, knows the precise extent of this responsibility and knows that the predecessor itself would not be able to pay a judgment obtained against it , the presumption should be in favor of the responsibility of the successor.11

In its appeal decision in Prather plumbing, the seventh circuit panel did not reach the equity to impose the responsibility of the successor. Instead, the court considered whether the plaintiffs’ single claim alleging the federal common law doctrine of successor liability constituted an allegation “under” federal law for the purposes of establishing federal jurisdiction over successor liability. question. In a unanimous opinion, the Seventh Circuit concluded that it lacked jurisdiction in the matter, citing the earlier decision of the United States Supreme Court in Peacock c. Thomas, 516 US 349 (1996), where this Court found that an argument for piercing the corporate veil did not provide “federal question” jurisdiction in the absence of an underlying federal cause of action. , such as that arising from federal labor or employment laws.12 Likewise, the Seventh Circuit found that the applicants in Prather plumbing did not allege a breach of ERISA against the asset acquirer, but simply invoked successor liability as a “means of imposing liability on the basis of a cause of action underlying ‘they had previously won against the predecessor company.13 Although the responsibility of the successor “implied federal law[,] . . . it does not necessarily follow that federal law also created a cause of action enforce this doctrine in federal court.14 As such, notwithstanding the fact that the plaintiffs cited ERISA in their declaration of jurisdiction, nothing in this law actually provided for legal action based on successor liability.15 Thus, the Seventh Circuit overturned the district court’s judgment and returned with instructions to dismiss the action for lack of federal jurisdiction.

Although the decision of the Seventh Circuit in Prather plumbing may reduce the potential for successor liability in federal common law by excluding it as a source of federal questioning jurisdiction to bring an action in federal court, this form of liability is indeed present in at least four of the courts of law. federal circuits, including appellate courts that cover major jurisdictions such as Cincinnati, Chicago, Detroit, Los Angeles, Philadelphia, and San Francisco. When conducting due diligence on an acquisition, companies and M&A participants should take note of the potential liability of the successor under federal labor or employment laws, even when a transaction is structured as a sale of assets, if substantial business continuity is an expected result. It is also to be expected that the plaintiffs et al. Will attempt to extend the doctrine of successor liability in federal common law to other federal causes of action which “arise” from federal law. This all serves as a further reminder of the importance of not only performing in-depth due diligence when completing an asset acquisition, but also the importance of seeking adequate representation and collateral coverage (including on matters implied by federal law), as well as remedies for breach.

Footnotes

1) E. Hundred. Illinois Pipe Trades Health & Welfare Fund v. Prather Plumbing & Heating, Inc., n ° 20-252, 3 F.4th 954 (7th Cir. 2021).

2) William M. Fletcher et al., Fletcher Cyclopedia of Law of Private Corporations § 7122 (rev. Vol. 2008).

3) Teed v. Thomas & Betts Power Sols., LLC, 711 F.3d 763, 764 (7th Cir. 2013); see also Einhorn v. ML Ruberton Const. Co., 632 F.3d 89, 94 (3d Cir. 2011); Guarantee of pension benefits. Corp. vs. Findlay Indus., Inc., et al., 902 F.3d 597, 609-11 (6th Cir. 2018); Sullivan v Dollar Tree Stores, Inc., 623 F.3d 770, 780-81 (9th Cir. 2010).

4) EEOC c. GKG, Inc., 39 F.3d 740, 747-48 (7th Cir. 1994); see also Teed, 711 F.3d at 765-66.

5) See Ted, 711 F.3d at 765-66.

6) See Wheeler v. Snyder Buick, Inc., 794 F.2d 1228, 1236 (7th Cir. 1986).

7) See Sullivan, 623 F.3d at 786-87.

8) See Einhorn, 632 F.3d at 96-100; Pension Fund of the International Union of Upholsterers c. Artistic furniture, 920 F.2d 1323, 1327-28 (7th Cir. 1990).

9) E. One hundred. Illinois Pipe Trades Health & Welfare Fund & Plumbers v. Prather Plumbing & Heating, Inc., n ° 1: 18-CV-01434, 2020 WL 4060766, at * 8 (CD Ill. July 17, 2020).

ten) Identifier. to 10.

11) Ind. Elect. Workers’ Pension Fund v ManWeb Servs., Inc., 884 F.3d 770, 783 (7th Cir. 2018) (emphasis added) (citing Worth vs. Tyer, 276 F.3d 249, 260 (7th Cir. 2001)).

12) Prather plumbing, 3 F.4th at 959-60 (citing Peacock c. Thomas, 516 US 349 (1996)).

13) Username. to 960.

14) Username. (emphasis added).

15) Username. to 961.


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