Tag Archive for: dismiss

Tenth Circuit expands possible successor liability for a purchaser especially if their purchase agreement contains a due-diligence clause

Generally, the purchase of a business can be done in two ways: (1) a so-called “equity deal” where the stock in a corporation (or other ownership interest if the business is not a corporation) is acquired or (2) an “asset deal” in which only the assets of a business are acquired. In an equity deal, the business itself never changes, just its owners, so the business remains liable usually for whatever its liabilities were prior to the transaction; in other words, the acquisition doesn’t affect the business, or its liabilities, just its ownership. Partially for that reason, asset deals are often pursued instead. In an asset deal, the goal is to acquire only the assets of the business, so the buyer can start its own new business fresh. Recognizing that might not be fair to creditors (including victims of wrongdoing by the business) if for example the “new” business is anything but fresh and is instead a simple continuation of the old business even in name, the courts have long imposed a test for successor liability.

In a recent decision titled EEOC v. Roark-Whitten Hopitality 2, LP, the Tenth Circuit summarized that test, as follows:

The longstanding common law rule outside of the Title VII context has been that “where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor.” W. Tex. Ref. & Dev. Co. v. Comm’r of Internal Revenue, 68 F.2d 77, 81 (10th Cir. 1933) (citing federal and state cases). There are “four well recognized exceptions” to this general common law rule. Id. Those include: “(1) [w]here the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporations; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.”

When considering whether to impose successor liability, the Tenth Circuit has adopted nine factors, none of which alone should generally be controlling but all of which should be weighed in context of a particular case’s circumstances:

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.

As one sees, the first factor is whether the successor had “notice.” The Tenth Circuit has cautioned this factor is not controlling, alone, either way, and, further, that in deciding whether “notice” existed, courts should not limit the evidence to cases of actual notice.

In Roark-Whitten, according to the Court’s decision, the sales agreement at-issue contained “a due diligence provision that afforded SGI thirty days in which to investigate, in pertinent part, the liabilities of the business.” The plaintiff claimed that, if the purchaser had properly exercised due diligence, it would have learned of the employment law liability exposures at-issue.

Despite a strong dissent to the contrary, a 2-judge majority in this panel decision ruled that the plaintiff had adequately pled sufficient facts against at least one of the purchasers at-issue. The case contained allegations of especially unusual and vivid employment law violations, as well as relatively unusual allegations of fact regarding the diligence process itself, and a rather unique and complicated set of facts involving the transactions that were at-issue. Given the dissent, it is arguable that this 2-judge panel holding is likely to be viewed as limited to the constellation of alleged facts at-issue, especially since the case was decided on a motion to dismiss, meaning the issue was only whether the claims were sufficiently pled to start the lawsuit. In other words, the Tenth Circuit did not hold that as an evidentiary matter, issues of fact were raised, must less did its ruling suggest liability might exist.

Supreme Court reaffirms importance of “but-for” analysis in certain kinds of discrimination claims against private employers

An on-going issue in litigation is frequently the standard of causation and whether a plaintiff’s allegations and evidence are established to meet it. One of the more strict standards is the “but-for” test, meaning a plaintiff must show that the adverse employment action (such as termination or refusal to hire) would not have occurred “but for” their membership in a protected class. One of the least strict standards requires the plaintiff to prove only that their membership in a protected class was “a motivating factor” in the decision.

Two recent Supreme Court decisions reinforced the role of “but-for” analysis in at least certain kinds of cases.

First in  Babb v. Wilkie, the Supreme Court held that governmental employers do not enjoy the protection of “but for” analysis in age discrimination claims, even though private employers have and continue to be able to assert the need for “but for” proof in age discrimination cases.

We are not persuaded by the argument that it is anomalous to hold the Federal Government to a stricter standard than private employers or state and local governments. That is what the statutory language dictates, and if Congress had wanted to impose the same standard on all employers, it could have easily done so. 

Second in Comcast Corp. v. National Association of African American-Owned Mediaa unanimous Supreme Court held that a plaintiff asserting a sec. 1981 claim against a non-governmental defendant must meet the stricter “but-for” test, rather than the less strict “motivating factor” test.

Readers are reminded that the “motivating factor” test is the applicable test in some types of claims. As the Supreme Court explained in Comcast, the issue depends upon the specific statute, its language and its legislative history, as well as the extent of relief sought on the claim asserted.