The notion of successor liability can override a sale of a business free and clear of claims, at least when labor and employment law is involved, according to District Judge Ricardo S. Martinez of Seattle.
A company in the scaffolding business withheld money from employees’ salaries that should have been paid to a union welfare fund but was not. After filing under chapter 11, the company sold the business in a typical “free and clear” sale.
Later, the union sued the buyer in district court. In his opinion on Feb. 1, Judge Martinez held the buyer liable on a successor liability theory.
The judge explained that most states have successorship doctrines allowing creditors to sue the buyer if a sale or merger “leaves real ownership unchanged.” Federal common law is “broader still,” Judge Martinez said.
In labor and employment lawsuits, whether there is substantial continuity between the old and new businesses is the “primary question,” according to Judge Martinez.
The judge said the sale was intended to convert the business from a union shop to a non-union operation. Since the same people owned the business before and after the bankruptcy sale, Judge Martinez found successor liability, also noting that management remained the same.
The opinion does not discuss the effect of a sale free of claims under Section 363(b) except inferentially by citing a Seventh Circuit opinion called Tasemkin, which said that the purpose of successor liability in the labor context is to allow recovery when bankruptcy leaves the creditor empty-handed.