Case Name: EMPLOYMENT SECURITY COMMISSION v. ARROW PLATING COMPANY, INC.
Court: Michigan Court of Appeals
Jurisdiction: Michigan
Decision Date: 1968-03-27
Citations: 10 Mich. App. 323
Docket Number: Docket No. 3,045
Parties: EMPLOYMENT SECURITY COMMISSION v. ARROW PLATING COMPANY, INC.
Judges: Fitzgerald, P. J., concurred with McGregor, J.
Reporter: Michigan appeals reports; cases decided in the Michigan Court of Appeals.
Volume: 10
Pages: 323–332

Head Matter:
EMPLOYMENT SECURITY COMMISSION v. ARROW PLATING COMPANY, INC.
Opinion of the Court.
1. Unemployment Compensation — Successor Employer.
Statutory definition of successor employer as an individual, legal entity, or employing unit which acquired the organization, trade, or business, or 75% or more of the assets of an employer subject to the act, intended that a successor employer need only meet 1 of the listed criteria to be classified as a successor employer, thereby becoming subject to the rate of contribution of its predecessor (CLS 1961, §§421.22, 421.41).
2. Same — Successor Employer — Acquiring Trade or Business.
Employer in the plating business, which bought part of the assets of another employer in the plating business, did not take over the trade or business of the purchased employer where the clientele of the 2 businesses were different, the sale of eer tain assets did not include the sale of customers, and there was evidence that the kind of work performed by the 2 employers would appeal to different markets, so that the purchasing employer did not become a successor employer under the employment security act (CLS 1961, §421.41).
References for Points in Headnotes
[1-6, 8] 48 Am Jur, Soeial Security, Unemployment Insurance and Retirement Eunds §§ 7, 10, 11, 15.
[7] 5 Am Jur 2d, Appeal and Error § 1009; 48 Am Jur, Soeial Security, Unemployment Insurance and Retirement Eunds § 51.
3. Same — Successor Employer — Acquisition of Assets- — Accounts Receivable.
The value of accounts receivable owned by a predecessor employer must be included as an asset of the predecessor employer in determining whether a purchaser of part of the assets has obtained more than 75% of the assets of the predecessor employer, so as to beeome a successor employer under the employment security act (CLS 1961, § 421.41).
4. Same — Successor Employer — Words and Phrases — Organization.
The word “organization”, used in employment security act making one who acquires the organization of an employer a successor employer, means the vital, integral parts which are neeessary for continued operation (CLS 1961, §421.41).
5. Same — Successor Employer — Organization.
Sale of some of the assets of 1 employer, who was partially in the plating business, to a corporation also in the plating business held, not to constitute a sale of the organization under the employment security act, where the entire managerial component of the seller was the sole proprietor of the business, and the business could not have continued as a going business without managerial talent (CLS 1961, § 421.41).
6. Same — Successor Employer — Organization.
Transfer of the “organization” of a business for purposes of the employment security act making the transferee of the organization a successor employer held, not to occur where a vital, integral part of the business is not transferred, regardless of how many people make up that integral part, so that the business could not continue (CLS 1961, § 421.41).
7. Costs — Construction of Statute — Contribution Rate Under Employment Security Act.
No costs are allowed on appeal in proceeding to determine contribution rate, under employment security act, for defendant employer (CLS 1961, §§421.22, 421,41).
Separate Opinion.
Levin, J.
8. Unemployment Compensation. — Successor Employer — Transfer of Business.
No transfer of business occurred within the meaning of the employment security act, so as to malee the transferee a successor employer under the act, where the buyer of the business did not acquire and use the seller’s trade name or good will, did not continue or resume all or part of the seller’s business, used different processes in its business, and never did business with any of seller’s customers (CLS 1961, §§ 431.33, 431.41).
Appeal from Wayne; Wise (John M.), J.
Submitted Division 1 June 7, 1967, at Detroit.
(Docket No. 3,045.)
Decided March 27, 1968.
Employment Security Commission determined that Arrow Plating Company, Inc., a Michigan corporation, was subject as a successor employer to the higher contribution rate paid by Wade Boring-Works. Arrow Plating- Company appealed, and a referee of the Employment Security Commission affirmed the higher contribution rate. Arrow Plating Company appealed to the Employment Security Appeal Board, which reversed the finding of the referee. Employment Security Commission appealed to circuit court, which reversed the Appeal Board. Arrow Plating Company appeals.
Reversed.
Frank J. Kelley, Attorney General, Robert A. Derengoski, Solicitor General, and Richard 1. Rubin, Assistant Attorney General, for Employment Security Commission.
Lawson <& Anderson, for Arrow Plating Company.

Opinion:
McGregor, J.
Basically the facts of this case are not disputed. Before and including Friday, Febru ary 5, 1965, Frank C. Beck was doing business as the Wade Boring Works in Hamtramck, Michigan. On that Friday, Mr. Beck sold much of the assets of Wade Boring to Arrow Plating Company, Inc., for $15,500. The main asset of Wade Boring seems to have been the right of possession of the building leased by Wade Boring. This was true because the city of Hamtramck allowed the flushing of waste chemicals into the public sewer system, a distinct economic advantage in the plating business because of difficulty in disposing of waste chemicals. The building was not owned by Wade Boring, nor did the lease automatically continue, but apparently the right to continue using the building was understood. Arrow Plating also acquired some plating equipment of Wade Boring and employed the five employees of Wade Boring who worked at the same location. Mr. Beck retained equipment valued at $2,000, accounts receivable valued at $8,000, a bank account valued at $1,500, and an unspecified inventory. Also retained by Mr. Beck and not assigned a 'monetary value were the trade name of Wade Boring Works, the phone number, customers, and the right to compete.
Arrow Plating began operations in the Hamtrack building February 8, 1965. Within a year, Arrow's work force had grown from 5 employees to 35 employees, and the gross sales were $209,000, compared to Wade Boring's sales in 1964 of $35,000. Arrow's business was confined to plating operations, while Wade Boring had done both plating and sheet metal fabrication.
This appeal has grown out of the subsequent dispute between Arrow Plating Company and the Michigan employment security commission. Normally, a new organization that is subject to the employment security act, CLS 1961, § 421.1 et seq. (Stat Ann 1960 Rev and 1963 Cum Supp § 17.501 et seq.) is assessed a contribution rate of 2.7% of the annual payroll. This contribution rate is subject to adjustment up or down, based upon the experience of the employer as to layoffs of personnel resulting in payments from the unemployment compensation fund. This sliding scale of employer contribution rates is in line with the purposes of this act, to protect the people of Michigan from the hazards of unemployment by encouraging stable employment. In this case, the employment security commission assessed Arrow Plating Company at the contribution rate of '4.6% based on the high unemployment experience . of Wade Boring Company. The commission thereby treated Arrow Plating as a successor employer of Wade Boring under authority of section 22 of the act, which authorizes a transfer of rating to suc.cessor employers, and section 41(2) of the act, which defines an employer as:
"(2) Any individual, legal entity or employing unit which acquired the organization, trade or business, or 75% or more of the assets thereof, of another which at the time of such acquisition was an employer subject to this act."
Our problem is whether Arrow Plating is properly classed as a successor employer under this act. Arrow maintains it is not a successor employer under the act, while the employment security commission feels otherwise. The commission's referee held Arrow Plating was a successor employer. The Michigan employment security appeal board reversed the referee and held that Arrow was not a successor employer. The commission filed an appeal with the circuit court for Wayne county, which reversed the appeal board and held Arrow was a successor employer, and thus subject to the transfer of the employer experience rating.
The critical wording of section 41(2) is the phrase defining what must be acquired by a successor employer as "the organization, trade or business, or 75% or more of the assets". By using the conjunction "or", the legislature obviously intended that a successor employer need only meet one of these listed criteria to be so classified.
No issue is raised in this case as to whether Arrow Plating took over the trade or business of Wade Boring. It is clear that it did not. The clientele of the two businesses were different. The sale of certain assets did not include the sale of customers. There is also evidence that the type of work performed by the two companies would appeal to different markets. This case is thus factually different from Valley Metal Products Company v. Employment Security Commission (1961), 365 Mich 297, which presented some elements similar to this case, but where the trade or business was transferred.
The Michigan employment security commission advances the theory that Arrow Plating obtained more than 75% of the assets of Wade Boring Works, because the value of the accounts receivable can be disregarded. The commission argues that including the accounts receivable as an asset would be like having a purchaser pay cash for cash. This theory was held untenable by the trial court. We agree. It is admitted by the commission that its theory is not in accord with standard accounting principles. This theory is also not in accord with the legal precedents of Michigan, that intangible assets are properly considered as assets for the purpose of the employment security act. Russ Dawson, Inc. v. Unemployment Compensation Commission (1952), 334 Mich 82. It must he pointed out that the accounting-practices used in this transfer have made the job of this Court more difficult. The highest value in the transfer was assigned to the plating- equipment, although the president of Arrow Plating admitted his company's concern was not primarily in the equipment, which was mostly scrapped within a few months, but in the right to use a building with a favorable location. This asset was not assigned a value in the transfer. Causing further consternation is the fact that several of the intangible assets retained by Prank Beck were not assigned a value. "While these accounting practices make it impossible for this Court accurately to determine the exact value of those assets transferred and those retained, it is possible to determine that those assets transferred were something less than 75% of the total tangible and intangible assets of Wade Boring.
The remaining phrase defining a successor employer was the downfall of defendant Arrow Plating in the trial court. It was held that Arrow acquired the "organization" of Wade Boring because it retained the work force of Wade Boring. Such a holding was erroneous.
The term "organization" has not been expressly defined in Michigan; therefore, confusion concerning the term is not surprising. In order to define "organization" for the purposes of this statute, attention must be paid to the evil this section of the act sought to combat. The successor employer provision seeks to prevent the sliding scale employer contribution rate from being defeated by paper reorganizations which, in fact, change nothing. In this light, "organization" means the vital, integral parts which are necessary for continued operation. In this case, there was not a transfer of the vital, integral parts required for continued operation of the Wade Boring Works. Mr. Frank Beck constituted the entire managerial component of Wade Boring Works, and it could not have continued as a going business without managerial talent. Therefore, the "organization" of Wade Boring Works was not transferred to the appellant Arrow Plating Company. We do not hold in any way that the mere elimination of one person from the organization of a business would automatically prevent the transfer of the organization for the purposes of this act. What we do hold is that if a vital, integral' part of the business is not transferred, regardless of how many people make up that integral part, so that the business could not continue, then there has not been a transfer of the "organization" for the purposes of this act.
The decision of the circuit court is reversed. No' costs, the interpretation of a public statute being involved.
Fitzgerald, P. J., concurred with McGregor, J.
OLS 1961, § 421.22 (Stat Ann 1963 Cum Supp § 17.524).
CLS 1961, § 421.41 (Stat Ann 1963 Cum Supp § 17.543).