Court Opinion

ID: 856221
Source: CourtListenerOpinion
Date Created: 2013-03-26 14:43:44.92386+00
Date Added: 2024-06-11T13:09:53.689775
License: Public Domain

In the

 United States Court of Appeals
                For the Seventh Circuit

Nos. 12-2440, 12-3029

B RIAN T EED et al.,
                                               Plaintiffs-Appellees,
                                 v.

T HOMAS & B ETTS P OWER S OLUTIONS, L.L.C.,

                                             Defendant-Appellant.

             Appeals from the United States District Court
                 for the Western District of Wisconsin.
  Nos. 3:08-cv-00303-bbc, 3:09-cv-00313-bbc—Barbara B. Crabb, Judge.

      A RGUED JANUARY 9, 2013—D ECIDED M ARCH 26, 2013

  Before P OSNER, F LAUM, and W ILLIAMS, Circuit Judges.
  P OSNER, Circuit Judge. Before us are appeals in two
closely related collective actions for overtime pay
under the Fair Labor Standards Act; for simplicity we’ll
pretend that they are just one suit and that there is just
one appeal. The original named defendants were JT
Packard & Associates, the plaintiffs’ employer, and
Packard’s parent, S.R. Bray Corp. We don’t know why
the parent was made a defendant. It was not the plain-
2                                      Nos. 12-2440, 12-3029

tiffs’ employer, and a parent corporation is not liable for
violations of the Fair Labor Standards Act by its subsidiary
unless it exercises significant authority over the subsid-
iary’s employment practices. In re Enterprise Rent-A-Car
Wage & Hour Employment Practices Litigation, 683 F.3d 462,
469 (3d Cir. 2012); cf. Antenor v. D & S Farms, 88 F.3d 925,
935-36 (11th Cir. 1996). The record doesn’t indicate that
Bray exercised such authority over Packard’s employ-
ment practices.
  But this is an aside. What is important is that the
district judge allowed the plaintiffs to substitute
Thomas & Betts Power Solutions, LLC, for the original
defendants, the reason being that its parent, Thomas &
Betts Corporation, had bought Packard’s assets and
placed them in a wholly owned subsidiary, the substi-
tuted defendant. Essentially that company is Packard
renamed, and we’ll continue to refer to it under that
name when we are talking about the company as a com-
pany; when we are talking about it as the substituted
defendant we’ll call it Thomas & Betts.
  By virtue of the substitution, Thomas & Betts is the
entity against which the plaintiffs seek damages for
Packard’s alleged violations of their rights under the
Fair Labor Standards Act when Packard was owned
by Bray. Thomas & Betts objected to being substituted,
and its objection, rejected by the district court, is the sole
basis of the appeal, which is from a final judgment
for some $500,000 in damages, attorneys’ fees, and costs,
pursuant to a settlement agreement that is conditional
however on the outcome of this appeal. We must decide
Nos. 12-2440, 12-3029                                        3

whether Thomas & Betts is, as the district court held,
liable by virtue of the doctrine of successor liability for
whatever damages may be owed the plaintiffs as a
result of Packard’s alleged violations.
  When a company is sold in an asset sale as opposed to
a stock sale, the buyer acquires the company’s assets but
not necessarily its liabilities; whether or not it acquires
them is the issue of successor liability. Most states limit
such liability, with exceptions irrelevant to this case,
to sales in which a buyer (the successor) expressly or
implicitly assumes the seller’s liabilities. Wisconsin,
the state whose law would apply if the underlying
claim were based on state law, is such a state. Columbia
Propane, L.P. v. Wisconsin Gas Co., 661 N.W.2d 776, 784
(Wis. 2003). But when liability is based on a violation
of a federal statute relating to labor relations or em-
ployment, a federal common law standard of suc-
cessor liability is applied that is more favorable to
plaintiffs than most state-law standards to which the
court might otherwise look. See, e.g., John Wiley & Sons,
Inc. v. Livingston, 376 U.S. 543, 548-49 (1964) (Labor Man-
agement Relations Act); Golden State Bottling Co. v. NLRB,
414 U.S. 168, 184-85 (1973) (National Labor Relations
Act); Wheeler v. Snyder Buick, Inc., 794 F.2d 1228, 1236 (7th
Cir. 1986) (Title VII); Upholsterers’ Int’l Union Pension
Fund v. Artistic Furniture, 920 F.2d 1323, 1327 (7th Cir. 1990)
(ERISA); EEOC v. G-K-G, Inc., 39 F.3d 740, 747-48 (7th
Cir. 1994) (Age Discrimination in Employment Act);
Sullivan v. Dollar Tree Stores, Inc., 623 F.3d 770, 781 (9th
Cir. 2010) (Family and Medical Leave Act); cf. Musikiwamba
v. ESSI, Inc., 760 F.2d 740, 746 (7th Cir. 1985) (42 U.S.C.
4                                      Nos. 12-2440, 12-3029

§ 1981—racial discrimination in contracting). In par-
ticular, a disclaimer of successor liability is not a defense.
   We must consider whether the federal standard
applies when liability is based on the Fair Labor
Standards Act, and if so whether, properly applied,
the standard authorized the imposition of successor
liability in this case.
  Packard provided, and continues under its new owner-
ship 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 as-
sets—including its stock in Packard, which was its princi-
pal asset—to an affiliate of the bank. The assets were
placed in a receivership under Wisconsin law and auc-
tioned off, with the proceeds going to the bank. Thomas
& Betts was the high bidder at the auction, paying ap-
proximately $22 million for Packard’s assets. One condi-
tion 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
Nos. 12-2440, 12-3029                                   5

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 litiga-
tion. 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 employ-
ment to most of Packard’s employees.
   If Wisconsin state law governed the issue of successor
liability, Thomas & Betts would be off the hook because
of the conditions. But as we said, they do not control,
or even figure, when the federal standard applies. As
usually articulated, that standard requires consideration
of the following factors instead (see Wheeler v. Snyder
Buick, Inc., supra, 794 F.2d at 1236; Musikiwamba v. ESSI,
Inc., supra, 760 F.2d at 750-51):
  (1) Whether the successor had notice of the pending
lawsuit, which Thomas & Betts unquestionably had
when it bought Packard at the receiver’s auction; this is
a factor favoring successor liability.
   (2) Whether the predecessor (Packard or Bray—remem-
ber that both were defendants originally) would have
been able to provide the relief sought in the lawsuit
before the sale. The answer is no, because of Packard’s
and Bray’s insolvency caused by Bray’s defaulting on
the bank loan. The answer counts against successor
liability by making such liability seem a windfall to
plaintiffs. But this depends on how long before the sale
one looks.
   (3) Whether the predecessor could have provided re-
lief after the sale (again no—Packard had been sold, with
the proceeds of the sale going to the bank, along with
6                                     Nos. 12-2440, 12-3029

Bray’s remaining assets). The predecessor’s inability to
provide relief favors successor liability, as without
it the plaintiffs’ claim is worthless.
  (4) Whether the successor can provide the relief
sought in the suit—Thomas & Betts can—without which
successor liability is a phantom (this is a “goes without
saying” condition, not usually mentioned).
  (5) Whether there is continuity between the opera-
tions and work force of the predecessor and the
successor, as there is in this case, which favors succes-
sor liability on the theory that nothing really has changed.
  Judges tend to be partial to multifactor tests, which
they believe discipline judicial decisionmaking, providing
objectivity and predictability. But this depends on
whether the factors making up the test are clear, whether
they are valid, whether each is weighted so that the
test can be applied objectively even if the factors don’t
all line up on one side of the issue in every case (they
don’t in this case, for example), and whether the
factors are exhaustive or illustrative—if the latter, the
test is open-ended, hence indefinite. The federal
standard does not satisfy all these criteria. But applying
a slight variant of the standard, the district judge con-
cluded that there was successor liability in this case, and
her analysis is thoughtful and persuasive.
   We reach the same conclusion that she did, though by
a slightly different route. We suggest that successor
liability is appropriate in suits to enforce federal
labor or employment laws—even when the successor
disclaimed liability when it acquired the assets
Nos. 12-2440, 12-3029                                  7

in question—unless there are good reasons to
withhold such liability. Lack of notice of potential lia-
bility—the first criterion in the federal standard as
usually articulated—is an example of such a reason. We’ll
examine other possible reasons applicable to this case
shortly; but first we need to decide whether a federal
standard should ever apply when the source of liability
is the Fair Labor Standards Act.
   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. Hub-
bard, 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
8                                     Nos. 12-2440, 12-3029

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 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 Su-
preme Court adopted for example in United States v.
Bestfoods, 524 U.S. 51, 62-64 (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
Nos. 12-2440, 12-3029                                     9

labor or employment statute. The issue is not extension
but exclusion.
  Thomas & Betts argues that the Act imposes liability
only on “employers,” 29 U.S.C. §§ 203(d), 216(b), and
Thomas & Betts was not the employer of the suing
workers when the Act was violated. But that is equally
true when successor liability is imposed in a Title VII
case, as the case law requires. It argues that Wisconsin
has an interest in this case because it too has minimum
wage and overtime laws. But states also have their
own laws, paralleling Title VII, forbidding employment
discrimination. It points out that most FLSA suits are
brought by individuals for the recovery of individual
damages rather than by the government (though in fact
the Department of Labor brings many), but likewise
most Title VII suits are private rather than public. It
argues that violations of the FLSA are “victimless,” because
no one is compelled to work for a company that violates
that Act. Neither is anyone forced to work for a
company that discriminates on grounds forbidden by
Title VII, such as race and sex. Yet there are victims of
the violations in both FLSA and Title VII cases—workers
who would be paid higher wages if their employer com-
plied with the FLSA and workers who would have
better jobs and working conditions if their employer
complied with Title VII. Moreover, there is an interest
in legal predictability that is served by applying the
same standard of successor liability either to all federal
statutes that protect employees or to none—and “none”
is not an attractive option at our level of the judiciary,
given all the cases we cited earlier.
10                                    Nos. 12-2440, 12-3029

   And so the federal standard applies to this case. But
was it properly applied? The argument that it was not
focuses on Packard’s financial situation before it was
sold to Thomas & Betts. Remember that Bray owed
the bank $60 million and couldn’t pay; that its only valu-
able asset was Packard; and that Packard was worth
little more than a third of what Bray owed the bank. So
only the happenstance of Packard’s acquisition by
Thomas & Betts could enable the plaintiffs to obtain relief.
   But it might seem that to allow that relief would
enable the plaintiffs, whose wage claims are unsecured,
to obtain a preference over a senior creditor, namely
the bank, which had a secured claim. Thomas & Betts
would have bid less at the auction had it known it
would have to pay the workers’ FLSA claims, and so
the bank would have obtained less money from the sale. It
is true that as soon as Bray defaulted, the bank could have
foreclosed on Packard’s assets because they were the
security for the bank’s loan; the workers’ claim to those
assets was unsecured and therefore subordinate to the
banks’ claim. But the bank would no more want to
own Packard, a nonfinancial company, than to own
the houses of defaulting mortgagors whose mortgages
it forecloses. It would want to sell Packard; and if it sold
it as a going concern, a buyer subject to successor liability
would not pay as much as it would if it didn’t bear that
liability. As a result the bank’s secured claim would in
effect become junior to the workers’ unsecured claim
by the amount by which that claim depressed the price
that the successor would pay for Packard.
Nos. 12-2440, 12-3029                                    11

  That is a good reason not to apply successor liability
after an insolvent debtor’s default, whether its assets
were sold in bankruptcy or outside (by a receiver, for
example, as in this case): to apply the doctrine in such
a case might upend the priorities of competing creditors.
See In re Trans World Airlines, 322 F.3d 283, 290, 292-93
(3d Cir. 2003); Douglas G. Baird, The Elements of Bankruptcy
227-28 (5th ed. 2010). It’s an example of a good rea-
son not mentioned in conventional formulations of
the federal standard for not imposing successor liability.
But it doesn’t figure in this appeal. Thomas & Betts has
not urged it. It says that it didn’t discount its bid for
Packard because of the workers’ claims; this both
suggests that it didn’t anticipate successor liability and
may explain why the bank has not complained about
the imposition of that liability.
   Thomas & Betts argues that to allow the plaintiffs to
obtain relief gives them a “windfall.” They had no right
to expect that Packard would be sold, at least as a going
concern; and had it not been sold, but instead continued
under Bray’s ownership, or broken up and its assets sold
piecemeal, the bank loan would have precluded their
obtaining any relief. Had Packard remained an operating
subsidiary of Bray, its net income (about $5 million a
year) would have belonged to the bank, while if its
assets had been sold piecemeal there is no successor
liability, because of the lack of continuity between prede-
cessor and successor; for when a company is broken
up and its assets sold piecemeal, there is no successor
to transfer the company’s liability to. But to allow
Thomas & Betts to acquire assets without their
associated liabilities, thus stiffing workers who have
12                                    Nos. 12-2440, 12-3029

valid claims under the Fair Labor Standards Act, is
equally a “windfall.”
   Thomas & Betts argues finally, with support in
Musikiwamba v. ESSI, Inc., supra, 760 F.2d at 751, that
allowing the workers to enforce their FLSA claims
against the successor, in a case such as this in which
the predecessor cannot pay them, complicates the re-
organization of a bankrupt. Seeing the handwriting on
the wall and wanting to minimize the impact of the
reorganization on them (in loss of employment or benefits),
the workers might decide to file a flurry of lawsuits,
whether or not well grounded, hoping to substitute a
solvent acquirer for their employer as a defendant in
the suits. The prospect thus created of increased
liability might scare off prospective buyers of the assets.
But there is no suggestion of such a tactic by workers in
this case; if there were, it would be another good
reason for denying successor liability.
   Still another concern is that an insolvent company,
seeking to maximize its value, might decide not to sell
itself as a going concern but instead to sell off its assets
piecemeal, even if the company would be worth more as
a going concern than as a pile of dismembered assets. In
the latter case there would be as we said no successor
liability, and successor liability depresses the going-
concern value of the predecessor, so the insolvent
company might be better off even though it was
destroying value by not selling itself as a going concern.
Once a firm is in Chapter 7 bankruptcy (or in a Chapter 11
bankruptcy in which a trustee is appointed), or receiver-
Nos. 12-2440, 12-3029                                      13

ship, it is “owned” by the trustee (or receiver), whose sole
concern is with maximizing the net value of the
debtor’s estate to creditors (and maybe to other claim-
ants—including shareholders, if the estate is flush
enough to enable all the creditors’ claims to be satisfied
in full). In re Taxman Clothing Co., 49 F.3d 310, 315 (7th
Cir. 1995); In re Central Ice Cream Co., 836 F.2d 1068, 1072
(7th Cir. 1987). With immaterial exceptions, the trustee
in a Chapter 7 bankruptcy (or, we assume, a receiver)
must sell the debtor’s assets for the highest price he can
get. 11 U.S.C. § 704(a)(1); In re Moore, 608 F.3d 253, 263
(5th Cir. 2010); In re Atlanta Packaging Products, Inc., 99
B.R. 124 (Bankr. N.D. Ga. 1988). He may not cut the price
so that some junior creditor can enforce a claim not
against the debtor’s assets but against a third party, the
successor, in this case Thomas & Betts. The trustee
would be required to sell the assets piecemeal if that
would yield more money for the creditors as a whole (to
be allocated among them according to their priorities)
than sale as a going concern would, even if some
creditors would be harmed because successor liability
would have been extinguished, and even if economic
value would have been destroyed.
  But this is a theoretical rather than a practical objection.
Since most firms’ assets are worth much more as a
going concern than dispersed, successor liability will
affect the choice between the two forms of sale in only
a small fraction of cases. Lynn M. LoPucki & Joseph W.
Doherty, “Bankruptcy Fire Sales,” 106 Mich. L. Rev. 1, 5
(2007).
14                                   Nos. 12-2440, 12-3029

   With these chimeras set to one side, there is no good
reason to reject successor liability in this case—the
default rule in suits to enforce federal labor or employ-
ment 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 com-
pany’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 judg-
ment or settlement would be; in addition, Thomas & Betts
incurred attorneys’ fees to defend against the suit. Never-
theless 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.
                                                A FFIRMED.

                          3-26-13