Successor Liability Applies To Claims Under The Fair Labor Standards Act According To Seventh Circuit Court Of Appeals

Keywords: successor liability, FLSA claims, federal bankruptcy

In a decision that might raise more questions than it answers, a federal appellate court has addressed the imposition of successor liability under the Fair Labor Standards Act (the FLSA).1

In Teed v. Thomas Power Solutions,2 the US Court of Appeals for the Seventh Circuit upheld the imposition of successor liability for FLSA claims on a company that had acquired the assets of an insolvent predecessor at an auction conducted by a state law receiver. In doing so, the court ruled that federal common law (and not state law) governs the issue of successor liability for FLSA claims, but rejected the multifactor test usually applied to such successor liability questions under state law in favor of an apparent rule that presumes such liability absent the showing of sufficient good reasons to the contrary: "We suggest that successor liability is appropriate in suits to enforce federal labor or employment laws ... unless there are good reasons to withhold such liability."3

The court did not find any such sufficient "good reasons" present in Teed. However, it did identify one "good reason" that might be present in almost every distressed situation, including a sale of a bankruptcy debtor's assets under Section 363 of the Bankruptcy Code: that the imposition of such successor liability after an insolvent debtor's default would upend established legal priorities by elevating the unsecured FLSA claims of employees or former employees over the secured claims of any creditor with liens on the sold assets of their former employer. Thus, Teed, even in the Seventh Circuit, may well have continued to leave the issue of the imposition of successor liability for FLSA claims open not only in the context of Section 363 sales, but also in the context of state court receiver sales and secured creditor foreclosures, where it can be shown that the imposition of such liability "in such a case might upend the priorities of competing creditors."4

Background

Employees of JT Packard & Associates (Packard) filed a suit against Packard and Packard's parent, S.R. Bray Corp. (Bray) under the FLSA for overtime pay. After the FLSA suit was filed, Bray defaulted on a $60 million secured loan that was guaranteed by Packard. Bray assigned its assets, including its stock in Packard, to an affiliate of the lender bank, which placed the assets in receivership. The assets were then auctioned off to Thomas & Betts Corporation for approximately $22 million and placed in a wholly owned subsidiary, Thomas & Betts Power Solutions, LLC (Thomas & Betts). One...