Application to Facts obligation at issue. 28 The Ninth Circuit even - - PDF document

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44CanalCenterPlaza,Suite400Alexandria,VA22314(703)739-0800Fax(703)739-1060www.abiworld.org ProskauerinNewYork. RichardJ.Corbi

SLIDE 1 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org

JOURNAL

A M E R I C A N B A N K R U P T C Y I N S T I T U T E

The Essential Resource for Today’s Busy Insolvency Professional

Contributing Editor: Richard฀J.฀Corbi Proskauer;฀New฀York rcorbi@proskauer.com

he Ninth Circuit Court of Appeals in Sullivan v. Dollar Tree Stores Inc.1 affirmed a district court’s granting of summary judgment to Dollar Tree Stores Inc. by holding that Dollar Tree was not the “successor in interest” to former chapter 11 debtor, Factory 2-U Stores Inc., for purposes of Family and Medical Leave Act of 1993 (FMLA) liability.2

Background

Factory 2-U was a retail store that sold discount clothing with more than 200 stores located in the western United States including Pasco, Wash., where the plaintiff, Christina Sullivan, was the full- time store manager.3 In 2004, Factory 2-U filed for chapter 11, and in September 2004, the bankruptcy court approved the sale of Factory 2-U’s leasehold on the Pasco store to Dollar Tree Stores Inc.,4 a retail store that sells various merchandise for under $1. Dollar Tree only purchased the existing leasehold on the Factory 2-U store and no other assets.5 At the end of September 2004, Factory 2-U closed its Pasco store and the Dollar Tree store

pened four weeks later.6 During the

four-week interim period, Dollar Tree built out the Pasco location by remodel- ing the interior to support a Dollar Tree store and set up a team to prepare the inventory, stock the shelves and perform

ther preparatory work.7

In September 2004, Sullivan filled

ut an employment application at the

Dollar Tree, which eventually hired her as an assistant manager for the soon-to- be-opened Dollar Tree store at the former Factory 2-U Pasco location.8 Sullivan’s employment between the closing of the Factory 2-U store and the opening of the Dollar Tree store was continuous because she trained at a pre-existing nearby Dollar Tree store and assisted in the preparatory work.9 Dollar Tree hired only Sullivan and one other person from the Factory 2-U store to work at the Pasco store.10 Sullivan worked at the Dollar Tree store from September 2004 to May

2005. In May 2005, Sullivan’s mother

experienced health problems,11 and Dollar Tree granted Sullivan some unpaid leave to care for her mother, but not the entire amount that Sullivan requested.12 The court’s description of the record on this point was unclear, but Sullivan either quit or was fired in late May or June 2005.13 Sullivan con- tacted the Department of Labor (DOL), which eventually concluded that Dollar Tree violated the FMLA.14 Sullivan was reinstated, received a partial amount, $5,000 of the $20,000 in lost wages that she requested, and began work in April 2006.15 Sullivan eventually quit in December 2006 and filed an action for the full amount of lost wages.16 The district court held that Dollar Tree was not a “successor in interest” under the FMLA and granted summary judgment to Dollar Tree.17

FMLA, Related DOL Regulations

The FMLA entitles an “eligible employee” to take family or medical leave for several reasons, including caring for a close relative.18 “Eligible employee” means an employee who has been employed for at least 12 months by the employer with respect to whom leave is requested.19 The term “employer” “includes…any successor in interest

f an employer.”20

Because Sullivan challenged a deni- al of leave that occurred several months short of her one-year anniversary with Dollar Tree, Sullivan relied on the “successor in interest” provision for relief.21 The FMLA does not define “successor in interest,” but the DOL has issued a regulation that sets forth eight factors to determine whether an employer is cov- ered because it is a successor in interest,22 which include: “(1) substantial continuity of the same business operations; (2) use of the same plant; (3) continuity

f the work force; (4) similarity of jobs

and working conditions; (5) similarity of supervisory personnel; (6) similarity in machinery, equipment and production methods; (7) similarity of products or services; and (8) the ability of the prede- cessor to provide relief.”23

About the Author

Richard฀Corbi฀is฀an฀associate฀in฀the฀ Bankruptcy฀and฀Restructuring฀Group฀of฀ Proskauer฀in฀New฀York.

Does Family Medical Leave Act Liability Attach to Purchasers of Chapter 11 Debtors?

Code to Code

1 623 F.3d 770 (9th Cir. 2010). 2 Sullivan, 623 F.3d at 787. 3 Id. at 775. 4 Id. 5 Id. 6 Id. 7 Id. 8 Id. 9 Id. 10 Id. 11 Id. 12 Id. 13 Id. 14 Id. 15 Id. at 776. 16 Id. 17 Id. 18 Id. at 780 (citing 29 U.S.C. § 2612(a)(1)). 19 Id. (citing 29 U.S.C. § 2612(2)(A)). 20 Id. (quoting 29 U.S.C. § 2611(4)(A)(ii)(II)). 21 Id. at 780. 22 Id. 23 Id. at 780-81 (quoting 29 C.F.R. § 825.107)).

SLIDE 2 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org The Ninth Circuit Court of Appeals also provided an overview of the successor-in-interest doctrine, which arose in traditional labor law disputes between a new employer and the union recognized by the old employer.24 “[T]he general thrust of the inquiry is whether the new business is a ‘essentially the same’ as the

ld business.”25 The inquiry in the suc-

cessor in interest in the labor law context is broader and does not adhere to the strict corporate law “successor” inquiry.26 “Because the origins of successor liability are equitable, fairness is a prime consideration in its application.”27 The Ninth Circuit explained that the inquiry in the successor-in-interest doctrine depends on the nature of the legal

bligation at issue.28 The Ninth Circuit

relied on the Supreme Court’s decision

f Howard Johnson Co. v. Detroit Local

Joint Exec. Bd.,29 which discussed the nature of the legal obligation at issue in successorship cases: [T]he real question in each of these “successorship” cases is,

n the particular facts, what are

the legal obligations of the new employer to the employees of the former owner or their rep- resentative? The answer to this inquiry requires analysis of the interests of the new employer and the employees and of the policies of the labor laws in light

f the facts of each case and the

particular legal obligation which is at issue, whether it be the duty to recognize and bargain with the union, the duty to remedy unfair labor practices, the duty to arbitrate, etc. There is, and can be, no single definition of “successor” which is applicable in every legal context. A new employer, in other words, may be a successor for some purposes and not for others.30 The Ninth Circuit also explained that the decisions of “successorship must balance, inter alia, the national policies underlying the statute at issue and the interests of the affected parties.”31 “The inquiry is fact-specific, fairness is a pri- mary consideration, and courts must balance the interests of the parties with the federal policy underlying the FMLA.”32 The Ninth Circuit, in agreement with the Sixth Circuit Court of Appeals, found that the balancing of the equities is the true test and the DOL’s eight factors assisted the balancing inquiry: [T]he eight factors are “not in themselves the test for successor liability.” Rather they are factors in an overarching, three- part test considering the equities

f imposing a particular legal
bligation on a successor: (1) the

interests of the plaintiff-employee, (2) the interests of the defen- dant-employer and (3) the federal policy goals of the statute.33

Application to Facts

The Ninth Circuit applied the eight- factor test from the DOL regulations and then examined the overreaching balancing of the equities analysis. First, the “substantial continuity of the same business operations” factor strongly support- ed the conclusion that Dollar Tree was not a successor to Factory 2-U because Dollar Tree acquired the lease on the former Factory 2-U Pasco site and nothing else.34 Dollar Tree did not acquire any of Factory 2-U’s merchandise; Dollar Tree sells a variety of merchandise for $1, whereas Factory 2-U sold only clothes, and at different prices.35 Also, there was a break in operations of four weeks between the closing of Factory 2-U and the opening of the Dollar Tree store.36 Second, the “use of the same plant” factor is neutral. Although the word “plant” is tied to old manufacturing cases, the appropriate inquiry is whether the new employer uses the same facilities as the

ld employer.37 This factor is neutral

because Dollar Tree used the same location and building shell as Factory 2-U but Dollar Tree spent four weeks reno- vating the space.38 Third, the “continuity of the work force” factor weighed against finding successorship. Dollar Tree hired a small number of Factory 2-U employees to assist in the four-week transition between the closing of the Pasco Factory 2-U store and the opening of the Dollar Tree store, “which suggests less than a robust continuity of the work force.”39 When the Dollar Tree store

pened for regular business, only two

employees from Factory 2-U worked at the Dollar Tree.40 Fourth, the “similarity of jobs and working conditions” factor slightly sup- ported a finding of successorship.41 The jobs between Dollar Tree and Factory 2-U were of the same kind: “cashiers and shelf-stockers, along with a few managers.”42 The working conditions, the Ninth Circuit noted, were most likely similar in that both the new and

lder employers operated retail business

chains during regular business hours.43 Fifth, the “similarity of supervisory personnel” factor suggested no successorship between the record disclosed and the “overlap of upper management between Factory 2-U and Dollar Tree,” even though Sullivan was an assistant manager at Dollar Tree.44 Sixth, the “similarity in machinery, equipment and production materials” factor suggested a slight successorship because both stores likely used cash reg- isters, hand trucks and other equipment usually associated with retail business chains.45 This factor is only slightly help- ful to Sullivan because the equipment used in both stores is common to most retail businesses.46 Seventh, the “similarity of products or services” factor weighed against successorship because Factory 2-U only sold clothing, at vari-

us prices, whereas Dollar Tree sold

various merchandise for $1.47 Moreover, Dollar Tree did not purchase any of Factory 2-U’s inventory, but instead bought new inventory.48 Eight, the “ability of the predeces- sor to provide relief” factor was inapplicable to FMLA claims.49 The Ninth Circuit agreed with the courts that “held that this factor is inapplicable to FMLA claims arising after the transition from

ld employer to new employer.”50 “A

former employer cannot grant leave to a person no longer employed by it.”51 The Ninth Circuit concluded that although some factors slightly suggested successorship, on balance the factors led strongly to the conclusion that Dollar Tree was not a successor in interest of Factory 2-U.52 Dollar Tree purchased no inventory of Factory 2-U; required 24 Id. at 781 (citations omitted). 25 Id. 26 Id. (citations omitted). 27 Id. at 782 (quoting Criswell฀v.฀Delta฀Air฀Lines฀Inc., 868 F.2d 1093, 1094 (9th Cir. 1989)). 28 Id. at 782. 29 417 U.S. 249, 262 n.9 (1974). 30 Id. at 249, 262. 31 Sullivan, 623 F.3d at 782 (quoting Steinbach฀v.฀Hubbard, 51 F.3d 843, 846 (9th Cir. 1995)) 32 Id. at 783. 33 Id. (quoting Grace฀v.฀USCAR, 521 F.3d 655, 672 (6th Cir. 2008)). 34 Id. at 784. 35 Id. 36 Id. 37 Id. at 785. 38 Id. 39 Id. 40 Id. 41 Id. 42 Id. 43 Id. 44 Id. at 785-86. 45 Id. at 786. 46 Id. 47 Id. 48 Id. 49 Id. 50 Id. (citations omitted). 51 Id. 52 Id. at 787.

SLIDE 3 Factory 2-U employees to apply for jobs at Dollar Tree; brought many of its own employees or newly hired employees; closed the store location for four weeks to complete renovations, train employees and set up the store; changed Sullivan’s job title and duties; assigned a new store manager and bought new inventory, including products never sold by Factory 2-U; and used an entirely different pric- ing structure than Factory 2-U.53

Conclusion

The Sullivan decision suggests that a new company purchasing an entity through a chapter 11 sale will not always be considered a “successor in interest”

f the old employer. Although this deci-

sion provides comfort to purchasers of distressed assets and chapter 11 compa- nies in that the new company will not be liable like the old company, one has to closely analyze the eight factors set forth by the DOL in order to determine whether any successor-in-interest liability attaches to the new company. n Reprinted฀with฀permission฀from฀the฀ABI฀ Journal,฀Vol.฀XXX,฀No.฀3,฀April฀2011. The฀ American฀ Bankruptcy฀ Institute฀ is฀ a฀ multi-disciplinary,฀nonpartisan฀organization฀ devoted฀ to฀ bankruptcy฀ issues.฀ ABI฀ has฀ more฀than฀13,000฀members,฀representing฀ all฀facets฀of฀the฀insolvency฀fjeld.฀For฀more฀ information,฀ visit฀ ABI฀ World฀ at฀ www. abiworld.org. 44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org 53 Id.