Under Florida law, a corporation that acquires the assets of another corporation generally does not assume the liabilities of the predecessor corporation. The successor corporation will acquire its predecessor’s liabilities only to the extent it agreed to acquire those liabilities in the asset purchase agreement. Many states have similar laws regarding a successor corporation’s liability. The analysis changes, however, when the predecessor’s liability stems from federal statutes like the federal Fair Labor Standards Act (“FLSA”). In other words, a predecessor corporation’s failure to pay its employees minimum or overtime wages under the FLSA could result in liability to the successor corporation.
Some federal courts have held that a successor corporation could, as a matter of federal law, acquire the FLSA liabilities of its predecessor despite state law to the contrary. Under federal law, courts consider the following factors, or slight variants thereof, to determine whether a successor corporation acquired its predecessor’s FLSA liabilities: (1) whether the successor corporation had notice of the predecessor’s liabilities; (2) whether there is continuity in operations and work force of the successor and processor; and (3) whether the predecessor has the ability to directly provide adequate relief.
In March 2013, the Seventh Circuit applied those factors, among others, in Teed v. Thomas & Betts Power Solutions, L.L.C., 711 F.3d 763 (7th Cir. 2013), and found the successor corporation liable for its predecessor’s FLSA violations. The successor corporation in Teed purchased the assets of its predecessor through an auction. The asset transfer agreement contained a specific condition that the transfer be “free and clear of all Liabilities” including any liabilities stemming from the predecessor’s pending FLSA litigation. The federal appellate court noted that if “state law governed the issue of successor liability, [the successor corporation] would be off the hook.” Teed, 711 F.3d at 765. However, the court held that federal law, not state law, governed. Consequently the court found that the successor corporation acquired its predecessor’s FLSA liabilities despite the exclusion in the the asset transfer agreement. The court in Teed found that “[i]n the absence of successor liability, a violator of the [FLSA] could escape liability … by selling its assets without an assumption of liabilities by the buyer … and then dissolving.” Teed, 711 F.3d at 766.