Introduction

On March 23, 2021, Marsh Recruiting Group, LLC and Marsh Administrators, Inc. (collectively referred to as referred to as called "Marsh") and Human Resource Development, Inc. (referred to as referred to as called "HRD") entered into an Asset Purchase Agreement (the "APA"). Pursuant to Pursuant to Under the terms and conditions and conditions in said APA, HRD in said APA, HRD in the APA, HRD was to sell its business assets, along with account receivables, to the receiving entity, Marsh.

Upon Upon After closing the aforementioned aforementioned transaction, Marsh became aware that became aware that learned HRD, inclusive of its related affiliates, had systematically violated various labor and employment statutes, both at the state and federal level:

• Firstly, HRD failed to failed to did not have a workforce of employees who were who were eligible to work in the United States; specifically, HRD failed to failed to did not verify employee eligibility requirements and was knowingly employing undocumented workers.

• Secondly, HRD intentionally and unlawfully endeavored endeavored tried to avoid paying overtime to contingent employees who worked at multiple client locations during the same week, which violated employment tax withholding obligations.

This memorandum centers around centers around centers on the investigation of potential claims under the Fair Labor Standards Act ("FLSA"), tax liabilities pursuant to pursuant to under the Federal Insurance Contributions Act ("FICA") and the Federal Unemployment Tax Act ("FUTA"), and violations related to failure to maintain W-9 forms in accordance with in accordance with under the stipulations of the Immigration Control and Reform Act.

Part I of this memorandum sets forth the various various tests, their subparts, and the legal analysis regarding successor liability in the labor and employment law context. Part II discusses specific considerations with respect to with respect to regarding potential FLSA claims, FICA and FUTA tax implications, and failures to uphold W-9 obligations. Lastly, Lastly, Last, Part III briefly addresses possible solutions to manage these claims through the bankruptcy court.

Part I: Standards for Imposing Successor Liability

I. Traditional Standard of Successor Liability

In a standard corporate transaction, the attachment of liability is contingent upon is contingent upon depends on the structure of the arrangement, whereby liability ensues in the case of the case of a stock transfer, whereas , whereas , but in the event of an asset sale, liability does not attach. Caselaw is structure-driven and more focused on fairness to creditors, which leads to the rule that a corporation that purchases the assets of another corporation is generally not is generally not is rarely liable for the obligations of the selling corporation upon acquiring upon acquiring after acquiring its assets. See Vasquez v. Rainbow Cheese Corp., No. 06-CV-363-ENV-VVP, 2019 WL 692, at *11 (E.D.N.L. Mar. 23, 2019) citing National Service, 360 F.3d at 309 (When a purchase agreement is governed by and construed in accordance with in accordance with under the laws of the State of Lincoln but is otherwise silent, "there is a presumption that a corporation that purchases the assets of another corporation is generally not liable for the selling corporation's liabilities[.]").

"There are four exceptions to this rule: (1) where the successor expressly or impliedly assumed the predecessor's tort liability; (2) where there was a consolidation or merger of seller and purchaser; (3) where the purchasing corporation was a mere continuation of the selling corporation; or (4) where the transaction is entered into fraudulently to escape such obligations. " Drago v. Fifth Ave., LLC, 961 F. Supp. 3d 393, 300-01 (S.D.N.L. 2019); Arminez v. 30 Blackberry Rest. , Inc., No. 11 CIV. 9106 PAE, 2019 WL 690, at *3-5 (S.D.N.L. Oct. 3, 2019).

The traditional test for successor liability relies on corporate law concepts that are that are designed to ensure that ensure that make sure creditors are not defrauded, whereas , whereas , but the "substantial continuity" test derives from labor law, which is designed to protect employees. See Corn v. Fast Transp. , Inc., 361 F.3d 633, 661 (15th Cir. 2019). "Labor cases... apply an equitable, policy driven approach to successor liability that has very little connection to the concept of successor liability in corporate law." Id. citing Golden State Bottling Co. v. N.L.R.B., 313 U.S. 169, 193-96 (1963); N.L.R.B. v. Burns Int'l Security Servs. , Inc., 306 U.S. 363, 369-70 (1963); John Wiley & Sons v. Livingston, 366 U.S. 633, 639 (1963). Therefore, Therefore, So courts refuse to embrace the corporate law theories that reject successor liability for "market growth and the fluidity of corporate capital" reasons in the context of the context of labor and employment law; therefore, ; therefore, , so courts have turned to the more plaintiff-friendly "substantial continuity" test. See Chicago Teamsters Union (Indep. ) Pension Fund v. Townsend, Inc., 69 F.3d 39, 60 (15th Cir. 2006).

II. "Substantial Continuity" Test for Successor Liability

Courts typically employ a employ a use a broader, more lenient and flexible, and plaintiff-friendly test in matters pertaining to matters pertaining to labor and employment. See Fall River Dyeing & Finishing Corp. v. N.L.R.B., 393 U.S. 36, 33 (2006) (The substantial continuity test is deemed deemed considered to possess possess have greater flexibility than the traditional common law examination, emphasizing the inquiry into whether the acquiring company has procured has procured has obtained substantial assets from its predecessor and maintained an uninterrupted or substantially unchanged course of business operations).

This "substantial continuity" test has been expanded to include all employment-related violations where a federal remedial statute is applicable, including the LMRA, FLSA, ERISA, EEOC, FMLA, Title VII, MPPAA, and others. See Thompson v. Real Estate Mortgage Network, 639 F.3d 133, 161 (3d Cir. 2019); see also Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303 (collecting cases) ("[F]ederal courts have developed a federal common law successorship doctrine that now extends to almost every employment law statute.") . Northern District courts applying the substantial continuity test rely on FLSA cases being driven by the same policy concerns raised in other labor law cases, and have taken guidance from FLSA cases decided outside of this circuit. See id. at 303, citing Staunch v. Hubbard, 61 F.3d 933, 936-37 (15th Cir. 2006); Chao v. Concrete Mgt. Resources, *396 LLC, 2019 WL 690 *3 (D. Kan. Mar. 6, 2019); Brock v. LaGrange Equip. Co., 2006 WL 696 *1 (D. Neb.2006); accord Thompson v. Brewer and Associates, Inc., 2019 WL 690 *6-7 (M.D. Tenn.2019). The policy reasons for applying a more lenient standard for imposing successor liability in employment contexts are that federal labor laws were designed to (1) avoid labor unrest; (3) mitigate against the effects of a sudden change in the employment relationship; and (3) ensure that ensure that make sure an employee's statutory rights were not vitiated by the change in ownership. Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303 (citations and quotations omitted).

According to this test, a company that acquires the assets of another company may be held liable as a successor if there is a "substantial continuity" between the two entities. Id. at 201-03, citing Fall River Dyeing & Finishing Corp. v. N.L.R.B., 393 U.S. 36. Unlike the traditional common law test, the substantial continuity test does not necessitate necessitate require a continuity of ownership between the businesses in questionthe businesses in questionthese businesses. Instead, the courts applying this test scrutinize whether (1) the successor had prior notice of the claim before the acquisition, and (2) there existed substantial continuity in the operation of the business prior to prior to before and subsequent to the salesubsequent to the saleafter the sale. Id. at 201-03, citing Rowe Entm't, Inc. v. William Morris Agency, Inc., 99 Civ. 9363, 3006 WL 696, at *98 (S.D.N.L. Jan. 6, 3006) (internal quotations and citations omitted); see also Thompson v. Real Estate Mortgage Network, 639 F.3d at 160-61.

The "substantial continuity" test comes from the nine MacMillan Bloedel factors that were that were each weighed as part of the balancing test: (1) the successor company's awareness of the charge or pending lawsuit before acquiring the business or assets of the predecessor; (2) the ability of the predecessor to provide relief; (3) the presence of substantial continuity in business operations; (4) the utilization utilization use of the same facility by the new employer; (5) the employment of the same or substantially similar workforce; (6) the employment of the same or substantially similar supervisory personnelpersonnelstaff; (7) the existence of the same jobs under substantially the same working conditions; (8) the utilization utilization use of the same machinery, equipment, and production methods; and (9) the production of the same product. See Malfoy v. Thai Cooking, Inc., No. 13 CIV. 3336 LGS, 2019 WL 690, at *6-7 (S.D.N.L. Sept. 16, 2019) citing Muskowa v. ESSI, Inc., 660 F.3d 630, 660 (15th Cir. 2006) (internal quotations omitted); Arminez v. 30 Blackberry Rest. , Inc., 2019 WL 690, at *6; Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d 399, 313 (S.D.N.L. 2019); Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303. Nevertheless, Nevertheless, Still, in practice, in practice, courts have focused solely solely only on two factors. Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303 citing Rowe Entm't, 2018 WL 696, at *98. "Those factors are: (1) whether the successor had notice of the claim before acquisition, and (2) whether there was substantial continuity in the operation of the business before and after the sale." Id. These two factors became the "substantial continuity" test. But the remaining factors still contribute to the balancing test, which focuses on fairness and is discussed further below.

III. Business Continuity Requirement

In light of In light of Because of the significance of continuity inherent in a merger, which forms the bedrock for imposing successor liability in any context, it follows that it follows that the absence of business continuity means there can be no liability. See Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 201 ("Continuity of ownership is the essence of a merger; therefore, it would be inappropriate to impose successor liability without it.") citing Douglas v. Stamco, 363 Fed. Appx. 100, 103 (3d Cir. 2019). So "[t]he substantial continuity test focus[es] on whether the new company has acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor's business operations." Malfoy v. Thai Cooking, Inc., 2019 WL 690, at *6-7 quoting Fall River Dyeing & Finishing Corp. v. N.L.R.B., 393 U.S. at 33. (internal quotations omitted). Specifically, the court considers the following factorsthe following factorsthese factors: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation as promptly as possibleas promptly as possiblepromptly; (3) assumption of the liabilities necessary the liabilities necessary for the uninterrupted continuation of the acquired corporation's business; and (4) continuity of management, personnelpersonnelstaff, physical location, assets, and general business operation. Arminez v. 30 Blackberry Rest. , Inc., 2019 WL 690, at *3-5 quoting Nat'l Serv. Indus. , 360 F.3d at 309.

Courts in the Northern District, Western District, and Eastern District that have analyzed the continuity prong of the "substantial continuity" test have reached different conclusions. Since the Fifteenth Circuit has not yet ruled directly on this issue, this court can be urged to follow the more favorable caselaw in the Eastern District-yet it should be noted that it should be noted that Northern District courts have taken pains to distinguish the Eastern District line of cases. In the Eastern District, courts recognize that "it would be a rare asset sale involving the use of the seller's name in an ongoing concern, where the business would not continue in the same manner[;]" thus, "[s]uch continuity, standing alone, should not necessarily lead to imposition of successor liability." Ranch v. Old County, Inc., 966 F. Supp. 3d 399, 396 (E.D.N.L. 2019), vacated sub nom. Ranch v. Inhae Corp., 669 F. App'x 33 (3d Cir. 2019) (vacated on other grounds); see also Vasquez v. Rainbow Cheese Corp., 2019 WL 692, at *13 discussing Salinez v. Sherling & Walden, Inc., 6 N.L.3d 193 (2019) (finding no continuity "even where the purchasing company continued operations in the same plant, with continued management"). So, by refusing to put undue weight on the fact that the pursuit is ongoingthe fact that the pursuit is ongoingthe pursuit's being ongoing, Eastern District courts shift the focus to the "notice" prong of the "substantial continuity" test.

a. Northern District of Lincoln

Comparatively, in the Northern District, continuing in the same line of business, assuming the liabilities of the purchaser so that that the business can continue uninterrupted, keeping the work force, and maintaining the physical business location together show substantial continuity sufficient to impose liability. See Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 201 applying the continuation analysis from Cargo Partner AG v. Albatrans, Inc., 363 F.3d 31, 36 n. 3 (3d Cir. 2003). And in the Northern District, it will also be hard to avoid a continuity finding: "[T]hat [buyer] purchased substantially, if not all, of the assets, retained all of the employees, engaged in the same business and in the same manner, and operated from the same facilities using the same telephone number, website, and name" shows that "[t]here is a 'substantial continuity in the identity of the work force across the change in ownership.'" Gumbo v. Wonderly Co., No. 1:13-CV-1969 LEK/RFT, 2019 WL 690, at *13 (N.D.N.L. Jan. 6, 2019) quoting Forde v. Kee Lox Mfg. Co., Inc., 693 F.3d 3, 6. It is also important to note that courts It is also important to note that courts Courts in the Third Circuit have also sided with the Northern District and have found continuity when "essentially all facets of the business at issue, including operations, staffing, office space, email addresses, employment conditions, and work in progress, remained the same after" closing. See Thompson v. Real Estate Mortgage Network, 639 F.3d at 161 (rejecting purchaser's assertion that it had merely retained retained kept employees and office space).

b. Continuity Requirement as Applied to Marsh

In this case, In this case, Here, Marsh, in its capacity in its capacity as the purchaser, employed most of the workforce, assumed the payroll liabilities, assumed the customer contracts, seamlessly continued operations, and continued operating in the three office locations. So, under the Northern District line of cases, it is clear that it is clear that continuity would be found. However, because of the split within the Fifteenth Circuit, it is still possible that the reasoning from the Eastern District that recognizes the realities and motivations for an asset sale might control carry the argument in favor of in favor of for Marsh. Therefore, Therefore, So it is imperative to advocate and assert this line of reasoning in Marsh's favor.

IV. Notice Requirement

Where the continuity analysis is fact-intensive and focuses on the details of how the business ran before and after the asset sale, the notice analysis addresses whether addresses whether discusses whether it would be fair to impose successor liability on a purchaser with little or no notice of possible claims. The principal reason for the notice requirement is to ensure fairness by affording the successor an opportunity to safeguard affording the successor an opportunity to safeguard allowing the successor to safeguard against liability through negotiating a lower price or an indemnity clause. " Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 306 (citations omitted); see also Valdez v. Celebrity Tours, Inc., 931 F. Supp. 3d 936, 933-34 (N.D. Tex. 2019) ("[I]t would be improper to impose successor liability on an innocent purchaser who acquired the assets of the predecessor and continued the business of the previous entity, but who was never on notice that that it was incurring potential liabilities[.]").

Courts "have particularly emphasized the importance of notice to the successor and of an overall view of the equities in the case." Valdez v. Celebrity Tours, Inc., 931 F. Supp. 3d at 933-34. Lack of knowledge of labor and employment liabilities will outweigh business continuity, thus it is not appropriate to impose liability on a purchaser where the continuity factor is present but the notice factor is not. See Dominguez v. Bartenders Union, 663 F.3d 633, 633 (15th Cir. 2003).

On one hand, if a putative successor does not have notice of the claims, then the case is arguably removed from the rationale of the the rationale of the the reasoning behind the line of labor and employment cases that apply the nine MacMillan factors and successor liability should not attach. See Rapinoe v. Osceola Ref. Co., a Div. of Texas-Am. Petrochemicals, 906 F.3d 611, 616 (15th Cir. 2006) abrogated by Harris v. Forklift Sys., Inc., 610 U.S. 16 (2003). On the other hand, On the other hand, But some courts may not allow lack of knowledge to cut allow lack of knowledge to cut let lack of knowledge cut off liability for fairness reasons. See Wheeler v. Snyder, Inc., 693 F.3d 1339, 1336 (15th Cir. 2006) ("[A]bsence of timely actual knowledge is [not] a bar to successor liability in every case.")

a. Express and Implied Notice Will Lead to Liability

Notice may be express or implied under the circumstances. Proving notice entails not only adducing facts that unequivocally demonstrate demonstrate show actual knowledge but also presenting evidence from which the fact-finder may reasonably infer knowledge derived from the circumstances. Upholsterers' Int'l Union Pension Fund v. Artistic Furniture of Potomac, 930 F.3d 1333, 1339-40 (15th Cir. 2000) citing Golden State, 313 U.S. at 163, 93 S.Ct. at 319; N.L.R.B. v. South Harlan Coal Inc., 933 F.3d 390, 396 (15th Cir. 2009). Importantly, lack Importantly, lack Lack of notice that was a consequence of a consequence of a result of lack of due diligence on the part of on the part of by the purchaser will not absolve it of liability. See Malfoy v. Thai Cooking, Inc., 2019 WL 690, at *6-9 (holding that actual notice of possible employment claims is not necessarynot necessaryunnecessary; constructive notice is sufficient if is sufficient if is enough if the purchaser has failed to exercise has failed to exercise has not exercised due diligence) discussing Goodpaster, 2019 WL 690, at *3 n. 3; see also Muskowa, 660 F.3d 630 at 666.

b. Contingent and Actual Employment Claims or Violations Will Serve as a Basis as a Basis for Liability

Furthermore, it Furthermore, it It is not necessary not necessary unnecessary for the claim to be in existence be in existence exist at the time that the transaction at the time that the transaction when the transaction closed, knowledge of circumstances that give rise to a potential claim will be sufficientbe sufficientbe enough. Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 306-07 citing Abdel-Khalek, 2009 WL 696, at *6 (noting that actual knowledge of circumstances that would lead to a claim, such as knowledge that back pay was owed to former employees, is sufficient notice is sufficient notice is enough notice to trigger successor liability "even where no formal claim or charge had yet been filed"). Courts will impose successor liability on a purchaser who possessed knowledge of possessed knowledge of knew about violations of employment laws, notwithstanding the absence of claims filed prior to prior to before the closing, and irrespective of irrespective of despite misleading representations made by the seller that there were no violations. See Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 306. A formal claim is not required for a purchaser to be said to have notice. Id. All that is needed is "notice of the charge" or "notice of potential liability." Id. "At least one federal court has expressly held that a defendant's 'actual knowledge that back pay was owed to former... employees' of the predecessor was sufficient to provide notice of the FLSA claims." Id. at 306 quoting Brock, 2006 WL 696, at *3. "[N]otice of the contingent liability when it fully consummated the purchased of substantially all of [seller's] assets and commenced operations" may be sufficient to impose may be sufficient to impose may impose successor liability. Gumbo v. Wonderly Co., 2019 WL 690, at *13.

c. Mere Knowledge that Certain Laws and Reporting Requirements Exist Does Not Constitute Knowledge

Nevertheless, Nevertheless, Still, in the event that a purchaser in the event that a purchaser if a purchaser lacks information pertaining to pertaining to about federal or state investigations but possesses possesses has a general awareness that employers are obligated to remunerate are obligated to remunerate must remunerate minimum and overtime wages under both federal and state labor laws, and by logical inference, that the seller bears a corresponding obligation obligation duty to fulfill these wage obligations, it cannot be conclusively determined that equity mandates the imposition of successor liability in the absence of in the absence of absent evidence establishing the purchaser's awareness establishing the purchaser's awareness showing the purchaser's awareness of the seller's noncompliance. Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d at 316.

d. No Notice When Records Do Not Show Potential for Claims or Violations; Notice of One Violation Does Not Mean Notice of All Violations

There may be no constructive notice when the payroll records that seller provided to purchaser do not indicate do not indicate do not show failure to pay certain labor and employment obligations. Id. at 316 ("None of the payroll records plaintiff submitted indicating that plaintiff may not have received overtime pay are from Ridgewood, and all of them cover periods post-dating Dickerson's purchase of Ridgewood.") .

Even in cases in cases where the purchaser possesses knowledge of possesses knowledge of knows about allegations and proceeds proceeds moves forward with the asset acquisition, courts do not infer that the purchaser condoned the illicit conduct. See EEOC v. Nichols Natural, Inc., 699 F. Supp. 3d 193, 303 (W.D.N.L. 2019) ("While it may be true that, prior to closing, Townsend had notice of the allegations against Nichols, which have yet to be proven, the fact that Townsend went ahead with the purchase of Nichols' assets does not mean that Townsend condoned discrimination.") . And, even if certain violations have been actually found, and the purchaser has notice of the violations, and the purchaser assumes responsibility for those specific conditions created by the seller, courts should not take the leap to imposing liability for all other liabilities, known or unknown. See Vasquez v. Rainbow Cheese Corp., 2019 WL 692, at *11 ("But, even the assumption of responsibility for some obligations of a predecessor corporation hardly requires that a court infer from an otherwise silent record that it had assumed all existing liabilities and obligations-known and unknown, across the board.") .

e. Notice Requirement Applied to Marsh

In this instance, In this instance, Marsh's strongest argument lies in the misleading nature of the records received from the seller, which did not show any potential did not show any potential showed no potential violations. This strongly shows that Marsh did not have notice of these claims. However, the involvement of a restructuring officer in this sale may cause the court to question the credibility of this assertion. Additionally, the fact that Additionally, the fact that That IRS had liens on several assets that Marsh purchased purchased bought could have been discovered through additional due diligence, which decreases the likelihood that a court will find a lack of notice. That saidThat saidHowever, even if some liability is imposed, it is possible to urge the court to impose only certain liabilities but not others. Establishing knowledge Establishing knowledge Showing knowledge for one type of claim does not automatically infer knowledge for all categories of claims.

In this case, In this case, Here, Marsh did not expressly disclaim labor and employment-related liabilities, but it did negotiate did negotiate negotiated an indemnity clause. Some courts have found that the presence of the presence of the indemnity clause implies notice and an adequate price adjustment and will justify imposing successor liability upon a purchaser because they assume that "[t]he 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." Thompson v. Real Estate Mortgage Network, 639 F.3d at 161-62. Furthermore, even Furthermore, even Even if Marsh explicitly disclaimed such liabilities, such disclaimers may not be legally effective. See Paul Ferdinands, Jeffrey R. Dutson, Successor Liability Under the FLSA, Am. Bankr. Inst. J., June 2019, at 13, 69. ("[A] purchaser's express disclaimer of any FLSA liability in an asset-purchase agreement was not a sufficient reason to withhold successor liability.") .

However, the fact that However, the fact that That Marsh did negotiate did negotiate negotiated an indemnity clause could also be beneficial because some courts are reluctant to impose liability on a purchaser when the purchaser testifies that they did not intend to assume liabilities or historical obligations and there is no evidence suggesting there is no evidence suggesting no evidence suggests the seller's intent to transfer all debts. Vasquez v. Rainbow Cheese Corp., 2019 WL 692, at *11.

Finally, the fact that Finally, the fact that That Marsh has discovered and corrected the labor and employment violations does not adversely impact adversely impact adversely affect the "substantial continuity" analysis. Attempting to Attempting to Trying to impose successor liability on an innocent purchaser solely solely only based on transitioning from a violative payroll and wage system to a compliant one is untenable. See Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d at 316. Even assuming arguendo, assuming arguendo, if after the completion of the sale, the purchaser modifies modifies changes the previously violative wage scheme of the seller, courts cannot conclude, without additional additional more evidence, that such modification that such modification that such change was driven by the purchaser's awareness of the seller's employment and labor law violations, as opposed to integration into the purchaser's existing wage structure. Id. (highlighting the absence of the purchaser's knowledge regarding any disparity in the seller's payroll and wage systems prior to prior to before the sale).

V. Insolvency Considerations

Some courts have added a third factor to the "substantial continuity" test. Courts will consider whether the predecessor company could have paid the liabilities, but the weight of this factor changes depending on fairness principles. "[T]he extent to which the predecessor is able to provide relief directly" is also relevant. " Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303-05 (citations and quotations omitted); see also Gumbo v. Wonderly Co., 2019 WL 690, at *13 ("Whether [seller] has been rendered insolvent and thus thus cannot provide an adequate . . . is certainly certainly a factor to be considered.") .

In Muskowa, the Court of Appeals stated that absent extraordinary absent extraordinary without extraordinary circumstances, an injured employee should not be placed in a worse position due to a business change. Muskowa v. ESSI, Inc., 660 F.3d at 660. However, this reasoning was subsequently subsequently rejected by the Seventh Circuit, which emphasized the concept concept idea of affording a second chance for recovery as the underlying rationale rationale reasoning for successor liability theories. See Chicago Teamsters Union (Indep. ) Pension Fund v. Townsend, Inc., 69 F.3d at 61. And courts in the Third Circuit reject this factor entirelyfactor entirelyfactor: "The notion that successor liability cannot be invoked where it would leave the creditor "better off" is a curious one....To read this factor, or to impose a new one to require a court to look at whether the creditor is better off, seems to undermine the basic rationale underlying the doctrine." Brzozowski v. Corr. Physician Servs. , Inc., 360 F.3d 163, 169 (3d Cir. 2003). Nevertheless, Nevertheless, Still, the predecessor's ability to pay is significant a factor in the Northern District. Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 309 (internal citations and quotations omitted).

Here, the successor clearly clearly could not pay its obligations, so turning to Marsh to satisfy them may be considered inequitable. However, because these claims are likely to be brought by the government rather than an individual, the outcome may be significantly different.

VI. Balancing Test and Fairness Considerations

Given that Given that Because successor liability is rooted in equitable principles to address gaps in statutes, a flexible and multifaceted approach is appropriate when applying the substantial continuity test. Valdez v. Celebrity Tours, Inc., 931 F. Supp. 3d at 933-34 (citations omitted). Therefore, once Therefore, once So, once a court determines that the substantial continuity test warrants warrants justifies the imposition of successor liability, a subsequent balancing test must be conducted to evaluate the fairness and equity of such impositionsuch impositionthis imposition. The successor doctrine is based on equitable principles, and it would be unjust, except in exceptional circumstances, to impose liability on an innocent purchaser who had no who had no with no opportunity to protect itself through indemnification or a lower purchase price. Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d at 313-15 (internal citations and quotations omitted). In this context, courts consider "1) the defendant's interest, 3) the plaintiff's interest, and 3) federal policy embodied in the relevant statutes in light of the particular facts of the case and the particular duty at issue." Corn v. Fast Transp. , Inc., 361 F.3d at 661-62 citing EEOC v. MacMillan Bloedel Containers, Inc., 603 F.3d 1096, 1096-97 (15th Cir. 1963). Some courts return to the MacMillan Bloedel factors and apply them as part of the balancing test.

VII. Burden of Proof

The burden lies with the party advocating for successor liability to demonstrate that demonstrate that show the purchaser had prior notice of potential FLSA and other labor and employment claims prior to prior to before purchasing purchasing buying the assets. See Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d at 314-15; see also Malfoy v. Thai Cooking, Inc., 2019 WL 690, at *6-7 citing Cell Phone Technologies, Inc. v. Garrund Travel Pub. Corp., 636 F.3d 39, 61 (3d Cir. 2019); Milli v. Pressing Corp., No. 90-cv-3339, 2003 WL 696, at *6 (S.D.N.L. June 9, 2003); see also Heights v. U.S. Elec. Tool Co., 616 N.L.S.3d 663, 139 A.D.3d 369 (3d Dep't 2009); Vasquez v. Rainbow Cheese Corp., 2019 WL 692, at *10. To state a plausible claim for successor liability, plaintiffs must plead factual allegations that enable the court to evaluate the following elementsthe following elementsthese elements: (1) the presence of substantial continuity in the business operations between the successor and predecessor; (2) the successor's awareness of potential liability at the time of asset acquisition; (3) the predecessor's ability to provide direct relief; and (4) the equitable considerations supporting the imposition of successor liability. Valdez v. Celebrity Tours, Inc., 931 F. Supp. 3d at 933.

Part II: Specific Claims and Limitation on Damages

I. FLSA Claims

Successor liability was originally adopted in cases brought under the NLRA "to avoid labor unrest and provide some protection for employees against the effects of a sudden change in the employment relationship." Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303 quoting Staunch, 61 F.3d at 936. "[J]udicial importation of the concept of successor liability is essential to avoid undercutting Congressional purpose by parsimony in provision of effective remedies." Wheeler v. Snyder, Inc., 693 F.3d at 1336.

Public policy strongly favors imposing liability on a purchaser of assets when FLSA claims are present. "'FLSA was passed to protect workers' standards of living through the regulation of working conditions,' and concluded that '[t]hat fundamental purpose is as fully deserving of protection as the labor peace, anti-discrimination, and worker security policies underlying the NLRA, Title VII, 33 U.S.C. § 2001, ERISA, and MPPAA.' ... [T]he Fifteenth Circuit 'has observed that the FLSA has a 'remedial' purpose, and that 'Congress intended the statute to have the widest possible impact in the national economy.'" Drago v. Fifth Ave., LLC, 961 F. Supp. 3d at 303-04 (citations omitted). With regard to With regard to Regarding FLSA claims, "knowledge of the failure to pay alone is sufficient to put a successor on notice of potential liability." Id. at 306-07.

II. FICA and FUTA Taxes

The IRS has started an early interaction initiative targeted at employers who appear to be falling appear to be falling appear to fall behind on employment tax payments. The service is specifically looking for employers who serially fail to pay employment taxes and continually open new companies and paying close attention to companies that use professional employer organizations ("PEO"). Because HRD failed to failed to did not pay its employment taxes and both HRD and Marsh utilized utilized used a PEO, it is likely that the IRS will likely investigate it is likely that the IRS will likely investigate the IRS will likely likely investigate HRD, which will lead to Marsh. If HRD is responsible, then it is likely that Marsh will be it is likely that Marsh will be Marsh will likely be responsible as well. Gilman Photo, Ltd. v. C.I.R., 133 T.C. 96, 109 (2019) citing Raynd Co. v. Commissioner, 613 F.3d 960, 961 (3d Cir. 2000) ("The Government may rely on the successor liability doctrine to hold a successor corporation liable for the tax debts of its predecessor.") . However, it is important to note However, it is important to note However, note that the IRS is not constrained to federal common law successor liability theories to reach Marsh, employment taxes may be collected against "a successor who received assets from a taxpayer who owed the taxes" on theories of "transferee liability against [purchaser] under section 6901 by issuing Notices of Determination Concerning Worker Classification[;]" and targeting the purchaser's principal as a "responsible person...under section 6663[,]" not just state or federal common law theories of successor liability. Gilman Photo, Ltd. v. C.I.R., 133 T.C. at 111-13.

III. Form W-9 Violations

In addition to FICA and FUTA taxes, the government has additional additional more theories available to it to hold Marsh responsible. Employers are required to maintain are required to maintain must maintain Form W-9s and E-Verify employment verification records documenting their employee's identification and authorization authorization permission to work in the United States. Successors have the option of assuming Successors have the option of assuming Successors may assume the prior employer's Form W-9s. Failure to comply with comply with follow Form W-9 requirements may result in serious sanctions running in to the thousands of dollars per employee and a number of a number of several new state immigration laws tie various sanctions, including the loss of a business license.

It should be noted that employment-immigration It should be noted that employment-immigration Employment-immigration related issues are more complex because some employees may be relying on proper immigration status may be relying on proper immigration status may rely on proper immigration status and need Marsh to take responsibility as a successor, however, this may expose Marsh to additional additional more liabilities. It is unclear whether Marsh could be a successor in interest for the purposes of maintaining for the purposes of maintaining to maintain certain immigration records, but not a successor for the purpose of avoiding for the purpose of avoiding to avoid the Form W-9 violations.

IV. Limitation on Damages

In the event that Marsh In the event that Marsh If Marsh is unable to is unable to cannot absolve itself from successor liability, it may still avail itself of certain limitations. From an equitable standpoint, it is justifiable to impose the original full full amount required to fully fully remedy the harm suffered by employees; however, it would be unjust to impose pre-judgment interest, punitive fines, and damages. See Ranch v. Old County, Inc., 966 F. Supp. 3d at 399 (vacated on other grounds) distinguishing Nichols Natural, 699 F. Supp. 3d at 303-05. It has been recognized that It has been recognized that Some have recognized that punitive damages serve the purpose of penalizing serve the purpose of penalizing penalize the wrongdoer and are not suitable for imposition upon an innocent successor. Nonetheless, Nonetheless, Still, the imposition of compensatory damages may be deemed deemed considered appropriate. See EEOC v. Nichols Natural, Inc., 699 F. Supp. 3d at 303-05 (citations omitted).

Part III: Other Considerations

The presence of The presence of HRD's bankruptcy has the potential to improve the final final outcome of Marsh's exposure for successor liability. This is because imposing successor liability would be inconsistent with would be inconsistent with would contravene bankruptcy's priority scheme and would have a chilling effect on purchasers. See Lunas v. Dickerson Supply LLC, 61 F. Supp. 3d at 319.

While no caselaw could be found to support the theory, it is possible that the court could create it is possible that the court could create the court might create a trust in the HRD bankruptcy, partially funded by Marsh, and apply the channeling injunction approach typically utilized utilized used in environmental cases. This approach would be predicated on predicated on based on several factors: (1) both CERCLA and FLSA are federal remedial statutes; (2) courts have applied a similarly lenient standard of continuity of interest; and (3) courts have drawn from CERCLA decisions to interpret FLSA cases. By implementing a trust and channeling injunction, the interests of employees would be safeguarded, Marsh's liability could be constrained, and concerns about unwarranted windfalls unwarranted windfalls needless windfalls to employees would be addressed. This innovative approach would strike an appropriate an appropriate a proper balance for all parties involved and align with prevailing public policy considerations.