Speaking of Crazy Labor Laws

Business gets held liable for the unpaid wages of the previous tenant of the building they are using.

An employer that acquired the assets of a defunct bar and restaurant and continued to operate a restaurant on the same premises was liable for unpaid wages owed to the defunct restaurant’s former employees, the Oregon Supreme Court has ruled. Blachana LLC v. Bureau of Labor and Industries, No. S060789 (Ore. Jan. 16, 2014).

Reversing the Oregon Court of Appeals, the Court found that the Bureau of Labor and Industries (BOLI) did not err in deciding the employer was a successor for state wage liability purposes because it conducted “essentially the same business as conducted by the predecessor,” even though it did not employ any of the predecessor’s employees.

  • http://www.kipesquire.net KipEsquire

    Did you read the decision? Your use of the word "tenant" strongly suggests you did not.

  • Zeeb

    Which doesn't change the point. "Successor" in OR law is undefined, so the courts decided an unrelated employer can be considered liable for the issues of the prior employer.

    That's wacky to me, too. This wasn't buying a business. It was buying assets without any mention of anything underhanded going on.

    It is unfortunate because it sets a precedent that isn't easily mitigable by a business owner if lost wages could be claimed after the sale.

    I wonder if this will start to become a secondary strategy for vendors dealing with bankrupt customers.

  • marque2

    I agree with you, though it does get tricky. If you buy the assets of a bankrupt business, not the business itself - you should not be liable. If you actually purchased the bankrupt business and the wages were not discharged in bankruptcy court you will be liable for the wages. It has to be this way. Otherwise any time a company gets purchased by another the new owner could default on all salary payments promised before the purchase.

  • ColoComment

    This, to me, would be analogous to family court finding the second husband of a woman liable for child support for her children by her first husband, which support had been previously agreed to but unpaid by her first husband, and notwithstanding that the second husband never adopted (or legally assumed) prior support obligations for those children.

    'Course, IANAL, so what do I know?

  • cal_culus

    I don't agree. The previous owners should be liable for the salary payments since they incurred the expense and were trying to make a profit. The sales agreement/contract should've stipulated that. How they "acquired the assets" is the key.

  • marque2

    Sorry - if you buy an existing business you also purchase all its obligations. Yes there are some exceptions - but you certainly can not buy a business stipulating salaries are to be paid by the previous owner - so the salaries get discharged in bankrupsy.

    If this guy was starting a new business and just happened to buy the old grills then he isn't liable. But if he buys an existing business he is liable for everything. Lesson learned for this guy.

  • Incunablum

    And, as the article say, he bought the *assets* - not the business. But since he ran a restaurant (the same *type* of business as the previous owner) the state simply 'deemed' him as having bought the *business* and stuck him with the bill.
    Which is shit - why didn't they go after the previous owners to recoup the lost wages from the money paid for the assets? Because *that* money went to secured creditors, with the employees are not.
    This was just an end-run around bankruptcy law to provide a benefit for a preferred constituency at someone else's expense.

  • NL7

    They bought all the assets, including the name and the goodwill (p. 679). That's functionally the transfer of the whole business, even if they nominally did not sell an entity. Successor liability for asset sales is not a new or exotic thing. It exists so that you can't merely sell all the assets and contracts of a business, but on paper leave all the liabilities and debts in an empty shell. Depending on the jurisdiction and law in question, if the substance of the transaction is that you bought substantially all the assets of a business, then creditors or the government may be able to treat that as a purchase of the entity as well. Especially true if the entity is dissolved or withers to nothing.

    Of course, liability for taxes is generally always a little stricter than say tort liability. Buyers can often get around something like this with tax clearance certificates from the state or with special contractual indemnities or escrows from the seller.

    It sounds unfair to the extent that people accept the fiction that taxes are connected to some kind of dessert - you owe your "fair share" or whatever. My personal opinion is that forced taxation is immoral. But under law taxes are liabilities, and the creditor will pursue the business even if it has new owners and even if the new owners did not expect to owe back taxes. This is why tax clearance certificates and tax status letters exist. It's like a title check but for sales, franchise, withholding, and other taxes.

    It's really an extension of contract theory, with an unfortunate nexus with the taxman's rapacious hunger. If you interact with a business entity as a vendor, lender, or customer, you would not expect that your contracts were voided if the owners sold out all their shares to new owners - your deal is with the business, even if the owners shift around. And you would not expect your contracts were voided if the same owners transferred all the assets, leases, and employees into a new entity - your deal is with the going concern business, not the specific chartered entity. So neither the owners nor the specific registered entity are inalienable parts of a deal, as we would intuitively understood them (leaving law aside). Our dealings are with some abstract tangle of contracts and workers known as a "business" or going concern, and we intuitively expect that a slight legal wrangle or a shift in the back-end owners shouldn't disrupt dealings with the business.

    So really this is a question of when a sale of assets, including the name, goodwill, and location, can really be a sale of the whole business as a conceptual unit. It's more philosophical at this level, but the law tries to crudely track our intuition here. And the taxman is a creditor, just like a tort creditor, a vendor, a customer, or what have you. The difference is that the taxman tends to get stricter successor liability rules, in part because it's so tempting to skip out on taxes and in part because the legislators get to spend money successfully collected from successors.

    Note also that a lot of successor rules in tax law are very good things. You can move assets between businesses or into new entities or merge two companies without triggering income tax or other taxes, where the businesses are functionally the same business (because of overlapping ownership, assets, etc.). So it's also quite a good thing to the extent it gives us so-called tax-free reorgs. The IRS has spilled a fair bit of ink trying to prevent taxpayers from too easily achieving qualified reorganizations, specifically because being a new business (rather than the same business reformulated) would sometimes trigger income tax.

  • NL7

    What if the first husband moved his brain and internal organs into a new body, and also transferred his house deed, driver's license, and bank accounts to the new body, and he kept using his old name, but claimed that he left behind his debts with the abandoned meatbag?

    If you can move all the meaningful parts of a corporation but leave behind the debts, then it severely undermines contracts. The taxpayer in this case probably should have looked into the tax history of the seller and the successor liability statutes, just as you'd look for liens on a house.

  • randian

    That sort of thing happens all the time, but to the second wife. She marries a guy with a child support obligation. His household income has increased, some of which will now go to the first wife for child support. The lovely thing is that since child support obligations can almost never be reduced, if she then divorces him he'll still have to pay the increased support amount.

  • NL7

    They bought the name and the goodwill. The goodwill is the value of the going concern over and above other definable assets (this may have been done for tax allocation purposes, since the seller previously bought the goodwill). It doesn't need to be underhanded, there is no moral taint here. This is a question of whether the going concern was transferred in the sale. The usual standard is the economic substance, not the procedural structure.

    They bought all the assets, assumed the lease, used the same business name, and paid for goodwill (they explicitly bought the abstract value of the company). The facts are not a slam dunk for the government, since some things changed slightly, but it's a fairly predictable outcome.

    If all you had to do was sell every scrap of a business but not the entity interests directly, then everybody could dodge debts easily. That's why the substance of a transaction controls over the form. In well-advised transactions, you can overcome this problem with a few government inquiries and some contractual representations and indemnities.

  • randian

    Asset purchases out of bankruptcy are almost always done by businesses in "essentially the same business as conducted by the predecessor". Who else would bother? If the traditional exemption from the obligations of the former business no longer exist it will severely reduce the value of assets in bankruptcy, harming the bankrupt business' creditors and owners.

  • NL7

    The point is that purchasing the assets, as well as the name and goodwill, and operating in the same location is arguably a purchase of the business.

    Where do you see bankruptcy law or secured creditors? Not all insolvent businesses must go into bankruptcy. They negotiated the sale of the business.

  • marque2

    It is tough. First - I am not sure if he bought just assets. Article could be wrong.

    And second - you even messed up. If the guy just bought assets how could there be a previous business owner? Maybe the owner of the previous business at that location?

    Somehow I think the restauranteur purchased more than he wanted to admit in court - and with the old debts not completely discharged he really does owe them.

  • marque2

    Exactly. The guy didn't do much to indicate he didn't take over the old business. Changing leases with landlords - changing names, etc would have made it more clear.

  • cal_culus

    You can buy a business and stipulate in the sales contract that certain debts (obligations) be paid by previous owner.

  • Matthew Slyfield

    We are talking about businesses here, why would you expect them to care?

  • marque2

    I did mention that - but you can't do this in a fraudulent manner. If you take all the assets and the previous owner keeps all the debt with no way to pay it back courts rightfully would consider that fraud. This is especially true since worker's salaries are the second highest precedence when debts are considered (lawyers are first). The assets could not be rightfully sold anyway because they are technically the property of the employees.

    You can image some guy and a relative constantly selling the assets yo each other and getting the debts discharged by selling only the assets of a business to each other every few years while the other gets the debts discharged to the old corporation via bankruptcy.

  • randian

    The buyer won't care, but the seller and its creditors surely will.

  • randian

    Only if the sale isn't for value. If it is "keeps all the debt" is irrelevant. Bankrupt companies frequently have no way to pay all their debts after liquidation.

  • marque2

    Absolutely not true. When you are bankrupt the assets belong to the creditors - leaving debt behind while distributing the assets is illegal without approval of the creditors.

  • bigmaq1980

    "purchasing the assets, as well as the name and goodwill" ... If true, looks like this guy didn't have very good legal council, or he didn't bother with it at all. Name, and in particular goodwill in combination are strong indicators of a purchase of a going concern.

    Really, the idea behind asset purchase only is to avoid this kind of problem. Doesn't logically make sense to then have "goodwill" on the books. Should have been some creative ways to pay the same amount and not have to recognize "goodwill", unless they way overpaid for the business in the first place.

    Next thing you know we may find out this guy was the first owner's brother in law.

  • randian

    Last I checked, selling assets for value isn't an illegal distribution of assets, no matter how much you owe. It's when you get rid of them for nominal value that you have problems. The bankruptcy trustee has the power to rescind a sale he believes was substantially below value. Selling assets for value not only isn't an affront to the creditors, it's arguably exactly what the executive of a bankrupt or soon to be bankrupt company should be doing for the benefit of the creditors.

  • Matthew Slyfield

    I was referring to the government agency that took the action discussed.

  • billford

    This might not be as weird as it sounds. Perhaps part of the agreement was to be responsible for certain kinds of debts of the old business. You know, like taking over a contract with a distributor, and maybe the issue was whether this particular debt fit into that category.

  • BillRobelen

    Except if you read the decision, he did not purchase the old name from the person who owed back wages. The person who owed back wages purchased the right to use the name from the original owners of the property, and leased the land from the original owners. When he went bankrupt, he released the name and goodwill back to the owners, who leased it to the new business. The new business did not in fact run the same type of business at first, but rather operated a bar only. It was about a year later when the new business opened a restaurant on the premises. The only connection the new business could be said to have to the old business was that both operated off the good will of the owners of the property.

  • NL7

    One difference doesn't make it a new business. It's a collection of factors and unless there's clear precedent, it usually involves juggling some key factors.

    You wouldn't be able to dodge back taxes by saying it's a new business because the owners changed, or the entity changed (e.g. all assets and operations moved at once to a new business), or the employees all changed, or you stopped serving food or switched all the food offerings to a different national variety. Maybe if all those things, and the name changed, you could argue it wasn't the same business.

    But the best way to avoid successor liability is to not buy all the assets and move into the same space using basically the same business name. The buyer could have also determined whether there was any tax debt by getting clearance letters from the state.