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Corporation Held Subject to Successor Liability in Title VII Suit

In EEOC v. Nichols Gas & Oil, Inc., __ F.Supp. __, 2010 WL 175158 (W.D.N.Y.), the District Court for the Western District of New York examined whether a successor corporation is liable for a Title VII suit filed against the previous corporation. The court determined that under the substantial continuity test, a successor corporation can be liable for the torts of a predecessor, especially when the purchasing entity had notice of the claim, the new company conducted the same business, and the previous company was unable to pay when the action was commenced.

The EEOC brought a Title VII action against Nichols Gas & Oil (“Nichols”). While the action was ongoing, Nichols entered into an agreement with Townsend Oil Corp. (“Townsend”) to sell the company. After Townsend found out about the EEOC claim, it required Nichols to indemnify it from any claims arising from the EEOC complaint. Fearing any negative impacts related to the Title VII action, Townsend changed the name of the company to Townsend Oil Corp. Townsend then sent a letter to Nichols’ customers indicating that the two companies had merged and service would not change.

Defendant Townsend then filed a motion for summary judgment seeking a determination that it has no successor liability for Nichols’ alleged discrimination. Townsend contended the general common law test in Graham v. James, 144 F.3d 229,240 (2d Cir. 1998) should be utilized. The common law states generally a corporation that acquires the assets of another corporation is not liable for the torts of its predecessor. However, the court rejected this argument and stated that the substantial continuity test, not the general common law, is expressly applied to Title VII cases under the Code of Federal Regulations. See 29 C.F.R. § 825.107 (2009).

The substantial continuity test required a court to determine whether the imposition of liability is equitable. The court examined three critical factors in this case, but different factors may be utilized in other situations. Notice was first examined by the court. Townsend had clear notice of the EEOC complaint, and because of this notice, the purchase agreement included an indemnity clause. Therefore, this clear notice weighs in favor of successor liability in under this prong of the test as explained in Golden State Bottling Co., Inc. v. National Labor Relations Bd., 414 U.S. 168, 185, 94 S.Ct. 414, 425, 38 L.Ed.2d 388 (1973). The second factor the court considered was continuing the same business. Here, it was clear that Townsend maintained the same business. The letter to customers provided an assurance that Townsend was engaged in exactly the same conduct Nichols had done in the past. The third and final factor the court considered in the substantial compliance test was the ability to pay. The court determined that Nichols was unable to pay when the action was commenced so Townsend should be liable. To hold otherwise would defeat the purpose of a monetary remedy under Title VII.

Additionally, the court considered whether Townsend is liable for compensatory and punitive damages. Under Musikiwamba v. ESSI, Inc., 760 F.2d 740, 749 (7th Cir.1985), all damages are available under the substantial continuity test. Thus, even though this is an equitable doctrine, it is not limited to equitable relief. Specifically in this case, the court reasoned that compensatory damages are appropriate against Townsend because these damages in a Title VII case are designed to make the employee whole. Accordingly, the court determined that compensatory damages may be appropriate here after a jury determines liability. However, the same cannot be said for punitive damages in this instance. Because punitive damages are designed to punish the wrongdoer, they are not appropriate against Townsend, who is not the wrongdoer in this action. However, it should be noted that the court did not state that punitive damages are never available against a successor corporation.

This case demonstrates the intricacies of successor liability. The substantial continuity test, applied in Title VII cases, is based in equity and requires the court to balance the interests at stake. Thus, results may vary on a case by case basis. However, it seems clear that a successor corporation is liable for the actions of a predecessor when it is aware of these actions and proceeds with the purchase anyway, carries on the same business, and it can pay damages when the predecessor cannot. Finally, it should be noted that both punitive and compensatory damages may apply to a successor.

Matthew J. Kibler, Esq.

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