Paschal et al v. Child Development Inc et al
OPINION AND ORDER denying 89 Plaintiffs' motion for summary judgment and granting 109 CDIHS's cross motion for summary judgment. Plaintiff's claims against CDIHS are dismissed with prejudice, and Judgment will be entered accordingly. Signed by Judge Kristine G. Baker on 1/7/2014. (thd)
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
SADIE PASCHAL, PENNY CLARK, BECCA COLEMAN,
DEBRA FRAZIER, EVANGELA JACKSON, HENRIETTA JAMES,
AMANDA KENNEY, VALERIE LEWIS, ANSHEKA NELSON,
ALICIA PETERSON, ASHLEY REED, JUANITA RELEFORD,
ANNA RENFRO, PATRICIA SHAVERS, TRACIE SMITH,
ANDREA TONEY, and VIRGINIA ZERMENO, INDIVIDUALLY
AND ON BEHALF OF OTHERS SIMILARLY SITUATED
Case No. 4:12-CV-0184 KGB
CHILD DEVELOPMENT, INC.,
COMMUNITY DEVELOPMENT INSTITUTE HEAD START
OPINION AND ORDER
Plaintiffs bring this action against defendants Child Development, Inc. (“Child
Development”) and Community Development Institute Head Start (“CDIHS”) for claims under
the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 216(b), the Employee Retirement Income
Security Act (“ERISA”), 29 U.S.C. §§ 1103, 1104, and 1106, the Arkansas Minimum Wage Act
(“AMWA”), Ark. Code Ann. §§ 11-4-218, 210, and the Arkansas Labor and Hours Relation
Code (“ALHRC”), Ark. Code Ann. § 11-4-405. Plaintiffs also allege claims for breach of
contract, promissory estoppel, and unjust enrichment.
Before the Court is plaintiffs’ motion for partial summary judgment on the successor
liability of CDIHS (Dkt. No. 89). CDIHS has responded (Dkt. No. 107) and filed a cross motion
for summary judgment on the issue of successor liability (Dkt. No. 109).
responded to CDIHS’s cross motion for summary judgment (Dkt. No. 113), and CDIHS has
replied (Dkt. No. 119). For the reasons that follow, plaintiffs’ motion for partial summary
judgment is denied (Dkt. No. 89), and CDIHS’s cross motion for summary judgment on the issue
of successor liability is granted (Dkt. No. 109).
Plaintiffs are former employees of Child Development. Child Development, as a grantee,
operated Head Start programs in twelve counties in Arkansas (hereinafter “Tri-Region,
Plaintiffs allege that Child Development did not pay any employees between
January 9, 2012, and February 10, 2012; that, between November 15, 2011 and January 9, 2012,
Child Development withheld for its own use money from plaintiffs’ compensation that Child
Development claimed to be for plaintiffs’ 403(b) retirement accounts and insurance premiums;
and that Child Development deprived plaintiffs and all other employees of Child Development of
earned leave time upon discharging plaintiffs and all other similarly situated employees on
February 3, 2012.
Plaintiffs and CDIHS agree that, during the relevant time period, CDIHS did not employ
plaintiffs, had no control of Child Development’s funds or operations, did not fail to pay
plaintiffs, had no contractual relationship with plaintiffs, made no promises to plaintiffs, and did
not fail to handle properly insurance premiums and retirement plan contributions. Instead,
CDIHS is assigned interim grants from the national Office of Head Start, Administration for
Children and Families (“ACF/OHS”), U.S. Department of Health and Human Services, to
operate Head Start grant recipient programs on an interim basis when a local Head Start grantee
cannot operate a Head Start program. The parties agree that CDIHS was assigned an interim
grant when the local Head Start grantee Child Development stepped aside.
On or about January 31, 2012, Child Development notified the Region VI, Department of
Health and Human Services, Office of Head Start that Child Development overspent its budget,
could not maintain the program, and could not make the next payroll. On January 31, 2012,
Community Development Institute (“CDI”) was given notice by ACF/OHS pursuant to the
Office of Head Start-National Interim Management Program (“NIMP”) contract that it might be
needed to oversee the implementation of interim Head Start services in Tri-Region, Arkansas. In
turn, a grant was awarded by the National Office of ACF/OHS to CDIHS as the interim provider
of the Head Start services in Tri-Region, Arkansas. On or about February 2, 2012, Child
Development voted to relinquish its grant and, thereafter, notified ACF/OHS in writing of its
decision to relinquish operation of the Head Start programs it was operating in Tri-Region,
Arkansas. On or about February 11, 2012, CDIHS began serving as the interim provider of the
Head Start services in Tri-Region, Arkansas, the area formerly served by Child Development.
Plaintiffs and CDIHS agree that CDIHS did not apply or submit a bid to become the
interim grantee of the Head Start program serving the Tri-Region, Arkansas. CDIHS was
awarded the grant because of the NIMP contract. Plaintiffs and CDIHS agree that the role of
CDIHS is to deliver interim Head Start services with little disruption to the children and families
receiving the services and to develop a Head Start program that is in compliance with Head Start
By way of background, CDI is a Colorado nonprofit corporation with offices in Denver,
Colorado, which is organized pursuant to § 501(c)(3) of the Internal Revenue Code. CDIHS
claims it also is a Colorado nonprofit corporation with offices in Denver, Colorado, and is
organized pursuant to § 501(c)(3) of the Internal Revenue Code. Plaintiffs deny these allegations
as to CDIHS but cite no authority in support of the denial.
CDIHS maintains that it is the sole contractor with the ACF/OHS to provide services to
the Office of Head Start-NIMP. Plaintiffs dispute this with no citation to authority. CDIHS
further maintains that the NIMP contract requires CDI to maintain a permanent professional staff
capable of providing the knowledge base, procedures, and technical, legal, financial, and
management expertise necessary for the operation of a Head Start program, while ACF/OHS
engages in the discretionary grants competition process for the selection of a permanent
replacement grantee. Plaintiffs again dispute this with no citation to authority. CDIHS contends
that, upon appointment, CDI must be prepared to be onsite as the representative of ACF/OHS
within 48 hours of being appointed and that the contract does not allow for additional
negotiations over any potential employee claims against the suspended/terminated/relinquished
grantee. Plaintiffs deny this. CDIHS maintains that, under the circumstances, the focus is on
maintaining the delivery of services to the underprivileged children eligible for Head Start
services. Plaintiffs dispute this with no citation to authority.
Plaintiffs and CDIHS agree that, as a part of its NIMP contract, CDI must maintain a
roster of qualified contract managers capable of implementing an interim program. CDI assigns
CDIHS to operate the day-to-day delivery of interim Head Start services in local areas. CDIHS
is assigned interim grants from the national ACF/OHS office to operate Head Start grant
recipient programs on an interim basis when a local Head Start grantee cannot operate a Head
CDIHS was assigned a new, separate grant with a new and unique grant identification
number to operate the Head Start program in Tri-Region, Arkansas, on an interim basis while the
ACF/OHS conducted the solicitation and application process to select a permanent replacement
grantee to operate the Head Start program for the counties in the Tri-Region, Arkansas.
Plaintiffs contend Child Development and CDIHS created a Memorandum of Understanding to
govern parts of the transition process. CDIHS disputes that the Memorandum of Understanding
was ever executed and refers to it as a “proposed” Memorandum of Understanding (Dkt. No.
108, ¶ 9; Dkt. No. 111, ¶ 19). Plaintiffs and CDIHS agree that CDIHS operates programs in
many, but not all, of the facilities formerly occupied by Child Development. However, it has
paid rent of $7,500.00 per month for 14 months to Child Development for facilities owned by
Child Development, and CDIHS does not use some facilities owned by Child Development. The
children eligible to receive federal Head Start services under applicable guidelines are the same,
irrespective of what entity may be providing the services.
Plaintiffs and CDIHS agree that CDIHS employed a majority of the former employees of
Child Development. Employees of Child Development that were interested in employment with
CDIHS were required to attend a job fair, review terms and conditions of employment with
CDIHS, file an application for specific positions, participate in an interview, and be selected for
employment with CDIHS in the sole discretion of CDIHS. Plaintiffs’ last day of employment
with Child Development was February 10, 2012, and first day of employment for those hired by
CDIHS was Monday, February 13, 2013. The parties agree that CDIHS employed 361 staff
members formerly employed by Child Development. The parties also agree that CDIHS hired
Jana Bays, Elizabeth Cox, Rosemary Henry, and Deborah Brown to administrative and
management positions. CDIHS states that Ms. Bays is currently the Program Director but
previously served Child Development as Early Head Start Director/Assistant Director. Ms. Cox
is currently a fiscal manager, Rosemary Henry is currently the administrative assistant for
payroll, and Deborah Brown is currently the administrative assistant for AP/AR (Dkt. No. 111,
¶ 24). However, CDIHS contends it did not hire any of the executives or other officers of Child
Development. Plaintiffs disagree but fail to elaborate.
Plaintiffs contend that CDIHS received $4,661,605.00 as an initial grant from the Office
of Head Start to run the operations in Tri-Region, Arkansas (Dkt. No. 91, ¶ 6). Plaintiffs also
contend that CDIHS submitted a budget proposal for $9,272,669.00 for operation of the Head
Start/Early Head Start facilities for Tri-Region, Arkansas, for February 1, 2012, through January
31, 2013 (Id., ¶ 18). Plaintiffs claim that CDIHS could have requested funds in its budget
proposal to cover the back pay of wages owed to plaintiffs by Child Development (Id., ¶ 19).
CDIHS disputes this.
CDIHS makes several assertions that plaintiffs dispute. CDIHS maintains that CDI and
CDIHS are separate entities from Child Development and that neither shares nor has ever shared
management or operations with Child Development (Dkt. No. 111, ¶ 14). CDIHS contends that
neither CDI nor CDIHS may apply to be the permanent replacement Head Start grantee (Id., ¶ 7).
CDIHS asserts that the grant received by CDIHS is a “categorical federal grant, which was
designated for Head Start services to children for approximately twelve months, beginning
February 11, 2012. . . . Its use is restricted for that purpose, and its grant funds are not available
to pay the obligations of a terminated/suspended/relinquished grantee for work previously
performed pursuant to a different grant. Rather, these grants are prospective and relate only to
the provision of future services. If such grant funds were used to pay for Child Development,
Inc.’s unsatisfied obligations, it would be at the expense of the underprivileged children Head
Start serves.” (Id., ¶ 16). CDIHS also maintains that “[t]here was no ‘transfer’ of federal
funding from Child Development, Inc., to [CDIHS] nor was there any transfer of Child
Development, Inc.’s corporate assets to [CDIHS]. Child Development, Inc., was funded by a
grant obtained through Region VI, Department of Health and Human Services, Office of Head
Start, which is located in Dallas, Texas. [CDIHS] is funded through a grant from the national
Office of Head Start located in Washington, D.C.” (Id., ¶ 17). Plaintiffs deny these allegations.
CDIHS also maintains that “[n]o assets or facilities owned by Child Development, Inc.,
have been transferred to or possessed by [CDIHS]. The only facilities, equipment or supplies
possessed or used by [CDIHS] that were formerly used or possessed by Child Development, Inc.,
are those which were purchased with ACF/OHS grant proceeds. This does not mean that Child
Development, Inc., has no assets. While it has filed for receivership and dissolution, . . . there
are assets of which it is disposing in that proceeding. . . . Both real and personal property
purchased with ACF/OHS grant proceeds are not owned by the grantee acquiring them. Such
property is subject to a federal interest and must be transferred to the next grantee for the benefit
of the children receiving Head Start services.
They are not held in trust for the federal
government by [CDIHS] and are not owned in fee absolute by [CDIHS]. Now that permanent
replacement grantees for the counties in TriRegion Arkansas have been selected to begin
operations in the summer of 2013, [CDIHS] will be required to transfer any such property to the
(Id., ¶ 20).
CDIHS also maintains that it “did not purchase Child
Development, Inc., or any of its assets. It did not engage in any negotiations with Child
Development, Inc., regarding purchase or acquiring assets owned by Child Development, Inc.”
(Id., ¶ 31). Plaintiffs do not agree. CDIHS also states it has no assets or profits which can be
used at its discretion (Id., ¶ 18). Plaintiffs claim they are without sufficient knowledge to admit
or deny this allegation and, therefore, deny it.
Summary Judgment Standard
Summary judgment is proper if the evidence, when viewed in the light most favorable to
the nonmoving party, shows that there is no genuine issue of material fact and that the defendant
is entitled to entry of judgment as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986). A factual dispute is genuine if the evidence could cause a reasonable
jury to return a verdict for either party. Miner v. Local 373, 513 F.3d 854, 860 (8th Cir. 2008).
“The mere existence of a factual dispute is insufficient alone to bar summary judgment; rather,
the dispute must be outcome determinative under the prevailing law.” Holloway v. Pigman, 884
F.2d 365, 366 (8th Cir. 1989). However, parties opposing a summary judgment motion may not
rest merely upon the allegations in their pleadings. Buford v. Tremayne, 747 F.2d 445, 447 (8th
Cir. 1984). The initial burden is on the moving party to demonstrate the absence of a genuine
issue of material fact. Celotex Corp., 477 U.S. at 323. The burden then shifts to the nonmoving
party to establish that there is a genuine issue to be determined at trial. Prudential Ins. Co. v.
Hinkel, 121 F.3d 364, 366 (8th Cir. 2008). “The evidence of the non-movant is to be believed,
and all justifiable inferences are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 255 (1986).
Plaintiffs seek to impose successor liability on CDIHS. The Court will examine the
doctrine of successor liability under federal labor laws as it relates to plaintiffs’ federal statutory
claims. The Court will then examine the doctrine of successor liability under Arkansas law.
Successor Liability Under Federal Labor Laws
The general rule of corporate liability is that, when a corporation sells all of its assets to
another, the latter is not responsible for the seller’s debts or liabilities, except where: (1) the
purchaser expressly or impliedly agrees to assume the obligations; (2) the purchaser is merely a
continuation of the selling corporation; or (3) the transaction is entered into to escape liability.
Golden State Bottling Co., Inc. v. N.L.R.B., 414 U.S. 168, 182 n.5 (1973). However, “[t]he
perimeters of the labor-law doctrine of successorship  have not been so narrowly confined.” Id.
Beginning with Golden State and other cases arising under the National Labor Relations Act
(“NLRA”), “federal courts have developed a federal common law successorship doctrine that
now extends to almost every employment law statute.” Steinbach v. Hubbard, 51 F.3d 843, 845
(9th Cir. 1995); see Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920
F.2d 1323 (7th Cir. 1990) (“Upholsterers”) (Multiemployer Pension Plan Amendments Act
(“MPPAA”)); Secretary of Labor v. Mullins, 888 F.2d 1448 (D.C. Cir. 1989) (Mine Safety and
Health Act); Criswell v. Delta Air Lines, Inc., 868 F.2d 1093 (9th Cir. 1989) (Age
Discrimination in Employment Act); Trustees for Alaska Laborers-Construction Industry Health
& Sec. Fund v. Ferrell, 812 F.2d 512 (9th Cir. 1987) (ERISA); Musikiwamba v. ESSI, Inc., 760
F.2d 740 (7th Cir.1985) (42 U.S.C. § 1981); Dominguez v. Hotel, Motel, Restaurant & Misc.
Bartenders, 674 F.2d 732 (8th Cir. 1982) (Title VII); Leib v. Georgia-Pac. Corp., 925 F.2d 240,
245-46 (8th Cir. 1991) (Vietnam Veteran’s Readjustment Act). This Court and others have
specifically found that successorship may apply to claims arising under the FLSA, as well (Dkt.
No. 22) (citing Brock v. LaGrange Equip. Co., CV 86-0-170, 1987 WL 39105 (D. Neb. July 14,
1987); Steinbach, 51 F.3d at 845).
“Successorship liability was originally adopted under the NLRA to avoid labor unrest and
provide some protection for employees against the effects of a sudden change in the employment
relationship.” Steinbach, 51 F.3d at 845 (citing Golden State, 414 U.S. at 182-85; John Wiley &
Sons, Inc. v. Livingston, 376 U.S. 543, 549 (1964)). “In deciding to extend successorship
liability to other contexts, courts have recognized that extending liability to successors will
sometimes be necessary in order to vindicate important statutory policies favoring employee
Id.; see also Upholsterers, 920 F.2d at 1326.
Therefore, the question of
successorship in the labor context “requires analysis of the interests of the new employer and the
employees and of the policies of the labor laws in light of 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.” Howard Johnson
Co. v. Detroit Local Joint Executive Bd., Hotel & Rest. Emp. & Bartenders Int’l Union, AFLCIO, 417 U.S. 249, 264 n.9 (1974). The inquiry is fact intensive. N.L.R.B. v. Winco Petroleum
Co., 668 F.2d 973, 975 (8th Cir. 1982).
“Particularly in light of the difficulty of the
successorship question, the myriad factual circumstances and legal contexts in which it can arise,
and the absence of congressional guidance as to its resolution, emphasis on the facts of each case
as it arises is especially appropriate.” Howard Johnson, 417 U.S. at 254. “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.” Id. at 262 n.9.
The Eighth Circuit has adopted the nine-factor test for determining successorship stated
in Equal Employment Opportunity Comm’n v. MacMillan Bloedel Containers, Inc., 503 F.2d
1086, 1094 (6th Cir. 1974). See Prince v. Kids Ark Learning Ctr., LLC, 622 F.3d 992, 995 (8th
Cir. 2010) (“The leading approach to resolving questions of successor liability remains the Sixth
Circuit’s decision in MacMillan, where the court set forth a nine-factor test to be applied on a
case-by-case basis.”). The nine MacMillan factors are: (1) whether the successor company had
notice of the charge; (2) the ability of the predecessor to provide relief; (3) whether there has
been a substantial continuation of business operations; (4) whether the new employer uses the
same plant; (5) whether the new employer uses the same or substantially the same work force;
(6) whether the new employer uses the same or substantially the same supervisory personnel; (7)
whether the same jobs exist under substantially the same working conditions; (8) whether the
new employer uses the same machinery, equipment, and methods of production; and (9) whether
the new employer produces the same product. Prince, 622 F.3d at 995 (citing MacMillan, 503
F.2d at 1086); see also Leib, 925 F.2d 247 (same). These factors were subsequently incorporated
into FMLA regulations. 29 C.F.R. § 825.107. As noted by other courts and as noted in this
Court’s previous order, the MacMillan factors can be condensed to only the first three factors –
notice, ability of the predecessor to provide relief, and substantial continuity – as the fourth
through ninth factors are essentially subfactors for determining substantial continuity. See
Wheeler v. Snyder Buick, Inc., 794 F.2d 1228, 1236 n.7 (7th Cir. 1986) (“The third factor
represents an amalgamation of a number of indicia of continuity set forth in MacMillan . . . .”).
The MacMillan factors “are not in themselves the test for successor liability. . . . The
ultimate inquiry always remains whether the imposition of the particular legal obligation at issue
would be equitable and in keeping with federal policy.” Prince, 622 F.3d at 995 (quoting Cobb
v. Contract Transp., Inc., 452 F.3d 543, 554 (6th Cir. 2006)). “Instead, the [MacMillan] factors
are simply factors courts have considered when applying the three prong balancing approach,
considering the defendant’s interests, the plaintiff’s interests, and federal policy.” Cobb, 452
F.3d at 554. Likewise, “all nine factors will not be applicable to each case. Whether a particular
factor is relevant depends on the legal obligation at issue in the case.” Id. The Court will apply
these factors to the present case.
Transfer Of Assets
As an initial matter, the Court first addresses the parties’ dispute as to whether there must
be a transfer of assets or property. CDIHS contends that the “threshold inquiry” is whether there
was a transfer of assets. This Court, in denying CDIHS’s motion to dismiss, rejected CDIHS’s
reliance on only whether a transfer of assets occurred (Dkt. No. 22). There is no explicit
requirement of a transfer of assets in the “substantial continuity” test for successor liability. See
Cobb, 452 F.3d at 554-55 (“Because the merger or transfer of assets is not a precondition to
successor liability in the labor law (or Title VII) context, it is not a precondition for liability in
the FMLA context.”); Leib, 925 F.2d at 247 (holding that the district court erred in focusing
exclusively on whether there was continuity in “ownership or control” and not considering all of
the relevant factors under the substantial continuity test). However, the Court recognizes that
whether a transfer of assets occurred may be relevant to the finding of substantial continuity
when balancing the equities in a particular case. Cobb, 452 F.3d at 556 (“Title VII cases do
consider the existence of a merger or transfer of assets, and we believe that in some cases
consideration of the existence of a merger or transfer of assets is appropriate.”) (citing EEOC v.
Vucitech, 842 F.2d 936, 945 (7th Cir. 1988)); see, e.g., Korlin v. Chartwell Health Care, Inc.,
128 F. Supp.2d 609, 614 (E.D. Mo. 2011) (declining to impose successor liability under Title VII
on the facts presented without a merger or transfer of assets because the court concluded that, if
the cost of liability was not reflected in any purchase price, imposition of successor liability
would not be equitable). Accordingly, the Court will consider the nature of the transaction as it
relates to the MacMillan factors and the balance of the equities.
The Court also gives consideration to whether there is substantial continuation of the
operations. The facts here are not disputed that CDIHS used most of the same facilities as Child
Development; employed substantially the same work force and substantially the same
supervisory personnel, at least as to the management of CDIHS’s operations in Child
Development’s former service area; had substantially the same working conditions; and provided
substantially the same services. CDIHS maintains that, despite meeting these factors, the nature
of the transaction here differs from those transactions in which successor liability has been
In support of this, CDIHS cites the way in which assets first used by Child Development
and then used by CDIHS are held. CDIHS claims that Child Development held nominal title to
these assets and that the assets were actually held in trust for the beneficiaries of the Head Start
program. See Neukirchen v. Wood County Head Start, 54 F.3d 809 (7th Cir. 1995) (analyzing
the application of this federal interest to a Head Start grant recipient). While CDIHS may use
program assets formerly used by Child Development, CDIHS’s use is also subject to these same
trust limitations. As a result, when a permanent replacement grantee is selected to provide Head
Start services beginning in the summer of 2013, in the Tri-Region, Arkansas, CDIHS will have
the same obligation to transfer program assets to the selected grantee as required by ACF/OHS
(Dkt. No. 110, at 5-7).
CDIHS also argues that there is no substantial continuation of business operations in
view of the interim nature of its operations. As CDIHS explains, Child Development was a
permanent, long-term grantee selected through the traditional competitive application process
and, provided it met ACF/OHS quality standards, could have continued to apply for and receive
Head Start grants. In contrast, CDIHS was brought in under an existing contract to provide
temporary, interim Head Start services for approximately 12 months to allow for a new longterm grantee to be selected pursuant to the traditional competitive grant process.
contends that “[p]roviding Head Start services in a defined area of one state for an indefinite
period is a fundamentally different business than being on standby to perform interim services
typically limited to one year in unidentified areas throughout the United States.” (Dkt. No. 110,
at 12). The Court agrees. Without more, the subfactors of the facilities, workforce, and services
could suggest substantial continuation of operations. However, the Court cannot find substantial
continuity given the nature of the transaction and CDIHS’s temporary involvement in providing
Head Start services in Tri-Region, Arkansas.
Even if the Court were to find substantial continuity, “[t]he ultimate inquiry always
remains whether the imposition of the particular legal obligation at issue would be equitable and
in keeping with federal policy.” Prince, 622 F.3d at 995. As discussed in more detail below, the
nature of this transaction weighs against a finding of successor liability.
Notice And The Predecessor’s Ability To Provide Relief
The Seventh Circuit has explained that notice and the predecessor’s ability to provide
relief are “critical” because “it would be inequitable to hold a successor liable when it was
unable to take the liability into account in negotiating the acquisition price or when the
predecessor was capable of paying and merely attempted to externalize the liability onto another
party.” Upholsterers, 920 F.2d at 1327 (citing Wheeler, 794 F.2d at 1236); see also Brock, 1987
WL 39105, at *2 (“The notice inquiry is more significant in the case of a disinterested third party
purchased than in a situation involving the same parties on both sides of the transaction.”) (citing
Evans Servs., Inc. v. N.L.R.B., 810 F.2d 1089, 1093 n.5 (11th Cir. 1987)). Steinbach, 51 F.3d at
847 (“The principle reason for the notice requirement is to ensure fairness by guaranteeing that a
successor had an opportunity to protect against liability by negotiating a lower price or indemnity
clause.”); Musikiwamba, 760 F.2d at 752 (same). Because these factors are interrelated, the
Court will examine and address them together.
The Court first considers the ability of the predecessor to provide relief. This factor is
examined because “it would be grossly unfair, except in the most exceptional circumstances, to
impose successor liability on an innocent purchaser when the predecessor is fully capable of
providing relief or when the successor did not have the opportunity to protect itself by an
indemnification clause in the acquisition agreement or a lower purchase price.” Musikiwamba,
760 F.2d at 750. It appears that there are obstacles to Child Development’s providing relief.
Indeed, CDIHS’s involvement in this case was necessitated in large part by Child Development’s
relinquishing its grant due to its inability to meet its financial obligations. Child Development
has filed for receivership and dissolution in state court.
As for notice, the parties do not dispute that CDIHS had some knowledge of the unpaid
wages. CDIHS “admits that it had an awareness or general knowledge that [Child Development]
had not paid its employees,” but CDIHS claims it “did not have access to the records of [Child
Development] to give it actual knowledge of what was owed or to whom.” (Dkt. No. 108, ¶ 12).
CDIHS maintains that, for notice to be meaningful, it must be adequate to allow the successor to
protect itself, e.g., by accounting for notice of the violations in negotiating the purchase of a
business or its assets (Dkt. No. 107, at 7) (citing NLRB v. Leiferman Enterprises, LLC, 649 F.3d
873, 879 (8th Cir. 2011)). Plaintiffs acknowledge that the purpose of the notice requirement is to
permit a successor to use this information and to account for any liabilities when it acquires a
predecessor (Dkt. No. 113, at 6). Even with this, however, the parties dispute whether the notice
CDIHS had was adequate.
CDIHS argues it did not have adequate notice because its NIMP contract “allowed
neither [the] time nor the ability to negotiate any provisions to allow it to accommodate liability
for [Child Development]’s failure to pay wages.” (Dkt. No. 107, at 7-8). CDIHS emphasizes
that any negotiation as to its NIMP contract for interim management predated notification of
Child Development’s relinquishment of its grant (Dkt. No. 110, at 10). In addition, according to
the affidavit of Carolyn Miller, in the event that a Head Start program is suspended, terminated,
or relinquished, ACF/OHS, without further negotiation, appoints CDIHS to establish an interim
Head Start program in the area formerly serviced by the suspended/terminated/relinquished
grantee. CDIHS must be prepared to be onsite as a representative of the ACF/OHS within 48
hours of being appointed as an interim grantee. CDIHS and Ms. Miller state that CDIHS’s
NIMP contract does not allow for negations for any potential employee claims against the
predecessor grantee and that paying the obligations of the predecessor grantee is not a permitted
obligation of CDIHS’s grant. Plaintiffs disagree and contend that CDIHS “was in a position to
account for this liability when it took over the programs.” (Dkt. No. 113, at 6).
Plaintiffs argue that contracting for liability is not the only method by which CDIHS
could have accounted for liability. Despite the affidavit of Ms. Miller to the contrary, plaintiffs
argue that CDIHS had the ability to request or allot funding to cover its liability. Plaintiffs cite
CDIHS’s Funding Proposal Narrative for program year February 1, 2012, to January 31, 2013,
and claim that CDIHS “could have easily allotted or requested additional funds to cover the
liabilities” because the funding narrative “lays out a budget specifically for staff salaries” (Dkt.
No. 113, at 6-7; see Dkt. No. 111-12, at 10). Plaintiffs also point to the allotment in the Funding
Proposal Narrative for $22,826 for “Liability / Legal Services [and] Legal Expenses” (Dkt. No.
111-12, at 12). Plaintiffs argue in their response that CDIHS’s only evidence that it cannot use
the budget to cover back pay is “the self-serving affidavit of Carolyn Miller.” Plaintiffs contend
nothing in the NIMP contract prevents using grant funds or requesting grant funds for the use of
paying outstanding obligations incurred by the previous grantee.
The Court rejects plaintiffs’ arguments.
Plaintiffs’ arguments rely on little, if any,
evidence in the record, and plaintiffs wholly fail to meet proof with proof as to Ms. Miller’s
affidavit. First as to plaintiffs’ claim regarding the funding proposal, it appears that the allotment
for salaries is only for current or future employees of CDIHS. The Court is not persuaded this
line item could be used to satisfy Child Development’s past obligation. Likewise, the Court is
not persuaded that a line item for “Liability / Legal Services [and] Legal Expenses” is meant to
cover the obligations of a previous grantee. Plaintiffs cite to no legal authority for their position
and rely on no evidence in the record to support their arguments as to these two items, instead
pointing only to the language of the form and the purported absence of restrictions in the NIMP
Plaintiffs also do not counter Ms. Miller’s affidavit. Ms. Miller’s affidavit provides that
the NIMP contract does not allow for negations for any potential employee claims against the
predecessor grantee, that paying the obligations of the predecessor grantee is not a permitted
obligation of CDIHS’s grant, and that CDIHS’s grants are prospective and relate only to the
provision of future services. Instead, plaintiffs simply dismiss the affidavit as self-serving.
In further response to plaintiffs’ claim that Ms. Miller’s affidavit is self-serving, CDIHS
in support of its reply presents the affidavit of Peter Thompson, the Director of Grants Policy
Division, Administration for Children and Families, HHS, which corroborates Ms. Miller’s
affidavit (Dkt. No. 119-1). Mr. Thompson states in part:
Under the applicable Office of [M]anagement and Budget Circulars and
regulations, a new grant does not and cannot provide funds to pay the liabilities of
a terminated grantee, which includes a grantee that has relinquished its grant. See
45 C.F.R. §1303.2 (defining termination to include voluntary relinquishment);
[see Termination and Enforcement under A-110 and Termination Costs
Applicable to Sponsored Agreements under A-122].
(Dkt. No. 119-1, ¶ 11).
CDIHS also in its reply presents the affidavit of Patricia Terry, the accounting manager
for CDIHS, in which Ms. Terry states that the line item for “Liability / Legal Services [and]
Legal Expenses” is only for future legal expenses for CDIHS and in no way reflects liability for
the prior grantee (Dkt. No. 119-2).
These points underscore the deficiency of notice here which, when coupled with the
nature of the transaction itself, persuades this Court that successor liability is inappropriate.
Although CDIHS admits having “general” knowledge that Child Development had not paid its
employees, CDIHS’s funding proposal narrative states CDIHS “has been left to make sense of
things with no help from the previous grantee.” (Dkt. No. 111-12). In addition, the record
indicates that CDIHS was unable to execute the Memorandum of Understanding with Child
Development due to “the lack of reliable obtained information” (Dkt. No. 90-8).
importantly, however, CDIHS has demonstrated that, even if it had sufficient knowledge of the
potential claims against Child Development, it had no ability to account for those claims.
Plaintiffs cite to no legal authority or record evidence that contradicts CDIHS’s showing that it
could not negotiate the terms of its interim grant, request funds for Child Development’s
obligations, or otherwise account for the liability of Child Development for alleged past
employment law violations.
Plaintiffs and CDIHS agree that CDIHS did not apply or submit a bid to become the
interim grantee of the Head Start program serving the Tri-Region, Arkansas. CDIHS was
awarded the grant because of the NIMP contract that predated its notice of Child Development’s
relinquishment. This is not a situation in which the parties could negotiate to account for the
risks presented by this type of notice; they could not shift the potential liability in a bargained-for
transaction or seek an indemnification agreement from Child Development before becoming an
interim grantee for Child Development under the NIMP contract. Under the facts of this case,
based on the record evidence before the Court, the deficient notice coupled with CDIHS’s
inability through the interim grant process to account for the obligations of Child Development
counsel against imposing successor liability.
The Court acknowledges that, if successor liability is not imposed, plaintiffs may be
without a meaningful remedy as there are obstacles to Child Development’s ability to provide
As to the employees’ interest, “[t]he balancing process includes an emphasis upon
protection for the victimized employee, who is ‘now without meaningful remedy when title to
the employing business changes hands.’” Winco, 668 F.2d 978 (quoting Golden State, 414 U.S.
at 181). The FLSA was passed to protect workers’ standards of living through the regulation of
working conditions. 29 U.S.C. § 202. “That fundamental purpose is as fully deserving of
protection as the labor peace, anti-discrimination, and worker security policies underlying the
NLRA, Title VII, 42 U.S.C. § 1981, ERISA, and MPPAA.”
Steinbach, 51 F.3d at 845.
However, here, there is a competing federal interest under the Head Start program, which exists
“to promote the school readiness of low-income children by enhancing their cognitive, social,
and emotional development.” 42 U.S.C. § 9831.
Plaintiffs and CDIHS agree that the role of CDIHS is to deliver interim Head Start
services with little disruption to the children and families receiving the services and to develop a
Head Start program that is in compliance with Head Start Performance standards. Plaintiffs seek
to impose successor liability on CDIHS by virtue of its acceptance of federal grant money to run
a troubled, local Head Start program on an interim basis. Imposing successor liability in this
context on the facts presented risks impeding the federal policy of the Head Start program.
Balancing the parties’ interests and the federal policies at issue, the Court finds that
successor liability should not lie in this case. Accordingly, the Court finds that CDIHS is not a
successor in interest to Child Development for purposes of plaintiffs’ claims under the FLSA and
ERISA. Therefore, CDIHS’s motion for summary judgment as to these claims is granted.
State Law Successorship
Defendants also move for summary judgment on the issue of successor liability as to
plaintiffs’ state-law claims. Under Arkansas law, the general rule is that a corporation which
purchases the assets of another corporation does not succeed to the liabilities of the selling
corporation. Ford Motor Co. v. Nuckolls, 894 S.W.2d 897, 903 (Ark. 1995). However, the
general rule is subject to the following exceptions: (1) where the transferee assumes the debts
and obligations of the transferor by express or implied agreement; (2) where there is a
consolidation or merger of the two corporations; (3) where the transaction is fraudulent or
lacking in good faith; and (4) where the purchasing corporation is a mere continuation of the
selling corporation. Id. “The general rule and its exceptions have long been a part of Arkansas
law.” Swayze v. A.O. Smith Corp., 694 F. Supp. 619, 622 (E.D. Ark. 1988) (citing Good v.
Ferguson & Wheeler Land, Lumber & Handle Co., 153 S.W. 1107 (Ark. 1913)).
Here, plaintiffs claim the “mere continuation exception.”
Courts considering this
exception “emphasize a common identity of officers, directors, and stock between the selling and
purchasing corporations.” Campbell v. Davol, Inc., 620 F.3d 887, 892 (8th Cir. 2010) (quoting
Swayze, 694 F.Supp. at 622-23). Notably, “it is not the general overlap of employees that is
relevant in determining whether the mere continuation exception applies; rather, it is the
common identity of officers and directors between the selling and purchasing corporations with
which the court is concerned.” Id. In addition, “common identity of assets is not one of the
factors that is considered in determining whether a purchasing corporation is a mere continuation
of a selling corporation under Arkansas law, according to Swayze.” Id.; see also 15 Fletcher
Cyc. Corp. § 7124.10 (“In determining whether one corporation is a continuation of another, the
test is whether there is a continuation of the corporate entity of the transferor, not whether there
is a continuation of the transferor’s business operations.”)
CDIHS argues that it is not a successor company under the mere continuation exception
because there was no transfer of stock or other assets and there is not an officer/ director overlap.
As an initial matter, the parties do not address whether a transaction is required under the mere
continuation exception in Arkansas.
Nonetheless, the Court agrees with CDIHS that the
requirements for the mere continuation exception are not met here. Clearly, there was no
transfer of stock.
Further, although CDIHS hired some management and administrative
personnel for the Head Start program in Tri-Region, Arkansas, this can hardly be said to be a
“common identity of officers and directors.” Moreover, for the reasons stated, the Court has
determined that plaintiffs cannot meet the more liberal successor liability standard under federal
labor and employment laws. For these same reasons, plaintiffs cannot show successorship under
the narrower “mere continuation” exception to the traditional rule of successor liability applied
in Arkansas. Therefore, the Court grants CDIHS’s cross motion for summary judgment as to
plaintiffs’ state-law claims, and these claims are dismissed with prejudice.
Plaintiffs’ motion for summary judgment is denied (Dkt. No. 89). CDIHS’s cross motion
for summary judgment is granted (Dkt. No. 109). Finding no successor liability on the part of
CDIHS as a matter of law, plaintiffs’ claims against CDIHS are dismissed with prejudice.
Judgment in favor of CDIHS will be entered accordingly.
SO ORDERED this the 7th day of January, 2014.
Kristine G. Baker
United States District Judge
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