Kratz v. Richard J. Boudreau & Associates, LLC
ORDER denying 32 Defendant Schlee & Stillman's Motion for Summary Judgment. So Ordered by Judge Steven J. McAuliffe.(lat)
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 1 of 28
UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Case No. 15-cv-232-SM
Opinion No. 2017 DNH 153
Richard J. Boudreau
& Associates, LLC, and
Schlee and Stillman, LLC,
O R D E R
Plaintiff, Patricia Kratz, filed this suit against her
employer, Richard J. Boudreau & Associates, LLC. (“RJBA”).
seeks damages against Boudreau under Title VII and NH RSA 354-A
for sexual harassment and retaliation, and asserts those
identical claims against Schlee and Stillman, LLC (“Schlee &
Stillman”) as a “successor” to Boudreau.
(Schlee & Stillman
purchased all of Boudreau’s assets in April of 2015.)
Stillman moves for summary judgment on Kratz’s claims.
is a close call, on the record as it has been presented, the
motion is necessarily denied.
STANDARD OF REVIEW
When ruling on a motion for summary judgment, the court is
“obliged to review the record in the light most favorable to the
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 2 of 28
nonmoving party, and to draw all reasonable inferences in the
nonmoving party's favor.”
Block Island Fishing, Inc. v. Rogers,
844 F.3d 358, 360 (1st Cir. 2016) (citation omitted).
judgment is appropriate when the record reveals “no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
In this context, a factual dispute “is ‘genuine’ if the
evidence of record permits a rational factfinder to resolve it
in favor of either party, and ‘material’ if its existence or
nonexistence has the potential to change the outcome of the
Rando v. Leonard, 826 F.3d 553, 556 (1st Cir. 2016)
Consequently, “[a]s to issues on which the
party opposing summary judgment would bear the burden of proof
at trial, that party may not simply rely on the absence of
evidence but, rather, must point to definite and competent
evidence showing the existence of a genuine issue of material
Perez v. Lorraine Enters., 769 F.3d 23, 29–30 (1st Cir.
In other words, if the nonmoving party's “evidence is
merely colorable, or is not significantly probative,” no genuine
dispute as to a material fact has been proved, and summary
judgment may be granted.
Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 249-50 (1986) (citations omitted).
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 3 of 28
So, to defeat a properly supported motion for summary
judgment, the non-movant must support his or her factual claims
with evidence that conflicts with that proffered by the moving
See generally Fed. R. Civ. P. 56(c).
follows that while a reviewing court must take into account all
properly documented facts, it may ignore a party's bald
assertions, speculation, and unsupported conclusions.
Serapion v. Martinez, 119 F.3d 982, 987 (1st Cir. 1997).
also Scott v. Harris, 550 U.S. 372, 380 (2007) (“When opposing
parties tell two different stories, one of which is blatantly
contradicted by the record, so that no reasonable jury could
believe it, a court should not adopt that version of the facts
for purposes of ruling on a motion for summary judgment.”).
Construing the record in the light most favorable to
plaintiff, and resolving all reasonable inferences in her favor,
the relevant facts appear to be as follows.
RJBA began business as a debt collection law firm in 2001.
Richard Boudreau owned 99 percent of RJBA; the remaining one
percent was owned by Keith Mitchell, who began working for RJBA
as its head of litigation in 2006, and then worked as its
Managing Attorney until RJBA’s closure in April, 2015.
peak, the firm had ten offices in several different states,
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 4 of 28
including New Hampshire, Massachusetts, Rhode Island,
Connecticut, Virginia, North Carolina, South Carolina, Georgia
See Document No. 32-2 at 64:1-4; Document No. 32-4
RJBA and Schlee & Stillman
Beginning around 2013, RJBA saw its business begin to
Concerned that RJBA might not survive the decline,
Boudreau attempted to consolidate RJBA’s business operations in
Woburn, Massachusetts, and decreased its workforce by
approximately 40 percent.
However, Boudreau’s efforts to save
the firm were unsuccessful, and eventually RJBA was dissolved.
Before the firm dissolved, however, RJBA began negotiating
an asset purchase agreement with Schlee & Stillman.
As part of
those negotiations, Schlee & Stillman reached out to and
negotiated facilitating agreements with several of RJBA’s
Specifically, Schlee & Stillman resolved potential
issues with: (1) Cummings Properties, the owner of property that
RJBA leased for its office in Woburn, Massachusetts; (2)
Pentucket Bank, RJBA’s main creditor, which had extended RJBA a
$1.3 million line of credit in return for a security interest in
RJBA’s assets, including its capital, receivables and equipment;
and (3) Brooks Properties, the holders of a mortgage on property
RJBA had purchased in Salem, New Hampshire.
While the record is
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 5 of 28
not entirely clear, Schlee and/or Stillman also spoke with
Mitchell concerning a pending litigation matter against RJBA
involving Citizens Bank.
See Document No. 32-4 at 49:19 – 50:1;
14:16 – 15:9.
On April 1, 2015, an asset purchase agreement between RJBA
and Schlee & Stillman was executed.
Under the agreement’s
terms, Schlee & Stillman paid $15,000 directly to Pentucket Bank
in return for all of RJBA’s assets.
The asset purchase
agreement between RBJA and Schlee & Stillman included a
provision that released Schlee & Stillman from “all liabilities
and obligations of [RJBA] with respect to current or former
Document No. 32-3 at 2.
On the same day, April 1, 2015, Schlee & Stillman opened a
Woburn branch, hiring the majority of RJBA’s employees.
employees included Boudreau, who became Schlee & Stillman’s
regional attorney manager, and Mitchell.
Robert O’Brien, a
litigation attorney who had been working with RJBA for several
years, had already begun working as an attorney for Schlee &
Stillman, as of January 1, 2015.
Schlee & Stillman assumed
RJBA’s lease of the property in Woburn, and began operating its
newly established branch out of that same office.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 6 of 28
Patricia Kratz & RJBA
Patricia Kratz began working for RJBA as a debt collector
on April 21, 2014, about one year before its dissolution.
Shortly after starting work, Kratz says she was subjected to
frequent sexual harassment by her training manager, Richard
For example, she says Fradette would take hold of her
hand and not let go; would touch her hair; rub her head,
shoulders and back; and would pinch her on the side of the
In addition, Fradette made comments to Kratz that were
sexual in nature, including telling her that he took Viagra;
that she was beautiful, and should be a model; and that he was
celibate in his marriage and wanted a new wife.
allegedly propositioned Kratz, asking her for a hug, or that she
go out for drinks with him, and not tell her husband.
On May 15, 2014, Kratz complained to Greg Ormond, RJBA’s
Director of Operations, that she was being sexually harassed by
Kratz then met with Ormand and a Human Resources
representative concerning her complaint.
However, no remedial
action was taken.
Following Kratz’s complaint, she was ridiculed by other
RJBA employees, including managers, for complaining about sexual
In addition, she was given poor quality leads to
Eventually, on June 2, 2014, Kratz was fired, purportedly
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 7 of 28
for not meeting her assigned quota.
Because other RJBA
employees who did not meet their quota were not terminated,
Kratz contends that her discharge was retaliatory - that she was
actually fired because she complained about sexual harassment.
On June 12, 2014, Kratz filed a formal Charge with the New
Hampshire Commission for Human Rights and the Equal Employment
Opportunity Commission (“EEOC”).
to RJBA on June 19, 2014.
Notice of the Charge was sent
RJBA filed an answer to the Charge on
August 18, 2014, which was signed and sworn to by Mitchell.
On November 12, 2014, the parties engaged in an
unsuccessful mediation proceeding.
Robert O’Brien appeared at
the mediation as RJBA’s attorney, and Mitchell spoke with the
mediator by phone.
The parties exchanged settlement proposals,
but no resolution was reached.
Following the mediation, the
Charge remained under investigation at the Human Rights
Commission and the EEOC until after the asset purchase was
On April 13, 2015, Kratz obtained a Right to Sue
On June 18, 2015, Kratz filed this suit, asserting claims
against RJBA under Title VII and NH RSA 354-A for sexual
harassment and retaliation, and against Schlee & Stillman based
on a “successor liability” theory.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 8 of 28
Kratz’s Claim and Schlee & Stillman
Prior to execution of the April 1, 2015, asset purchase
agreement, Schlee & Stillman did not review any RJBA records
concerning regulatory matters relating to RJBA, consumer
complaints relating to RJBA, or any records regarding pending or
potential lawsuits to which RJBA was a party.1
See Document No.
32-1 at ¶¶ 8-10.
Boudreau testified at deposition that he did not recall
when he became aware of the Kratz matter (which Mitchell was
handling on RJBA’s behalf).
He was generally uninvolved, and
did not remember discussing the matter with Mitchell.
Document No. 32-2 at 53:2-16; 12:18-13:8.
testified that he did not notify Schlee & Stillman of the
pending Kratz matter.
Id. at 50:5-10.
Mitchell testified at deposition that RJBA’s administrative
complaint records would have included Kratz’s EEOC charge.
Document No. 32-4 at 34:23 – 37:19. However, Schlee & Stillman
asserts that, during discovery, certain RJBA records produced
did not actually include that information. See Def.’s Reply in
Supp. of Mot. for Summ. Judgment at 4.
As plaintiff correctly points out, it is unclear from the
record whether those documents produced by Schlee & Stillman
included the entirety of RJBA’s potentially responsive
documents. See Pl.’s Surreply in Further Supp. of Opp. to Summ.
Judgment at 3. But more importantly, defendant’s assertion is
unsupported by any factual affidavit in the record, and is not
properly before the court at this time.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 9 of 28
For his part, Mitchell testified that he did not raise the
Kratz matter with Schlee & Stillman before April 1, 2015.
Document No. 32-4, at 40:12-16.
In fact, Mitchell stated that
he did not discuss the Kratz matter with anyone at Schlee &
Stillman until after Schlee & Stillman was served by Kratz in
See id., at 43:4-6; 46:3-11.
On April 22, 2015,
while working for Schlee & Stillman, Mitchell sent a letter to
Kratz, copying the EEOC, noting that all further communication
regarding the matter should be sent directly to Boudreau, as an
Id. at 43:7-23; 48:3-6.
Mitchell did not consult
with anyone at Schlee & Stillman before sending the letter.
As previously discussed, O’Brien began working for Schlee &
Stillman on January 1, 2015.
O’Brien did not discuss the Kratz
matter with anyone from Schlee & Stillman between January 1,
2015, and April 1, 2015.
See Document No. 32-5, at 13:1-7.
And, as of the date of his deposition, August 31, 2016, O’Brien
testified that he had yet to discuss the Kratz matter with
anyone from Schlee & Stillman.
Schlee & Stillman seeks summary judgment on grounds that it
had no notice of Kratz’s claim prior to its acquisition of
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RJBA’s assets, and so cannot be held liable to Kratz as a
successor to RJBA.
Generally, under New Hampshire law, when one corporation
sells all or a substantial portion of its assets to another, the
purchaser does not assume the liabilities of the seller.
Bielegus v. EMRE of New Hampshire Corp., 149 N.H. 635, 640
(2003) (“The standard for successor liability . . . begins with
the general rule of commercial law that a corporation purchasing
the assets of another corporation is not liable for the seller’s
Judicially recognized exceptions to that rule exist,
for example, when “the asset transfer amounts to a de facto
merger of the two corporations,” but the rule recognizes the
“free alienability of corporate assets to maximize their
productive use,” and “that an ordinary contract will not bind an
unconsenting successor to a contracting party.”
Id. at 640
Successor liability in suits involving unlawful employment
practices, however, is a bit more complicated.
In such cases,
federal courts have taken a more expansive view of successor
See Einhorn v. M.L. Ruberton Const. Co., 632 F.3d
89, 94 (3d Cir. 2011) (“Federal courts beginning with Golden
State [Bottling Co. v. NLRB, 414 U.S. 168 (1973)] have developed
a federal common law successorship doctrine imposing liability
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 11 of 28
upon successors beyond the confines of the common law rule when
necessary to protect important employment-related policies.”);
see also John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543,
549 (1964) (“[t]he objectives of national labor policy,
reflected in established principles of federal law, require that
the rightful prerogative of owners independently to rearrange
their businesses and even eliminate themselves as employers be
balanced by some protection to the employees from a sudden
change in the employment relationship.”).
While our court of appeals has not directly considered the
issue, other circuits addressing successor liability in the
Title VII employment context have applied “a federal common law
standard of successor liability . . . that is more favorable to
plaintiffs than most state-law standards to which the court
might otherwise look.”
Teed v. Thomas & Betts Power Sols.,
L.L.C., 711 F.3d 763, 764 (7th Cir. 2013).
See, e.g., EEOC v.
MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir.
1974); Wheeler v. Snyder Buick, Inc., 794 F.2d 1228, 1236 (7th
Cir. 1986); Rojas v. TK Communications, Inc., 87 F.3d 745, 750
(5th Cir. 1996).
The parties here seemingly recognize, and
agree, that the federal common law standard of successor
See Def.’s Mot. for Summ. Judgment at 7-8;
Pl.’s Mem. in Supp. of Opp. to Summ. Judgment at 4-5.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 12 of 28
In EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d at
1094, the Sixth Circuit described a useful nine-factor test when
determining successor liability under Title VII:
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
continuity of business operations, 4) whether the new
employer uses the same plant, 5) whether he uses the
same or substantially the same work force, 6) whether
he uses the same or substantially the same supervisory
personnel, 7) whether the same jobs exist under
substantially the same working conditions, 8) whether
he uses the same machinery, equipment and methods of
production and 9) whether he produces the same
The Sixth Circuit subsequently clarified that the “nine-factors
listed in MacMillan and subsequently adopted in regulation 29
C.F.R. § 825.107, are not in themselves the test for successor
Instead, the nine 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 v. Contract Transp., Inc.,
452 F.3d 543, 554 (6th Cir. 2006).
Courts have generally focused on the first three of the
See, e.g., Guarcas v. Gourmet Heaven, LLC,
No. CV 15-056ML, 2016 WL 7632844, at *6 (D.R.I. Nov. 30, 2016),
rept. & rec. adopted, No. 1:15-CV-00056-ML-PAS, 2017 WL 127868
(D.R.I. Jan. 3, 2017)) (“Turning to the elements of the federal
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 13 of 28
common law test, the cases generally deploy a three-prong
approach that considers 1) whether the purchaser is a bona fide
successor; 2) whether the purchaser had notice of the potential
liability; and 3) the extent to which the predecessor can
provide adequate relief directly.”).
As the Seventh Circuit
noted in Wheeler, 794 F.2d at 1236, “[t]he first two factors are
‘critical’ because of the inequity of holding a successor liable
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.’” (quoting Musikiwamba v. ESSI, Inc.,
760 F.2d 740, 750 (7th Cir. 1985)).
“The remaining [seven
factors] simply ‘provide a foundation for analyzing the larger
question of whether there is a continuity in operations and the
work force of the successor and predecessor employers.’”
v. TK Comm., Inc., 87 F.3d 745, 750 (5th Cir. 1996) (quoting
Musikiwamba, 760 F.2d at 751) (citing Bates v. Pacific Maritime
Assn., 744 F.2d 705, 709–10 (9th Cir. 1984) (three factors
governing successor liability determination are (1) continuity
in operations and workforce, (2) notice of the claim, and (3)
ability of predecessor employer to provide relief)) (additional
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And finally, as the Eighth Circuit observed:
“[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 [v. Kids Ark Learning Ctr., LLC, 622
F.3d 992, 995 (8th Cir. 2010)] (quoting Cobb v.
Contract Transp., Inc., 452 F.3d 543, 554 (6th Cir.
2006)). Before imposing successor liability, a court
must balance the plaintiff's interests, the
defendant's interests, and federal policy. See Cobb,
452 F.3d at 554. Imposing successor liability is
appropriate only if it “strike[s] a proper balance
between on the one hand preventing wrongdoers from
escaping liability and on the other hand facilitating
the transfer of corporate assets to their most
valuable uses.” EEOC v. Vucitech, 842 F.2d 936, 944–
45 (7th Cir. 1988).
Nutt v. Kees, 796 F.3d 988, 991 (8th Cir. 2015).
Here, both parties focus on the critical issue of notice.
“The notice requirement is animated by concerns that it is
inequitable to impose successor liability upon an innocent
purchaser who did not have an opportunity to protect itself by
obtaining indemnification or negotiating a lower purchase
Tsareff v. ManWeb Services, Inc., 794 F.3d 841, 849
(7th Cir. 2015).
“Where the successor has notice of a
predecessor's liability, there is a presumption in favor of
finding successor liability.”
EEOC v. N. Star Hosp., Inc., 777
F.3d 898, 902 (7th Cir. 2015).
Schlee & Stillman’s position is straightforward: it cannot
be held liable as a successor employer because it did not know
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 15 of 28
about Kratz’s pending Title VII claim against RJBA before the
Kratz counters that even if Schlee & Stillman
did not have “actual” notice of Kratz’s claim, the notice
requirement is still satisfied, because Schlee & Stillman had
“constructive” notice of her claim.
In other words, Kratz
contends that “the crucial point [here] is not whether the
successor knew, but whether it should have known.”
Opp. to Mot. for Summ. Judgment at 9.
Pl.’s Br. in
Had Schlee & Stillman
exercised minimal due diligence and made even the most basic of
inquiries, Kratz says, it would have readily discovered her
pending claim, and could have taken that potential liability
into account when purchasing RJBA’s assets.
notes, Schlee & Stillman conducted “selective due diligence”
into RJBA’s liabilities, “utiliz[ing] selective ignorance to
discriminate between claimants.”
Pl.’s Surreply in Supp. of
Opp. to Mot. for Summ. Judgment at 3.
Kratz also points to the high degree of business continuity
present, arguing that, as a result, Schlee & Stillman had a
heightened obligation to conduct due diligence into RJBA’s
Because Schlee & Stillman failed to adequately
conduct even minimal due diligence with respect to pending
employee claims when, as a practical matter, it was taking over
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 16 of 28
RJBA’s collections business, successor liability ought to be
Schlee & Stillman disagrees.
The applicable notice
standard, they argue, is not whether an asset purchaser “should
have known,” but whether it actually did know about pending
Alternatively, it contends that even if
constructive notice is the standard, the evidence in this record
would not permit a reasonable jury to find that it should have
known about Kratz’s pending claim.
It points out that due
inquiry was made into RJBA’s liabilities that directly related
to the assets it was purchasing (e.g., the Pentucket Bank line
of credit), as well as its lease obligations.
Schlee & Stillman, it had no reason to think that potential
liabilities were not being disclosed prior to execution of the
asset purchase agreement.
Nothing in the record, it says,
suggested that Kratz’s claim existed.
Therefore, Schlee &
Stillman argues, Kratz has pointed to no evidence suggesting
that it “should have known” about her claim, or that it engaged
in a game of “don’t ask, don’t tell” with respect to her Title
Def.’s Reply in Supp. of Mot. for Summ. Judgment at
Finally, Schlee & Stillman notes that its level of inquiry
into RJBA’s liabilities was entirely appropriate, given that
this was hardly a transaction involving the purchase of
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 17 of 28
“substantial assets,” but instead involved the purchase of very
modest physical assets from essentially a service company “in
financial distress and on the verge of failing.”
Id. at 5-6.
As a preliminary matter, precedent is unsettled as to
whether constructive notice is enough to establish successor
Courts addressing the issue have taken different
In 1986, the Court of Appeals for the Seventh
Circuit acknowledged – but did not resolve – the issue:
We are not prepared to hold that absence of timely
actual knowledge is a bar to successor liability in
every case. We are surely not prepared to hold it is
never a bar. The question is whether a judicial
doctrine should be created, focusing perhaps on the
diligence or lack of diligence of a successor in
making inquiry prior to purchase, or perhaps on the
development of indemnification rights in the successor
as against the predecessor entity.
... However, in the present case, in which the absence
of any timely actual knowledge on the part of the
successor is so clear, in which substantial, while not
complete, relief from the predecessor is available to
the victim, and in which the ownership of the
predecessor and of the successor is totally distinct,
we refrain from subjecting the doctrine of successor
liability to judicial surgery on the scale which would
be necessary to permit [plaintiff] to obtain relief
from [defendant successor]. More generally, the
national dimensions of the dilemma we have described
in this opinion are likely to be explored more
adequately and responded to more effectively by
Congress than by the courts.
Wheeler, 794 F.2d at 1237.
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Since that time, several courts have declined to mandate
purchaser due diligence in the successor liability context.
See, e.g., Trustees of Chicago Plastering Inst. Pension Tr. v.
Elite Plastering Co., 603 F. Supp. 2d 1143, 1151 (N.D. Ill.
2009) (“To be sure, where agents of a successor company already
know of claims against the predecessor, they have a duty to
inquire about the status of those claims and other claims
arising from the same dispute.
But where the successor lacks
such knowledge, courts should ‘refrain from subjecting the
doctrine of successor liability to judicial surgery’ through a
due diligence requirement”) (citing EEOC v. Vucitech, 842 F.2d
936, 945 (7th Cir. 1988), and quoting Wheeler, 794 F.2d at
1237); see also Heavenly Hana LLC v. Hotel Union, No. 14-CV03743-JCS, 2016 WL 524327, at *12-13 (N.D. Cal. Feb. 10, 2016)
(confronting whether, in the ERISA context, “a buyer's lack of
diligence can satisfy the notice requirement for successor
liability,” and stating that “no court — anywhere — has ever
held that a subsequent employer can be held liable for a
predecessor's ERISA obligations that it merely should have known
about, unless the employer actually knew at least the factual
basis for the liability.”); United Food & Commercial Workers
Local 1546 Pension Fund v. Variety Meat Co., No. 15 CV 137, 2016
WL 3213402, at *5 (N.D. Ill. June 10, 2016) (“[Plaintiff] argues
that, prior to purchasing the Carpenter Street building,
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[defendant] should have reviewed CG&S financial records and
union obligations, and had he done so, he would have learned of
the contingent liability.
But the Seventh Circuit has refused
to impose a requirement for potential successor companies to
conduct due diligence or inquire as to potential liabilities
prior to an asset purchase in order to avoid successor
Further, [plaintiff] does not identify anything that
would have provided the [defendant] sufficient notice to prompt
them to investigate CG&S's financial conditions or potential
withdrawal liability.”) (citing Wheeler, 794 F.2d at 1237).
Several other courts have taken a contrary view, and
determined that constructive notice may well suffice to impose
See, e.g., Bautista v. Beyond Thai
Kitchen, Inc., No. 14 Civ. 4335 LGS, 2015 WL 5459737 at *7
(S.D.N.Y. Sept. 17, 2015) (“Several courts outside this Circuit
have suggested that constructive notice is sufficient to
establish notice for substantial continuity purposes . . . These
decisions provide compelling policy reasons to impute
constructive notice on successors who have failed to exercise
due diligence.”) (collecting cases); see also Goodpaster v. ECP
Am. Steel, LLC, No. 1:09-CV-59 JVB, 2012 WL 5267971, at *4 (N.D.
Ind. Oct. 24, 2012) (“Goodpaster I”) (“For a purchaser of large
chunks of assets that substantially continues the predecessor's
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 20 of 28
business line, a pending claim for a violation of a federal
right is a potential liability.
This allows recovery from
successors who were careless, as well as those whose ignorance
Because ECP took no steps at all to discover
such a claim, ECP had constructive notice of Goodpaster's
suit.”); EEOC v. 786 South LLC, 693 F. Supp. 2d 792, 795 (W.D.
Tenn. 2010) (“constructive notice may suffice under the
successor liability doctrine, at least where the relevant
charges have been filed with the EEOC.”); Lipscomb v. Tech.
Servs. & Information, Inc., No. DKC 09-3344, 2011 WL 691605, at
*8 (D. Md. Feb. 11, 2011) (“lack of timely notice of a pending
EEOC investigation does not per se bar successor liability . . .
With some due diligence, Defendant would have been able to
ascertain that Plaintiff had filed an EEOC charge and
[predecessor] was being investigated by the EEOC.”); Jackson v.
Lockie Corp., 108 F. Supp. 2d 1164, 1168 (D. Colo. 2000)
(finding purchaser did not have notice where “there is no
evidence that [purchaser] knew or with the exercise of
reasonable diligence could have known prior to its purchase of
assets from [predecessor] of the plaintiff's Title VII
Courts have generally recognized that the principal reason
for the notice requirement (ensuring fairness by providing a
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 21 of 28
successor the opportunity to protect against potential liability
through the negotiation process) is not served if:
prospective liabilities of this sort could be shed by
playing ostrich. Businesses would quickly learn they
need only prevent actual knowledge on the part of the
buyer. So no seller of substantial assets would
volunteer the existence of the claim, because doing so
would result in a lower price. And buyers, seeking to
avoid the cost of valuing the prospective liability
and the risk of underestimating it, would readily put
Goodpaster v. NFLC, Inc., No. 1:09-CV-59 JVB, 2013 WL 1149568,
at *5 (N.D. Ind. Mar. 18, 2013) (“Goodpaster II); see also
Bautista, 2015 WL 5459737, at *8 (“an asset purchaser should not
avoid successor liability ... by playing an unspoken but
mutually understood game of ‘don't ask, don't tell.’
the proper rule is one that encourages shoppers for substantial
assets simply to get the whole story and adjust their offers
accordingly.”) (quotations omitted).2
Several of the cases applying a constructive notice
standard seem to assume an affirmative duty on the part of the
successor to inquire into its predecessor’s potential
liabilities. The point may be more subtle, but the conclusion
is identical. Customarily, a successor purchasing nearly the
entirety of a company’s assets would be expected to exercise due
diligence with regard to its purchase. In those instances,
however, when a successor fails to exercise even minimal due
diligence, that conduct — because it is outside the expected
norm — will raise an eyebrow. Cf., Goodpaster II, 2013 WL
1149568, at *4 (“if [defendant] truly remained ignorant, its
myopic inquiries of [predecessor], its decision not to review
public records or contact the EEOC, and [predecessor’s] sealed
lips . . . were the reasons. So it would be a gross distortion
to say [defendant] lacked an opportunity to protect itself.”).
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 22 of 28
Notably, the only court within our circuit to address the
issue applied a constructive notice standard.
In Guarcas, 2016
WL 7632844, plaintiffs filed suit against their employer,
Gourmet Heaven, asserting claims under the Fair Labor Standards
While the suit was pending, the employer executed an asset
purchase agreement, and sold the assets of the business to GSP.
Plaintiffs sought to impose successor liability upon GSP.
moved to dismiss, arguing, inter alia, that plaintiffs had not
sufficiently alleged that it had notice of its predecessor’s
potential legal obligations.
Noting the stage of the
litigation, the court observed:
At the Fed. R. Civ. P. 12(b)(6) phase, courts are
forgiving of claimants who struggle to demonstrate
notice before engaging in discovery. [Thompson v.]
Real Estate Mortg. Network, 748 F.3d [142,] 152-54
[(3d Cir. 2014)] (notice is not a matter as to which
claimant should be expected to come forward with
detailed proof at [Fed. R. Civ. P. 12(b)(6)] stage”).
Rather, the inquiry focuses on whether the buyer of
the business knew or should have known of the pending
litigation. [Thompson v.] Bruister & Assocs., [Inc.,
No. 3:07-00412,] 2013 WL 1099796, at *7 [(M.D. Tenn.
Mar. 15, 2013)]. A pleading establishing that the
The asset purchaser’s deviation from customary practice gives
rise to a higher level of scrutiny, and permits an inference of
constructive notice when minimal inquiry would have disclosed
the potential liability.
Of course, as several cases have held, a “successor who
exercises due diligence in its purchase and yet fails upon
inquiry to uncover evidence of the plaintiff’s lawsuit prior to
the purchase will not be found to have notice.” Coleman v.
Keebler, Co., 997 F. Supp. 1094, 1099 (N.D. Ind. 1998)) (citing
Wheeler, 794 F.2d at 1237).
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 23 of 28
litigation is a matter of public record in a court
docket permits the inference of notice, as does the
expectation that normal due diligence, in the absence
of collusion, would uncover such matters. Id. (citing
Musikiwamba, 760 F.2d at 752 (“Normally, the burden
[is] on the successor to find out from the predecessor
all outstanding potential and actual liabilities.”)).
This approach is consistent with the compelling policy
reasons to impute constructive notice when the
pleading is sufficient to permit the inference that
the successor failed to exercise due diligence in “an
unspoken but mutually understood game of ‘don't ask,
don't tell.’” Goodpaster v. ECP Am. Steel, LLC, No.
1:09–CV–59 JVB, 2012 WL 5267971, at *4 n.3 (N.D. Ind.
Oct. 24, 2012); see Bautista, 2015 WL 5459737, at *8
(“[t]he proper rule is one that encourages shoppers
for substantial assets simply to get the whole story
and adjust their offers accordingly”).
Id. at *8.
The court went on to find that plaintiffs had
adequately alleged notice to GSP of its predecessor’s potential
legal obligations, noting that “minimal due diligence would have
exposed that ‘Gourmet Heaven’ was facing FLSA liability.”
The Guarcas court’s analysis is persuasive.
Schlee & Stillman argues that it “had no reason to believe
all liabilities were not being disclosed prior to execution of
Judgment at 5.
Def.’s Reply in Supp. of Mot. for Summ.
But, the basis for its position is not entirely
clear from the record.
Schlee & Stillman does not explain how
it came to be informed of certain RJBA liabilities, including
pending litigation against RJBA, yet remained ignorant of
It is clear from the record that Schlee & Stillman’s
due diligence inquiries into RJBA’s potential liabilities was
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 24 of 28
minimal, and with respect to potential liabilities arising from
employee claims was apparently non-existent.
Boudreau, or Mitchell,3 or Schlee & Stillman’s own employee,
O’Brien, about all pending matters or claims would have likely
put it on notice of the pending Kratz claim.
A cursory review
of RJBA’s records (which, as Miller testified, likely would have
listed Kratz’s claim as a pending regulatory matter) also would
likely have provided actual notice of Kratz’s claims.
Schlee & Stillman seemingly decided not to ask those questions,
and declined to review RJBA’s records regarding consumer
complaints, regulatory matters or lawsuits to which RJBA was a
party prior to executing the asset agreement.
See Document No.
32-1, ¶¶ 8-10.
The record evidence does not negate, and indeed may well
support an inference that Schlee and Boudreau engaged in “an
unspoken but mutually understood game of ‘don’t ask, don’t
Guarcas, 2016 WL 7632844, at *8.
First, as noted, the
degree of business continuity here is quite significant: Schlee
& Stillman operates out of RJBA’s former Woburn office, employs
the majority of RJBA’s former employees (including its former
managers (and Boudreau)), uses the same office equipment, and
As previously mentioned, Schlee and/or Stillman did ask
Mitchell about the pending Citizens Bank litigation. See
Document No. 32-4 at 49:19 – 50:1; 14:16 – 15:9.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 25 of 28
performs debt collection services for many of RJBA’s major
Given the degree of business continuity, Schlee &
Stillman’s minimal due diligence is especially perplexing.
Schlee & Stillman offers no reasonable explanation for that lack
Cf., EEOC v. 786 South LLC, No. 2:07-CV-02621-
JPM, 2010 WL 4628101, at *3 (W.D. Tenn. Nov. 8, 2010) (finding
issue of notice not dispositive to successor liability question
where defendant “likely could have learned of the suit had it
performed due diligence,” but “offered reasonable explanations
for the lack of due diligence.”).
At least two RJBA attorneys who continued with Schlee &
Stillman worked on, and were familiar with, the Kratz claim.
Indeed, O’Brien, the attorney who served as counsel of record
for RJBA in the Kratz matter, began working for Schlee &
Stillman several months before the asset purchase.
It seems a
stretch, based on this record, to impute O’Brien’s knowledge to
Schlee & Stillman and conclude that it had actual knowledge of
Kratz’s claim, but his employment with Schlee & Stillman, while
he ostensibly continued to represent RJBA in the Kratz matter
before the EEOC, is a factor tending to support rather than
negate an inference of constructive knowledge.
Schlee and Stillman are not unsophisticated purchasers.
Indeed, as attorneys purchasing the assets of another
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 26 of 28
collections practice, it seems reasonable to expect that it
would both understand the significance of potential successor
liability and the value of at least asking the seller to
disclose all pending and potential employee claims, so that it
might protect itself by adjusting the offered purchase price in
light of any potential exposure.
Finally, while the record is largely undeveloped with
respect to this point, the purchase price paid by Schlee &
Stillman for RJBA’s assets appears to be quite modest.
Bautista, 2015 WL 5459737, at *8 (record supported a finding of
constructive notice where, inter alia, defendants paid
“suspiciously little for the assets they purchased . . . The
purchase price is less than what Defendants currently pay in
rent and is less than half the security deposit that they placed
for the lease.”).
Schlee & Stillman paid a total of $15,000 for
the entirety of RJBA’s assets.
Schlee & Stillman argues that
the price was appropriate, because the company “was in financial
distress and on the verge of failing.”
Mot. for Summ. Judgment at 6.
Def.’s Reply in Supp. of
However, it presents little
evidence in support of its argument, and provides no information
regarding a reliable valuation of the purchased assets.
unexplained seemingly low price paid for an ongoing collections
practice (while perhaps fully justifiable), standing alone, is
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 27 of 28
more suggestive of a de facto merger rather than a mere asset
The court finds that, on the record as currently developed,
a reasonable jury could conclude that Schlee & Stillman had
constructive notice of Kratz’s pending claim.5
Schlee & Stillman have not shown entitlement to judgment as a
matter of law with respect to successor liability.
In Bielagus, 149 N.H. at 641, the New Hampshire
Supreme Court noted that “a de facto merger” occurs when:
a company is completely absorbed into another through
a sale of assets; continues its operations by
maintaining the same management, personnel, assets,
location and stockholders; but leaves its creditors
without a remedy for its outstanding debt. The factfinder may look to other factors indicative of
commonality or distinctiveness with the corporations.
The bottom-line question is whether each entity has
run its own race, or whether there has been a relaystyle passing of the baton from one to the other.
(internal citations and quotations omitted). While not binding
(because, as discussed extensively, federal common law is
applicable here), that description is informative.
As previously mentioned, “[t]he doctrine of successor
liability is premised on the idea that the creditor cannot
obtain satisfaction from the predecessor.” Brzozowski v. Corr.
Physician Servs., Inc., 360 F.3d 173, 179 (3d Cir. 2004).
Whether the predecessor is able to provide relief to the
plaintiff is a significant factor in determining whether
successor liability ought to be imposed. Because neither Kratz
nor Schlee & Stillman discuss that factor, the court assumes
their agreement that the predecessor cannot provide relief.
Case 1:15-cv-00232-SM Document 50 Filed 08/22/17 Page 28 of 28
For the foregoing reasons, defendant’s motion for summary
judgment (document no. 32) is DENIED.
Steven J. McAuliffe
United States District Judge
August 22, 2017
H. Jonathan Meyer, Esq.
Lawrence B. Gormley, Esq.
Daniel P. Schwarz, Esq.
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