Successor Liability for Employee Claim

Trial Lawyer Austin Texas

Apr 4, 2013 — by Jeff Mundy
Tags: Successor Liability


In support of her successor-reliability claim, Shaw relies, in large part, on Rojas v. TK Communications, Inc., 87 F.3d 745 (5th Cir. 1996). In Rojas, a female employee, who worked for a radio station owned by TK Communications, Inc. ("TK"), brought a sexual-harassment claim against TK under Title VII of the Civil Rights Act of 1964. Id. at 746. She later joined Tichenor Media Systems, Inc. ("Tichenor"), which had bought the radio station, under a theory of successor liability. Id. The United States Court of Appeals for the Fifth Circuit noted that, under "general contract principles," it was undisputed that Tichenor, in its asset- purchase agreement, "expressly excepted" the discrimination claim. Id. at 749. However, the court recognized that successor liability "does not arise from contract" but "labor law principles enunciated in four Supreme Court cases." Id. (citing Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 107 S. Ct. 2225 (1987); Howard Johnson Co. v. Detroit Local Joint Exec. Bd., 417 U.S. 249, 94 S. Ct. 2236 (1974); NLRB v. Burns Int'l Sec. Servs., Inc., 406 U.S. 272, 92 S. Ct. 1571 (1972); John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 84 S. Ct. 909 (1964)). And the court explained that those labor law principles extended to "claims asserted under Title VII and related statutes" and supported the imposition of successor liability in such cases, explaining,

[T]he successor doctrine arises in the context of discrimination cases in situations where the assets of a defendant employer are transferred to another entity. Thus, the purpose of the doctrine is to ensure that an employee's statutory rights are not "vitiated by the mere fact of a sudden change in the employer's business." The doctrine allows the aggrieved employee to enforce against the successor a claim he could have secured against the predecessor.

Thus, applicability of the doctrine hinges on the need to protect a plaintiff where the offending entity is substituted by another company.

Id. at 750 (quoting Brennan v. Nat'l Tel. Directory Corp., 881 F. Supp. 986, 992 (E.D. Pa. 1995) (citations omitted)). The court then identified "nine factors to be considered in determining whether successor liability should be imposed in a discrimination case":

(1) whether the successor company had notice of the charge or pending lawsuit prior to acquiring the business or assets of the predecessor; (2) the ability of the predecessor to provide relief; (3) whether there has been 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 product.

Id. (quoting Musikiwamba v. ESSI, Inc., 760 F.2d 740, 750 (7th Cir. 1985)). Of these nine factors, the first two are critical, while the remaining seven 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." Id. (quoting Musikiwamba, 760 F.2d at 751).

E-Quest and Odyssey assert that, despite the court's reasoning in Rojas in regard to successor liability in the context of Title VII, this case is controlled by article 5.10 of the Texas Business Corporations Act, which provided,

B. A disposition of any, all, or substantially all, of the property and assets of a corporation, whether or not it requires the special authorization of the shareholders of the corporation . . .

(1) is not considered to be a merger or conversion pursuant to this Act or otherwise; and

(2) except as otherwise expressly provided by another statute, does not make the acquiring corporation, foreign corporation, or other entity responsible or liable for any liability or obligation of the selling corporation that the acquiring corporation, foreign corporation, or other entity did not expressly assume.

Act of May 4, 1979, 66th Leg., R.S., ch. 194, § 1, 1979 Tex. Gen. Laws 422, 422- 23 (amended 1987, 1991, 1993, and 1997, recodified 2002) (emphasis added). Shaw notes that article 5.10 has been "repealed, and is no longer in effect." However, article 5.10 in fact did not expire until January 1, 2010, over a year after Shaw filed the instant suit. See Act of May 13, 2003, 78th Leg., C.S., ch. 182, § 2, 2003 Tex. Gen Laws 267, 595 (expired Jan. 1, 2010). And the relevant part of the statute has since been recodified in the Texas Business Organizations Code, which states similarly,

(a) A disposition of all or part of the property of a domestic entity,

regardless of whether the disposition requires the approval of the entity's owners or members, is not a merger or conversion for any purpose.

(b) Except as otherwise expressly provided by statute, a person acquiring property described by this section may not be held responsible or liable for a liability or obligation of the transferring domestic entity that is not expressly assumed by the person.

TEX. BUS. ORGS. CODE ANN. § 10.254 (Vernon Supp. 2012) (emphasis added).

As reflected in the above statutes, Texas "strongly embraces" a "non- liability" rule for corporate successors. See Lockheed Martin Corp. v. Gordon, 16 S.W.3d 127, 139 (Tex. App.--Houston [1st Dist.] 2000, pet. denied). Texas law authorizes a successor to acquire the assets of a corporation without incurring any of the grantor corporation's liabilities unless the successor expressly assumes those liabilities. C.M. Asfahl Agency v. Tensor, Inc., 135 S.W.3d 768, 780-81 (Tex. App.--Houston [1st Dist.] 2004, no pet.); Lockheed Martin, 16 S.W.3d at 139; see also McKee v. Am. Transfer and Storage, 946 F. Supp. 485, 487 (N.D. Tex. 1996) ("The Texas Business & Corporations Act eliminates the doctrine of implied successor liability."). Thus, in Texas, there is no successor in interest when an acquiring corporation does not expressly agree to assume the liabilities of the other party to an agreement because "successor" has a specialized meaning "beyond simple acquisition." Sitaram v. Aetna U.S. Healthcare of N. Tex., Inc., 152 S.W.3d 817, 828 (Tex. App.--Texarkana 2004, no pet.).

Shaw cites to no Texas authority applying successor liability as discussed by federal courts in the context of Title VII or otherwise imposing liability on a successor company in spite of the Texas rule in support of non-liability. However, the reasoning supporting the federal application of successor liability is similar to the reasoning supporting the "mere continuation" exception to limited liability, an exception "even more liberal" than the de facto merger doctrine. See, e.g., Mudgett v. Paxson Mach. Co., 709 S.W.2d 755, 758 & n.4 (Tex. App.--Corpus Christi 1986, writ ref'd n.r.e.) (listing elements of "mere continuation" doctrine as whether "the buyer purchased the 'good will' and name of the seller, operated the business in the same place, with the same employees and continued to produce the same product") (citing Cyr v. B. Offen & Co., 501 F.2d 1145, 1153 (1st Cir. 1974)); see also Hollowell v. Orleans Reg'l Hosp. LLC, 217 F.3d 379, 390-91 (5th Cir. 2000) (applying "mere continuation" doctrine under Louisiana law and listing elements as: "(1) retention of the same employees; (2) retention of the same supervisory personnel; (3) retention of the same production facility in the same physical location; (4) production of the same product; (5) retention of the same name; (6) continuity of assets; (7) continuity of general business operations; and (8) whether the successor holds itself out as a continuation of the previous enterprise").

However, Texas courts have interpreted article 5.10 as expressly abrogating the mere continuation doctrine as a means of imposing successor liability. See Motor Components, LLC v. Devon Energy Corp., 338 S.W.3d 198, 205 (Tex. App.--Houston [14th Dist.] 2011, no pet.) ("The Texas legislature rejected long ago the 'continuation' doctrine of implied successor liability . . . .") (citing TEX.

BUS. ORGS. CODE ANN. § 10.254); Shapolsky v. Brewton, 56 S.W.3d 120, 137-38 (Tex. App.--Houston [14th Dist.] 2001, pet. denied) (holding that just as liability cannot be transferred under "mere continuation" doctrine, company's contacts cannot be imputed to successor for purposes of establishing personal jurisdiction), abrogated on other grounds by Michiana Easy Livin' Country v. Holten, 168 S.W.3d 777 (Tex. 2005); Mudgett, 709 S.W.2d at 758 ("Certainly if the de facto merger doctrine is contrary to the public policy of our state, so must be the mere continuation doctrine.").

Here, it is undisputed that neither E-Quest nor Odyssey "expressly assumed" liability for Shaw's judgment against RLM. Shaw argues that we should nevertheless extend the successor-liability doctrine from Rojas to the present case because the above cited Texas cases "do not involve employment discrimination claims." She notes that in Rojas the Fifth Circuit stated that the doctrine of successor liability "has been extended to claims asserted under Title VII and related statutes." Rojas, 87 F.3d at 750. As stated by the Texas Supreme Court, one of the purposes of the Texas Commission on Human Rights Act ("TCHRA") is to "provide for execution of the policies of Title VII of the Civil Rights Act of 1964 and its subsequent amendments." Quantum Chem. Corp. v. Toennies, 47

S.W.3d 473, 476 (Tex. 2001) (citing TEX. LABOR CODE ANN. § 21.001(1)). "Therefore, analogous federal statutes and cases interpreting them guide our reading of the TCHRA." Id. (citing NME Hosps., Inc. v. Rennels, 994 S.W.2d 142, 144 (Tex. 1999)).

However, as Shaw concedes in her brief, successor liability, as discussed by the federal courts, is a "common law" doctrine, like the "mere continuation" doctrine. It is not based on a statutory interpretation of Title VII, but rather "derived from equitable principles." See, e.g., Brzozowski v. Correctional Physician Servs., Inc., 360 F.3d 173, 178 (3rd Cir. 2004); Ed Peters Jewelry Co. v. C & J Jewelry Co., 124 F.3d 252, 265 (1st Cir. 1997) ("[S]uccessor liability is an equitable doctrine, both in origin and nature."). And, unlike in Rojas, where the plaintiff brought suit under Title VII and directly joined the defendants in that suit, Shaw brings her claim under neither Title VII or the TCHRA. Rather, Shaw seeks to recover on a judgment entered long ago, presumably for violations of the TCHRA. And, again, Shaw cites us to no Texas authority imposing successor liability under such circumstances.

Shaw does note that a federal district court has applied successor liability to claims brought under the TCHRA. See Mendez v. Ameri-Forge Corp., No. Civ.A. H-01-0523, 2005 WL 2241009, at *4 (S.D. Tex. Sept. 15, 2005). Although the federal district court in Mendez did provide a brief analysis of the applicability of successor liability to the plaintiff's claims brought under both Title VII and the TCHRA, it ultimately resolved the case by concluding that the plaintiff had failed to timely prosecute the action. Id. at *4-5; but see McKee, 946 F. Supp. at 487 (declining to apply successor liability to Texas wrongful-termination claim, brought along with claim under Americans with Disabilities Act, because of Texas statute limiting successor liability to those expressly assumed); Schutze v. Fin. Computer Software, No. 04-CV-0276-H, 2006 WL 2842008, at *9-10 & n.2 (N.D. Tex. Sept. 29, 2006) (concluding it "clearly true" that successor liability could not apply to plaintiff's Texas discrimination claims and assuming, without deciding, that doctrine could not apply to plaintiff's statutory discrimination claims brought under TCHRA). As a result, Mendez is inapplicable here.

In light of the express statutory mandate precluding the imposition of implied successor liability under Texas law, we conclude that Shaw's successor- liability claim is precluded by Texas statute. See Act of May 4, 1979, 66th Leg., R.S., ch. 194, § 1, 1979 Tex. Gen. Laws 422, 422-23 (amended 1987, 1991, 1993, and 1997, recodified 2002); TEX. BUS. ORGS. CODE ANN. § 10.254; see also Motor Components, LLC, 338 S.W.3d at 205 ("The Texas legislature rejected long ago the 'continuation' doctrine of implied successor liability . . . ."); Lockheed Martin,

16 S.W.3d at 139.

Accordingly, we hold that the trial court erred in concluding otherwise.


Having held that the trial court erred in concluding that Shaw's successorliability claim is not barred by Texas law, we need not address the remaining issues of E-Quest and Odyssey. We reverse the judgment of the trial court and render a take-nothing judgment in favor of E-Quest and Odyssey.

Panel consists of Justices Jennings, Higley, and Sharp.

Opinion Footnotes

*fn1 In her first amended petition, filed on April 23, 2008, Shaw brought claims only against E-Quest. Shaw did not bring suit against Odyssey until December 9, 2009.


Our Friendly Staff
Is Ready to Answer
Your Questions!

Email Us

* Denotes required field
To: The Mundy Firm PLLC

From (email)*:

Dear The Mundy Firm PLLC,
Hello, my name* is and I am interested in scheduling an appointment with you and would like to receive information about .
Please call me at at your earliest convenience.

Expand to Personalize Your Message