By the time Wisconsin-based JT Packard & Associates ran into financial trouble, it was also the target of a lawsuit by employees who claimed they hadn’t been paid overtime.
Eventually, Packard went out of business, and its assets were sold to a company called the Thomas & Betts Corp. As part of the sale agreement, Thomas & Betts specifically said that it wasn’t assuming liability for the overtime claim.
When a company purchases the assets of a failed business, rather than buying its stock, it’s generally allowed to decide what types of liabilities it’s taking on (or not taking on). That’s the rule in most states, including Wisconsin.
There was just one problem, however. The overtime lawsuit was brought under federal law, not state law. Therefore, Wisconsin law didn’t matter … and even though Thomas & Betts specifically said that it wouldn’t assume liability for the overtime issue, it had to do so anyway.
That was the ruling of a federal appeals court, which said Thomas & Betts was on the hook for $500,000 in overtime pay.
This court decision has thrown a monkey wrench into a number of pending asset sales involving troubled businesses, because suddenly purchasers are less certain of what types of liabilities they might be buying for themselves along with the assets.
Many potential purchasers are now taking more care to consider what sorts of lawsuits have been brought or might be brought against the seller. In some cases, they’re slashing their purchase price to take the potential liability into account.
In other cases, purchasers might insist that the seller go through a formal bankruptcy proceeding rather than a quiet liquidation. That’s because bankruptcy judges have more power to do away with pending lawsuits and other liabilities than buyers do with a simple contract.