Mark Pestronk
Q: I have an agreement in principle to buy another agency while keeping its location and employees in place. I understand that if the deal is structured as an asset purchase agreement that states that I am buying the assets "free and clear" and that the seller is "solely responsible" for any liabilities and debts, then my agency can't be held liable for debts and problems arising before closing. Is that always the case, or are there some exceptions?
A: Like almost every generalization in the law, there are exceptions to the rule that asset buyers do not assume any liabilities. State and federal laws transfer the seller's liability onto the buyer in several circumstances.
Under state law, the buyer can be responsible for the debts of the seller in two cases: First, even if the agreement states that you are not assuming any contracts or leases, a creditor could go after you if you take the benefit of the contract or lease without paying the creditor.
For example, if the seller owes back rent, and you take over the location, the landlord could validly claim that you are liable not only for current rent but also for the rent debt because you "assumed" the lease by your actions. The same claim could be made by the seller's GDS vendor if you access the system on a regular basis.
Second, creditors can go after you if you pay a seller less than the value of the assets with the intent to deprive creditors of what the seller owes. As you can imagine, proving these things is quite difficult, so the debt would have to be very large to justify litigation against you.
Under federal law, the courts have decided to hold buyers responsible for the seller's violations of several statutes. The enormous potential fines, penalties and damages for those violations mean that all buyers need to be aware of the risks.
Potentially the biggest risk of federal liability for service businesses such as travel agencies is wage and hour law. Under the Fair Labor Standards Act, buyers have been held responsible for overtime claims for hours worked by nonexempt staff before the sale, if the buyer takes over the seller's office as a going concern, as you plan to do, and the seller is unable to pay.
The same thing could happen if the seller has independent contractors who are later reclassified as employees. The taxes and penalties owed by the seller could wind up being the buyer's responsibility.
As one federal court of appeals stated, "We suggest that successor liability is appropriate in suits to enforce federal labor and employment laws, even when the successor disclaimed liability when it acquired the assets in question."
The quoted term "federal employment laws" is very broad, as it would encompass laws against discrimination and sexual harassment, age and disability discrimination, and family and medical leave.
The lesson of these cases is that you need to conduct a due diligence investigation even for simple asset purchases, and you need to make the seller personally guarantee that there is no such liability. Then, you need to hold some of the purchase price back against unassumed liability or retain the right to deduct the acquired debts from any installment payments, or both.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].