UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Patricia Kratz, Plaintiff

v. Case No. 15-cv-232-SM Opinion No.

Richard J. Boudreau & Associates, LLC, and Schlee and Stillman, LLC, Defendants

O R D E R

Plaintiff, Patricia Kratz, filed this suit against her

employer, Richard J. Boudreau & Associates, LLC. (“RJBA”). She

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.) Schlee &

Stillman moves for summary judgment on Kratz’s claims. While it

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

1 nonmoving party, and to draw all reasonable inferences in the

nonmoving party's favor.” Block Island Fishing, Inc. v. Rogers,

(1st Cir. 2016) (citation omitted). Summary

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

suit.” Rando v. Leonard,

(1st Cir. 2016)

(citation omitted). 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

fact.” Perez v. Lorraine Enters.,

, 29–30 (1st Cir.

2014). 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.,

(1986) (citations omitted).

2 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

party. See generally Fed. R. Civ. P. 56(c). It naturally

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. See

Serapion v. Martinez,

(1st Cir. 1997). See

also Scott v. Harris,

(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.”).

BACKGROUND

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. At its

peak, the firm had ten offices in several different states,

3 including New Hampshire, Massachusetts, Rhode Island,

Connecticut, Virginia, North Carolina, South Carolina, Georgia

and Texas. See Document No. 32-2 at 64:1-4; Document No. 32-4

at 8:4-14.

RJBA and Schlee & Stillman

Beginning around 2013, RJBA saw its business begin to

decline. 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

creditors. 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

4 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

employees.” 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. Those

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.

5 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

Fradette. 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

waist. 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. Fradette also

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

Fradette. 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

harassment. In addition, she was given poor quality leads to

call. Eventually, on June 2, 2014, Kratz was fired, purportedly

6 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”). Notice of the Charge was sent

to RJBA on June 19, 2014. 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

completed. On April 13, 2015, Kratz obtained a Right to Sue

letter.

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.

7 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. See

Document No. 32-2 at 53:2-16; 12:18-13:8. Boudreau further

testified that he did not notify Schlee & Stillman of the

pending Kratz matter. Id. at 50:5-10.

1 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.

8 For his part, Mitchell testified that he did not raise the

Kratz matter with Schlee & Stillman before April 1, 2015. See

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

the suit. 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

individual. Id. at 43:7-23; 48:3-6. Mitchell did not consult

with anyone at Schlee & Stillman before sending the letter. Id.

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. Id.

DISCUSSION

Schlee & Stillman seeks summary judgment on grounds that it

had no notice of Kratz’s claim prior to its acquisition of

9 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. See

Bielegus v. EMRE of New Hampshire Corp.,

(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

debts.”). 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.”

(citations omitted).

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

liability. See Einhorn v. M.L. Ruberton Const. Co.,

(3d Cir. 2011) (“Federal courts beginning with Golden

State [Bottling Co. v. NLRB,

(1973)] have developed

a federal common law successorship doctrine imposing liability

10 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,

(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.,

(7th Cir. 2013). See, e.g., EEOC v.

MacMillan Bloedel Containers, Inc.,

(6th Cir.

1974); Wheeler v. Snyder Buick, Inc.,

(7th

Cir. 1986); Rojas v. TK Communications, Inc.,

(5th Cir. 1996). The parties here seemingly recognize, and

agree, that the federal common law standard of successor

liability applies. See Def.’s Mot. for Summ. Judgment at 7-8;

Pl.’s Mem. in Supp. of Opp. to Summ. Judgment at 4-5.

11 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 product.

The Sixth Circuit subsequently clarified that the “nine-factors

listed in MacMillan and subsequently adopted in regulation

, are not in themselves the test for successor

liability. 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.,

(6th Cir. 2006).

Courts have generally focused on the first three of the

MacMillan factors. See, e.g., Guarcas v. Gourmet Heaven, LLC,

No. CV 15-056ML,

, at *6 (D.R.I. Nov. 30, 2016),

rept. & rec. adopted, No. 1:15-CV-00056-ML-PAS,

(D.R.I. Jan. 3, 2017)) (“Turning to the elements of the federal

12 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,

, “[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.,

(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.’” Rojas

v. TK Comm., Inc.,

(5th Cir. 1996) (quoting

Musikiwamba,

) (citing Bates v. Pacific Maritime

Assn.,

, 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

citations omitted).

13 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,

(8th Cir. 2010)] (quoting Cobb v. Contract Transp., Inc.,

(6th Cir. 2006)). Before imposing successor liability, a court must balance the plaintiff's interests, the defendant's interests, and federal policy. See Cobb,

. 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,

, 944– 45 (7th Cir. 1988).

Nutt v. Kees,

(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

price.” Tsareff v. ManWeb Services, Inc.,

(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.,

(7th Cir. 2015).

Schlee & Stillman’s position is straightforward: it cannot

be held liable as a successor employer because it did not know

14 about Kratz’s pending Title VII claim against RJBA before the

asset purchase. 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.” Pl.’s Br. in

Opp. to Mot. for Summ. Judgment at 9. 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. Instead, Kratz

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

liabilities. 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

15 RJBA’s collections business, successor liability ought to be

imposed.

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

employee claims. 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. Moreover, says

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

VII claims. Def.’s Reply in Supp. of Mot. for Summ. Judgment at

5. 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

16 “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

liability. Courts addressing the issue have taken different

positions. 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,

.

17 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.,

(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,

, 945 (7th Cir. 1988), and quoting Wheeler,

); see also Heavenly Hana LLC v. Hotel Union, No. 14-CV-

03743-JCS,

, 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,

, at *5 (N.D. Ill. June 10, 2016) (“[Plaintiff] argues

that, prior to purchasing the Carpenter Street building,

18 [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

liability. 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,

).

Several other courts have taken a contrary view, and

determined that constructive notice may well suffice to impose

successor liability. See, e.g., Bautista v. Beyond Thai

Kitchen, Inc., No. 14 Civ. 4335 LGS,

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,

, at *4 (N.D.

Ind. Oct. 24, 2012) (“Goodpaster I”) (“For a purchaser of large

chunks of assets that substantially continues the predecessor's

19 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

was strategic. 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,

(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,

, 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.,

(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

claims.”).

Courts have generally recognized that the principal reason

for the notice requirement (ensuring fairness by providing a

20 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 blinders on.

Goodpaster v. NFLC, Inc., No. 1:09-CV-59 JVB,

,

at *5 (N.D. Ind. Mar. 18, 2013) (“Goodpaster II); see also

Bautista,

, 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.’ Rather,

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

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,

, 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.”).

21 Notably, the only court within our circuit to address the

issue applied a constructive notice standard. In Guarcas,

, plaintiffs filed suit against their employer,

Gourmet Heaven, asserting claims under the Fair Labor Standards

Act. 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. 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,]

, 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.,

(N.D. Ind. 1998)) (citing Wheeler,

).

22 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.

(citing Musikiwamba,

(“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,

, at *4 n.3 (N.D. Ind. Oct. 24, 2012); see Bautista,

, 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.” Id.

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

the agreement.” Def.’s Reply in Supp. of Mot. for Summ.

Judgment at 5. 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

others. It is clear from the record that Schlee & Stillman’s

due diligence inquiries into RJBA’s potential liabilities was

23 minimal, and with respect to potential liabilities arising from

employee claims was apparently non-existent. Simply asking

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. Instead,

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

tell.’” Guarcas,

, 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

3 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.

24 performs debt collection services for many of RJBA’s major

clients. Given the degree of business continuity, Schlee &

Stillman’s minimal due diligence is especially perplexing. And,

Schlee & Stillman offers no reasonable explanation for that lack

of diligence. Cf., EEOC v. 786 South LLC, No. 2:07-CV-02621-

JPM,

, 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

25 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. See

Bautista,

, 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.” Def.’s Reply in Supp. of

Mot. for Summ. Judgment at 6. However, it presents little

evidence in support of its argument, and provides no information

regarding a reliable valuation of the purchased assets. The

unexplained seemingly low price paid for an ongoing collections

practice (while perhaps fully justifiable), standing alone, is

26 more suggestive of a de facto merger rather than a mere asset

purchase.4

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 Accordingly,

Schlee & Stillman have not shown entitlement to judgment as a

matter of law with respect to successor liability.

4 In Bielagus,

, 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 fact- finder 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 relay- style 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.

5 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.,

(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.

27 CONCLUSION

For the foregoing reasons, defendant’s motion for summary

judgment (document no. 32) is DENIED.

SO ORDERED.

____________________________ Steven J. McAuliffe United States District Judge

August 22, 2017

cc: H. Jonathan Meyer, Esq. Lawrence B. Gormley, Esq. Daniel P. Schwarz, Esq.

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