Explore a complex M&A case involving the liability of a buyer for a seller’s alleged forced labor issues. Discover how the court ruled in favor of the buyer, highlighting the importance of thorough due diligence in mergers and acquisitions.
M&A Stories
January 21, 2019
In this M&A case, we delve into a scenario involving a trucker’s previous employment as a driver for a trucking company. The seller had leased tractor trailers to the trucker, who subsequently subleased both the trailers and their driving services to the trucking company.
The core issue was that the trucker claimed the trucking company mandated leasing tractors from the seller, and as per the lease agreement, they were bound to exclusively work for the trucking company. Failure to do so would trigger a lease default, requiring the trucker to immediately pay the entire lease balance to the seller.
The trucker entered into a lease agreement with the seller on October 20, 2015, which terminated in December of the same year.
Fast forward to September 19, 2016, the seller sold some of its assets to the buyer, another subsidiary of its parent company. These assets included leasing agreements with truck drivers working for the trucking company.
On October 3, 2016, the buyer and the seller’s parent company split into two publicly traded firms. The buyer joined the fleet management group, while the seller became part of the commercial finance group.
The turning point came on December 19, 2017, when the trucker initiated a class action against the buyer, the seller, and the trucking company, alleging a violation of the federal forced labor statute. The trucker claimed that the seller coerced continuous labor through threats of harm, operating a scheme that caused the trucker to believe non-performance would lead to severe financial and professional consequences, thus violating the federal forced labor statute.
The buyer moved for a court ruling asserting that it was not liable for the seller’s alleged misconduct. The buyer’s argument was clear: it had purchased the seller’s assets without assuming this liability and should not be held accountable under any successor liability theory.
The buyer contended that it had neither accepted responsibility for the trucker’s claims nor benefited from the seller’s alleged unlawful conduct. Furthermore, the buyer argued that it had no knowledge of the seller’s illegal practices. Moreover, the seller could provide the trucker with the necessary relief.
The court sided with the buyer.
In conclusion, this case underscores the importance of thorough due diligence for buyers to identify potentially unlawful seller conduct for which they might be held responsible.
Case Reference:
Carter v. Paschall Truck Lines, Inc., Civil Action No. 5:18-CV-041-TBR, United States District Court, W.D. Kentucky, Paducah, (January 23, 2019).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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