On May 28, 2014. Seller, a 211-bed independent community hospital located in the greater Newark, New Jersey area, entered into an asset purchase agreement with Buyer, a for-profit hospital chain based in California, for the sale of Seller’s hospital to Buyer for $84 million.
Over a year later, and while the sale was still pending, on August 19, 2015, Roseann was terminated from her employment with Seller. She had been working as a laboratory aide and department administrative assistant in Seller’s pathology department since March 1968.
By the end of October 2015, the parties obtained all required governmental approvals for the hospital sale.
However, on November 10, 2015, the hospital filed for chapter 11 bankruptcy relief because Seller’s liquid resources had been depleted to a point that it was unable to complete the transaction without having the ability to financially restructure its operations
The sale to Buyer proceeded in the bankruptcy proceeding and Roseann was given all required notices of the proposed sale and was listed as a creditor of Seller.
After a hearing on January 20, 2016, the bankruptcy court entered its order authorizing Seller to sell the hospital assets free and clear of liens, claims, and encumbrances. Furthermore, under the asset purchase agreement, Buyer did not assume any liability of Seller owed to Roseann. The transaction closed on March 1, 2016.
About three months after the sale closed (and nine months after being terminated from the hospital), Roseann sued Buyer in state court for age discrimination, and sought back pay, front pay, emotional distress compensatory damages, aggravation of preexisting condition damages, punitive damages, interest, monetary gross up to compensate for any negative tax consequences, attorneys’ fees, and legal costs.
Roseann claimed that Buyer was her employer and alternatively, subject to successor liability under New Jersey’s age discrimination law. She further claimed that Buyer was not a mere successor to the hospital because Buyer was sufficiently connected to the culpable conduct that terminated Roseann in violation of her rights under the state’s age discrimination law. According to Roseann, the individual who terminated her employment was an upper manager employed by Buyer.
On October 26, 2016, Buyer filed a motion in the bankruptcy court requesting that the court 1) prohibit Roseann from pursuing the state court action, and 2) direct Roseann to dismiss her state court action.
The bankruptcy court did so, finding that Buyer did not assume any Seller liability owed to Roseann, and because the bankruptcy court had decreed that the hospital was sold free and clear of liens, claims, and encumbrances. The court’s decision was affirmed by the federal district court.
This case is referred to as In Re East Orange General Hospital, Inc., Civ. No. 17-1595, Bankruptcy Case No. 15-31232 (Jointly Administered), United States District Court, D. New Jersey, (June 28, 2018).
Comment. Buying a distressed business in bankruptcy allows the buyer to purchase the business free and clear of most of seller’s liabilities.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291