Explore the intricacies of a recent federal court ruling in Diaz v. Slayton One Cleaner Inc., dissecting the responsibility of asset buyers for seller’s wage and hour issues in M&A transactions. Understand the court’s decision and its implications for small acquisitions in New York.
M&A Stories
October 23, 2018
In a recent case, a New York federal court explored the responsibility of an asset buyer regarding unassumed seller liabilities in the context of a 2016 sale of a Manhattan dry cleaner’s assets.
In negotiations, the seller assured the buyer of legal compliance and freedom from liabilities. The buyer, without conducting due diligence, acquired assets worth $350K, including goodwill, leasehold interest, and equipment.
Operating under the seller’s name, the buyer initially retained most employees. However, a former employee sued both buyer and seller in 2017, alleging federal wage and hour violations.
The court examined whether the buyer could be held responsible under the successor liability doctrine. I said that buyer would only be responsible if the buyer had pre-closing knowledge of wage and hour issues. The court rejected the employee’s argument that the buyer should be held responsible because it could have discovered the problem through due diligence. The court emphasized that the buyer’s obligation to perform due diligence in small transaction, would arise only in the presence of specific red flags, such as unusually low purchase prices and quick closings.
Ultimately, the court ruled that the buyer was not accountable for the seller’s federal wage and hour debt.
This decision highlights that in smaller acquisitions in New York, extensive due diligence may not be obligatory to avoid successor liability for unassumed seller debts unless red flags are present.
Case Reference:
This case is referred to as Diaz v. Slayton One Cleaner Inc., No. 17 CV 1311-LTS-KNF, United States District Court, S.D. New York (October 11, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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