Asset purchaser facing liability for wages owed

A corporation that acquired a retail food business could be sued by employees claiming to have been paid less than the amount required by federal and state minimum wage and overtime laws, a U.S. magistrate judge has determined.

The defendant corporation moved to dismiss the complaint, arguing that the plaintiff employees failed to allege facts sufficient to impose successor liability.

Judge Patricia A. Sullivan disagreed, finding that the complaint satisfied the pleading standards required by the Fair Labor Standards Act and the Rhode Island Minimum Wage Act.

“I find that Plaintiffs’ FLSA claims against [the defendant] based on the federal common law doctrine of successor liability are well pled,” Sullivan wrote, adding that the plaintiffs’ complaint was “good enough to ‘nudge[] their claims across the line from conceivable to plausible.’”

The 21-page decision is Guarcas, et al. v. Gourmet Heaven, LLC, et al.

Robert D. McCreanor of Providence was the lead attorney for the plaintiffs. Opposite him was Brian LaPlante, also of Providence, for the defendant.

Assets sold

Plaintiffs Pedro Guarcas, Edgar Orellana, Roberto Quinilla, Pedro Us, Domingo Aj, Bairon Lopez, Rafael Hernandez and Edgar Vargas claimed to have worked for Gourmet Heaven, with locations in Providence on Weybosset and Meeting streets.

During the period when the plaintiffs were working at the Gourmet Heaven enterprise, the Weybosset Street store was owned by Gourmet Heaven, LLC, while the Meeting Street store was owned by RI Gourmet Heaven, Inc.

Chung Cho was the sole member of Gourmet Heaven, LLC, the sole shareholder of RI Gourmet Heaven, Inc., and the sole decisionmaker regarding the plaintiffs’ wages and working conditions at both Gourmet Heaven locations.

The plaintiffs brought suit in February 2015. Each plaintiff sued to recoup his earned but unpaid wages.

On April 9, 2015, defendant GSP Corp. filed its articles of incorporation with the Rhode Island secretary of state. On May 20, GSP and Gourmet Heaven, LLC, signed an asset purchase agreement, pursuant to which the defendant agreed to pay $500,000 for the retail food store located at 173 Weybosset St.

Two days later after the closing, the defendant allegedly “took over operation” of the Weybosset Street store and renamed it Serendipity Gourmet.

“I find that Plaintiffs’ FLSA claims against [the defendant] based on the federal common law doctrine of successor liability are well pled,” the judge wrote, adding that the plaintiffs’ complaint was “good enough to ‘nudge[] their claims across the line from conceivable to plausible.’”

FLSA test

The defendant contended that the plaintiffs had the burden of meeting the elements of the applicable standard drawn from the rigorous test developed by the Rhode Island Supreme Court in 1989 in H.J. Baker & Bro. v. Orgonics, Inc., and not from the less-strict federal common law test developed in 1995 by the 9th U.S. Circuit Court of Appeals in Steinbach v. Hubbard.

“Significantly, GSP does not cite, and this Court could not find, an FLSA case that has made a successor liability determination and selected a more stringent state law test, rather than the approach used in Steinbach,” Sullivan said, concluding that the FLSA successor liability determination is governed by the federal common law test.

The federal common law test involves 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.

“Plaintiffs’ Complaint contains more than sufficient facts to establish that GSP is a bona fide successor, based on the ‘continuity in operations and workforce of the successor and predecessor employers,’” Sullivan found.

She added that the plaintiffs’ complaint more than adequately alleged notice to GSP of its predecessor’s legal obligations.

The judge found that the complaint easily satisfied the last prong of the successor liability test.

“Cho is now bankrupt and Defendants Gourmet Heaven, LLC, and R.I. Gourmet Heaven, Inc., are defunct,” Sullivan wrote.

“[S]uccessor liability for the entire Cho operation is pled with sufficient plausibility so that Plaintiffs’ claims for the failure to pay wages for work performed at either location should proceed,” she added.

State standard

Sullivan found the plaintiffs’ state law claims for unpaid minimum wages and overtime pay under the Rhode Island Minimum Wage Act to be governed by Rhode Island’s standard for successor liability.

The Rhode Island successor liability test applicable to the case is a flexible one, Sullivan concluded.

“Plaintiffs’ state law claims may proceed as long as there are plausible facts to establish most of the H.J. Baker factors, particularly if there are facts permitting the inference that the sale transaction may have been intentionally structured by Cho and GSP acting in collusion to defraud the former ‘Gourmet Heaven’ employees asserting FLSA claims,” she said.

“To begin, the first, third and fifth H.J. Baker factors — transfer of assets, continuation of the business, and transfer that renders the seller unable to pay its creditors — are more than sufficiently pled,” she found.

The plaintiffs pointed to “an array of plausible facts permitting the inference that the sale of the ‘Gourmet Heaven’ Weybosset store was not an arm’s length business transaction, but rather was an arrangement between close business associates resulting in nearly half of the purchase price being disbursed to corporations owned and operated by an official representative of the purchaser, and leaving no assets available for satisfaction of claims against the seller,” Sullivan wrote.

Such a factual array was enough to give rise to the inference “that ‘the transferor harbored a fraudulent intent to evade its obligations to creditors,’” Sullivan said.

“And the allegations of GSP’s ongoing business relationship with Cho, coupled with its ‘don’t ask/don’t tell’ acceptance of Cho’s flagrantly false representation that he had no creditors or pending claims, is enough to taint GSP with the inference of collusion so as to keep the state law claims alive,” she added.