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Buy At Your Own Risk: Tenth Circuit’s Decision Highlights Importance of Employment Diligence
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A recent decision from the Tenth Circuit Court of Appeals emphasizes the importance of thorough research before purchasing a company.
A hotel owner is now responsible for a discrimination case tied to the previous owner. It’s a situation that could have been avoided if the company had done its homework.
The Case
The case begins with Roark-Whitten Hospitality. It acquired a hotel in New Mexico in 2009. Then, in 2014, it sold the hotel to another entity: Jai Hanuman, LLC.
Shortly after Jai Hanuman, LLC took ownership, the Equal Employment Opportunity Commission (EEOC) filed a lawsuit under Title VII. Its complaint was based on discrimination allegations that hotel employees made while Roark-Whitten Hospitality still owned the hotel.
After learning the hotel ownership had changed, the EEOC adjusted its complaint to reflect the new owner. But then, Jai Hanuman, LLC sold the hotel to another company, SGI, LLC. The EEOC amended its complaint to name the new owner again.
Case dismissed, then upheld.
Both Jai Hanuman and SGI pushed back. They moved to dismiss the complaint because they weren’t liable for conduct that happened before they owned the hotel. The District Court agreed. Ultimately, it dismissed the case.
But now, that case is being upheld. SGI is being named the defendant.
In an appeal, the EEOC argued that the Jai Hanuman-SGI purchase agreement had protective language. It stated that SGI had 30 days to investigate the hotel’s existing liabilities.
The Tenth Circuit Court of Appeals explained that if SGI had done its due diligence, it could have uncovered the lawsuit. Therefore, it could have used that information to back out of the purchase. Thus, the court ruled that SGI could be liable for the discrimination claims.
Here’s why this is important.
This new ruling is an important reminder to do your homework before entering a company transaction. Remember that knowledge is power. It’s best to bet on your known risks, rather than your perceived protections.
Successor liability is always a serious risk in purchases, and protective language may not be as effective as you think. That’s because protection under “retained liabilities” and indemnification language is limited.
- While it allows you to recover damages from the seller, if that seller no longer operates or doesn’t have the funds – it proves useless;
- Regardless, obtaining such a judgment may be difficult;
- And it doesn’t protect you from being held legally liable.
Lesson learned: Practice your due diligence.
Here’s the bottom line: practice due diligence before going through with a company purchase. Do thorough research on any potential employment liabilities, whether it’s a stock or asset purchase. If you find any potential liabilities, discern whether they’re a risk you’re willing to take on.
Hughes Lawyers specializes in employment law. If you need help understanding your potential liabilities or have an urgent legal need, reach out right away. We’ll help you make the best decision for your assets. Tell us about your case today.
