Hepler Broom, LLC

Corporate Death Cut-Off Claims: Oakridge Healthcare and Successor Nonliability

November 5, 2020

On September 24, 2020, the Illinois Supreme Court issued its decision in People of the State of Illinois ex rel. the Department of Human Rights v. Oakridge Healthcare Center, LLC, 2020 IL 124753, constricting the avenue through which plaintiffs can bring Illinois Human Rights Act claims for workplace discrimination against their defunct employers’ corporate successors. In its 6-0 decision, authored by Justice Kilbride (Justice Neville abstaining), the court affirmed summary judgment for the succeeding corporate entity and rejected a divided Illinois Appellate Court’s adoption of a federal standard that would have broadened the path for plaintiffs to claim fraudulent corporate transfers.

Jane Holloway’s Charge, Corporate Transfer, and the Human Rights Commission

As reviewed in the Supreme Court and Appellate Court decisions, Jane Holloway worked at Oakridge Convalescent Home, a nursing home managed by Oakridge Nursing & Rehabilitation Center, LLC (Oakridge Rehab). In February of 2011, Ms. Holloway filed a charge against the nursing home and Oakridge Rehab, claiming her employers discriminated against her on the basis of age and disability in violation of the Illinois Human Rights Act (775 ILCS 5/1-101 et seq. (West 2010)). By this point, Oakridge Rehab was in dire financial straits, with unpaid Medicaid sums owed by the State. So, in the Spring of 2011 it began negotiations with its landlord, Oakridge Nursing and Rehab Properties, LLC (Landlord), to transfer assets to a new entity that would take over the facility from Oakridge Rehab and become the new tenant—Oakridge Healthcare, LLC (Oakridge Healthcare).

It bears noting at this point that the managing company Oakridge Rehab, the successor Oakridge Healthcare, and the Landlord entity contained a similar cast of characters. Without belaboring all of the connections, Helen Lacek was a managing member of Oakridge Rehab, and she had previously met Elisha Atkin, who managed the Landlord entity and would go on to found the successor Oakridge Healthcare. Ms. Lacek and Mr. Atkin were two members of another facility, McAllister Properties, LLC, with the pair and various extended family acting as members of yet another long-term care facility, McAllister Nursing and Rehab Center, LLC. Ms. Lacek serves as the administrator at the latter McAllister facility, but has not acted in that role for the successor corporation in this case, Oakridge Healthcare.

The Oakridge entities’ negotiations concluded in January 1, 2012, with Oakridge Rehab, Oakridge Healthcare, and the Landlord entering into a termination agreement ending the old entity’s lease, and making Oakridge Healthcare the new lessee. Also on that date, Oakridge Rehab transferred substantially all of its assets to Oakridge Healthcare through a transfer agreement, operating the nursing home at the same location, with the same staff and residents. The transfer agreement declared that Oakridge Healthcare was not a successor or successor-in-interest to the transferor, and that Oakridge Healthcare was neither liable for nor subject to any judgment against Oakridge Rehab. As stated by Ms. Lacek in her later deposition, Oakridge Rehab never appraised the transferred assets for value, and it never received payment for them.

During the 2011 negotiations to transfer assets to Oakridge Healthcare, Oakridge Rehab received notice of Jane Holloway’s charge with the Illinois Department of Human Rights (Department). After an investigation, the Department filed a civil rights complaint on Ms. Holloway’s behalf with the Illinois Human Rights Commission (Commission) in September of 2012, seeking relief only against Oakridge Rehab with no claim asserting personal liability. In the Spring of 2014, the Commission ordered Ms. Holloway be awarded back pay of $30,880, with prejudgment interest, and granted a motion to enforce the order against the sole respondent in the matter, Oakridge Rehab, which was involuntarily dissolved in November of that year and unable to satisfy the judgment.

The State’s Suit and the Appellate Court’s Adoption of the Federal Standard

After Oakridge Rehab failed to pay on the judgment, the State of Illinois filed a civil complaint in the Circuit Court of Cook County, naming both Oakridge Rehab and Oakridge Healthcare as defendants. Oakridge Healthcare sought summary judgment on the Illinois common-law rule of corporate successor nonliability, which was granted.

The Appellate Court, with Justice Walker writing for a 2-1 majority, reversed the judgment for the Oakridge defendants and remanded for further proceedings. People ex rel. Dept. of Human Rights v. Oakridge Nursing & Rehab Center, 2019 IL App (1st) 170806. Adopting the federal standard articulated in Equal Employment Opportunity Commission v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974), the majority noted that “Illinois has not yet addressed a successor corporation’s liability in the employment discrimination context,” but that “federal courts…have considered the issue and enunciated a standard for determining successor liability” in such circumstances. Id. ¶ 52. The majority quoted MacMillan for its holding that “‘the rightful prerogative of owners independently to rearrange their businesses and even eliminate themselves as employers’ needed to be ‘balanced by some protection to the employees from a sudden change in the employment relationship.’” Id. ¶ 54.

Noting that “in Illinois, the standards for recovery under the [Human Rights] Act are the same as the federal standards under Title VII,” the majority held it was appropriate to apply the federal, nine-factor test from MacMillan to assess potential fraudulent transfers in the face of an employee’s discrimination charge. The factors include, in summary, whether:  the successor had notice of the charge; the predecessor was able to give relief; there was continuity of operations between the two; and whether there existed the same plant, work force, supervisors, working conditions, production methods, and products from the new entity. Id. ¶¶ 56, 62. After weighing these factors, the majority reversed summary judgment and held there was sufficient evidence for a jury to find that the transfer was fraudulent. Id. ¶ 65.

Justice Mason dissented, arguing that the State strategically waived key arguments before the Circuit Court that could not be advocated here, and that “the majority’s decision to adopt a federal standard of corporate successor liability in employment discrimination cases [was] inconsistent with decades of controlling Illinois decisions.” Id. ¶ 68. The dissent noted that “[t]he general rule of corporate successor nonliability, as formulated in Illinois [in] Vernon v. Schuster, 179 Ill. 2d 338, 334-45 (1997)…recognized four—and only four—exceptions that warrant imposing successor liability on the purchasing entity.” Id. ¶ 80. None of the four were present here to preclude summary judgment, and the majority, as the dissent framed it, was simply adding a “just result” exception that did not exist in Illinois law. Id.

The Supreme Court Rejects Federal Corporate Successor Liability

Oakridge Healthcare appealed, and the Supreme Court began its analysis by reviewing the development of the federal successor liability doctrine. The Court explained that “Illinois, along with the majority of American jurisdictions, has long applied the common-law rule that a corporate successor is not subject to any debts or obligations incurred by the entity that previously operated the business,” as articulated in Vernon. Oakridge Healthcare, 2020 IL 124753, ¶¶ 17-20. Quoting Vernon and its cited authorities, the Court noted this rule arose “to protect bona fide purchasers from unassumed liability…to maximize the fluidity of corporate assets.” Id. ¶ 20

The Court then addressed the four Vernon exceptions to the nonliability rule:  (1) an express or implied agreement that the transferee would assume the transferor’s liabilities; (2) the transaction amounts to an actual or de facto merger or consolidation; (3) the transferee is a mere continuation or reincarnation of the transferor; or (4) the transaction was entered into for the fraudulent purpose of avoiding liability for the transferor’s obligations.” Id. ¶ 20.

The Court rejected the State’s assertions that the four exceptions failed to serve the Act’s antidiscrimination purpose, and that the federal case-by-case standard better balances competing interests. Rather, the Court held, adopting the federal rule risks “harm[ing] bona fide corporate buyers by creating undue uncertainty,” and in the decades since it decided Vernon, such buyers “have undoubtedly come to rely on that rule.” Id.¶ 21. Applying Vernon, the Court noted that “it was Oakridge Rehab’s independent inability to pay the judgment entered against it due to its financial failure and ultimate dissolution that led to the State’s filing the instant action against its successor, Oakridge Healthcare,” and furthermore, “the predecessor and successor corporations have absolutely no continuing relationship.” Id. ¶ 23.

Even under the fourth Vernon exception, for “fraudulent purpose,” the Court found insufficient evidence to preclude judgment for Oakridge Healthcare. Quoting the Uniform Fraudulent Transfer Act (UFTA) (at 740 ILCS 160/5 (West 2020)), the Court emphasized that “[w]ithout proof of the debtor’s ‘actual intent to hinder, delay, or defraud any’ of its creditors, fraud in fact cannot be established.” Id. ¶ 37. Section 5 of the UFTA provides 11 factors for consideration when reviewing whether a transfer is fraudulent, the balance of which fell in Oakridge Healthcare’s favor, according to the Court. Id. ¶ 38-42.

Regarding the business relationships of the Oakridge personalities, the Court found that, “[a]lthough Helen [Lacek] and Eli [Atkin] were admittedly well acquainted with each other after years of working in the same industry, that does not create a reasonable inference that the asset transfer was not an arm’s-length transaction,” and that “[i]n industries with fewer players in a particular region…it is not surprising that Helen and Eli would both have connections to some of the same business entities.” Id. ¶ 43. “Taken alone, those business connections do not create any nefarious inferences.” Id. The Court also discounted any taint of fraud to the no-money / no-appraisal exchange, noting that “Oakridge Healthcare was the only entity that expressed any serious interest in the facility,” and “Oakridge Rehab obtained a distinct benefit:  it was no longer liable for the operation’s escalating expenses and retained its accounts receivable, including the Medicaid sums due from the State.” Id. ¶ 44.

Ultimately, the Court chose to abide by stare decisis and reaffirm Vernon’s non-liability presumption and four exceptions. However, the Court noted that “it is within the legislature’s power to abrogate the common-law rule we adopted in Vernon or otherwise alter its standards through appropriately targeted legislation….” Id. ¶ 33. The legislature has not done so. Until it does, corporate successors rest comfortably in the knowledge that plaintiffs pleading employer discrimination have a very narrow path to walk under Vernon and Oakridge Healthcare.

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