Successor Liability in Employment Discrimination Cases

In a recent case, an Illinois appellate court held that a corporate successor may be liable for the civil rights violation of a predecessor under the Illinois Human Rights Act. The case is People ex rel. Department of Human Rights v. Oakridge Nursing & Rehab Center, 2019 IL App (1st) 170806.

The General Rule
By way of background, in Vernon v. Schuster, 179 I11. 2d 338 (1997), the Illinois Supreme Court held that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation. The rule of successor corporate nonliability is intended to protect bona fide purchasers from unassumed liability and was created to improve the fluidity of corporate assets. Even so, there are four exceptions to the general rule: 

- Where there is an express or implied agreement of assumption;
- Where the transaction amounts to a consolidation or merger of the purchaser or seller corporation;
- Where the purchaser is merely a continuation of the seller; or
- Where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations.

In this case, there was evidence the transfer at issue may have been made for the fraudulent purpose of escaping Oakridge Center’s potential obligation to a claimant, Holloway.

The State urged the court of appeals to look to federal common law where successor liability is recognized as the default rule in employment discrimination cases. The State maintained that recognition of successor liability in employment discrimination cases aids victims such as Holloway to enforce judgments against employers involved in discriminatory practices who might otherwise escape liability. In turn, Oakridge argued that recognizing successor liability in the employment discrimination context departs from well-settled Illinois law, which is a violation of the doctrine of stare decisis. 

State and Federal Standards Aligned
The appeals court noted that Illinois has not yet addressed a successor corporation’s liability in the employment discrimination context. However, federal courts have considered the issue—and have enunciated a standard for determining successor liability in cases involving employment discrimination. The Sixth Circuit first imposed liability on successor employers in Equal Employment Opportunity Comm’n v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974). 

In Illinois, the standards for recovery under the Illinois Act are the same as the federal standards under Title VII. (See Zaderaka v. Illinois Human Rights Comm’n, 131 111. 2d 172, 178 [1989]; see also Sangamon County Sheriff’s Department v. Illinois Human Rights Comm’n, 233 111. 2d 125, 138 [2009].) Therefore, for reasons similar to those outlined by the Sixth Circuit, the appeals court held, in a 2-1 split, that in an action where the underlying claim stems from a charge of employment discrimination in violation of the Illinois Human Rights Act, Illinois courts may rely on the federal doctrine of successor corporate liability. 

Companies or individuals acquiring an existing business should carefully determine if there is a potential civil rights violation—and if so, take this fact into account in the acquisition process. PM