Buyer Beware - 3rd Circuit Provides Lesson In Successorship Liability in Title VII Case

Posted 9:51 PM by Michael Fox

In a 2-1 decision the 3rd Circuit untangles a procedural mess and revives a claim of discrimination that looked hopeless. The basic facts of Brzozowski v. Correctional Physician Services, Inc. (3rd Cir. 2/23/04) [pdf] are that Mrs. B. was employed by Correctional which provided medical services for various prisons. Mrs. B. filed a Title VII claim for discrimination against Correctional, suing within 90 days of the receipt of a right to sue letter. Unknown to her, Correctional was failing financially. She found out when its Counsel moved to withdraw for failure to get paid. By that time, Correctional had sold its assets, which consisted mainly of contracts with various states to Prison Health Services.

Mrs. B. sought to add Prison as a successor to Correctional, but the district court refused. Thereafter Mrs. B and Correctional entered into an agreed judgment for $150,000 with an agreement that the plaintiff would not seek to enforce the judgment against any of the individuals who had owned Correctional.

The 3rd Circuit first determined that it had jurisdiction, and then determined under the expanded rule of successor liability applicable in employment and labor cases, that Prison was in fact a successor. It also held that Mrs. B's attempt to add Prison related back to the timely filed action against Correctional. In at least one break, the majority held that Prison was not bound by the agreed judgment, and was entitled to defend itself on the merits.

The dissent, noting that the question is basically one of equity, would have applied the principle of a 7th Circuit decision distinguished by the majority, Musikiwamba v. Essi, Inc.,760 F.2d 740 (7th Cir. 1985). It held that while an employee should not lose rights because of a sale, neither should an employee be placed in a better position. Here, since Correctional was essentially judgment proof, by making the deep pocket of Prison available, Mrs. B.'s position was much better than it would have been against her employer.

The important lesson for those purchasing a business, even asset transactions, is to always be aware of the potentially broad reach of successorship liability.

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