ASAP

Puerto Rico Supreme Court Sets Standard to Apply the Successor Liability Doctrine

By Ana B. Rosado-Frontanés and Erika Berrios-Berrios

March 15, 2018
5 minute read

The Puerto Rico Supreme Court (“PRSC”) recently issued an Opinion in the case of Roldán Flores v. M. Cuebas, 2018 TSPR 18, 199 D.P.R. __ (Feb. 6, 2018), in which it addressed again the requirements for applying the “successor liability doctrine.”¹ The PRSC held that prior to applying the successor liability doctrine, courts must first determine whether the prior owner/employer had any legal obligations or committed an illegal act with respect to the plaintiff-employee. If there was no employment obligation or illegal act attributable to the prior owner/employer, then there is no need to examine or apply the successor liability doctrine. In the context of unjust dismissal claims, the effect of the PRSC’s holding is that when there is a complete closing of operations, which is considered just cause for termination under Act No. 80 of May 30, 1976 (“Act 80”),² there is no need to examine the applicability of the successor liability doctrine as there is no illegal act for which the acquiring entity could be held liable.

This case involved consolidated cases from two former employees of the co-defendant M. Cuebas Inc. (“Cuebas”). The former employees alleged that they were terminated without just cause as a result of the transfer of business from Cuebas to co-defendant corporation, Bohío International Corporation (“Bohío”).

In its analysis, the PRSC considered the following uncontested facts. On or around 2010, Cuebas decided to close its operations. During this time, it also commenced negotiations with Bohío to sell certain assets and capitalize on the shutdown of the corporation. On April 1, 2011, Cuebas and Bohío endorsed a Letter of Intent, which stated that they were negotiating the sale of certain assets “upon Seller’s unequivocal decision to close its operations.”

On April 8, 2011, Cuebas notified all of its employees of the corporation's closing. Shortly thereafter, Cuebas began closing operations and terminated one of the plaintiffs. Four months later, Cuebas and Bohío executed an Asset Purchase Agreement, which stated that Bohío was only acquiring certain machinery and trademarks from Cuebas. In the agreement, both parties explicitly agreed that Bohío would not acquire Cuebas's debts, stocks, or employees. In addition, Bohío would not acquire any other asset not conveyed in the Agreement. Significantly, Bohío did not acquire the Cuebas name or the plant where Cuebas made its products. By the time the Asset Purchase Agreement was signed, Cuebas was not making any products. Cuebas assumed sole responsibility over the process of closing its operations, including the sale to third parties of assets not sold to Bohío, the collection of unpaid accounts, and the payment of debts. In October 2011, Cuebas terminated all remaining employees, including the second plaintiff.

Taking these facts into consideration, the PRSC held that summary judgment was appropriate. Regarding the successor liability doctrine, the PRSC determined that since Cuebas had just cause for the terminations, there was no need to entertain or analyze the successor liability doctrine. There was no illegal act on Cuebas’s part that could be imputed to Bohío, which is what the successor liability doctrine addresses. The PRSC did analyze whether there was a transfer of an ongoing business under Act 80 and concluded, based on the specific facts of the case, that there was not.³

Although each transaction has to be evaluated on a case-by-case basis, the PRSC’s decision may support the position that a buyer of assets from an employer that closes its operations will not be liable for failing to hire the seller’s employees under the successor liability doctrine. However, both the seller and the buyer may still be liable under Act 80 if the transaction meets the definition of transfer of an ongoing business.⁴ To minimize the possibility of liability under Act 80, employers considering the closing of operations should ensure that the intent to cease operations is evidenced in relevant documents. Further, both the seller and the buyer should ensure that any sale of assets is structured in a way that reflects that intent.

¹ This is the second time this case reached the PRSC. The first time, the PRSC clarified the standard that the Court of Appeals has to follow when it reviews summary judgment issued by the lower court. See Meléndez González v. M. Cuebas, 193 D.P.R. 100 (2015). On remand, the Court of Appeals applied said standard but, in the PRSC’s opinion, did it incorrectly. This time, the PRSC resolved the case on the merits based on the uncontested facts of the case.

² 29 P.R. Laws Ann. §185a et al.

³ Under Article 6 of Act 80, when there is a transfer of an ongoing business, if the new owner continues to use the services of the employees who were working with the prior owner, such employees shall be credited with the time they worked for the prior owner. Also, in the event that the new owner chooses not to continue with the services of all or any of the prior owner’s employees, the former employer shall be liable for the statutory severance compensation, and the purchaser shall retain the corresponding amount from the selling price. See 29 PR Laws Ann. §185f. Act No. 4 of January 26, 2017 amended Act 80 to include a definition of “transfer of an ongoing business” but said definition was not part of the law at the time relevant to the decision discussed herein.

⁴ Transfer of an ongoing business is defined by Act 80, as amended by Act 4, as

the purchase of a business or company, whereby an employer sells to another employer a substantial portion of the assets and/or liabilities of a business, without interrupting or ceasing the operations thereof for longer than six (6) months and continues operating the same type of business in the same or a different establishment, with basically the same equipment, machinery, and inventory, producing basically the same products and/or rendering the same services, retaining the same name of the business and commercial brands or a similar name, provided, that most of the employees who work in the business at any time during the six (6) months following the transfer worked for the selling employer at the time of the transfer of the business.

29 P.R. Laws Ann. §185n.