Federal court dismissed claims of former seller employees against buyer of restaurant assets because employees did not allege in their complaint that buyer had been aware of wage and hour problems at the restaurant or the inability of the seller to provide relief to the employees
M&A Stories
September 6, 2022
Introduction
When purchasing the assets of a business, the buyer may face legal action regarding wage and hour violations committed by the seller.
The Deal
In this case, a buyer acquired the assets of a New York restaurant from the seller, who was a former employee of the restaurant. The buyer and seller entered into an asset purchase agreement.
The Lawsuit
After the transaction was completed, former employees of the seller filed a lawsuit against the buyer in federal court, claiming that the buyer was responsible for the seller’s violations of federal and state wage and hour laws.
The Buyer’s Defense: The buyer asked the court to dismiss the lawsuit, arguing that they did not assume any liabilities for the seller’s wage and hour violations under the asset purchase agreement. According to the law, the employees could only pursue claims against the buyer if they alleged that the buyer had knowledge of the wage and hour issues and that the seller was unable to address them. The buyer pointed out that the employees had failed to make these crucial allegations in their complaint.
Court Ruling: The court agreed with the buyer and dismissed the employees’ claims. However, the court allowed the employees to amend their complaint to include allegations that the buyer was aware of the violations and that the seller couldn’t provide relief to the employees.
See Vazquez v. Molto Bene Bellmore, Inc., No. 18-CV-3681 (MKB), United States District Court, E.D. New York, (August 26, 2022).
Comment
Although the lawsuit is not concluded, the employees have been given the opportunity to revise their complaint by alleging that the buyer had knowledge of the claims and the seller’s inability to help them.
Lesson for Buyers: If potential wage and hour problems are uncovered during due diligence, it is important for the buyer to manage the risk, such as by using escrow or holdback mechanisms.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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