LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)


SUNSHINE BISCUITS INC, Employer

KEEBLER CO, Employer

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Hearing No. S9700259MD, Account No. 002080


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on the applicable law, records and evidence in this case, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

1. Facts and posture.

Keebler Co. and Sunshine Biscuits, Inc., (Sunshine) were competing producers and suppliers of biscuits for retail sale in grocery stores. During the autumn of 1996, Keebler Co. acquired Sunshine's corporate stock. (1) Thereafter, in September or October 1996, Keebler Co. employes took over the task of stocking Sunshine products in grocery stores.

As of September 6, 1996, Sunshine's only employe in Wisconsin was Francis Karnick. Mr. Karnick's job involved distributing Sunshine product for sale at retail in grocery stores. In addition to Mr. Karnick, Sunshine contracted with an independent broker to ensure that grocery stores in Wisconsin were stocked with Sunshine products. Mr. Karnick dealt with the independent brokers, individual store managers, or the grocery store chain's upper management. Synopsis, pages 5, 6 and 8. Mr. Karnick's role was also described more as public relations than sales. Synopsis, page 5.

Mr. Karnick was laid off on September 6, 1996, shortly before Keebler Co. employes took over distributing Sunshine products. Synopsis, page 7-8. The most reasonable inference from the record is that Mr. Karnick's September 6, 1996 lay-off occurred shortly before the autumn of 1996 stock acquisition. Keebler Co. representative Scott James testified that Mr. Karnick was laid off because his function was "no longer in the equation as far as Keebler was concerned." Synopsis, page 8.

About the time it acquired Sunshine's stock, Keebler Co. replaced the Karnick-broker system with a direct sales system. Under Keebler Co.'s system, Keebler Co. and Sunshine products were distributed directly to individual grocery stores by Keebler Co. employes who took the orders, drove the products to the stores in vehicles owned by Keebler Co., and stocked the products on the store shelves themselves.

Keebler Co. zone sales manager Mark Doerr testified Sunshine did not continue to operate as a separate entity after the stock acquisition. However, Mr. Doerr had little knowledge of what went on beyond product distribution; he was unaware if Sunshine continued to bake products under its own name or whether the baking aspects of the businesses were merged. Mr. Doerr did testify that:

"When I took over responsibility for distribution of Sunshine products it was my understanding that the sale had been completed and we were distributing Sunshine and Keebler products on Keebler trucks."

Synopsis, pages 6 and 7.

No Wisconsin-based Sunshine employes were transferred to Keebler Co. following the stock acquisition. Mr. James also testified that the Sunshine acquisition was strictly a stock purchase, not a merger or a transfer of assets. However, some Sunshine employes in other states were eventually "switched" or transferred to Keebler Co.'s payroll on January 1, 1997.

In early March 1997, Keebler Co.'s agent informed the department that Keebler Co. had acquired the business of Sunshine Biscuits, Inc., on January 1, 1997. Shortly thereafter, on March 17, 1997, Keebler Co.'s agent filed a report of business transfer form, stating that Sunshine's business had been transferred to Keebler Co., and that the effective date of the transfer was January 1, 1997. The report indicated that all of Sunshine's tangible and intangible assets had been transferred to Keebler Co. The report also stated that "both the predecessor [Sunshine] and successor [Keebler Co.] are wholly-owned subsidiaries of the same parent company (Keebler Corporation)." Keebler Co. chose not to apply to succeed to Sunshine's account.

Thereafter, on April 15, 1997, the department issued an initial determination finding that Keebler Co. was a mandatory successor to the account of Sunshine, and that a total transfer had occurred, resulting in a contribution rate for 1997 of one percent. Keebler Co.'s agent responded by filing an amended report of business transfer on April 25, 1997. In a letter attached to its amended report, Keebler Co.'s agent explained that, with the exception of employes none of Sunshine's assets were transferred to Keebler Co. In a follow-up letter documenting a telephone call with a representative of the department, Keebler Co.'s agent asserted that no merger occurred, no assets were transferred, and no employes were transferred in Wisconsin.

Following a hearing in this matter, the ALJ affirmed the initial determination. Keebler Co. petitioned for commission review.

2. The law.

Wisconsin Statutes § 108.16(8)(a), (b), (e), (f), and (h) provide:

"108.16(8)(a) For purposes of this subsection a business is deemed transferred if any asset or any activity of an employer, whether organized or carried on for profit, nonprofit or governmental purposes, is transferred in whole or in part by any means, other than in the ordinary course of business.

"(b) If the business of any employer is transferred, the transferee is deemed a successor for purposes of this chapter, if the department determines that all of the following conditions have been satisfied:

"1. The transferee has continued or resumed the business of the transferor, in the same establishment or elsewhere; or the transferee has employed substantially the same employes as those employed by the transferor in connection with the business transferred.

"2. The transfer included at least 25% of the transferor's total business as measured by comparing the payroll experience assignable to the portion of the business transferred with the transferor's total payroll experience for the last 4 completed quarters immediately preceding the date of transfer.

"3. The same financing provisions under § 108.15, 108.151 or 108.18 apply to the transferee as applied to the transferor on the date of the transfer.

"4. The department has received a written application from the transferee requesting that it be deemed a successor. Such application must be received by the department on or before the contribution report and payment due date for the first full quarter following the date of transfer.
". . .

"(e) Notwithstanding par. (b), a transferee is deemed a successor for purposes of this chapter, if the department determines that all of the following conditions are satisfied:

"1. At the time of business transfer, the transferor and the transferee are owned or controlled in whole or in substantial part, either directly or indirectly by legally enforceable means or otherwise, by the same interest or interests. Without limitation by reason of enumeration, it is presumed unless shown to the contrary that the "same interest or interests" includes the spouse, child or parent of the individual who owned or controlled the business, or any combination of more than one of them.

"2. The transferee has continued or resumed the business of the transferor, either in the same establishment or elsewhere; or the transferee has employed substantially the same employes as those the transferor had employed in connection with the business transferred.

"3. The same financing provisions under § 108.15, 108.151 or 108.18 apply to the transferee as applied to the transferor on the date of the transfer.

"(f) The successor shall take over and continue the transferor's account, including its positive or negative balance and all other aspects of its experience under this chapter, in proportion to the payroll assignable to the transferred business. The liability of the successor shall be proportioned to the extent of the transferred business. The transferor and the successor shall be jointly and severally liable for any amounts owed by the transferor to the fund and to the administrative account at the time of the transfer, but a successor under par. (c). is not liable for the debts of the transferor except in the case of fraud or malfeasance."

In summary, the occurrence of a business "transfer" raises the question of whether the acquiring entity succeeds to the account experience of the transferring entity. Often, the acquiring entity desires to succeed to an account when it is positive and has a low contribution rate, (2) but desires to "dump" an account that has a negative balance or a high contribution rate. An acquiring entity is able to choose to succeed in cases of "optional" successorship under Wis. Stat. § 108.16(8)(b), by filing an application requesting to be deemed the successor. If an acquiring entity does not apply for an optional successorship within the specified time period after the transfer, it cannot succeed to the transferring entity's account.

However, an "optional" successorship is only available when the transfer is the result of an arms length transfer between strangers. When the transferring entity and the acquiring entity are related entities, (3) the acquiring corporation is not allowed the option to choose not to succeed to the account experience. In those cases, successorship to the transferring entity's account experience, good or bad, is "mandatory" under Wis. Stat. § 108.16(8)(e).

The commonly-accepted rationale for allowing optional successorship for arms length transfers between strangers is the "clean slate" explanation. When an unrelated entity acquires an existing business, it brings in new management which is given the opportunity to create its own history of stable or unstable business operations. DILHR v. LIRC & Arkay, case no. 89-1238 (Wis. Ct. App., February 1, 1990). (4) Allowing the acquiring entity to "dump" the bad account facilitates the transfer of business which, in turn, promotes economic development.

On the other hand, a different situation is presented when the transfer is between related entities. Such a transfer may simply be an attempt to evade a poor account experience, while continuing with the same management that was responsible for the negative experience rating in the first place. Further, the concern about impediment to legitimate transfers of businesses is absent when the transfer is not at arms length.

3. Analysis.

The first question, then, is whether a transfer has occurred in this case. A transfer occurs when any asset or any activity of an employer is transferred in whole or in part by any means, other than in the ordinary course of business. Wis. Stat. § 108.16(8)(a). Transfers of assets or business activities may be done by sale, gift, lease, inheritance, foreclosure, termination or cancellation of lease, bankruptcy sale, reorganization, merger, or consolidation and receivership. Wis. Admin. Code § ILHR 115.01 (2).

One point which is highly relevant to this case: shares of corporate stock are not "assets" for the purposes of a business transfer. Indeed, the transfer of shares of corporate stock by a shareholder is not a "business transfer" for the corporation which issued the shares. Wis. Admin. Code § § ILHR 115.001(1) and 115.01 (3).

Thus, the department and Keebler Co. agree that a transfer did not occur simply as the result of Keebler Co. buying Sunshine's stock. The department asserts, however, that when Keebler Co. began distributing Sunshine's products, the transfer of that activity constituted a business transfer. Indeed, since Sunshine's only employe in Wisconsin was involved in the distribution of Sunshine's products, the transfer constituted 100 percent of Sunshine's total business as measured by payroll under Wis. Stat. § 108.16(8)(b)2.

Keebler Co. asserts, however, because its current method of product distribution is so different from Sunshine's former method of product distribution that a "transfer" did not occur. Keebler Co. also argues that, to the extent a transfer or a business activity did occur, it was to Keebler Co. from the independent distributors hired by Sunshine, not to Keebler Co. from Sunshine.

However, the commission cannot accept Keebler Co.'s position. Distribution of the bakery products it made was an activity of Sunshine. Regardless of whether Sunshine performed the activity entirely with its own employes, or hired an independent distributor to perform a large part of the activity, it was still an activity of Sunshine's that was transferred to Keebler Co. The fact that Keebler Co. performed the product distribution task much differently than Sunshine had, if anything, strengthens the conclusion that Keebler Co. took over that function from Sunshine itself, rather than merely assumed the role of the independent distributors. Indeed, Mr. Doerr's testimony indicates that Keebler Co.'s assumption of the activity of distributing Sunshine products was an important result or consequence of the stock acquisition.

Beyond that, of course, Sunshine's employe, Mr. Karnick, was directly involved in the distribution of its product in Wisconsin. Mr. Karnick's role in the activity may seem minor in comparison with the role of Sunshine's independent distributors. However, the fact remains that Mr. Karnick was laid off as a result of the transfer of the distribution activity to Keebler Co. In short, product distribution was a business activity transferred from Sunshine to Keebler Co establishing a transfer under Wis. Stat. § 108.16(8)(a).

The next question is whether the optional successorship provision of Wis. Stat. § 108.16(8)(b), or the mandatory successorship provision of Wis. Stat. § 108.16(8)(e) applies in this case. To answer this question, the commission must determine whether the transfer of the product distribution activity occurred between related entities under Wis. Stat. § . 108.16(8)(e)1 (i.e., entities owned or controlled in whole or substantial part, either directly or indirectly, by the same interest or interests.)

The record indicates that before Keebler Co. acquired Sunshine's stock, the two were competing businesses. After the stock acquisition in 1996, Sunshine came, as Mr. Doerr puts it, under the Keebler umbrella. The commission concludes that, immediately prior to the occurrence of the stock acquisition, Keebler Co. and Sunshine were not related entities.

Of course, it is not the stock acquisition, but the transfer of the product distribution activity, that was the "business transfer." Thus, the question is whether, at the time of the transfer of the distribution activity, Keebler Co. and Sunshine were related entities. The commission finds they were not, and so concludes that the optional successorship provision applies in this case.

The close temporal connection between Mr. Karnick's discharge (September 6, 1996), the stock acquisition (the fall of 1996), and Keebler Co.'s assumption of the distribution of Sunshine's products (September or October 1996) cannot be gainsaid. In addition, Mr. Karnick was laid off in anticipation of Keebler Co. assuming the distribution activities. Mr. Doerr directly related his assumption of responsibility of the product distribution activities to the completion of the sale, and his testimony on this point was not contradicted in any respect by Mr. James. The commission concludes that the transfer of the distribution activity was one of the main objects of the stock acquisition, and that the transfer of the distribution activity occurred at the time of the stock acquisition for all practical purposes. Consequently, while Keebler Co. and Sunshine became related entities after Keebler Co. acquired Sunshine's stock, they were not related entities at the time of the transfer of the product distribution activity which occurred simultaneously with the acquisition of the stock. (5)

The commission did consider the statement in the initial and amended reports of business transfer submitted by Keebler Co. that:

"Both the predecessor and successor are wholly-owned subsidiaries of the same parent company (Keebler Corporation)."

That statement might be read to indicate that Keebler Co. and Sunshine were already both owned by Keebler Corporation, or by some other member of the Keebler Corporation "corporate family," even before Keebler Co. acquired Sunshine's stock in fall of 1996. However, that inference is not supported by the record, and in fact is contradicted by Mr. Doerr's testimony that Keebler Co. and Sunshine were competitors until Sunshine came under the "Keebler Co. umbrella" with the stock acquisition in 1996.

Beyond that, the reports of business transfer were written with respect to the transfer of employes in other states in January 1997. By the time the employes in other states were transferred to Keebler Co.'s payroll in January 1997, Sunshine and Keebler Co. were in fact owned by the same corporate entity. However, the event constituting the business transfer under Wis. Stat. § 108.16(8)(a) was not the transfer of employes in other states in January 1997, but rather the transfer of the Sunshine product distribution activity in September or October 1996.

The commission therefore finds that Keebler Co. is not a mandatory successor to the account of Sunshine Biscuits, Inc., within the meaning of Wis. Stat. § 108.16(8)(e). The commission further finds that Keebler Co. did not submit a timely application requesting successorship to the account of Sunshine Biscuits, Inc., under Wis. Stat. § 108.16(8)(b).

DECISION

The decision of the administrative law judge is reversed. Accordingly, Keebler Co. is neither a successor to the account of Sunshine Biscuits, Inc., nor subject to Wis. Stat. § 102.16(8)(f) with respect to that account. The case is remanded to the department for further appropriate action to determine the Keebler Co.'s contribution rate in accordance with this decision.

Dated and mailed: November 18, 1998
sunshin.srr : 101 : 5  ER 470.02   ER 470.01

/s/ David B. Falstad, Chairman

Pamela I. Anderson, Commissioner

/s/ James A. Rutkowski, Commissioner

NOTE: The commission reversal in this case is not based on an assessment of witness credibility or demeanor, but rather because it reached a different legal conclusion on essentially the same set of facts as found by the presiding ALJ. Consequently, a credibility conference was not required. Transamerica Ins. Co. v. ILHR Department, 54 Wis. 2d 272, 283-84 (1972).


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Footnotes:

(1)( Back ) According to the synopsis of the hearing testimony, Keebler Co.'s representative testified only that the stock acquisition occurred in 1996. However, the ALJ found the stock acquisition occurred in the fall of 1996, a finding reiterated by Keebler in its petition for commission review. The department did not file a brief or other written argument on review.

(2)( Back ) The contribution rate is the percentage of payroll which an employer must contribute to the unemployment reserve fund. Generally, an employer with a better "account experience" (that is, fewer employes collecting UI) will have a lower contribution rate.

(3)( Back ) Or as the statute describes it "owned or controlled in whole or substantial part directly or indirectly by legally enforceable means or otherwise, by the same interest or interests." Wis. Stat. § 108.16(8)(e) 1.

(4)( Back ) The legislative history indicates another rationale for the distinction between mandatory and optional successorship: an attempt to avoid merging "contributory" versus "reimbursement" financing of the unemployment reserve fund. First Federal Savings Bank v. LIRC, 200 Wis. 2d 786 (Ct. App., 1996). The court in First Federal quoted legislative history providing this succinct summary of the opposing effects of successorship under Wis. Stat. § 108.16 (8)(b) (optional) and Wis. Stat. § 108.16(8)(e) (mandatory): "As of January 1, 1980, the successorship provisions of 108.16(8) were changed to allow for a mixture of mandatory and optional successorship. Prior to 1/1/80 all transfers resulted in mandatory successorship. Section 108.16[(8)(e), effective 1/1/80, was created to define mandatory successorship though common ownership or control of the employers, as opposed to optional successorship available with `arms length' transfers between employers with no common ownership or interest." First Federal, at 200 Wis. 2d 796.

(5)( Back ) In determining the relationship of the entities "at the time of the business transfer," the commission looks to the relationship of the parties immediately before the transfer occurs. First Federal, supra at 200 Wis. 2d 794-97.