Wis.LIRC UC Decision: Neenah Foundry - July 26, 2013 - ER 451 - Employer - Contributions (UI Taxes), incl. liability for taxes; penalties; interest - ER 470.01 - Successorship; generally - For there to be a business transfer under Wis. Stat. � 108.16(8)(a) and Wis. Admin. Code � DWD 115.01, the asset or business activity must pass from a transferor to a transferee. This requires that the transferor and the transferee be legally separate entities, and there is no transfer within the meaning of the statute when the only change that occurs is a transfer of a parent corporation.

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 its review, the commission agrees with the decision of the ALJ, and it adopts the findings and conclusion in that decision as its own, except that it makes the following modifications:

Paragraphs 5 through 12 of the appeal tribunal's Findings of Fact and Conclusions of Law are deleted, and the following is substituted therefor:

The statutory definition of employer, Wis. Stat. § 108.02(13), includes corporations subject to Chapter 108, and the appellant (Neenah Foundry) is such a corporation. Each employer has an "account" in the Unemployment Reserve Fund, which is credited with the employer's tax contributions and charged for the benefits paid to the employer's employees, and an employer's tax rate is dependent upon the balance or "experience" of the employer's account. Neenah Foundry is a wholly-owned subsidiary of NFC Castings, Inc., which in turn is a wholly-owned subsidiary of Neenah Enterprises, Inc. (Neenah Enterprises).

Neenah Foundry has its own account and, following large numbers of layoffs in 2009 and 2010, its tax rate increased significantly. It argues that a change in the ownership of Neenah Enterprises entitles it to shed that rate.

On February 3, 2010, Neenah Enterprises petitioned for bankruptcy reorganization under Chapter 11. The outcome of the reorganization was as follows. All of Neenah Enterprises' pre-petition common stock was cancelled as of the effective date of the reorganization, July 29, 2010. Neenah Enterprises issued new common stock, which went entirely to pre-petition secured debt holders, and there is no dispute that the two groups of shareholders are different individuals or entities.

The new shareholders appointed a new board of directors for Neenah Enterprises, which had no carryover from Neenah Enterprises' pre-petition board. The new board then hired new corporate management. They hired a new president and CEO, and a new interim CFO. They hired the same COO, the same VP - Corporate Controller, the same VP - Purchasing, and the same VP - Technology as had worked for Neenah Enterprises pre-petition. They moved the old VP - Finance, Treasurer, and CFO, to VP - Municipal Sales and Operations, and they moved the old VP - Interim COO, to VP - Industrial Sales and Operations.

Following the reorganization of Neenah Enterprises, Neenah Foundry submitted a report of business transfer, asking for a new employer tax rate. The name, address, and federal ID number of Neenah Foundry remained the same, however. All employees remained the same and the business continued, without interruption, in the same location. The department's determination in response to the request for a new tax rate held that the post-reorganization Neenah Foundry was not a successor to pre-petition Neenah Foundry. The department reasoned that a sale or transfer of corporate stock by a stockholder does not result in a change of legal entity for successorship purposes.

A transfer of business occurs when any asset or business activity is transferred in whole or in part by a transferor to a transferee. Wis. Admin. Code § DWD 115.01(1). An asset is transferred if ownership, possession, or use changes from the transferor to the transferee. Wis. Admin. Code § DWD 115.01(4). These terms are defined. A transferor is "an employer which transfers an asset or business activity," and a transferee is "the person to whom an asset or business activity is transferred." Wis. Admin. Code § DWD 100.02(65) and (64). Wisconsin Admin. Code § DWD 115.01(5) lists criteria to consider when determining whether there has been a transfer of business activity. Factors (b), (c), and (f) specifically refer to both the transferor and the transferee. The only reasonable conclusion from these provisions is that, for there to be a business transfer, the transferor and transferee must be separate. Neenah Foundry is the employer in this case, and it transferred nothing.

The decision of the administrative law judge, as modified, is affirmed. Accordingly, the appellant is not a transferee in a business transfer or a successor for business successorship purposes. The appellant therefore is ineligible to receive a new employer account number for contribution liability purposes under the Wisconsin Unemployment Insurance Law.

Dated and mailed July 26, 2013

BY THE COMMISSION:

/s/ Laurie R. McCallum, Chairperson

/s/ C. William Jordahl, Commissioner

The parties briefed the remaining aspect of the successorship analysis as well, mandatory versus optional, and the commission's response is as follows.

The only provision in dispute here is Wis. Stat. § 108.16(8)(e)1., which states in relevant part that successorship is mandatory if:

At the time of business transfer, the transferor and the transferee are owned, managed, or controlled in whole or in substantial part, either directly or indirectly by legally enforceable means or otherwise, by the same interest or interests.

Neenah Enterprises did put in place a completely new board of directors, which in turn appointed a new interim president and CEO and a new interim CFO. It retained six of the eight pre-petition officers, however, with four of them staying in their pre-petition positions, including COO Andrews and VP - Corporate Controller Gitter. Where the line is drawn is going to vary, depending upon the percentages of retention and the positions in which individuals are retained, but the present scenario easily constitutes direct management in substantial part by the same interests.

Neenah Foundry has also asserted that bankruptcy courts routinely hold that a debtor's assets and business activities, whether transferred to an acquirer through an asset sale or via Chapter 11 plan, are free of pre-petition encumbrances such as adverse state unemployment experience ratings. This assertion overstates the case, however. It is only when the bankruptcy proceeding causes an increase in the tax rate that the federal bankruptcy proceeding limits the tax rate the state employment security agency may assess the subsequent entity. Neenah Foundry first cites Mass. Dep't of Unemployment Assistance v. OPK Biotech, L.L.C., 484 B.R. 860, 2013 Bankr. LEXIS 247 (B.A.P. 1st Cir. 2013). In that case, debtor PBBPC, Inc., previously having laid off nearly all of its employees, had a very high contribution rate. It sought Chapter 11 relief in the form of its sale, free of all encumbrances of any kind, to OPK. The bankruptcy court order granted the relief sought, and specifically ordered that OPK not have any liability either for any obligation of the debtor or for any claim against the debtor related to the purchased assets by reason of the transfer of such assets. The state subsequently tried to tax OPK at PBBPC's high rate, but the bankruptcy court disallowed it, reasoning that, because the right to tax at the higher successor rate arose from the sale of the debtor [as part of the bankruptcy proceeding], bankruptcy law (11 U.S.C. § 363(f)) permitted the bankruptcy court to authorize the sale free and clear of that rate.

Neenah Foundry also cites Hollytex Carpet Mills, Inc. v. Oklahoma Employment Security Comm'n, No. CIV-95-48-R, 1995 U.S. Dist. LEXIS 19661 (W.D. Okla. May 24, 1995), aff'd, 73 F.3d 1516 (10th Cir. 1996). In this case, the company's first quarter 1991 taxes came due after the company had filed under Chapter 11, but before the bankruptcy court confirmed its plan. The debtor did not pay the taxes, so the state agency penalized the debtor by substantially increasing its contribution rate, and the debtor applied to the bankruptcy court for relief.

The state agency argued that the Bankruptcy Code permits utilization of pre-petition experience factors in determining contribution rates for reorganized debtors, and the bankruptcy court agreed, but the district court did not.

Unemployment compensation contributions are a tax relating to employment under the Bankruptcy Code, entitled to Seventh priority, and bankruptcy courts have the power to make determinations regarding the legality of contribution rates. This power must be exercised in a manner which is consistent with state law, however. See Arkansas Corp. Comm'n v. Thompson, 313 U.S. 132, 145 (1941). To this end, under most circumstances a state agency may utilize a Chapter 11 debtor's pre-petition history and experience factors when determining contribution rates for a post-confirmation debtor. Put another way, pre-petition experience factors may be used to assess contribution rates when the factors have nothing to do with the bankruptcy proceeding. See In re Primrose Bedspread Corp., 67 B.R. 659, 1986 Bankr. LEXIS 4983 (Bankr. D.N.J. 1986).

It is a different matter, however, when the particular experience factor which causes a debtor's contribution rates to rise results solely from non-payment of unpaid contributions that are addressed by the debtor's plan of reorganization. Under the Bankruptcy Code, and this was the case in Hollytex, a state agency's right to an increased contribution rate, which was a post-petition assessment, is treated as a pre-petition priority claim included in and settled by the plan of reorganization. This scenario would not have happened had Neenah Foundry undergone reorganization, however.

The 10th Circuit's reading of the rights of state employment security agencies is fairly restrictive.(1 ) Even under that reading, however, the department would have been able to hold a post-confirmation Neenah Foundry to its pre-petition tax rate, because the tax rate and the bankruptcy proceeding would have had nothing to do with each other.

Neenah Foundry asserts that reorganized entities are entitled to a "clean slate." It admits, however, Reply Brief at 18, that it had been a failing company, and this is precisely the point. Neenah Foundry was failing, it continued in business, and it would have been legally obliged under Wisconsin law, law not pre-empted by any bankruptcy proceeding, to continue paying the contribution rate it was paying pre-petition, because the bankruptcy proceeding would have had nothing to do with Neenah Foundry's unemployment tax rate.

Finally, this position is consistent with the federal requirement that state employment security agencies not allow entities to improperly "dump" adverse contribution rates. See 42 U.S. C. § 503(k)(1)(A) (a provision of the SUTA Dumping Prevention Act of 2004 that in essence mirrors Wisconsin's mandatory successorship provision, Wis. Stat. § 108.16(8)(e)1.). Neenah Foundry took umbrage at the department's even having mentioned SUTA dumping. It obviously cannot be the case that Neenah Enterprises' several hundred million dollar reorganization was a veiled attempt to evade Neenah Foundry's high unemployment tax rate. Reference to this act simply underscores the federal interest in proper management by the states of their contribution schemes.

Note: In her July 11, 2013, Notice of Appearance, received by the commission on July 15, 2013, counsel for Neenah Foundry asks for a briefing schedule. As of that time, however, the commission had already reviewed the case. The request for a briefing schedule therefore is denied. See Wis. Admin. Code § LIRC 1.07. In addition, both Neenah Foundry and the department had full opportunity to, and did, brief the matter at the appeal tribunal level.

Appealed to Circuit Court. Affirmed. Appealed to Court of Appeals. Affirmed January 29, 2015.

(1)( Back ) There is a split among the circuits. The 6th Circuit, for example, does not consider a debtor's experience rating to be an "interest" within the meaning of 11 U.S.C. � 363(f), so it would survive the bankruptcy proceeding. See Mich. Empl. Sec. Comm'n v. Wolverine Radio Co., 930 F.2d 1132 (6th Cir. 1991). In that decision, the 6th Circuit properly noted that state employment security laws are part of a comprehensive federal-state system providing for the security of unemployed workers, that the state laws at issue in this kind of case have been certified as being in compliance with FUTA, that Congress knew about the unemployment scheme when it drafted the Bankruptcy Reform Act of 1978, and that there was no evidence in the Bankruptcy Code establishing that Congress had intended to pre-empt states from assigning liability for employment history to successor purchasers.