Restaurant Firm Is Liable as Successor For Prior Eatery's Title VII Breach, Court Says

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By Kevin McGowan

Jan. 30 — A corporation operating a Wisconsin restaurant properly was held liable under Title VII of the 1964 Civil Rights Act for a predecessor restaurant's retaliatory firing of a black employee who complained of racial harassment, the U.S. Court of Appeals for the Seventh Circuit ruled Jan. 29.

Applying a five-factor test, the Seventh Circuit said the district court didn't abuse its discretion in finding North Broadway Holdings Inc. liable as a successor for the misdeeds of Northern Star Hospitality Inc., which ran the now-closed Sparx Restaurant. Hospitality violated the Title VII rights of Dion Miller, a black assistant kitchen manager fired in October 2010, three weeks after he complained about a racist display in the kitchen.

The Equal Employment Opportunity Commission sued Hospitality on Miller's behalf, but after the company folded, the EEOC added North Broadway Holdings and Northern Star Properties LLC as defendants.

Following a bench trial, the U.S. District Court for the Western District of Wisconsin ruled Northern Star Properties and North Broadway Holdings could be held liable under Title VII based on two alternate and equitable determinations—a pierced corporate veil or successor liability.

A jury subsequently ruled for the EEOC on retaliation and awarded Miller $15,000 in compensatory damages. The trial judge added $43,300 in back pay plus a “tax-component award” of $6,495 to offset increased taxes Miller might be assessed.

The evidence supports successor liability for North Broadway Holdings, so there is no need to reach a pierced corporate veil theory, the Seventh Circuit said.

When Northern Star Hospitality dissolved, North Broadway Holdings was created, Judge Michael S. Kanne wrote. “Successor liability is meant for this very scenario; it helps make victims of discrimination whole under Title VII by combatting similar changes in business.”

Five-Factor Test Satisfied 

Under Teed v. Thomas & Betts Power Solutions LLC, 711 F.3d 763, 20 WH Cases2d 726 (7th Cir. 2013), a court considers whether the successor had notice of the pending lawsuit, whether the predecessor could have provided the relief sought before the sale or dissolution, whether the predecessor could have provided relief after the sale or dissolution, whether the successor can provide the relief sought and whether there is continuity between the operations and workforces of the predecessor and successor.

Chris Brekken, the sole owner of Properties, which leased the Menomonie, Wis., building to Northern Star Hospitality and North Broadway Holdings, also was the sole shareholder, officer and director of Northern Star Hospitality and North Broadway Holdings, the court said.

North Broadway Holdings was formed in March 2012 to operate a Denny's Restaurant in the building after Brekken closed Sparx in June 2012, the court recounted. About 50 percent of the workforce hired for Denny's previously had worked for Sparx. The funds to open the Denny's mostly had come from Northern Star Hospitality, the court said.

All the companies had notice of the EEOC suit, and Northern Star Hospitality couldn't have paid any judgment after Sparx closed, the court said. Those factors weigh in favor of successor liability, as does the interrelationship among the entities controlled by Brekken, the court said.

“Because each of the factors weighs in favor of successor liability, the district court did not abuse its discretion when it found Holdings to be a successor of Hospitality and therefore liable to Miller,” the court said.

Sparing Plaintiff From Tax Hike 

The defendants also challenged the district court's awarding $6,495 to offset any tax burden Miller might bear as a result of his $43,300 lump-sum back pay award.

But citing Eshelman v. Agere Sys., Inc., , 554 F.3d 426, 21 AD Cases 865 (3d Cir. 2009), and Sears v. Atchison, Topeka & Santa Fe Ry. Co. 749 F.2d 1451, 36 FEP Cases 783 (10th Cir. 1984), the court said “we join the Third and Tenth Circuits in affirming a tax-component award in the Title VII context.”

The back pay award would put Miller into a higher tax bracket and the resulting tax increase would “decrease the sum total he should have received had he not been unlawfully terminated,” the court said.

“Put simply, without the tax-component award, [Miller] will not be made whole, a result that offends Title VII's remedial scheme,” the court said.

Although the district court should have described how it arrived at the 15 percent figure used to compute the award, the trial court didn't “abuse its wide discretion in granting this modest, equitable remedy,” Kanne wrote.

Judges Daniel A. Manion and Joel M. Flaum joined in the decision.

The EEOC in Washington represented the agency. The Schwartz Law Firm represented the corporate defendants.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://www.bloomberglaw.com/public/document/Eeoc_v_N_Star_Hospitality_No_141660_2015_BL_21437_7th_Cir_Jan_29_.