NCCI May Not Impose Bankrupt Staffing Company’s Experience Rating on Purchaser in Court-Approved Sale of Assets

A debtor’s workers’ compensation experience rating is the sort of “interest” of which the debtor’s assets can be sold free and clear, under § 363 of the U.S. Bankruptcy Code, held the U.S. Bankruptcy Court for the District of New Hampshire recently [In re ARSN Liquidating Corp., 2017 Bankr. LEXIS 185 (D. N.H., Jan. 20, 2017)]. Accordingly, National Council on Compensation Insurance (“NCCI”) could not impose the Debtor’s experience rating on the purchaser and any attempt to do so violated the terms of the court’s Sale Order.

Background

The Debtor owned and operated a staffing company that supplied temporary workers to many businesses in both New Hampshire and Massachusetts. At the time the Debtor filed for bankruptcy protection, it employed more than 1,000 workers. The bankruptcy court subsequently approved a sale of substantially all of the assets of the Debtor to Wicked Staffing Solutions, LLC (“WSS”).

Sale “Free and Clear” of Liens and Interests

The sale included the Debtor’s customer contracts and employee files for the Debtor’s temporary employees. The notice of sale and other court documents indicated the sale was to be free and clear of “any and all liens, claims, …, obligations, rights, interests …, and encumbrances” [emphasis added]. The terms of sale also indicated that the buyer would not assume “any liabilities of any kind …”, and that the sale was “as is, where is, ….”

Substantial Difference in Premiums, Depending Upon Which Experience Rating Used

After the sale of the Debtor’s assets to WSS, NCCI issued a letter indicating it was transferring the Debtor’s experience rating to WSS. When the parties were unsuccessful in resolving the issue, WSS filed a Motion to Enforce with the Court, indicating if NCCI were to use the “correct” workers’ compensation experience rating, its workers’ compensation premiums would be $609,902, whereas the premiums would be approximately $773,249 if the Debtor’s experience rating were utilized.

Similar to Unemployment Experience Rating

The Court noted that the Bankruptcy Code did not define the term ‘any interest’ as used in § 363(f) and that the matter continued to be addressed on a case-by-case basis. The Court noted, however, that in a decision of the United States Bankruptcy Appellate Panel for the First Circuit, Massachusetts Dep’t of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.), 484 B.R. 860 (B.A.P. 1st Cir. 2013), as well as a trend among other courts, the term “interest” was broadly construed.

The Court noted that in PBBPC, the bankruptcy court had been faced with the question of whether a sale order prevented the Massachusetts Department of Workforce Development, Division of Unemployment Assistance (the “State”) from imputing the debtor’s unemployment experience rating to the purchaser of the debtor’s assets, as a “successor employer” under Massachusetts state law. The bankruptcy court held that the State was barred from taxing the purchaser at the debtor’s unemployment contribution rate since the State’s right to tax a purchaser of the debtor’s assets based upon the debtor’s unemployment experience rating was in the nature of an “interest” of which the debtor’s assets could be sold free and clear.

NCCI’s Argument

NCCI countered that its use of the Debtor’s workers’ compensation experience rating was distinguishable from the State’s use of the debtor’s unemployment contribution rate in PBBPC. According to NCCI, the transfer of an employer’s contribution rate to a successor asset purchaser was really an attempt to recover the money that the predecessor employer would have paid if it had continued in business.

Court Sided with Purchaser

Acknowledging the position of NCCI, the Court held nevertheless that the Debtor’s workers’ compensation experience rating was similar enough to the unemployment tax contribution rating in PBBPC so that it too constituted an “interest” within the meaning of § 363(f) of the Bankruptcy Code. The Court stressed that buyers at § 363 sales should not be burdened (or benefitted) by a debtor’s workers’ compensation experience rating where the sale order makes clear (as the Sale Order did in this case) that the buyer is an entirely new and separate entity from the debtor and is only purchasing the debtor’s assets free and clear of all liens, claims, interests and encumbrances of any kind and nature.