Diversified Technical Services, Inc. v. Indiana Department of Workforce Development , 84 N.E.3d 723 ( 2017 )

FILED
Oct 12 2017, 9:47 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Mary Lee Schiff Curtis T. Hill, Jr.
Wm. Michael Schiff Attorney General of Indiana
Ziemer, Stayman, Weitzel & Shoulders, James D. Boyer
LLP Deputy Attorney General
Evansville, Indiana Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Diversified Technical Services, October 12, 2017
Inc., Court of Appeals Case No.
Appellant, 93A02-1702-EX-422
Appeal from the Indiana
v. Department of Workforce
Development
Indiana Department of The Honorable Aija Funderburk,
Workforce Development, Liability Administrative Law
Judge
Appellee.
Cause No. 103781
Bailey, Judge.
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Case Summary
[1] Diversified Technical Services, Inc. (“DTS”) appeals the decision of a Liability
Administrative Law Judge (“ALJ”) concluding that DTS was a successor
employer that had assumed unemployment tax liabilities, upon acquiring
substantially all the assets of Diverse Technical Services (“Diverse”), an entity
owned by Pokey, Inc. DTS raises a single issue, whether the ALJ erred as a
matter of law in concluding that DTS is a successor employer of Diverse or
Pokey, Inc.,1 under Indiana Code Section 22-4-10-6(a). We reverse.
Facts and Procedural History
[2] Pokey, Inc., an entity owned by Richard and Pamela Martin, registered with
the Indiana Department of Workforce Development (“the Department”) and
was assigned an Unemployment Insurance Benefit Fund (“Fund”) account
number of 718021. Pokey, Inc. owned Diverse, a staffing agency that placed
retired ALCOA employees in temporary post-retirement positions with
ALCOA in Indiana. In November of 2014, Diverse shut down its operations.
The Diverse labor force of approximately forty-five persons was, in large part,
transferred to Manpower.
1
The appealed order states that “DTS acquired the organization, trade, or business, or substantially all of the
assets of Diverse’s business and became an employer and a successor employer.” (App. Vol. II, pg. 8.)
However, the tax liability at issue may have been that of Pokey, Inc., Diverse’s parent corporation, as the
Merit Rate Delinquency Notice lists account numbers for each.
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[3] Daniel Harpenau (“Harpenau”) worked in the construction industry as an
electrician, project manager, and general manager. He incorporated DTS in
July of 2015. Having spent significant amounts of time at the ALCOA plant in
Newburgh, Indiana, he was aware of the closing of Diverse. He approached
the Martins with an offer to pay for the name, goodwill, and accounts
receivable of Diverse as an “opening in the door” at ALCOA. (Tr. Vol. II, pg.
83). At that time, Diverse had two dormant staffing accounts, one with
ALCOA and one with Toyota Motor Manufacturing Indiana, Inc. Harpenau
initially was advised that there was a “zero balance” due as receivables, but it
was subsequently discovered that a sum was due on one account. (Tr. at 82.)
[4] On September 9, 2015, DTS and Diverse executed an Asset Purchase and Sale
Agreement (“the Agreement”) whereby DTS purchased from Diverse, for the
sum of $15,000.00:
A. Name “Diverse Technical Services”;
B. Accounts receivable due from Alcoa Warrick accruing after
June 26, 2015;
C. Any accounts receivable due from Toyota Motor
Manufacturing Indiana, Inc. to the extent work is performed
after the Closing Date;
D. All goodwill associated with the Business.
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(Exhibits, pg. 12.) Apart from the Agreement, DTS acquired W-2s and W-3s
pertaining to former employees of Diverse. The Agreement stated that DTS
was not acquiring any liability of Diverse.
[5] DTS, which had three employees including its owner/incorporator, offered
safety training and consulting services, project management services, project
funding management, electrical design services and electrical safety services to
ALCOA and Toyota.
[6] In October of 2015, an accountant employed by DTS, Karen Moseley
(“Moseley”), contacted the Department regarding completion of State Form
2837, SUTA Account Number Application & Disclosure Statement. The “call
came in” to Department staff to pose an inquiry summarized as “if you buy the
name of a company, does that count as an acquisition?” (Tr. Vol. II, pg. 38.)
After consultation, Moseley answered Question 5(a) on the SUTA form to
reflect that DTS had acquired 100% of a “disposer” Indiana corporation,
specified as “Pokey, Inc.” having SUTA account number 412947. Harpenau
reviewed and signed the form, and it was submitted to the Department.
[7] After receipt of the SUTA form, the Department concluded that DTS had
acquired the complete business of Diverse (having SUTA account 412947).2
On November 6, 2015, the Department issued a Notice of Complete
2
The SUTA form in the record now includes a hand-written notation in the right-hand corner of 718021, the
experience account number assigned to Pokey, Inc.
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Disposition of Business to New Acquirer. The Notice identified the “Acquirer”
as Diversified Technical Services with an account number of 718021 and
identified the “Disposer” as Diverse Technical Services, Inc. with an account
number of 412947. In part, the Notice stated: Our records show you acquired
the complete business on or about 06/26/2015 from the named disposer.”
(Exhibits, pg. 69.)
[8] On November 9, 2015, the Department issued a Merit Rate Delinquency
Notice to DTS for January 2011 forward. The notice alternately referenced
SUTA account numbers 718021 and 412947. The notice demanded the sum of
$170,776.25, which was identified as “Delinquent Quarters for Account
Number 718021 – 2/2015” and liabilities for “predecessor with account number
412947.” (Exhibits, pg. 70.) The notice demanded payment within ten days on
Account Number 412947.
[9] On November 20, 2015, a representative of DTS’s accounting firm issued a
letter to the Department, stating that DTS did not acquire the business, stock,
or substantially all assets of Pokey, Inc., and claiming that DTS and Pokey, Inc.
were completely unrelated taxpayers. Subsequently, DTS filed a tax protest
form with the Department to oppose the determination of successorship.
[10] On December 7, 2016, and January 18, 2017, the ALJ conducted a hearing to
address whether DTS had timely protested the successorship determination 3
3
The ALJ ruled that the protest was permissible, and this is not challenged on appeal.
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and whether DTS was a “successor employer assuming the liabilities and
experience balance of the predecessor [pursuant to] IC 22-4-10-6(a).” (App.
Vol. II, pg. 4.)
[11] The Department’s representative testified that the Department had relied upon
the SUTA form submitted by DTS’s accountant, and the Department had no
independent knowledge of the extent of the assets formerly held by Diverse.4
The Department had attempted to obtain information on the holdings of
Diverse from the former owners, but they were unresponsive.
[12] Moseley testified that she had “filled in 100%” on the form, attached a copy of
the Agreement, and “relied on the Department.” (Tr. Vol. II, pg. 66.) She
denied having any knowledge of the percentage of total assets purchased and
testified that her intent was to apply “as a new business for this SUTA account
number” reported on the form. (Tr. Vol. II, pg. 66-67.) She described the form
as a “request for an unemployment insurance account.” (Tr. Vol. II, pg. 68.)
Harpenau testified that he “didn’t know what Diverse had to sell.” (Tr. Vol. II,
pg. 100.) He estimated that DTS had acquired 1 or 2% of Diverse’s assets.
[13] On February 1, 2017, the ALJ issued an order providing in relevant part:
DTS acquired the organization, trade, or business, or
substantially all of the assets of Diverse’s business and became an
employer and a successor employer. See Ind. Code § 22-4-7-2(a);
4
Despite the SUTA form’s use of an account number for Pokey, Inc., no focus was placed upon Pokey,
Inc.’s assets apart from Diverse.
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Ind. Code 22-4-10-6(a). Based on the foregoing conclusions, the
Liability Administrative Law Judge concludes that the
Department correctly determined that DTS made a complete
acquisition and assumed all the resources and liabilities of the
predecessor’s experience account as a successor employer.
DTS’s protest is DENIED. The Department’s determination is
AFFIRMED.
(App. Vol. II, pg. 8.) This appeal ensued.
Discussion and Decision
[14] Both DTS and the Department acknowledge a dearth of evidence as to the
disposer’s assets, due to the disposer’s non-cooperation. DTS observes that the
ALJ initially advised the parties that the Department bore the burden of proof
to establish successorship, but then concluded that DTS had failed to provide
adequate proof of non-acquisition of assets. The Department responds that it
relied upon DTS’s own representation that it acquired 100% of a predecessor
corporation and, despite DTS “challenging its own representation,” there is an
absence of evidence to show that DTS did not acquire all assets “that existed at
the time of transfer.” Appellee’s Brief at 9. Thus, the parties disagree as to
which bore the burden of proof on scope of acquisition. Additionally, DTS
argues that determining a proportional share of assets is not summarily
dispositive of successorship, as the statutory focus is upon continuity of
employment and DTS took none of Diverse’s employees.
[15] Our applicable standard of review was set forth in Franklin Elec. v. Unemployment
Ins. Appeals, 953 N.E.2d 1066, 1069 (Ind. 2011):
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Under Indiana Code § 22-4-32-9 (2007), “Any decision of the
liability administrative law judge shall be conclusive and binding
as to all questions of fact.” The decision of the LALJ may be
appealed “solely for errors of law under the same terms and
conditions as govern appeals in ordinary civil court.” Id. The
LALJ’s legal conclusions are not entitled to the same deference.
Ind. Dep’t of Envtl. Mgmt. v. West, 838 N.E.2d 408 (Ind. 2005).
“When the facts are undisputed, and the question is whether those facts lead to
a certain conclusion, the case presents a question of law and the courts need not
defer to agency decision making.” Ashlin Transp. Servs. v. Ind. Unemployment Ins.
Bd., 637 N.E.2d 162, 165 (Ind. Ct. App. 1994). Here, we are asked to apply a
statutory provision to sparse, undisputed facts.
[16] Unemployment insurance in Indiana is financed by a tax on Indiana employers.
The employer contributions are charged proportionally against an employer’s
experience account. I.C. § 22-4-11-1(a). The greater the number of
unemployment claims, the more that employer must contribute to the
unemployment fund. Franklin Elec., 953 N.E.2d at 1069. Indiana Code Section
22-4-10-4 requires that the Department maintain within the fund a separate
experience account for an individual employer. Each year, the Department
determines the contribution rate applicable to each employer, and the
contribution is then credited to the experience account. UTLX Mfg., Inc. v.
Unemployment Ins. Appeals, 906 N.E.2d 889, 892 (Ind. Ct. App. 2009).
[17] Pursuant to Indiana Code Section 22-4-7-2(a), an “employer” includes “any
employing unit … which acquires substantially all the assets within this state of
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such an employer used in or in connection with the operation of such trade or
business, if the acquisition of substantially all such assets of such trade or
business results in or is used in the operation or continuance of an organization,
trade, or business.”
[18] Indiana Code Section 22-4-10-6(a) governs whether an entity is a “successor
employer” that “shall assume the position of the predecessor with respect to all
the resources and liabilities of the predecessor’s experience account.” A
successor employer includes one that becomes an employer under Indiana
Code Section 22-4-7-2(a), and an employer that “acquires the organization,
trade, or business, or substantially all the assets of another employer.”
[19] The word “substantially” does not invoke a “definite, fixed amount of
percentage but is an elastic term which must be construed according to the facts
of the particular case.” Astral Indus., Inc. v. Ind. Emp. Sec. Bd., 419 N.E.2d 192,
197 (Ind. Ct. App. 1981). A “prime question” in determining whether
substantially all assets were acquired is whether the acquisition resulted in a
substantial continuation of the same or like business. Id.5
[20] In Indianapolis Concrete v. Unemployment Ins., 900 N.E.2d 48 (Ind. Ct. App.
2009), a panel of this Court observed that several factors have been considered
in determining whether one employer has acquired substantially all the assets of
5
The Astral Court expressed the view that Accounts Receivable are not “assets” for successorship purposes,
as they are not usable by both the predecessor and successor in continuing a business. Id. at 198.
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another. These have traditionally included acquisition of: (1) manufacturing
equipment and machinery; (2) office equipment; (3) corporate name; (4)
inventories; (5) covenants not to compete; (6) possession of premises; (7) good
will; (8) work in progress; (9) patent rights; (10) licenses; (11) trademarks; (12)
trade names; (13) technical data; (14) lists of customers; (15) sales
correspondence; (16) books of accounts; and (17) employees transferred. Id. at
51.
[21] In Indianapolis Concrete, the Court considered the following facts of record.
Indianapolis Concrete was an entity formed one week after the dissolution of
Indy Concrete. Indianapolis Concrete initially hired five of Indy Concrete’s
former employees, and, after six weeks, had acquired a total of eighteen.
Indianapolis Concrete received Indy Concrete’s telephone number, two trucks,
a trailer, several water pumps, trowel machines, and other equipment.
Indianapolis Concrete acquired and leased other equipment and ten vehicles.
Indianapolis Concrete did not take Indy Concrete’s computers or office
equipment or conduct business from Indy concrete’s office. Indianapolis
Concrete did not use Indy Concrete’s goodwill but did acquire two of Indy
Concrete’s clients. See id. at 49. The Court concluded that “Indianapolis
Concrete did not acquire substantially all of the assets of Indy Concrete.
Rather, it acquired assets from which it built a new business.”
[22] By contrast, this Court affirmed the decision of the ALJ in concluding that D &
D NAPA, Inc. was a partial successor to Chaffins Enterprises, Inc. for purpose
of calculating its unemployment benefit contributions. D & D NAPA, Inc. v.
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Unemployment Appeals of Ind., 44 N.E.3d 67 (Ind. Ct. App. 2015). There, the
acquirer testified that “D & D purchased Chaffins’s assets and hired the
employees ‘to operate the same business in the same location under the same
DBA that the former entity had used.’” Id. at 77. She also testified that the
business had operated “seamlessly” between D & D and Chaffins and the store
was a NAPA store before and after the sale, never ceasing to be a NAPA
location. Id.
[23] Here, at the hearing before the ALJ, DTS contended that it acquired no tangible
property from Diverse, DTS provided different services from those offered by
Diverse, and DTS had not acquired substantially all Diverse’s assets.
Testimony from the Department and DTS witnesses distilled to the following:
Diverse ceased doing business as a staffing agency and transferred the majority
of its forty-five employees to Manpower; DTS reported an acquisition of an
Indiana entity and provided an unemployment account number for Pokey, Inc.;
the reporting accountant made a written representation that was not founded
upon her personal knowledge or information provided to her; DTS’s owner,
despite having signed the form, disputed its accuracy; and the extent of Diverse
assets prior to or at the time of the execution of the Agreement was not known
by either the Department or DTS.
[24] The ALJ made factual findings, including: DTS has three employees; DTS did
not acquire assets like equipment, inventory, machinery, vehicles, leases, or
intellectual property; DTS did not acquire Diverse’s employees; Harpenau did
not know what assets Diverse had available to sell; and DTS submitted a SUTA
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form to report “100% of a business called Pokey, Inc., with SUTA# 412947
transferred to DTS on June 26, 2015.” (App. Vol. II, pg. 5.) In the findings of
fact section, the ALJ acknowledged Harpenau’s testimony regarding the
estimated percentage of assets acquired, but did not adopt the testimony or
make a credibility determination. However, the ALJ appeared to credit
Harpenau’s testimony in part, in that he provided the sole testimony that DTS
did not acquire any physical assets from Diverse and the ALJ enumerated
excluded assets.
[25] Nonetheless, in the “decision” section of the order, the ALJ found a “complete
acquisition” had been achieved or, more particularly, that DTS had not
established the absence of a complete acquisition:
DTS argues that it did not acquire all of Diverse’s assets or
business and, therefore, did not make a complete acquisition.
The [ALJ] disagrees. More specifically, DTS acquired Diverse’s
name, two main client accounts and all of the goodwill
associated with Diverse’s business. DTS acquired those items in
order to preserve Diverse’s business reputation, conduct business
with Diverse’s clients, and prevent any business competition.
Based on those facts, the [ALJ] concludes that DTS acquired the
organization, trade or business of an employer in this state and
became an employer under Indiana Code § 22-4-7-2(a).
In addition, while DTS did not acquire certain assets, like
equipment or employees, DTS did not know what assets, if any,
that Diverse had available to sell. Thus, DTS failed to establish
that it did not acquire substantially all of the assets of Diverse’s
business.
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(App. Vol. II, pg. 8.)
[26] The foregoing language indicates that the ALJ placed squarely upon DTS the
burden of proving it was not a successor employer because it did not acquire
substantially all Diverse’s assets. However, the relevant statutory scheme does
not require that DTS prove a negative. Rather, an employer is to be treated by
the Department as a successive employer, for purposes of assumption of an
experience account, when the employer has acquired the “organization, trade,
or business, or substantially all the assets of another employer.” I.C. § 22-4-10-
6. “The Department is responsible for determining the successorship status of
an acquiring employer when either a total or partial acquisition occurs between
employers.” Indianapolis Concrete, 900 N.E.2d at 50. It follows that the
Department must have an adequate basis for making this determination. Here,
the evidence fell short.
[27] “[S]uccessor employer status occurs under Section 6(a) when the entity or
substantially all of its assets are acquired by another employer.” Ashlin, 637
N.E.2d at 169. The Department determination of successorship did not rest on
grounds that DTS simply took over and continued Diverse’s trade or business.
Indeed, the ALJ stated that DTS did not provide all the same services as
Diverse and such was not required. The Department’s position was that of
substantial acquisition, based upon the SUTA form identifying Pokey, Inc. as a
disposer corporation and including Diverse’s account number. Because the
ALJ concluded that DTS was a successor employer without addressing the
credibility of the testimony of error, it is unclear whether the ALJ treated the
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SUTA form as conclusive under the law, something not to be amended or
contradicted. Ultimately, what is clear is that, after the presentation of
evidence, it remained unknown what assets either Pokey, Inc. or Diverse held
prior to DTS’s acquisition of some assets. Thus, it is impossible to determine
on the limited record whether DTS acquired substantially all those assets.
[28] But regardless of percentile apportionment of assets, clearly the intangibles
purchased by DTS were insufficient to support continuation of the business
conducted by Diverse. Crucially, DTS did not acquire Diverse employees, the
essence of an ongoing staffing business. See Ashlin, 637 N.E.2d at 167
(“Employees add value just as do physical assets and customer good will.”) A
most generous consideration of the Department’s evidence would reveal no
more than DTS “acquired assets from which it built a new business.”
Indianapolis Concrete, 900 N.E.2d at 52. In such circumstances, an employer is
not a successor employer. See id.
Conclusion
[29] The ALJ’s conclusion that DTS is the successor employer of Diverse was
incorrect as a matter of law.
[30] Reversed.
Baker, J., and Altice, J., concur.
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