Cornwall Industries, Inc. v. Maine Dept. of Manpower Affairs, Employment Sec. Commission

• Citation: 351 A.2d 546
• Parties: CORNWALL INDUSTRIES, INC. v. MAINE DEPARTMENT OF MANPOWER AFFAIRS, EMPLOYMENT SECURITY COMMISSION.
• Decision Date: 30 January 1976
• Court: Supreme Judicial Court of Maine (US)

Page 546

351 A.2d 546

CORNWALL INDUSTRIES, INC. v. MAINE DEPARTMENT OF MANPOWER AFFAIRS, EMPLOYMENT SECURITY COMMISSION.

Supreme Judicial Court of Maine.

Jan. 30, 1976.

Berman, Berman & Simmons, P.A. by Jack H. Simmons, Gary Goldberg, Lewiston, for plaintiff.

Peter S. Dublin, S. Kirk Studstrup, Asst. Attys. Gen., Augusta, for defendant.

Before DuFRESNE, C. J., and WEATHERBEE, POMEROY, WERNICK, ARCHIBALD and DELAHANTY, JJ.

WEATHERBEE, Justice.

On November 12, 1973, the Maine Employment Security Commission (hereinafter the Commission), after an evidentiary hearing, concluded that Cornwall Industries, Inc. had purchased the business of Ard Instruments, Inc. 'in toto' within the meaning of 26 M.R.S.A. § 1221(5) and consequently had acquired Ard's unemployment compensation experience rating. Cornwall appealed this decision to the Superior Court of Kennebec County and the matter, upon agreement of the parties, was submitted to a Referee under M.R.C.P., Rule 53(b). The Referee's report affirmed the Commission's decision and the report was adopted in full as the judgment of the Superior Court. Cornwall has now appealed from that judgment. We deny the appeal.

The facts of this case, as found by the Commission, are not in dispute. On June 5, 1972, Ard Instruments, a manufacturer of metal components having its principal manufacturing facility at East Baldwin, Maine, entered into a sale agreement with Cornwall Industries whereby Cornwall agreed to purchase Ard's manufacturing facilities, machinery, equipment, tools, accounts receivable, inventories and all other operating assets, tangible and intangible. Good will was specifically exempted from the agreement.

A purchase and sale agreement, entered into on May 18, 1972 and incorporated by reference into the final agreement, had provided that Ard would use its best efforts to keep its organization intact; would keep available to Cornwall the services of its present officers; and would preserve the good will of those with whom it had business relations. Moreover, that agreement stated that the purpose of the acquisition was to combine 'the capabilities, talents, and efforts of both corporations, their officers and employees' for the purpose of manufacturing and marketing clocks, barometers and related consumer items. Cornwall retained the right to use the name 'Ard Instruments, Inc.'.

Cornwall Industries is composed of several divisions, one of which is Cornwall Classics whose offices and facilities at the time of the sale were located in South Paris, Maine. Cornwall Classics' principal business is the manufacture of wood components used in the production of 'decorator' clocks, barometers and lamps. After the acquisition of Ard's facilities in East Baldwin, Cornwall transferred the manufacturing and production facilities of Cornwall Classics to Ard's facilities and changed the name of Ard's plant to Cornwall Classics. Several of Ard's production employees were retained but were employed under new contracts. None of these employees retained their seniority, security or fringe benefits. Ard's former president was hired under an employment agreement as a vice president of Cornwall Industries, with the responsibilities of general manager of Cornwall Classics.

At the time of its acquisition, Ard was a going concern, manufacturing and selling products to its regular customers. Cornwall Classics completed some of Ard's nearly finished items and shipped other finished items to Ard's purchasers, advising that they would no longer supply these items. Cornwall Classics continued to use some of the components previously manufactured by Ard because those items were similar to the components used in the assembly of some of their own products. These components, however, were a small percentage of Ard's entire output.

From these facts both the Commission and the Referee concluded that Cornwall had acquired Ard's business 'in toto'.

The Commission's findings of fact were adopted by the Referee and are not in dispute here. The Referee's review was limited to the correction of errors at law (Guy Gannett Pub. Co. v. Maine Employment Sec. Com'n, Me., 317 A.2d 183 (1974); DuBois v. Maine Employment Sec. Com'n, 150 Me. 494, 505, 114 A.2d 359, 365 (1955)) and he found there had been none. Our own review of the Referee's report is thus confined to matters of law. M.R.C.P., Rule 53(e)(2).

The consequences of the decision below are better understood after a brief examination of Maine's Employment Security Law, 26 M.R.S.A. §§ 1041-1251 (hereinafter the Act). This Act provides for the accumulation of reserves during periods of employment to be paid to qualified workers during periods of unemployment. The principal source of unemployment benefits is contributions from the employer who is obligated to pay a percentage of his or her annual payroll as specified in 26 M.R.S.A. § 1221. The standard rate of contribution is 2.7% of wages paid. This standard may, however, be varied by reference to the individual employer's experience rating, a tax device establishing differential rates of contribution gauged by the employer's success in keeping his employees from unemployment. This success is measured by the unemployment benefits paid to persons formerly on that employer's payroll. Thus, because relatively few of its former employees had become eligible for unemployment benefits, Cornwall merited an experience rating of 2.0%. Ard, on the other hand, enjoyed a less favorable employment experience and had earned, at the time of sale, a rating of 4.5%.

The issue before this Court is whether Cornwall inherited Ard's experience rating by acquiring its business 'in toto' within the meaning of 26 M.R.S.A. § 1221(5). The resolution of that issue requires this Court to construe, for the first time, the words 'acquire the business . . . in toto' as used in § 1221(5) (A) which states:

'A. The executors, administrators, successors or assigns of any employer who acquire the business of such employer in toto shall acquire the experience of such employer with payrolls, contributions and benefits. Effective as of the date on which such business was acquired, the commission shall for purposes of rate determination transfer to the successor employer the payroll record and experience rating records of the predecessor employer.'

Two possible interpretations of this section are urged upon us. Appellant argues that section 1221(5)(A) applies only when the actual continuity between the old and new enterprises is sufficient to perpetuate the risks of unemployment created by the predecessor. The appellant's identity-of-the-risk rationale looks to the successor's subsequent conduct of the business in determining whether the continuity of the business reflects a likelihood that the experience of the predecessor is indicative of the probable experience of the successor. The referee, on the other hand, concluded that the proper test under section 1221(5)(A) was whether the new employer had the capacity, at the moment of acquisition, to maintain continuity of the enterprise. Under this standard, the successor would inherit his predecessor's experience rating if, on the date of acquisition, he could have continued his predecessor's business had he so chosen. This test differs from that suggested by the appellant in that it disregards the subsequent conduct of the business. We believe it to be the proper test for the application of section 1221(5).

While section 1221(5) has never been interpreted by this Court, a somewhat similar issue was decided in Stewart v. Maine Employment Sec. Com'n, 152 Me. 114, 125 A.2d 83 (1956). Both the appellant and appellee claim to derive support from Stewart and the case must therefore be considered in some detail.

Stewart addressed the meaning of 'employer' as used in 26 M.R.S.A. § 1043(9) (C) of the Act which reads:

"Employer' means:

C. Any individual or employing unit which acquired the organization, trade or business, or substantially all the assets thereof, of another employing unit not an employer subject to this chapter and which, if subsequent to such acquisition it were treated as a single unit with such other employing unit, would be an employer . . . (as elsewhere defined in this chapter).'

The Court determined that the phrase 'acquire the organization, trade, or business' referred to situations in which there is 'continuity of the enterprise relatively uninterrupted by the transfer of ownership.' 152 Me. at 117, 125 A.2d at 84. The alternative criterion of subsection (9)(C), 'substantially all the assets thereof', was read literally by the Court which concluded that the phrase required a purchase of substantially all the seller's physical or tangible assets. The Stewart Court clearly distinguished between the acquisition of a business and the acquisition of assets and held that the former 'contemplated a situation in which there is continuity of the enterprise relatively uninterrupted by the transfer of ownership.' 152 Me. at 117, 125 A.2d at 84. From this decision appellant rightfully concludes that the acquisition of physical assets is only part of the test for measuring the acquisition of a business. Appellant further argues, however, that Stewart requires the Commission to apply the actual continuity of the enterprise test under section 1221(5) as well as under section 1043(9)(C) and thereby invests the case with a meaning it cannot properly support.

The issue in Stewart was whether the petitioner qualified as an employer within section 1043, the Act's definitional section. Section 1043(9)(A) defined an employer generally as one who employed eight or more persons for each of twenty different weeks. ¹ The remaining paragraphs of subsection 9 enumerated specific instances in which a person was liable as an employer under the Act. Paragraph (C) required that the employment experience of one who acquires a business (or substantially all its assets) be coupled with that of...