Musikiwamba v. ESSI, Inc.

• Decision Date: 13 May 1985
• Docket Number: No. 83-3268,83-3268
• Parties: 37 Fair Empl.Prac.Cas. 821, 36 Empl. Prac. Dec. P 35,149, 53 USLW 2525 Maswamba MUSIKIWAMBA, Plaintiff-Appellant, v. ESSI, INC. and Shalabh Kumar, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 740

760 F.2d 740

37 Fair Empl.Prac.Cas. 821,

36 Empl. Prac. Dec. P 35,149, 53 USLW 2525

Maswamba MUSIKIWAMBA, Plaintiff-Appellant, v. ESSI, INC. and Shalabh Kumar, Defendants-Appellees.

No. 83-3268.

United States Court of Appeals Seventh Circuit.

Argued Nov. 16, 1984.

Decided April 12, 1985.

As Amended April 16, 1985.

Rehearing and Rehearing In Banc Denied May 13, 1985.

John E. Juergensmeyer, Juergensmeyer & Assoc., Elgin, Ill., for plaintiff-appellant.

Scott A. Creswell, Mass, Miller & Josephson, Chicago, Ill., Lorraine C. Davis, Atty. E.E.O.C., Washington, D.C., for defendants-appellees.

Before CUMMINGS, Chief Judge, ESCHBACH, Circuit Judge, and SWYGERT, Senior Circuit Judge.

SWYGERT, Senior Circuit Judge.

This case presents a question of first impression in this circuit: does the successor doctrine apply to claims for employment discrimination brought under the Civil Rights Act of 1866, 42 U.S.C. Sec. 1981 (1982)? The district judge held that the doctrine does not apply; accordingly, she dismissed the federal discrimination claims and pendent state law claims against the successor corporation, ESSI, Inc. ("ESSI") and its president and sole shareholder, Shalabh Kumar. We affirm in part, reverse in part, and remand for further proceedings.

I

Plaintiff Maswamba Musikiwamba is a thirty-year-old black man. In the fall of 1978 he was hired as an expeditor by defendants Electronic Support Systems, Inc. ("Electronic") and Gary Crews and Jack M. Heeren, officers of Electronic. As a condition of employment, Musikiwamba was required to sign an agreement containing a broad covenant not to compete. Musikiwamba alleges that similarly situated white expeditors at Electronic were not required to sign such an agreement. In November 1978 Musikiwamba became a major accounts representative at Electronic. Plaintiff claims that he was qualified for this position and that he performed his job satisfactorily, but that he was denied the same sales commissions and salary granted to all of the other sales representatives who were white. Plaintiff further claims that in January 1979 he was promised, but never received, a sales commission equal to that paid other sales representatives. Musikiwamba was discharged from Electronic on October 27, 1980. He alleges that he was replaced by a white employee who was paid a substantially higher salary.

Approximately one month after his discharge, Musikiwamba accepted a job with one of Electronic's major competitors. Electronic subsequently sued Musikiwamba for violation of the covenant not to compete, but, for reasons that are unclear, voluntarily withdrew the lawsuit on October 2, 1981.

On December 4, 1981, Musikiwamba filed suit against Electronic, Crews, and Heeren pursuant to 42 U.S.C. Sec. 1981 alleging that they had discharged him and denied him sales commissions and a higher salary because he is black. He claimed $650,000 in actual and punitive damages. The defendants answered that Musikiwamba's job was not the same as that of the white employees and that he was therefore not entitled to commissions or a higher salary. They also claimed that Musikiwamba was discharged as a result of a severe curtailment in Electronic's business.

On November 1, 1982, Musikiwamba filed an amended complaint alleging the same facts, but adding a claim for "intentional discrimination" under section 1981 and state law claims for breach of contract, quantum meruit, wrongful discharge, and breach of implied contract. He claimed $300,000 in compensatory damages and one million dollars in punitive damages.

Throughout 1982 and the first few months of 1983 substantial discovery took place. On July 12, 1983, Musikiwamba received from ESSI a "Notice to Creditors of Bulk Transfer." That notice informed Musikiwamba that Electronic was transferring substantially all of its assets to ESSI, pursuant to Illinois' Bulk Transfer Act, Ill.Rev.Stat., ch. 26 Art. 6, Secs. 6-101-106 (1984). The transfer was scheduled to take place on July 19, 1983. The notice stated that the sale/purchase involved the transfer of property consisting of "furniture, fixtures, and equipment used by Electronic in the manufacture of printed circuit boards, accounts receivable, trade names, trademark, notes receivable, telephone numbers, inventory, materials and supplies, customer list pricing formulas and customer orders, and work in process." The estimated total of Electronic's secured and unsecured debts was $2,235,000, and the "amount of new consideration" to be paid for the assets of Electronic by ESSI was $1,480,000.

On July 19, the day the transfer of assets was to occur, Musikiwamba filed a "Verified Petition for a Temporary Restraining Order and a Motion to Add Additional Defendants," seeking to enjoin the sale of the assets and to add ESSI and Shalabh Kumar as defendants. He claimed that he was a creditor of Electronic, and that the sale was for inadequate consideration, the actual consideration being $855,000 less than the total of the existing secured and unsecured debts. He further claimed that he would be irreparably harmed because after the sale Electronic and its corporate officers would have no assets with which to pay his claims and because he would lose access to certain documents which were crucial to the prosecution of his lawsuit. On the same day, Musikiwamba voluntarily withdrew his petition in its entirety when the district judge entered an order requiring ESSI and Kumar to preserve and make available the documents which Musikiwamba claimed he needed. Defendants ESSI and Kumar entered an appearance on that day solely for the purposes of the hearing and not as party defendants, although it is unclear from the record if they were added as party defendants on that day or on July 22. See Order of Protection in Discovery (July 19, 1983); Minute Order (August 3, 1983). The transfer of assets took place later on July 19.

On August 19, 1983, Musikiwamba filed a second amended complaint specifically naming ESSI and Kumar as additional defendants. He alleged that on July 19 ESSI and Kumar became "successors" of Electronic because: (1) there was a substantial continuity of business operations; (2) ESSI was using the same plant, equipment, machinery and methods of process, and employing the same work force and the same supervisory personnel; and (3) ESSI continued the same jobs under substantially the same working conditions. He further alleged that Kumar and ESSI had knowledge of his pending lawsuit against Electronic prior to the transfer on July 19, 1983. He alleged that on June 28, 1983, Kumar met with Musikiwamba and his attorney and offered to settle the case. Finally, he alleged that the balance of Electronic's assets had been transferred to parties other than ESSI leaving Electronic, Heeren, and Crews without an ability to provide relief. Plaintiff's claims against ESSI and Kumar are identical to those made against the original defendants, and those original defendants are retained as party defendants.

On August 26, 1983, ESSI and Kumar filed a motion to dismiss all claims against them on the ground that as mere purchasers of the assets of Electronic they were not liable for the debts of Electronic. The district court granted the motion because in its view "... it is inappropriate to apply the successor doctrine in Sec. 1981 actions." District Court Memorandum Opinion and Order at 1. The district judge first questioned whether that doctrine was even applicable to employment discrimination claims brought under Title VII of the Civil Rights Act of 1964, codified as amended at 42 U.S.C. Secs. 2000e-2000e-17 (1982) ("Title VII"). She reasoned that even if it were, the substantial differences existing between Title VII and section 1981 militated against extending the successor doctrine to claims of employment discrimination brought under section 1981. The district judge noted that under section 1981 a plaintiff must prove discriminatory intent or purpose; if he brings an action under Title VII, however, he may or may not need to prove discriminatory intent, depending upon whether he proceeds on a theory of disparate impact or disparate treatment. The district judge believed that a strict requirement of discriminatory intent "may be somewhat at odds with an easy test for vicarious liability." District Court Memorandum Opinion and Order at 2.

The district judge also observed that the National Labor Relations Act, codified as amended at 29 U.S.C. Secs. 151-69 (1982) ("the NLRA"), and Title VII were both formulated with the objective of promoting peace in the work place and good labor relations and that the successor doctrine was developed to further that objective. Section 1981, on the other hand, was not adopted to remedy labor relations problems, and it was never designed to regulate the terms and conditions of employment. The district judge also reasoned that section 1981 is not limited to claims for employment discrimination; extending the successor doctrine to a section 1981 claim for employment discrimination might lead unnecessarily to the extension of that doctrine to other types of section 1981 claims. Creating a limited exception for employment discrimination claims brought pursuant to section 1981 would be arbitrary and perhaps unmanageable. Accordingly, she dismissed the federal and pendent state law claims against ESSI and Kumar. She specifically rejected plaintiff's argument that Kumar could be held personally liable on all the claims, federal and state, because he incorporated ESSI and knew of the claim prior to the transfer, even though he had not personally discriminated against Musikiwamba.

We hold that the successor doctrine may be applied in section 1981 claims for employment discrimination. We note, however, that the complaint in the instant case does not properly allege with specificity a claim for successor liability. Nonetheless, we believe that the plaintiff should be given an...