Employment Security Commission v. Arrow Plating Co.

10 Mich. App. 323 (1968) 159 N.W.2d 378 EMPLOYMENT SECURITY COMMISSION v. ARROW PLATING COMPANY, INC. Docket No. 3,045. Michigan Court of Appeals. Decided March 27, 1968. Frank J. Kelley, Attorney General, Robert A. Derengoski, Solicitor General, and Richard I. Rubin, Assistant Attorney General, for Employment Security Commission. Lawson & Anderson, for Arrow Plating Company. McGREGOR, J. Basically the facts of this case are not disputed. Before and including Friday, February *326 5, 1965, Frank C. Beck was doing business as the Wade Boring Works in Hamtramck, Michigan. On that Friday, Mr. Beck sold much of the assets of Wade Boring to Arrow Plating Company, Inc., for $15,500. The main asset of Wade Boring seems to have been the right of possession of the building leased by Wade Boring. This was true because the city of Hamtramck allowed the flushing of waste chemicals into the public sewer system, a distinct economic advantage in the plating business because of difficulty in disposing of waste chemicals. The building was not owned by Wade Boring, nor did the lease automatically continue, but apparently the right to continue using the building was understood. Arrow Plating also acquired some plating equipment of Wade Boring and employed the five employees of Wade Boring who worked at the same location. Mr. Beck retained equipment valued at $2,000, accounts receivable valued at $8,000, a bank account valued at $1,500, and an unspecified inventory. Also retained by Mr. Beck and not assigned a monetary value were the trade name of Wade Boring Works, the phone number, customers, and the right to compete. Arrow Plating began operations in the Hamtrack building February 8, 1965. Within a year, Arrow's work force had grown from 5 employees to 35 employees, and the gross sales were $209,000, compared to Wade Boring's sales in 1964 of $35,000. Arrow's business was confined to plating operations, while Wade Boring had done both plating and sheet metal fabrication. This appeal has grown out of the subsequent dispute between Arrow Plating Company and the Michigan employment security commission. Normally, a new organization that is subject to the employment *327 security act, CLS 1961, § 421.1 et seq. (Stat Ann 1960 Rev and 1963 Cum Supp § 17.501 et seq.) is assessed a contribution rate of 2.7% of the annual payroll. This contribution rate is subject to adjustment up or down, based upon the experience of the employer as to layoffs of personnel resulting in payments from the unemployment compensation fund. This sliding scale of employer contribution rates is in line with the purposes of this act, to protect the people of Michigan from the hazards of unemployment by encouraging stable employment. In this case, the employment security commission assessed Arrow Plating Company at the contribution rate of 4.6% based on the high unemployment experience of Wade Boring Company. The commission thereby treated Arrow Plating as a successor employer of Wade Boring under authority of section 22 of the act,[1] which authorizes a transfer of rating to successor employers, and section 41(2) of the act,[2] which defines an employer as: "(2) Any individual, legal entity or employing unit which acquired the organization, trade or business, or 75% or more of the assets thereof, of another which at the time of such acquisition was an employer subject to this act." Our problem is whether Arrow Plating is properly classed as a successor employer under this act. Arrow maintains it is not a successor employer under the act, while the employment security commission feels otherwise. The commission's referee held Arrow Plating was a successor employer. The Michigan employment security appeal board reversed the referee and held that Arrow was not a successor employer. The commission filed an appeal with the circuit court for Wayne county, which *328 reversed the appeal board and held Arrow was a successor employer and thus subject to the transfer of the employer experience rating. The critical wording of section 41(2) is the phrase defining what must be acquired by a successor employer as "the organization, trade or business, or 75% or more of the assets". By using the conjunction "or", the legislature obviously intended that a successor employer need only meet one of these listed criteria to be so classified. No issue is raised in this case as to whether Arrow Plating took over the trade or business of Wade Boring. It is clear that it did not. The clientele of the two businesses were different. The sale of certain assets did not include the sale of customers. There is also evidence that the type of work performed by the two companies would appeal to different markets. This case is thus factually different from Valley Metal Products Company v. Employment Security Commission (1961), 365 Mich 297, which presented some elements similar to this case, but where the trade or business was transferred. The Michigan employment security commission advances the theory that Arrow Plating obtained more than 75% of the assets of Wade Boring Works, because the value of the accounts receivable can be disregarded. The commission argues that including the accounts receivable as an asset would be like having a purchaser pay cash for cash. This theory was held untenable by the trial court. We agree. It is admitted by the commission that its theory is not in accord with standard accounting principles. This theory is also not in accord with the legal precedents of Michigan, that intangible assets are properly considered as assets for the purpose of the employment security act. Russ Dawson, Inc. v. Unemployment Compensation Commission (1952), 334 *329 Mich 82. It must be pointed out that the accounting practices used in this transfer have made the job of this Court more difficult. The highest value in the transfer was assigned to the plating equipment, although the president of Arrow Plating admitted his company's concern was not primarily in the equipment, which was mostly scrapped within a few months, but in the right to use a building with a favorable location. This asset was not assigned a value in the transfer. Causing further consternation is the fact that several of the intangible assets retained by Frank Beck were not assigned a value. While these accounting practices make it impossible for this Court accurately to determine the exact value of those assets transferred and those retained, it is possible to determine that those assets transferred were something less than 75% of the total tangible and intangible assets of Wade Boring. The remaining phrase defining a successor employer was the downfall of defendant Arrow Plating in the trial court. It was held that Arrow acquired the "organization" of Wade Boring because it retained the work force of Wade Boring. Such a holding was erroneous. The term "organization" has not been expressly defined in Michigan; therefore, confusion concerning the term is not surprising. In order to define "organization" for the purposes of this statute, attention must be paid to the evil this section of the act sought to combat. The successor employer provision seeks to prevent the sliding scale employer contribution rate from being defeated by paper reorganizations which, in fact, change nothing. In this light, "organization" means the vital, integral parts which are necessary for continued operation. In this case, there was not a transfer of the vital, integral parts required for continued operation of *330 the Wade Boring Works. Mr. Frank Beck constituted the entire managerial component of Wade Boring Works, and it could not have continued as a going business without managerial talent. Therefore, the "organization" of Wade Boring Works was not transferred to the appellant Arrow Plating Company. We do not hold in any way that the mere elimination of one person from the organization of a business would automatically prevent the transfer of the organization for the purposes of this act. What we do hold is that if a vital, integral part of the business is not transferred, regardless of how many people make up that integral part, so that the business could not continue, then there has not been a transfer of the "organization" for the purposes of this act. The decision of the circuit court is reversed. No costs, the interpretation of a public statute being involved. FITZGERALD, P.J., concurred with McGREGOR, J. LEVIN, J. (concurring). The employment security act contains two applicable definitions. One defines "employer"[1] and the other defines "transfer of business."[2] It appears from a comparison of the two *331 definitions that the legislature intended to impose the liability of an "employer" on one who acquires the business of a former employer upon a lesser showing than that required to tack the unemployment claims experience of the former employer onto one who continues, as well as acquires, the former employer's business. It will be observed (footnotes 1 and 2) that while one who acquires the "organization, trade or business" of another is an "employer", such an acquisition is not regarded as a "transfer of the business" unless there has been either an acquisition and use of the transferor's trade name or good will, or the transferee has continued or resumed all or part of the business of the transferor. I am inclined to think that when Arrow Plating acquired all the employees, excepting the proprietor Mr. Beck, all the plating equipment and the leasehold of Wade Boring Works, which leasehold, although terminable, was not in fact to be terminated — indeed, the leasehold was the raison d'etre of the entire transaction — Arrow acquired the "organization, trade or business" of Wade.[3] This interpretation of the statutory definition of "employer" seems more consistent with the act's apparent purpose, which is, no doubt, to continue coverage under the act in situations such as this one without the necessity of waiting for 20 weeks to expire. However, I see no need to decide whether Arrow is an "employer". The only question raised by the Michigan employment security commission determination, taken to the appeal board by Arrow, was whether there was a "transfer of business" within *332 the meaning of section 22(a).[4] I agree with my colleagues there was not a "transfer of business". It is undisputed that Arrow did not acquire and use Wade's trade name or good will. Nor did Arrow continue or resume all or part of Wade's business. Wade and Arrow used different plating processes. Arrow never did business with any of Wade's customers. Thus, Arrow's method of operation, product, and customers were different from that of Wade. The appeal board's finding that there was not a "transfer of business" is supported by substantial evidence. I concur in the reversal of the judgment here on appeal. NOTES [1] CLS 1961, § 421.22 (Stat Ann 1963 Cum Supp § 17.524). [2] CLS 1961, § 421.41 (Stat Ann 1963 Cum Supp § 17.543). [1] "Sec. 41. `Employer' means * * * (2) Any individual, legal entity or employing unit which acquired the organization, trade or business, or 75% or more of the assets thereof, of another which at the time of such acquisition was an employer subject to this act." CLS 1961, § 421.41 (Stat Ann 1963 Cum Supp § 17.543). [2] "Sec. 22(a) If an employer subject to this act transfers subsequent to June 30, 1954, any of the assets of his business by any means otherwise than in the ordinary course of trade, such transfer shall be deemed a `transfer of business' for the purposes of this section if the commission determines: "(1) That the transferee is an employer subject to this act on the transfer date or has become so subject as of the transfer date under section 41(2) * * * and "(2) That the transferee has acquired and used the transferor's trade name or good will, or that the transferee has continued or within 12 months after the transfer resumed all or part of the business of the transferor either in the same establishment or elsewhere." CLS 1961, § 421.22 (Stat Ann 1963 Cum Supp § 17.524). [3] The question does not turn on disputed facts, nor would it appear to be one within the special competence of the appeal board to decide. [4] While the appeal board decided both that Arrow was not an employer and that there was not a transfer of business, the basic dispute was whether by reason of a "transfer of [Wade's] business" to Arrow, Arrow should be burdened with the higher experience rating of Wade. This appears not only from the nature of the arguments to us, but also from the initiating document. That document, a "notice of determination of transfer of rating account", from the employment security commission to Arrow, advised Arrow that certain records indicated that on February 7, 1965, a transfer of business occurred "wherein you acquired assets involving 100% of the payroll for the four completed calendar quarters prior to the date of acquisition, from Frank C. Beck, an individual owner, d/b/a Wade Boring Works", and that, accordingly, it was determined the total rating account of the transferor would be transferred to Arrow as provided in section 22 of the act. It was from that determination that Arrow appealed. The employment security commission later issued a redetermination confirming its prior determination. Arrow appealed that redetermination.