*By Scott Coghlan
The Franklin County Court of Appeals recently released its decision in State of Ohio ex rel. The K&D Group, Inc. v. Marsha Ryan, Administrator, Ohio Bureau of Workers’ Compensation,
2011-Ohio-5051 (“K&D Group”) upholding the Ohio Bureau of Workers’
Compensation’s (“BWC”) determination that K&D Group, Inc., a
property management company, was the successor-in-interest to another
property management company despite the fact that neither management
company was a party to the sale of the apartment complex at issue.
This decision illustrates the need to include consideration of
workers’ compensation transfer of liability issues as part of your due
diligence checklist when purchasing, leasing or acquiring business
interests or entering into management contracts related to such business
interests.
Chapter 4123-17-2 of the Ohio Administrative Code permits the
BWC to transfer the workers’ compensation experience rating and
liabilities of a predecessor company to the “successor-in-interest.”
In practical terms this means that the purchaser is liable to the BWC
for all of the seller’s unpaid workers’ compensation premiums and it
inherits the seller’s workers’ compensation experience rating. This
often leads to higher than expected workers’ compensation premiums.
The K&D Group Court clearly articulated that the
BWC can transfer liabilities and experience ratings between entities
that are not in privity of contract with one another. At issue in K&D Group
was an apartment complex that was operated by a professional
management company hired by the owner. The apartment complex was sold
by its owner to K&D Enterprises. K&D Enterprises, using
several holding companies, eventually caused K&D Group to become
the new property management company for the apartments.
Following an audit, the BWC found that K&D Group was a
partial successor-in-interest to the prior management company despite
the fact that neither management company was involved in the sale of
the apartment complex. As a result, it transferred a portion of
Mid-America’s experience rating to K&D Group, including a
significant workers’ compensation claim that negatively impacted the
transferred experience rating.
K&D Group protested the transfer. However, the BWC
Adjudicating Committee and the Administrator’s Designee (which are the
statutorily assigned entities to which premium rate making appeals are
filed) upheld the BWC’s finding of successorship. The matter then was
appealed to the Franklin County Court of Appeals.
The Court of Appeals upheld the BWC’s finding of successorship
as well. The Court noted that OAC 4123-17-2 does not require an
alleged successor to actually acquire something in order to be deemed a
successor. Thus, the fact that K&D Group did not purchase the
apartment complex or have a contract with the prior management company
was irrelevant. The Court found that K&D Group was affiliated with
K&D Enterprises (the purchaser of the apartments) despite the use
of several holding companies to distance one from the other. It then
focused on the management operations of the apartment complex before
and after the sale. After stripping away the layers of holding
companies employed to complete the assignment of the property
management duties to K&D Group, the Court noted that the day-to-day
operations of the apartment complex were unchanged before and after
the sale; that K&D Group assumed all of the tenants’ prior leases;
that it retained many of the prior management company’s former
employees and the employees operated under the same manual job
classification numbers. As a result, K&D Group was saddled with
the prior management company’s workers’ compensation experience rating.
Management contracts are becoming commonplace, particularly in
the healthcare industry. This decision reinforces the need to
consider the successor-in-interest rules imposed by the BWC and the
need to review workers’ compensation experience ratings as part of your
due diligence in negotiating the sale, lease or assignment of business
entities and contracts.
If you have any questions regarding the K&D Group
decision or how to recognize, manage and reduce the impact that
successor-in-interest issues may have on your business transactions,
please contact us.
*Scott Coghlan, the chair of the firm’s
Workers’ Compensation Group, has extensive experience in all aspects of
workers’ compensation law and work safety and health matters. For
more information, please contact Scott sc@zrlaw.com at 216.696.4441.
