Illinois Supreme Court Reaffirms Common Law Rule of Successor Nonliability

The Illinois Supreme Court’s recent decision in Department of Human Rights v. Oakridge Healthcare Center, LLC¹ reaffirms that the common law rule of successor nonliability controls in Illinois. In that case, a former of employee of Oakridge Rehabilitation Center, LLC (Oakridge Rehab) filed a complaint with the Illinois Department of Human Rights. She alleged that Oakridge Rehab had discriminated against her based on age and disability in violation of the Illinois Human Rights Act. The former employee’s case was taken up by the Illinois Human Rights Commission and an administrative law judge ultimately recommended that she be awarded compensation for the alleged discrimination. The Commission adopted the administrative law judge’s recommended award and granted a motion to enforce the award against Oakridge Rehab.

While its former employee’s discrimination claims were making their way through the administrative process, Oakridge Rehab terminated its operations and transferred substantially all of its assets to another company, Oakridge Healthcare Center, LLC (Oakridge Healthcare). The agreement governing the transfer of assets from Oakridge Rehab to Oakridge Healthcare stated that Oakridge Healthcare would not be the successor to Oakridge Rehab. It also made clear that Oakridge Healthcare did not assume Oakridge Rehab’s liabilities.

When Oakridge Rehab failed to satisfy the award against it, the state filed a complaint in the circuit court alleging that Oakridge Healthcare was liable for the award as successor to Oakridge Rehab. Oakridge Healthcare moved for summary judgment on the basis that the state could not establish an exception to Illinois’s common-law rule of corporate successor nonliability. The state opposed the motion, arguing that the circuit court should abandon the common-law rule of successor nonliability and adopt the less restrictive successor liability standard federal courts employ in labor law cases.

The circuit court granted Oakridge Healthcare’s summary judgment motion, but the appellate court reversed. Noting that it “[had] not specifically addressed a successor corporation’s liability for employment discrimination,” the appellate court held the federal standard for corporate successor liability should apply in Illinois employment discrimination cases.²

The supreme court disagreed. It held that, under the well-established rule of successor nonliability, “a corporate successor is not subject to any debts or obligations incurred by the entity that previously operated the business.”³ The purpose of this rule is to provide certainty to bona fide purchasers of corporate assets that they will not be held liable for unassumed liabilities of the predecessor corporation. Thus, Illinois, like most other United States jurisdictions, recognizes only four limited exceptions to the rule of successor nonliability: (1) the transferee agreed to assume the transferor’s liabilities, (2) the transaction amounts to a merger or consolidation or a de facto merger of the transferor and the transferee, (3) the transferee is a mere continuation or reincarnation of the transferor, or (4) the transaction was entered into for the fraudulent purpose of avoiding liability for the transferor’s obligations.⁴

The court rejected the state’s argument that it should adopt a fifth exception mirroring the broader exception to successor nonliability applied in federal labor law cases. It noted that the looser federal standard is premised on the unique status of collective bargaining agreements under federal law.⁵ Those issues are not present in employment discrimination cases brought under state law. Thus, there was no compelling reason to abandon the well-settled principle of corporate successor nonliability.⁶ And because the state failed to establish one of the four exception to the general rule of successor nonliability, summary judgment for Oakridge Healthcare should have been affirmed.⁷

The Oakridge Healthcare opinion makes clear the longstanding rule of corporate successor nonliability is alive and well in Illinois. As the court noted, providing bona fide purchasers of corporate assets the certainty that they will not be responsible for liabilities they did not assume promotes “the salability of marginal businesses to avoid the loss of jobs, community resources, and revenues that result when a business is shuttered.”⁸

A partner at Riley Safer Holmes & Cancila LLP in Chicago.