March 1, 1999

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MAXI DRUG, INC.
BROOKS PHARMACY

V. A.A. 97-53

DEPARTMENT OF LABOR AND
TRAINING, BOARD OF REVIEW

D E C I S I 0 N
 

GORMAN, J. Through this suit, plaintiff seeks review of a decision by the Department of Labor and Training Board of Review finding that Maxi Drug was a "successor employer" under Rhode Island General Laws S 28-43-10(a)(1)(i), which resulted in a significant increase in the firm's unemployment tax rate.
 

After an adverse decision of the Director of the Department of Labor and Training, Maxi Drugs filed an appeal which was heard by the Chairman of the Board of Review for that department sitting as a review panel. The Chief Legal Counsel for the Board of Review, the tax coordinator for the Department of Labor and Training, and two employees of plaintiff attended the
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hearing. Based on the testimony and documents presented at that hearing and post-hearing submissions, the board made the following findings of fact:
 

In October 1994 Maxi purchased 23 retail stores formerly known as Brooks Drugs. Thereafter, the combined operation continued under the Brooks name. The transaction in October, 1994, did not include the former Brooks administration offices (although some of those employees were later picked up by the new company) nor did it include the former Brooks warehouse.
 

The record also reflects that the sale of the Brooks assets occurred on October 29, 1994, with Maxi Drugs taking over the operation of 23 drug stores formerly operated by Brooks. With that purchase, all the inventories and fixtures in the stores were transferred to Maxi Drugs. Brooks owned the land and buildings at 16 of the stores, and had leases for the remaining 7 locations.
 

After the sale, Brooks retained ownership of and continued to operate, at least for a few months, two facilities in Rhode Island. One of these housed administrative offices employing
 

439 people and the other was a warehouse with 185 workers. See post-hearing letter dated February 5, 1997, which is part of the record from the board of review. The attorney for the board

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testified that the Department of Labor and Training records report Brooks with a total of 885 employees in the third quarter of 1994. Tr., P. 10. The Maxi representative appeared satisfied with this number, responding: "Which would be about that number. Because I'm saying 400 at the corporate location, and 300 in the stores. That's a round number. This is based on June information." Ibid.
 

In addition to its Rhode Island stores, Brooks apparently operated stores in other states. A Maxi employee testified that "the entire Brooks Drugs, which was three hundred, plus, stores." Tr., p. 9.
 

The number of Brooks employees reported to the Department of Labor and Training show the following statistics for the first month of each quarter in 1994:

First quarter 878
Second quarter 872
Third quarter 885
Fourth quarter 723

See Research and Statistics Inquiry dated 12/18/96 attached to the December 18, 1996 memorandum from Kenneth J. Iavarone to the board of review. Then, the number decreases to 232 for the second month of the fourth quarter, dips further to 152 in the third month of the fourth quarter, and is 97 for the first quarter in 1995. The number is lower further to 14 for the second quarter, and 0 for the 1995 third quarter. Ibid. These figures suggest and the parties agreed that it took Brooks some time to shift its remaining employees and operations from Rhode

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Island to other states. See Tr., pp. 7-8.
 

In addition to Administrative offices and the warehouse, ilaccounts and notes receivable, prepaid expenses, and any and all security deposits" were not transferred as part of the sale. See Para. 1.2 in Asset Purchase Agreement attached to Plaintiff's brief.'/
  II. DISCUSSION
 

The decision of the board of review is based on the provisions of 5 28-43-10(a)(1)(i), which state in relevant part:
 

Application of Predecessor's Payroll Record to Successor Employer (a)(') Whenever any employing unit in any manner succeeds to, or has succeeded to, or acquires, or has acquired, the organization, trade, * * *1 or business, or substantially all the assets thereof, * * * the predecessor employing unit shall be deemed to have relinquished all rights to have its prior payroll records, * * *, used for the purpose of determining experience rates of employer contributions for that predecessor, and the director shall use those prior payroll records for the purpose of determining experience rates of employer contributions for that successor. Plaintiff seeks reversal of the board decision based on contentions that the board's  action is "Clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record." 5 42-35-15(g)(5). When applying this standard, the court may not substitute its judgment for the board's

While it does not appear that this document was made a formal exhibit at the hearing before the board of review, its provisions are the basis for the board's decision, and no objection was made to its submission to the court as an appendix to plaintiff's brief.

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concerning the weight of the evidence on questions of fact. C & J Jewelry Co., Inc. v. Department of Employment and Training, Board of Review, 702 A.2d 384, 385 (R.I. 1997). Therefore, this court I s review is limited to determining whether substantial evidence exists to support the agency's decision. Newport Shipyard v. Rhode Island commission for Human Rights, 484 A.2d 893, 896-897 (R.I. 1984).
  The Rhode Island Supreme Court recently examined the successor in interest statute and quoted from a Minnesota . . 2 Supreme Court opiniona/ listing factors to be considered when determining whether "substantially all" the assets of an employer have been acquired. Among those mentioned, several are also relevant here, including: 1) office equipment, 2) corporate name, 4) inventories, 5) possession of premises, 6) good will, 7) accounts receivable,-!/ and 8) employees.
 

The C & i Jewelry decision is the only opportunity our supreme court has had to interpret this part of the unemployment taxing law. In that case the court found the only assets not transferred to the acquiring company in a $1,300,000 sale were some trucks and a life insurance policy on one of the selling
 

Mid-American Festivals Corporation v. Commissioner of Department of Economic Security, 349 N.W.2d 270, 274 (Minn. 1984)
 

In its decision the Minnesota court used the term "books of account. " This court believes that the ref erence is to monies owed to the company being acquired.

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firm's former owners. 702 A.2d at 386. Based on those facts the agency decision was affirmed.
 

A number of other states have similar laws which have been the subject of litigation and these decisions are instructive. See annotations at 4 A.L.R. 721 and 22 A.L.R.3d 673. Based on the collected cases, it is clear that a business sometimes seeks to benefit from acquiring another company because by operation of law, it will result in an unemployment tax which is lower than the one paid by the acquiring corporation before the purchase. Of course, in other instances, as here, the company buying out another firm, will try to avoid being saddled with the higher contribution rate which was previously assessed against the company being sold.
 

The various decisions acknowledge the tension between policies which would avoid penalizing an employer with a good record (and a low contribution rate) which purchases the assets of another company, and the interest in assuring that sufficient funds are collected to cover all unemployment claims. Notwithstanding these competing concerns, "(t]he unemployment compensation statute is a taxing statute and as all taxing statutes, it is to be strictly construed against the taxing authority." State Department of Industrial Relations v. McElrath Farms, Inc., 348 So.2d 252 (Ala. Civ. App. 1976, revId on other grounds, 3348 So.2d 257 (Ala. 1977)) cited in James v. McCoy Manufacturing Company, 431 So.2d 1147, 1149 (Ala. 1983).

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In attempting to conduct its analysis of the f acts in this case, the court was hampered by a less than clear record and received no memorandum from the Department of Labor and Training. At the hearing, the representative of the Department of Labor and Training indicated some confusion about exactly what facts were available when the decision was made to treat Maxi as a successor. The testimony included the following statement:
  However, our records indicate that a hundred percent of the business, as existed, Brooks Drugs, was transferred to Maxi Drugs. Now, that they chose not to employ its -- continue the employment -- of some of the employees that were working in the administrative office in Pawtucket, that's one thing. And that's fine. That would change our position that the criteria in the law to meet here. That they acquired substantially all of the assets. If there were some employees, there would have been duplication of -- of -- effort. Where they did not retain them, that would change the f act that they did, in our view, meet the requirements of Section 28-43-10. And, therefore, we had no choice but to include the (inaudible) history of Brooks Drugs in the compu -in the calculation -- of Maxi Drug's 1996 tax rate.

Tr. p. 4.
 

Later in the hearing, the tax coordinator f or the Department of Labor and Training offered further testimony reflecting the department's failure to evaluate the available information relating to employees retained by Brooks. Mr. Avarone explained:
  But, we don't know how many people worked for the corporate office in Pawtucket that were not retained 0984M
 

Tr., p. 8 (emphasis added).
 

It may well be that at the time of the hearing the department and the board did not leave precise employment figures - although these were certainly available to anyone who had access to the monthly employment reports filed with the department. Also, with the post hearing information furnished by Maxi, the data were in the board's possession at the time it decided this case.
 

A final indicator of employees retained by Brooks can be found in documents submitted to the board by the Department of Labor and Training on December 18, 1996, well before the hearing. The Research and Statistics Inquiry dated 12/18/96 shows total wages paid by Brooks to be in the $4 million to $5.7 million range from the fourth quarter of 1993 through the last quarter of 1994, except for the third quarter of 1994 when it jumped to $7.89 million. Furthermore, the payroll totaled $4 million for the 1994 fourth quarter - a period which included an entire month after the sale occurred. And for the f irst quarter of 1995 Brooks paid almost $2 million (1.929) in wages

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to Rhode Island employees. The figure remains over a million dollars (1.071) even in the 1995 second quarter.
 

The assets retained by Brooks which are located in this state include: 1) accounts receivable, 2) administrative offices in Pawtucket, 3) a distribution facility (warehouse) in Pawtucket and 4) approximately 624 employees. The record contains no indication of the size or value of the Pawtucket facilities, and it is not even clear whether there are two separate locations or one complex of buildings housing both the administrative and distribution operations. However, the evidence presented to the board does include other information about the Pawtucket facilities. According to the post-hearing letter submitted to the board, there were 439 workers employed at the "administrative building" and another 185 at the warehouse. This compares with 277 persons employed at the 23 drug stores which were purchased by Maxi.
 

The employment figures for Brooks are consistent with the change in the number of workers reported by Maxi. After listing between 418 and 476 employees from the months of April, May, June and October,A/ the report jumps to 822 in November after the sale is completed.
 

A/ These numbers are reported in a January 30, 1997 memorandum from the Division of Taxation to the board chairman. This list has no figures for July or August, and has the figure of 654 for September, a number that does not seem consistent with any other month on the report.

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While courts uniformly recognized the phrase "substantially all" as imprecise,-V the New Hampshire Supreme Court has come closer than other tribunals in an effort to quantify the meaning of this term as used in the unemployment statutes. In Auclair Trans., Inc. v. Riley, 69 A.2d 861, 863 (N.H. 1949) the court construed a statute which defined a successor corporation as one "which acquires the organization, trade, or business, or substantially all of the assets thereof," saying:
  The word "substantially" is necessarily an elastic term which does not indicate a definite, fixed amount of percentage. At one extreme it may be said that the transfer does not have to be 100%. At the other extreme it may be said that the transfer cannot be less than 90% in the ordinary situation [citations omitted]. The court then went on and found that the acquisition of 89%

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of the assets of a company_/ did not permit the corporation
to be taxed as a successor.
 

The court finds these opinions persuasive. "Substantially all" must be construed to require all the significant assets to have been transferred. Here, the uncontradicted evidence before the board showed that buildings that housed over 600 employees

In its C & i Jewelrv opinion, our supreme court noted
that the language was "extraordinarily broad." 702 A.2d at 386.

 The acquiring company brought the trucking portion of a business with a book value of $34,095.94 but did not purchase a gas station owned by the selling firm. The station was valued at $4,234.35.

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were not included in the sale to Maxi. The number of workers alone suggests that the Pawtucket assets -- the administrative offices and warehouse -- were substantial, but a comparison of the number of employees who were retained by Brooks with the number picked up by Maxi is even more convincing. Of 901 persons listed as working for Brooks in Rhode Island before the transfer, only 277 at the stores and another 85 from the Pawtucket warehouse or administrative office were transferred to Maxi. These 362 constitute only 40% of the Brooks employees, leaving 60% of the workers still employed by Brooks after the sale.
 

Given the large number of workers employed at the Pawtucket facility and retained by Brooks, as well as the retention of accounts receivable, the court must conclude that the board of review's decision is clearly erroneous and is not supported by substantial, reliable evidence when the record is viewed as a whole. Therefore, the decision of the Board of Review of the Department of Labor and Training is reversed. The court finds

1/ These figures are taken from the February 5, 1997
post-hearing letter sent to the board by Maxi.
 

I/ The numbers Brooks reported to the Department of Labor and Training as part of its regular submissions are lower, but the percentage of retained workers remains high. Brooks reported 723 employees in October 1994, and the figure dropped to 232 in November, after the sale. These reports reflect that 32% of the Brooks employees remained on its payroll.

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that the plaintiff is not a successor in interest as defined in S 28-43-10(a)(1)(i).