Walden, Dianne McKaig

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University of Kentucky

Kentucky Law JournalVolume 42 | Issue 3 Article 121954Workmen's Compensation--Effect of Transfer ofBusiness Without NoticeDianne McKaig WaldenUniversity of KentuckyFollow this and additional works at: https://uknowledge.uky.edu/kljPart of the Workers' Compensation Law CommonsRight click to open a feedback form in a new tab to let us know how this document benefitsyou.This Note is brought to you for free and open access by the Law Journals at UKnowledge. It has been accepted for inclusion in Kentucky Law Journal byan authorized editor of UKnowledge. For more information, please contact UKnowledge@lsv.uky.edu.Recommended CitationWalden, Dianne McKaig (1954) "Workmen's Compensation--Effect of Transfer of Business Without Notice," Kentucky Law Journal:Vol. 42 : Iss. 3 , Article 12.Available at: https://uknowledge.uky.edu/klj/vol42/iss3/12NoTFs mw CommENTsgreater than in actions brought by an automobile passenger againsthis host for injuries caused by his host's negligence. These casesshould not be "saddled with a presumption of fraud."30As to the desirability factor, it is submitted that an injury resultingfrom the tortious act of a spouse should be no less compensable thanan act of a stranger. One cannot reasonably assume that a husband ismore willing to recompense the general public than his wife, nor isan injured spouse any less injured because she is married. Where anaction is denied, she may be without an adequate remedy. It is dif-ficult for courts to continue to argue that denying such an action willcontribute to the preservation of domestic happiness in the intentionaltort cases where the greatest damage has already occurred and in theautomobile negligence cases where the insurance company will in-demnify the losing spouse. For those who fear that once the door isopened a volume of trivial suits will arise, it is suggested that the de-fenses of consent and assumption of risk are applicable to this situa-tion.The reasons most often advanced for denying a husband or wifesuch an action are no longer compelling. In addition, denying theright of action may place a heavy burden on the injured spouse.Therefore the decision of the Kentucky court seems a step in the rightdirection.WuLL Im J. BrCesWORKMEN'S COMPENSATION-EFFECT OFTRANSFER OF BUSINESS WITHOUT NOTICETransfer of business without notice to the employee as affectingthe employee's right to recover against the original employer and hisinsurer for injuries sustained after the transfer was the subject of anunusual legal determination which was given judicial reaffirmancerecently by the Court of Appeals of Kentucky in two similar work-men's compensation cases, Hamlin v. Sammons," and Bituminous GasCorp. v. Johnson.2 In each case the plaintiff was hired as a mineworker of employer-one who carried workmen's compensation insur-ance. Employer-one then transferred the mining operations to em-10 Ibid.I261 S.W. 2d 440 (Ky. 1953).2259 S.W. 2d 448 (Ky. 1953).KENTuKt LAw JotRNALployer-two. 3 The employee was not given actual notice of the transfernor could a change have been inferred since the operations continuedin a manner nearly identical to that with which they had theretoforebeen conducted. The employee who was injured subsequent to thetransfer sought a compensation award against employer-one and hisinsurer. The awards granted in both cases by the Workmen's Com-pensation Boards and affirmed by the Circuit Courts were sustainedby the Court of Appeals. In the Bituminous decision it was asserted:. . . where there is no actual change in the management of thebusiness, and it is continued in the same general way after the saleby the same servants and employees and the servants are in no wayexpressly or otherwise informed of the transfer and consequentchange of proprietors, the relation is presumed to continue for areasonable time, and the master remains liable to them to the sameextent as though no sale or transfer had taken place.. .. 'The Employer. That an employer who transfers his business with-out giving notice to his employees cannot release himself from liabilityfor their subsequent injuries either at common law or under a work-men's compensation act is the accepted rule.5 At first glance this would8 It should be noted that employer-two was a sub-lessee rather than a sub-contractor. Therefore, statutes and case holdings to the effect that the employeesof sub-contractors may collect directly from the insured main employers are in-applicable. See HoRovrrz, Wom:EN's COMPENSATION 232 (1944).'Supra note 2 at 451, quoting from Palmer v. Main, 209 Ky. 226, 272 S.W.736, 737 (1925). The Bituminous decision was also held to be controlling inHamlin v. Sammons, supra note 1.'Wilson and Co., Inc. v. Locke, Deputy Commissioner, Employees' com-pensation Commission, 50 F. 2d 81 (2d Cir. 1931); Ledbetter v. Adams, 217 Ark.329, 230 S.W. 2d 21 (1950) (not only was the transfer unknown to the publicand the employees, but it was also executed without requisite good faith);Donnelly v. San Francisco Bridge Co., 117 Cal. 417, 49 P. 559 (1897); Sechler v.Pastore, 103 Colo. 139, 84 P. 2d 61 (1931) (the transfer itself was invalid, butby way of dicta the court averred that even if the sale had been effective, noticeis a prerequisite to employer-one's release from liability); Brenan v. Berlin IronCo., 74 Conn. 382, 50 A. 1030 (1902); Consolidated Coal Co. v. Seniger, 179Ill. 370, 53 N.E. 733 (1899); Solomon R. Co. v. Jones, 30 Kan. 601, 2 P. 657(1883); Hamlin v. Sammons, 261 S.W. 2d 440 (Ky. 1953) (principal case);Bituminous Gas Corp. v. Johnson, 259 S.W. 2d 448 (Ky. 1953) (principal case);Buchanan Mining Co. v. Henson, 228 Ky. 367, 15 S.W. 2d 291 (1929); Palmerv. Main, 209 Ky. 226, 272 S.W. 736 (1925) (leading case); Goodwin v. Smith, 23Ky. L. R. 1810, 66 S.W. 179 (1902) (the transfer was merely a formal changefrom a partnership to corporate form); State to use of Hall v. Trimble, 104 Md.317, 64 A. 1026 (1906); Warren's Case, 272 Mass. 127, 172 N.E. 254 (1930)(the transfer was merely a bill of sale given for security); Beauregard v. BenjaminF. Smith Co., 213 Mass. 259, 100 N.E. 627 (1913); Adams v. McKay, 229 Mich.670, 202 N.W. 962 (1925); Melhus v. Sam Johnson and Sons Fisheries Co., 188Minn. 304, 247 N.W. 2 (1933); Benson v. Lehigh Valley Coal Co., 124 Minn.222, 144 N.W. 774 (1914); Ocean Accident and Guarantee Corporation, Ltd. v.Connell, 93 N. H. 77, 35 A. 2d 385 (1943); Delaware, L. and W. R. Co. v.Hardy, 59 N. J. Law 35, 34 A. 986 (1896); Noel v. Morrison, 260 App. Div. 377,22 N. Y. S. 2d (1940); Murray v. Union Railway Co. of New York City, 229N. Y. 110, 127 N.E. 907 (1920); Anderson v. Polleys, 53 R. I. 182, 165 A. 436NoTs AND CoMmN-rrsbe an unusual view since an employer-employee relationship is a pre-requisite to compensation,6 and it would appear that the employmentseem to relationship with employer-one ended when the business wastransferred, while the employment relationship with employer-two com-menced with the work continuance. However, although the employeeis actually working for employer-two-technically, no employment re-lationship could have arisen because an employment contract, like anyother, presupposes mutual assent. A new relationship cannot be thrustupon a servant without his knowledge or consent.7 As stated by JusticeCardozo in Murray v. Union Ry. Co. of New York City, "There canbe no unwitting transfer [of an employee] from one service to an-other."8 Thus, no new relationship having arisen, the injured employeemust look primarily to the old in seeking compensation. 9In holding that the original employment continues for a reasonabletime after the transfer if the employee has no knowledge of the change,the courts are limiting the usual rule that the employment terminatesupon sale of the business10 to situations where the exchange is madeknown to the worker. It is not clear to what specific incidents ofemployment this limitation is applicable, but certainly there is a posi-tive application in the cases where an injured employee seeks eithercommon law damages or compensation. In his treatise on workmen'scompensation Mr. Schneider has said that where there is no notice, therelationship continues "with respect to the right to compensation ..."11This conclusion is not based merely on the broad policy of the com-pensation acts. The primary reason for holding employer-one is that"rights and remedies are not lost by stumbling unawares into a newcontractual relation."12 Thus, employer-one should be held liable notonly in compensation and common law damage suits, but also in othersituations where litigation arises out of employment.1933); Holloway v. G. 0. Cooley and Sons, 206 S. C. 234, 37 S.E. 2d 6661946); Traders and General Insurance Co. v. Jaques, 131 S.W. 2d 133 (Tex.1939); Federal Surety Co. v. Shigley, 7 S.W. 2d 607 (Tex. 1928) (the transferwas not completed until after the injury); Missouri K. and T. R. Co. of Texas v.Ferch, 36 S.W. 487 (Tex. 1896); Gulf, C. and S. F. R. Co. v. Shearer, 21 S.W.133 (Tex. 1892). Also see note 50 A. L. R. 1166 (1944); 71 C. J. 397 (1935).'See Cody v. Combs, 302 Ky. 596, 194 S.W. 2d 525 (1946)."Standard Oil Co. v. Anderson, 212 U. S. 215, 225 (1909); Hull v. Phila.and Reading Co., 252 U . 475 (1920).229 N. Y. 110, 127 N.E. 907 (1920)." It has been said, however, that employer-two is an undisclosed principle andtherefore liable as master. McClure v. Detroit Southern R. Co., 146 Mich. 457,109 N.W. 847 (1906)."3 ScmqnEm, Wonvx N's CommxsAr=oN LAw 44-45 (1943).u Ibid." Supra note 8.KENT cKY LAW JoURNALOnly three injury cases 13 have been found wherein an employeewas denied recovery against employer-one despite lack of notice. Inthese cases it was said that since the employee was actually doingwork for employer-two, that relationship should control-notice beingimmaterial. However, none of these cases discussed or distinguishedthe principle that there can be no employment relationship until theconsent of the employee is procured. The only additional reasoningdiscerned was found in Smith v. Belshaw,'4 an action against an em-ployer for common law damages, wherein it was asserted that em-ployer-one should not be held liable for the negligence of employer-two. This argument has merit even in the compensation cases despitethe fact that negligence is not a prerequisite to a recovery of work-men's compensation, as the negligence of employer-two may, in manyinstances, have caused or contributed to the injury, and it may be thata previous employer should not be held liable for the consequencesof an act committed by another person. Yet, it should be rememberedthat the estoppel placed on employer-one is based on his own failureto make known his change in circumstances, thereby leaving the em-ployee in an alien situation involving possible risks of which he hadnot been forewarned.The rule under consideration places on the employer the duty ofnotifying the employee not that he is no longer covered by workmen'scompensation, but merely that there has been a "transfer" 5 or "changein ownership."16 This notice may be express or even implied from thecircumstances. Ancillary to the "no express notice" factor upon whichthis rule depends, is the essential requirement that the working con-ditions remain the same so that the employee has no sufficient causefor suspicion and inquiry. But as stated by a South Carolina court:There are no circumstances to make this inference [of implied under-standing] inevitable. Whether the circumstances were such as tonecessarily put claimant on inquiry a question of fact to be determinedby the Industrial Commission."The Insurer. Having determined that the original employer isliable, the succeeding question is whether his insurer should also beheld. If the insurer had notice of the transfer and did not take im-'Smith v. Belshaw, 89 Cal. 427, 26 P. 834 (1891) (Donelly v. The SanFrancisco Bridge Co. which is cited with the majority in footnote five was decidedby the California Court only six years after the Smith Case, supra. Although anopposite stand was taken, the Smith Case was not mentioned); Crusselle v. Pugh,67 Ga. 430, 44 Am. Rep. 724 (1881); Putnam v. Ind. Comm., 80 Utah 187, 14P. 2d 973 (1932).89 Cal. 427, 26 P. 834, 835 (1891).Supra note 2."Supra note 10.Holloway v. G. 0. Cooley & Sons, 208 S. C. 234, 37 S.E. 2d 666 (1946).Noams AND CoaiEnmrsmediate action, the company should be estopped from denying liability,having acquiesced in the change. But in the event the insurance com-pany had no knowledge of the change, it might be argued that thecompany should not be held to have insured someone unknown tothem-that insurers have a right to select their risks, having a fullunderstanding of the facts.The issue of the insurer's liability was considered in only one ofthe two Kentucky cases under consideration, Bituminous Gas Corp. v.Johnson. Therein the court pointed out that there was ample evidenceto sustain a finding that the insurer had notice of the transfer. How-ever, it further asserted:That is not to say that, in the absence of such notice, the non-assign-ment provision in the policy would have worked its discharge in thiscase. The insurer will not be relieved from its liability to a workmaninjured at work covered by the policy at the location named in thepolicy merely because of an inconsequential change in the operations.'Thus, the actual operation of the business being the same, the riskoriginally insured had not been changed or increased.Although the transfer in the type of case under consideration mademerely an inconsequential change in the practical operations of thebusiness, it is submitted that a substantial change was effected in thelegal relationships between the parties. Employer-one was no longeractually operating the business, nor was he, in actuality, an employer.Thus, failing to give notice was taking an inequitable advantage of hisinsurer. Nevertheless, since the employer is liable, the insurer shouldalso be held. Any other decision would violate the purpose and spiritof the workmen's compensation legislation. Note, for example, thewording of the Kentucky Compensation Act:All policies insuring the payment of compensation under this chaptershall contain a clause to the effect that . . .the insurer shall in allthings be bound by and subject to the awards, judgments or decreesrendered against the insured.'To leave the employee an avenue of redress against the employeralone would oftentimes give him a technical recovery without prac-tical effect, should the employer be judgment proof. This result iscontrary to one of the humanitarian purposes of workmen's compensa-tion-taking the burden of the economic loss from the shoulders of theemployee who is, after all, in the poorest position to bear it.20Little has been written on the liability of the insurance companyin this particular situation. In most compensation cases of this type," Supra note 2 at 451."Ky. REy. STAT. 42.360 (1953)."See generally 58 Am. Jun. 576 (1948).KENTucKY LAW jou-NArthe employer is held liable without mention of the insurer's responsi-bility.21 There are, however, two cases in which the insurance com-pany has been specifically mentioned as being answerable along withthe insured,22 and in yet another instance, where the owner-employerhad executed a bill of sale for the purpose of security, the court said"The evidence falls far short of compelling a finding that the policy ofinsurance issued to the subscribers was rendered invalid because ofthese written instruments without the consent of the insurer."23A second line of reasoning upon which the insurer's liability issometimes based is the theory of a direct obligation between the in-surer and the employee. Returning to the Kentucky CompensationAct, we find this provision:No policy of insurance against liability for compensation arising underthis chapter shall be issued unless it contains the agreement of theinsurer that it will promptly pay to the person entitled to it all bene-fits conferred by this chapter and all installments of the compensationthat may be awarded or agreed upon, and that the obligation shall notbe affected by any default in the giving of any notice required bysuch policy, or otherwise. This agreement shall be construed to be adirect promise by the insurer to the person entitled to compensation,enforceable in his name. (Italics writer's)"This type of provision was construed in a South Carolina case whereinthe court asserted:It is suggested that the policy in question contains a provision thatno assignment of any interest under the policy shall bind the Com-pany unless its consent is endorsed thereon. But this is not a contestbetween the insurer and the insured. Under the terms of the actand paragraph D of the policy, a direct obligation arose from thecarrier to the claimant and this obligation would not be affected bythe failure of the sellers or purchasers to give notice to the carrierof a sale or a transfer of possession of the business.'It would, therefore, appear that in addition to the "spirit of the act"argument for holding the insurer liable, in those jurisdictions wherethe compensation act provides for a direct obligation between the in-surer and the employee, the insurer would be answerable for claimsagainst the employer despite the contemplated wrongful actions bythe employer. DxuqNE McKAiG WALDEN'Wilson and Co. Inc. v. Locke, Deputy Commissioner, Employees Compen-sation Commission, 50 F. 2d 81 (2nd Cir. 1931); Ledbetter v. Adams, 217 Ark.329, 230 S.W. 2d 21 (1950); Sechler v. Pastore, 103 Colo. 139, 84 P. 2d 61(1938); Buchanan Mining Co. v. Henson, 228 Ky. 367, 15 S.W. 2d 291 (1929);Palmer v. Main, 209 Ky. 226, 272 S.W. 736 (1925); Neal v. Morrison, 260 App.Div. 377, 22 N. Y. S. 2d 649 (1940).'Adams v. McKay, 229 Mich. 670, 202 N.W. 962 (1925); Melhus v. SamJohnson and Sons Fisheries Co., 188 Minn. 304, 247 N.W. 2 (1933).'Warren's Case, 272 Mass. 127, 172 N.E. 254, 255 (1930).' Ky. REv. STAT. 342.365 (1953).'Holloway v. G. 0. Cooley and Sons, 206 S. C. 234, 37 S.E. 2d 666, 671(1946). Also see 7 APPLEasAN, INSuRANcE LAw Am PRACTICE 471-472 (1943).

Workmen\u27s Compensation--Effect of Transfer of Business Without Notice

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Workmen\u27s Compensation--Effect of Transfer of Business Without Notice

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