Cleary et al v. American Capital, Ltd.
Filing
62
Judge Richard G. Stearns: ORDER entered granting 42 Motion for Summary Judgment (RGS, law1)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 13-12652 -RGS
GREGORY CLEARY and JOHN DANIELE,
on behalf of themselves and all others similarly situated
v.
AMERICAN CAPITAL, LTD.
MEMORANDUM AND ORDER ON DEFENDANT’S
MOTION FOR SUMMARY JUDGMENT
November 14, 2014
STEARNS, J.
The issue in this case is whether a private equity firm seeking to
protect its shareholders’ stake in a failing company succeeded in
negotiating the delicate boundary between permissible self-help and de
facto corporate control so as to avoid liability as a “single-employer” under
the Worker Adjustment and Retraining Notification (WARN) Act of 1988,
29 U.S.C. §§ 2101-2109. Plaintiffs Gregory Cleary and John Daniele are
former employees of Constar International, Inc. (Constar), a bankrupt
electrical service contractor.1
Cleary and Daniele were employed at a
Constar facility in Norwood, Massachusetts.
They were terminated on
The claims of plaintiffs Rob Heindl, Jason McGee, Dennis Parrish,
and Gordon Taylor were dismissed by this court on February 28, 2014. See
Dkt. # 30.
1
October 31, 2007, when Constar’s Board of Directors voted to terminate all
Constar employees at the close of business so as “to avoid incurring further
payroll for which there [were] no funds available to pay.” Def.’s Mem. at Ex.
28 (Constar Board minutes, Oct. 31, 2007). Cleary and Daniele seek to
represent a class of former employees of Constar who were similarly
terminated.
They are attempting, through this Complaint, to recover
unpaid WARN Act wages and benefits from American Capital, Ltd.
(American Capital), a publicly traded Delaware private equity fund that, at
the time of the bankruptcy, owned the majority share of equity and debt in
NewStarcom
Holdings,
Inc.
(NewStarcom),
Constar’s
corporate
grandparent. On February 28, 2014, in an order denying in part American
Capital’s motion to dismiss, the court undertook to consider, as a threshold
matter, whether American Capital’s involvement in Constar was of a level
sufficient to render it a single employer for WARN Act purposes.
At
plaintiffs’ request, the court authorized discovery limited to this question.
The issue now fully briefed, the court heard oral argument on American
Capital’s motion for summary judgment on October 24, 2014.
BACKGROUND
Plaintiffs were employed as apprentice electricians by Constar, a
commercial electrical contractor incorporated in Massachusetts in 1976.
2
Constar’s parent company, NewStarcom, was organized under the laws of
Delaware. NewStarcom was a shell corporation housing three operating
companies: Constar, Matco Electric Corporation (Matco), and Port City
Electric, Inc. (Port City). From November 1, 2006, through April 23, 2007,
Constar was a wholly-owned subsidiary of NewStarcom. From April 23,
2007, through the employment terminations on October 31, 2007, Constar
was a wholly-owned subsidiary of NSC Holdings (NSC), as were the other
two subsidiary companies.
All of NSC’s common stock was owned by
NewStarcom.
Defendant American Capital has a significant presence in the equity
markets with over $5 billion invested in some 130 portfolio companies. In
2007, NewStarcom was one of those companies. American Capital owned
70% of NewStarcom’s shares until October 1, 2007 (and 59% thereafter), as
well as a majority of its debt (at one point in May of 2007, America Capital
held approximately 95% of NewStarcom’s subordinated secured debt).
In late 2006, NewStarcom began to incur substantial losses on the
operations of its subsidiaries. In April of 2007, American Capital invested
$14 million in NewStarcom (including the purchase of approximately $10
million of its preferred stock).
The injection of cash was intended to
alleviate NewStarcom’s short-term liquidity problems and to bring its
3
vendor accounts current.
The effort failed as NewStarcom’s operating
losses continued to compound. On June 4, 2007, NewStarcom’s Chief
Executive Officer Dennis Dugan was replaced by William Skibitsky.2 Later
(on August 21, 2007) Steven Cumbow replaced NewStarcom’s Chief
Financial Officer, John Kearney.
By early October of 2007, American
Capital had given up on the rescue effort, refusing to provide NewStarcom
with a requested $6 to $7.8 million infusion of new capital. At the time that
it made the decision to pull back on its investment, American Capital was
aware that NewStarcom was in danger of being placed in default by Citizens
Bank, its senior debt holder.
On October 11, 2007, NewStarcom’s Board of Directors approved a
last-ditch plan to save the company and its affiliates. The plan hinged on
securing debt relief and refinancing from NewStarcom’s key stakeholders,
including Citizens Bank, CNA Surety, American Capital, and the largest of
the vendor-creditors.
The plan failed, when on October 30, 2007,
The responsibility for Skibitsky’s accession is disputed. The Board
of Directors approval minute was signed by one board member, Gordon
O’Brien, who was also an officer of American Capital. Based on O’Brien’s
signature and a declaration submitted by Dugan (the displaced CEO),
plaintiffs argue that American Capital acted unilaterally in putting Skibitsky
at the helm. See Pls.’ Mem. at Ex. GG (Dugan Decl. ¶¶ 7-8). American
Capital relies on the declaration of Steven Price, also a NewStarcom
director and American Capital officer, who states that the decision was
taken by the Board as a whole. See Def.’s Mem. at Ex. 2 (Price Decl. ¶ 35).
2
4
negotiations with Citizens Bank floundered and the Bank declared a
default. On October 31, 2007, the Boards of Directors of NewStarcom and
Constar met and voted to terminate all employees.
DISCUSSION
Congress enacted the WARN Act in 1988 “in response to extensive
worker dislocation that occurred in the 1970s and 1980s when employees
lost their jobs, often without notice, as companies were merged, acquired or
closed. The purpose of the WARN Act is to protect workers by obligating
employers to give their employees advanced notice of plant closings.” In re
APA Transp. Corp. Consol. Litig., 541 F. 3d 233, 239 (3rd Cir. 2008), citing
Hotel Employees and Rest. Employees Int’l Union Local 54 v. Elsinore
Shore Assocs., 173 F.3d 175, 182 (3rd Cir. 1999).
As explained in the
attendant regulations, the WARN Act provides
protection to workers, their families and communities by
requiring employers to provide notification 60 calendar days in
advance of plant closings and mass layoffs. Advance notice
provides workers and their families some transition time to
adjust to the prospective loss of employment, to seek and obtain
alternative jobs and, if necessary, to enter skills retraining that
will allow these workers to successfully compete in the job
market.
20 C.F.R. § 639.1(a).
5
To implement these goals, the WARN Act provides that “[a]n
employer shall not order a plant closing or mass layoff until the end of a 60day period after the employer serves written notice of such an order . . . to
each affected employee.” 29 U.S.C. § 2102(a). If an employer fails to
provide the required notice, it “shall be liable to each aggrieved employee
for back pay and benefits for each day that the notice was not given.” 29
U.S.C. § 2104(a).
The typical WARN Act case arises when a company decides for costsaving or unionization reasons to close a plant and move its operations
elsewhere. In those instances, the employer is aware of the impending
move well before it occurs and is in a position to either give employees the
required notice, or if it chooses otherwise, to pay the sixty days of a
worker’s lost wages and benefits. Bankruptcy is the atypical case. In the
context of an impending bankruptcy, a WARN Act notice may hasten the
collapse of the business by undermining management’s best efforts to
salvage it.3
And, once a bankruptcy is declared, the company (or its
remnants) passes to the control of the bankruptcy trustee, leaving workers
Although not at issue for purposes of the instant motion, the WARN
Act allows for exceptions to the notice requirement in the instance of either
a “faltering business” or an “unforeseeable business circumstance.” 29
U.S.C. §§ 2102(b)(1)-(2). If an exception is found to apply, the employer is
only required to give “as much notice as is practicable.” 20 C.F.R. § 639.9.
3
6
with no immediate recourse other than in a case like this one, where there
may be a claim against a solvent affiliate of the bankrupt enterprise.
The WARN Act does not address the issue of when (or if) an affiliated
entity can be deemed an alter-ego or “single employer” of the bankrupt
company so as to lead to joint or successor liability for the failure to provide
the 60-day notice.
The WARN Act states only that it applies to any
“business enterprise” that employs more than 100 employees. 29 U.S.C. §
2101(a)(1).
A Department of Labor regulation attempts to give more
specific guidance.
Under existing legal rules, independent contractors and
subsidiaries which are wholly or partially owned by a parent
company are treated as separate employers or as a part of the
parent or contracting company depending upon the degree of
their independence from the parent. Some of the factors to be
considered in making this determination are (i) common
ownership, (ii) common directors and/or officers, (iii) de facto
exercise of control, (iv) unity of personnel policies emanating
from a common source, and (v) the dependency of operations.
20 C.F.R. § 639.3(a)(2). However, in a subsequent explanatory statement,
the Department of Labor made clear that the WARN Act regulation was not
intended to displace “existing law” governing the liabilities of related
business entities. See 54 Fed. Reg. 16,045 (Apr. 20, 1989).
As a threshold matter, the court must determine which of three
competing legal tests to apply in making the determination whether
7
American Capital is liable for Constar’s failure to provide plaintiffs with the
60-day WARN Act notice. Plaintiffs advocate for the Department of Labor
(DOL) balancing test adopted by the Third, Fifth and Ninth Circuits. See
Pearson v. Component Tech. Corp., 247 F.3d 471, 491 (3rd Cir. 2001);
Administaff Cos. v. New York Joint Bd., Shirt & Leisurewear Div., 337
F.3d 454, 457-458 (5th Cir. 2003); Int’l Bhd. of Teamsters, Chauffeurs,
Warehousemen & Helpers, Gen. Truck Drivers, Office Food & Warehouse
Local 952 v. Am. Delivery Serv. Co., 50 F.3d 770, 775 (9th Cir. 1995).4
American Capital, for its part, invokes two District Court cases from the
First Circuit that meld three competing tests: (1) state corporate law (veil
piercing);5 (2) the “single employer” rule;6 and (3) the DOL factors. See
A Second Circuit case cited by plaintiffs, Coppola v. Bear Stearns &
Co., 499 F.3d 144 (2d Cir. 2007), is not fully on point. Although the Second
Circuit referenced the DOL balancing test, it ultimately decided to follow
the lead of the Eighth and Ninth Circuits in deferring to traditional
principles of lender liability. The “traditional” test asks “whether, at the
time of the plant closing, the creditor was in fact ‘responsible for operating
the business as a going concern’ rather than acting only to ‘protect [its]
security interest’ and ‘preserve the business asset for liquidation or sale.’”
Id. at 148, quoting Chauffeurs, Sales Drivers, Warehousemen & Helpers
Union Local 572, Int’l Bhd. of Teamsters, AFL-CIO v. Weslock Corp., 66 F.
3d 241, 244 (9th Cir. 1995), and citing Adams v. Erwin Weller Co., 87 F.3d
269, 272 (8th Cir. 1996). I will, however, draw on traditional lender
liability principles in my application of the DOL balancing test.
4
The Massachusetts veil-piercing theory focuses on common
ownership, pervasive control, intermingling of business assets, thin
capitalization, nonobservance of corporate formalities, absence of corporate
5
8
Milan v. Centennial Commc’ns. Corp., 500 F. Supp. 2d 14, 26 (D.P.R.
2007) and United Paperworkers Int’l Union, AFL-CIO, CLC, and United
Paperworkers Int’l Union, AFL-CIO, CLC, Local 408 v. Alden Corrugated
Container Corp., 901 F. Supp. 426, 437 (D. Mass. 1995).
Of the cases cited by the parties, Judge Becker’s opinion in Pearson
offers the greatest substance. In Pearson, employees of a defunct company
sought to impose WARN Act liability on the major secured lender of their
former employer. Judge Becker took measure of the difficulty courts have
had in applying the DOL test, the factors of which “do not precisely
correspond to any of the established tests for [determining when two
records, non-payment of dividends, insolvency at the time of the litigated
transaction, the siphoning of corporation funds by dominant shareholders,
nonfunctioning officers and directors, the use of the corporation for
unilateral transactions benefitting dominant shareholders, and the use of
the corporation as a vehicle for fraud. Attorney Gen. v. M.C.K., Inc., 432
Mass. 546, 555 n.19 (2000).
The First Circuit has applied four factors in determining whether
two business entities constitute a single employer: “(1) interrelation of
operations, (2) common management, (3) centralized control of labor
relations and (4) common ownership.” Penntech Papers, Inc., v. NLRB,
706 F. 2d 18 (1st Cir. 1983) citing Radio & Television Broad. Union v.
Broad. Service of Mobile, Inc., 380 U.S. 255 (1965). None of these factors is
controlling and they do not all need to be present in order to find that there
is a single employer. Ultimately the question “depends on ‘all of the
circumstances of the case’ and is marked by an absence of an ‘arm’s length
relationship found among unintegrated companies.’”
Id. (citations
omitted). But see Romano v. U-Haul Int’l, 233 F.3d 655, 666-667 (1st Cir.
2000) (holding “control of employment decisions” is “the most important”
factor).
6
9
corporations compose a single entity].
Courts examining affiliated
corporations under the WARN Act have often applied two or more tests,
purporting to ‘average’ the results, usually without any systematic method
for doing so.”
Pearson, 247 F.3d at 483.
Judge Becker, however,
persuasively argued that the application of multiple tests “obfuscates the
purposes of the inquiry itself, i.e., whether the affiliated corporation should
be legally responsible for issuing WARN notice.” Id. at 489 (emphasis in
original). He concluded that “the most prudent course is to employ the
factors listed in the Department of Labor regulations themselves” as this
approach allows for the greatest simplicity and uniformity in setting a
standard for imposing WARN Act liability. Id. I am persuaded by Judge
Becker and will follow his lead in applying the DOL balancing test.
In assembling the balancing test, the DOL sought to provide clarity,
while at the same time not encroaching on firmly established principles of
state corporate law.
While the DOL test, the integrated or “single
employer” test, and state corporate law may vary at the margins, none
departs from the “general principle of corporate law deeply ingrained in our
economic and legal systems that a parent corporation (so-called because of
control through ownership of another corporation’s stock) is not liable for
10
the acts of its subsidiaries.” United States v. Bestfoods, 524 U.S. 51, 61
(1998) (internal quotation marks omitted).
Summary judgment is appropriate when “the movant shows that there is
no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). “[T]he mere existence
of some alleged factual dispute between the parties will not defeat an
otherwise properly supported motion for summary judgment; the
requirement is that there be no genuine issue of material fact.” Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 247-248 (1986) (emphases in
original). A material fact is one which has the “potential to affect the
outcome of the suit under applicable law.” Nereida-Gonzalez v. TiradoDelgado, 990 F.2d 701, 703 (1st Cir. 1993). In assessing the genuineness of
a material dispute, the facts are to be “viewed in the light most flattering to
the party opposing the motion”. Nat’l Amusements, Inc. v. Town of
Dedham, 43 F.3d 731, 735 (1st Cir. 1995).
Plaintiffs recognize that American Capital was not an equity holder,
creditor, or manager of Constar. Rather, they argue a two-tier approach:
(1) that NewStarcom and Constar were so closely integrated that they
qualified as a single employer; and (2) that American Capital, as an equity
11
partner and creditor of NewStarcom, should be deemed a single employer
with respect to both NewStarcom and Constar.
The first tier of plaintiffs’ approach appears to have a solid
foundation. NewStarcom owned all of NSC, which in turned owned all of
Constar.
NewStarcom and Constar shared a corporate headquarters.
Meetings of the Boards of Directors of NewStarcom and Constar were held
simultaneously and the individual directors were for the most part
interchangeable. The president of Constar reported to both the Board of
Directors of Constar and the CEO of NewStarcom. NewStarcom only had
two employees, the CEO and CFO. All other employees were employed by
one of the three operating subsidiaries (Constar, Port City and Matco).
NewStarcom and its three operating subsidiaries filed their state and
federal tax returns simultaneously and issued combined annual audited
financial statements.
In other words, none of the DOL factors appear
untouched.
The second tier of plaintiffs’ approach, however, is planted on shakier
ground. American Capital and NewStarcom did not share offices, bank
accounts, financial statements, tax returns, employment practices, hiring
procedures, or office equipment and supplies. Rather, American Capital’s
alleged de facto control of NewStarcom is pinned by plaintiffs on the
12
apparent control it exercised as NewStarcom’s largest shareholder
(American Capital owned a majority of NewStarcom, which in turn owned
NSC, which in turn owned Constar), as well as the work performed by the
board members appointed by American Capital7 (the first two of the DOL
factors).8
That American Capital owned a majority of NewStarcom stock by
itself merits little weight. It is a bedrock principle of corporate law that “the
At all relevant times, a majority of both NewStarcom and Constar’s
Boards of Directors were officers of American Capital. American Capital
makes the not altogether implausible argument that because none of the
directors of NewStarcom or Constar served on American Capital’s Board, it
is a misnomer to refer to a “common” board of directors as described in the
DOL test (similarly no officer of NewStarcom served as an officer of
American Capital). But see In re Las Colinas, Inc., 426 F.2d 1005, 1014 (1st
Cir. 1970) (“We perceive no reasoned distinction between the interlocking
director cases and those where the same individual serves one corporation
as a director and another as an officer.”).
7
American Capital characterizes much of this work as having
occurred pursuant to a Management Services Agreement (MSA). The MSA
cuts both ways. On the one hand, (as American Capital argues) it can be
seen as independent justification for the advice that American Capital
offered to the management of NewStarcom and Constar on the companies’
daily operations. On the other hand, the MSA can be viewed (as through
plaintiffs’ eyes) as a Trojan Horse inserted to give cover to American
Capital’s micro-management of the companies’ internal affairs. Given the
court’s ultimate view that American Capital was within (if sailing close) to
the boundary separating a concerned creditor-investor from a corporate
alter-ego, it is unnecessary to decide whether the DOL factors should be
expanded to include management consulting arrangements like this one as
a common employer indicia.
8
13
corporation and its shareholders are distinct entities.” Dole Food Co. v.
Patrickson, 538 U.S. 468, 474 (2003). For this reason, “it is hornbook law
that ‘the exercise of the ‘control’ which stock ownership gives to
stockholders . . . will not create liability beyond the assets of the subsidiary.
That ‘control’ includes the election of directors, the making of by-laws . . .
and the doing of all other acts incident to the legal status of stockholders.’”
United States v. Bestfoods, 524 U.S. 51, 61-62 (1998).9 While de facto
exercise of control is one of the factors of the DOL test, it “is not intended to
support liability based on a parent’s exercise of control pursuant to the
ordinary incidents of stock ownership.” Pearson, 247 F. 3d at 503. As a
majority shareholder, American Capital was entitled to exercise the
emblems of control that ownership gives to stockholders, including the
naming of members of the company’s board of directors.
For this reason, there is little to be taken from plaintiffs’ citation of
the corporate self-description offered by American Capital’s CEO regarding
the firm’s general approach to its portfolio companies: “[I]f you really look
at our assets, we look most like a diversified growth company, diversified
holding companies. . . . We’re very similar to Roper [a competitor], but
we’re probably more hands-on than Roper is, in terms of its subsidiaries.
We don’t call them subsidiary companies, right, as an investment company,
we have to call it a portfolio company, but really they’re operating
subsidiaries of ours. We control them. As I showed, we have an operations
team with 10 former Presidents and CEOs and they’re constantly working
in those companies to help grow them and develop them.” Pls.’ Mem. at Ex.
Z (Transcript of American Capital’s CEO Presents at J.P. Morgan SMid Cap
Conference, Dec. 11, 2013). The CEO was articulating the difference
between the typical angel investing and venture capital firm.
9
14
Plaintiffs concede as much, but argue that the directors appointed by
American Capital to the NewStarcom and Constar boards took actions that
exceeded the authority of a mere director, and on occasion took them
without the participation of other members of their respective boards. For
most of the time at issue, three American Capital appointees served on the
boards of NewStarcom and Constar: Steve Price, Gordon O’Brien and Mark
Fikse.10 A fourth American Capital appointee, Craig Moore, joined both
boards on October 11, 2007, just prior to the de facto termination of
business.
Plaintiffs focus principally on the events surrounding the
removal and replacement of Dugan and Kearney with Skibitsky and
Cumbow.
Plaintiffs dwell at length on the fact that Dugan and Kearney
had been recruited to their positions at NewStarcom by American Capital,
although the relevance is not altogether clear as the descriptions of the
involvements of Price and O’Brien in the hiring process seem well within
the authority of a board member delegated to perform the task.11
All three were also members of the American Capital operations
team that “worked with portfolio companies, working on due diligence,
advising . . . on the strategic directions of the companies, and was involved
in the hiring of senior executives within those companies,” as well as
“coach[ing] those management teams of those portfolio companies in their
endeavors.” Pls.’ Mem. at Ex. CC (Fikse Dep. 12-13).
10
states in his declaration that, after being called by a head
hunter, he was interviewed at American Capital’s offices by, among others,
Dugan
11
15
Plaintiffs turn more forcefully to the decision to replace Dugan and
Kearney at NewStarcom, which they argue was initiated by Fikse (an
American Capital appointee to NewStarcom’s Board) without the
participation of other directors. According to plaintiffs, Fikse signed a legal
services agreement with the law firm of Sally & Fitch to represent
NewStarcom in any unpleasantness resulting from the terminations. He
also signed an engagement letter on behalf of NewStarcom with Advantage
Partners, the head hunting firm that recruited Cumbow.
In signing the
letter, Fikse listed his title as “Principal” of NewStarcom. He also told
Advantage Partners to bill American Capital for their services in order to
keep Kearney in the dark about the search. When Skibitsky was hired,
O’Brien alone signed the minute order accepting Dugan’s resignation as
CEO, as well as adopting the terms of his separation agreement and those
of the employment agreement with Skibitsky.
O’Brien and Price, although he also met with Steve Bisson, a minority share
holder and subordinated secured lender to NewStarcom. Pls.’ Mem. at Ex.
GG (Dugan Decl. ¶ 7). Similarly, Kearney states that, after being contacted
by an employment search agency, he also interviewed with Price and later
with O’Brien. Pls.’ Mem. at Ex. FF (Kearney Decl. ¶¶ 4-6). Kearney relates
being offered the position of Chief Financial Officer by then NewStarcom
CEO Eli Florence who told him on his first day on the job that he was there
“over my strong objections.” Id. ¶¶ 6 & 8. Kearney also states that he
renewed his employment agreement after his first year with Price. Id. ¶ 17.
16
American Capital responds that none of the acts alleged by plaintiffs
to have been undertaken by Price, O’Brien, or Fikse, is inconsistent with the
duties of a corporate director.
American Capital also points to the
declaration submitted by Cumbow attesting that, in his experience, while
American Capital made occasional employment recommendations, the
ultimate authority over hiring at NewStarcom resided at all times with
management and the Board of Directors. Def.’s Mem. at Ex. 1 (Cumbow
Decl. ¶¶ 24-25).
Plaintiffs nonetheless persist with the argument that the degree of
control over NewStarcom exercised by Price, O’Brien, and Fikse rose to that
of a de facto putsch. They point to Dugan’s complaint that Fikse had
effectively seized control of the company from him during his tenure, as
well as an email exchange between Fikse and Skibitsky in which Skibitsky
remonstrated: “I believe that I am responsible for Constar. . . . I think it is
about time that you let me run with the situation. I warned you that we are
starting to confuse the people. . . . [T]hey are questioning who is in charge,
we both can’t be. . . . [L]et me do my job.” Pls.’ Mem. at Ex. J (e-mail chain
dated Aug. 28, 2007). (Curiously, this latter exchange directly contradicts
plaintiffs’ portrayal of Skibitsky as an abject tool of American Capital).
17
The law is not so foolish as to fashion a rule – even under the laudable
auspices of the WARN Act – that would prevent an equity investor like
American Capital from taking measures to protect or, if necessary, salvage
its shareholders’ stake in an investment going bad. As the Second Circuit,
among others, has recognized, “a creditor may exercise very substantial
control in an effort to stabilize a debtor and/or seek a buyer so as to recover
some or all of its loan or security without incurring WARN liability.”
Coppola, 499 F.3d at 150. See also Pearson, 247 F. 3d at 503 (the de facto
control factor does not “create liability for a lender’s general oversight of its
collateral.”); Adams, 87 F.3d at 272 (a lender does not “become a WARN
employer because it proposed methods to improve [the borrower’s]
profitability, suggested new management, and stepped up its verifications
to keep track of [the borrower’s] deteriorating financial condition. Major
lenders do these sorts of things all the time.”). Rather, “the dispositive
question is whether a creditor is exercising control over the debtor beyond
that necessary to recoup some or all of what is owed, and is operating the
debtor as the de facto owner of an ongoing business . . . When the exercise
of control goes beyond that reasonably related to such a purpose and
amounts to the operation of the debtor as an ongoing business — such as
18
when there is no specific debt-protection scenario in mind — [then] WARN
liability may be incurred.” Id.
In this light, the actions undertaken by American Capital, however
aggressive, were consistent with those of (an ultimately unsuccessful)
attempt to protect its investment. These include proposing and assisting
the recruitment of “new management,” and the ferreting out of an accurate
and complete understanding of the company books (I have in mind Allison
Young Zabranksy’s work to improve the weekly financial reporting). See
Adams, 87 F.3d at 272 (a creditor may propose “methods to improve [the
borrower’s] profitability,” and may step “up its verification to keep track of
[the borrower’s] deteriorating financial condition” without incurring
WARN Act liability). While a WARN Act plaintiff should not be held to the
nearly impossible burden of demonstrating a complete merger of identities
between the defunct employer and its former equity owner, at a minimum a
plaintiff must establish control by the later over the “the allegedly illegal
employment practice that forms the basis for the litigation.” Pearson, 247
F.3d at 491.
Plaintiffs offer no material evidence that the decision of
NewStarcom and Constar to terminate all employees and file for
bankruptcy was made by American Capital, nor any plausible reason why
American Capital, as an unsecured creditor, would have thought it in the
19
interest of its shareholders to do so. In this regard, at most plaintiffs
unpersuasively quibble with aspects of the NewStarcom board minutes.
For example, they dispute the recording of a vote to send termination
notices to employees based on Dugan’s (who was no longer employed at
NewStarcom) recollection that votes were never taken at board meetings.12
Plaintiffs’ final argument, based on the fifth of the DOL factors
(operational dependency), is that NewStarcom’s operating losses placed it
in financial thrall to American Capital whose forbearance was essential to
its survival. The argument confuses operational dependency with financial
reality. While it is true that American Capital’s refusal to inject more cash
into NewStarcom’s and Constar’s operations was a precipitating factor in
eventually forcing the companies into bankruptcy, the same could be said of
Citizens Bank, and possibly others of the major creditors. It will be recalled
that even after American Capital declined to supply further funding to
NewStarcom, management embarked on an ultimately futile attempt to
locate a white knight. As Judge Becker observed about a similar course of
events in Pearson, the “negotiations with [the creditor company], and its
This is disputed by Cumbow and Price, both of whom attended the
Board meeting in question and who attest that an affirmative vote was
taken with respect to the WARN Act notices. In any event, it is clear that,
because plaintiffs have failed to adduce evidence demonstrating a “unity of
personnel policies emanating from a common source,” they fail to
demonstrate the fourth of the DOL factors.
12
20
attempts to secure additional financing all reflect [the debtor company’s]
own vitality, and demonstrate that [the creditor company’s] decision to cut
off its funding was not a ‘de facto exercise of control’ over [the debtor
company’s] decision to close its doors.” Pearson, 247 F.3d at 505.
Moreover, here, as in Pearson, the persistent requests from NewStarcom to
American Capital for relief “demonstrate that [the debtor company] was
acting as an independent entity seeking further capital rather than as a
branch of [the creditor company] operating under [the creditor company’s]
direction.” Id.
At best, plaintiffs have shown that American Capital knew that its
attempts to rescue NewStarcom and Constar had likely failed and that a
bankruptcy filing was probably imminent. See Pls.’ Mem. at Ex. M (Price email of Oct. 1, 2007: “If we look at the business as a whole then yes we are
about to lose Constar and the rest of it.”). This knowledge does not,
however, translate into an obligation on American Capital’s part to warn
employees of impending doom. Had American Capital taken that course,
all it would likely have earned is a lawsuit even larger than this.
ORDER
21
For the foregoing reasons, American Capital’s motion for summary
judgment is ALLOWED. The Clerk will enter judgment for the American
Capital and close the case.
SO ORDERED.
/s/ Richard G. Stearns
UNITED STATES DISTRICT JUDGE
22
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?