In a 24 page decision signed July 8, 2011, Judge Walrath of the Delaware Bankruptcy Court granted a motion to for summary judgment, holding a non-debtor defendant liable with the Debtor as a single employer for alleged WARN Act violations. Judge Walrath’s opinion is available here (the “Opinion”).
Tweeter Opco, LLC (the “Debtor”), filed for bankruptcy on November 6, 2008, the same day that the class action plaintiffs (the “Plaintiffs”) filed the class action adversary complaint that gave rise to the Opinion. The Plaintiffs alleged in their complaint, that the Debtor and Schultze Asset Management, LLC (“SAM”) constitute a single employer, such that both are liable for violations of the WARN Act, 29 U.S.C. § 2102(a). Under the WARN Act, an employer with 100 or more full time employees cannot conduct mass layoffs of fifty or more employees without providing each employee, or the employees’ representative, sixty days notice. Opinion at *4. SAM and the Plaintiffs stipulated to staying the proceeding against the Debtors (whose bankruptcy had been converted to a chapter 7 liquidation) and continuing the proceeding against SAM.
Both SAM and the Plaintiffs filed cross motions for summary judgment for determination of the following issues: (1) whether SAM and the Debtor are a single employer under the WARN Act, (2) if SAM and the Debtor are a single employer, whether SAM is entitled to the faltering company exception available under the WARN Act, and (3) whether the Debtor acted in good faith, thereby precluding damages under the WARN Act. Opinion at *2.
Judge Walrath’s Opinion
Judge Walrath’s legal analysis begins with a discussion of the standard for summary judgment in Delaware. Opinion at *3. While it may be true that both parties seem to believe there are no facts in dispute, Judge Walrath opined that the Court must still examine each motion separately, determining for each side if judgment may be entered. Opinion at *4.
Judge Walrath then methodically examined each of the elements of the WARN Act in route to her decision that it was satisfied. The elements of the WARN Act are: 1) The Debtor was an employer with more than 100 employees; 2) The Debtor’s two adjacent buildings constitute a single site of employment as required by the WARN Act; 3) Fifty-four employees were terminated within a ninety-day period; and 4) The terminated employees did not receive sixty-days of notice prior to termination. Opinion at *5-8.
Judge Walrath then addressed the issue of whether SAM and the Debtor constituted a single employer under the WARN Act, relying upon the five-factor test created by the Department of Labor, and adopted by the Third Circuit in Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001). Opinion at *8. The five factors are: (1) Common Ownership, Opinion at *9-12; (2) Common Directors and Officers, Opinion at *12-13; (3) De Facto Exercise of Control, Opinion at *14-18; (4) Unity of Personnel Policies, Opinion at *18-19; and (5) Dependency of Operations, Opinion at *19-20. Judge Walrath determined that the Plaintiff showed common ownership, common directors and officers and a “particularly egregious” de facto exercise of control by SAM over the Debtor. Opinion at *21. She thus determined to grant summary judgment in favor of the Plaintiffs. Id.
As a final step in her analysis, Judge Walrath examined the two affirmative defenses pled by SAM, (1) the faltering company defense and (2) good faith. Judge Walrath held that because SAM failed to explain the lack of a notification period, it is not entitled to the faltering company defense. Opinion at *23. Lastly, because SAM did not raise the good faith defense in its answer, it cannot raise it in response to the summary judgment motion. Opinion at *24. Judge Walrath thus ruled for the Plaintiffs, granting their motion for summary judgment, holding that SAM was liable for violating the WARN Act in conjunction with the Debtors.
Two general principles can easily be gleaned through a reading of this Opinion. (1) If you fail to plead an affirmative defense in your answer, you will lose it. (2) If you exercise control over another entity, you are highly likely to be held liable for any illegal actions it takes. This principle of agency law is as relevant in standard employer-employee relationships and in relationships in which the principal is another company which gained control of the “agent” through debt covenants or equity ownership.