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2nd Circuit: Class-Action WARN Claim Fails

By Scott M. Wich  9/28/2007
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Under the Worker Adjustment and Retraining Notification Act (WARN), employers are often required to provide advance notice of closings or mass layoffs. The 2nd U.S. Circuit Court of Appeals addressed the issue of to what extent this notice obligation extends to entities related to the employer.

The plaintiffs were employees of National Finance Corp., a mortgage originator and reseller. In early 1999, National encountered financial difficulties. Later that year, according to the appellate court, it was discovered that National falsified certain records to misappropriate approximately $5.6 million from one of its major creditors, Bear Stearns. In November 1999, Bear Stearns learned of the misconduct, placing National in default of its agreement with Bear Stearns. Rather than seize National’s assets pursuant to the default, Bear Stearns implemented a strategy to allow National to remain in business long enough to sell it, using the proceeds to repay Bear Stearns.

Part of the implemented strategy was the removal of the National officers involved in the misappropriations. Bear Stearns and its subsidiary, EMC Mortgage Corp., remained active in the financial affairs of National for the following month. On Dec. 22, 1999, unable to meet its payroll, National was closed.

The plaintiffs brought suit against Bear Stearns and EMC, alleging that the organizations failed to provide adequate WARN notice to employees. A federal district court granted summary judgment in favor of Bear Stearns and EMC. The appeals court affirmed.

WARN generally requires covered employers to provide employees with 60 days’ written notice in advance of a plant closing or mass layoff. The appeals court noted that the dispositive question on appeal was whether Bear Stearns could be considered the “employer” of National’s employees, thereby obligating Bear Stearns to provide WARN notices.

The court held that the proper inquiry is 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.’ ” Absent evidence that a creditor has become the debtor’s agent, partner or alter ego, the court ruled that traditional principles of lender liability would weigh against the imposition of WARN liability.

Bear Stearns did not assume control of National as a going concern. Rather, the federal appellate court found, Bear Stearns did nothing more than exert the control needed to attempt a “workout” for National and salvage its value.

Ruling that “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,” the court concluded that the claim against Bear Stearns, which had taken no long-term interest in National as a going concern, to have been properly dismissed.

Coppola v. Bear Stearns & Co ., 2nd Cir., No. 05-6440 (Aug. 30, 2007).

Professional Pointer: This decision is a good reminder of the potential liability that can arise in the employment context in dealing with other employers. Theories of liability based on single employer, joint employer or alter ego status permeate claims under employment discrimination, wage and hour, and labor laws. Employers doing business with other employers, which may involve shared responsibility for employment matters, are well-advised to review potential liabilities beforehand.

Scott M. Wich is an attorney with the law firm of Clifton Budd & DeMaria LLP in New York.

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