05-6440-cv Coppola v. Bear Stearns

1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 August Term, 2006 6 7 (Argued: January 11, 2007 Decided: August 30, 2007) 8 9 Docket No. 05-6440-cv 10 11 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12 13 VINCENT J. COPPOLA, MICHAEL BRESLIN, and OLIN MCDONALD, on behalf 14 of themselves and all others similarly situated, 15 Plaintiffs-Appellants, 16 17 v. 18 19 BEAR STEARNS & CO., INC., BEAR STEARNS HOME EQUITY TRUST, BEAR 20 STEARNS INTERNATIONAL LIMITED, and EMC MORTGAGE CORPORATION, 21 Defendants-Appellees. 22 23 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 24 B e f o r e: WINTER, CABRANES, Circuit Judges, and KORMAN, 25 District Judge.* 26 27 Appeal from a judgment of the United States District Court

28 for the Northern District of New York (Scullin, J.) granting

29 summary judgment to defendants-appellees on the ground that

30 defendant-appellee Bear Stearns was not an "employer" of

31 plaintiffs-appellants under the Worker Adjustment and Retraining

32 Notification Act,

. We affirm.

33

* The Honorable Edward R. Korman, District Judge of the United States District Court for the Eastern District of New York, sitting by designation.

1 1 2 CORNELIUS D. MURRAY (Pamela A. 3 Nichols, Michael D. Assaf, of 4 counsel), O'Connell & Aronowitz, 5 Albany, New York, for Plaintiffs- 6 Appellants. 7 8 NEIL L. LEVINE (Alan J. Goldberg, 9 John P. Calareso, Jr., of counsel), 10 Whiteman Osterman & Hanna LLP, 11 Albany, New York, for Defendants- 12 Appellees. 13 14 15 WINTER, Circuit Judge: 16 17 The appellants here filed a class-action lawsuit against

18 appellees Bear Stearns & Co., Inc. ("Bear Stearns" or "Bear"),

19 Bear Stearns Home Equity Trust, Bear Stearns International

20 Limited, and EMC Mortgage Corporation, for violation of the

21 Worker Adjustment and Retraining Notification Act ("WARN"), 29

. Appellants claim that Bear Stearns closed the

23 principal offices of National Finance Corporation (“NFC”), their

24 employer and a debtor of Bear Stearns, and terminated their

25 employment without the advance written notice required by WARN.

26 Judge Scullin granted appellees' motion for summary judgment,

27 holding that appellees had no liability under WARN because Bear

28 was not appellants’ "employer" within the meaning of the statute.

29 We agree and affirm.

30 BACKGROUND

31 Given the procedural posture of this matter, we view the

32 facts in the light most favorable to appellants. Cioffi v.

2 1 Averill Park Cent. Sch. Dist. Bd. Of Educ.,

, 162 (2d

2 Cir. 2006). Appellants were employees of NFC until its closure

3 on December 23, 1999. NFC's business consisted of the

4 origination and resale of mortgages and home equity loans to

5 residential customers. It earned revenue from fees charged for

6 originating the loans and from premiums paid by purchasers of the

7 loans in the secondary market. To conduct this business, NFC

8 relied on two lines of credit: a short-term "operating" credit

9 line from BankBoston ("BB"), and a longer-term "warehouse" credit

10 line from Bear Stearns. NFC used the BB line to fund its

11 origination of loans, which became collateral for the debt

12 incurred to BB. If a loan on the BB line sold quickly in the

13 secondary market, NFC would use the receipts to pay off its debt

14 to BB. Otherwise, NFC would sell the loan to Bear and "sweep" it

15 into the warehouse line, with the right and obligation to

16 repurchase it from Bear in the event of resale or default on the

17 part of NFC. When NFC sold a loan on the Bear warehouse line, it

18 would pay Bear an agreed-on price to repurchase the loan from

19 Bear and retain any profit earned from the sale. NFC paid off

20 the amount owed on the BB line on an approximately weekly basis.

21 NFC fell on hard times in the fall of 1998, and by February

22 1999, could not fund its continued operations. To obtain the

23 needed funds, NFC, chiefly through David Silipigno, NFC's then-

24 President and CEO, retained money from sales of loans on the

3 1 warehouse line that it should have paid to Bear Stearns. NFC

2 covered its tracks by falsifying the weekly loan schedules it

3 submitted to Bear, listing resold loans as unsold and still

4 available as collateral on the warehouse line.

5 In August 1999, NFC's misappropriations -- which by that

6 point amounted to $5.6 million of Bear's money -- were discovered

7 by Westwood Capital ("Westwood"), a company NFC had hired to help

8 sell NFC. In November 1999, Westwood persuaded NFC to disclose

9 its conduct to Bear. NFC's actions had placed NFC in default

10 under the terms of the Master Repurchase Agreement ("MRA")

11 governing its relationship with Bear, and Bear consequently had

12 the right under the MRA to seize all loans on the warehouse

13 credit line to pay off the line. Instead, Bear pursued a workout

14 strategy that would allow NFC to remain in business for a time in

15 the hope of selling NFC and using the proceeds to repay Bear.

16 Bear refused, however, to continue to do business with the

17 individuals responsible for the fraud. In response, David

18 Silipigno, Joseph Silipigno, and the other NFC personnel involved

19 in the theft resigned as officers of NFC. Harvey Marcus, NFC's

20 General Counsel, volunteered to serve as the new President and

21 CEO. He was confirmed in this position by a "Unanimous Consent"

22 executed on November 24, 1999, by NFC's board, which appears to

23 have consisted solely of David and Joseph Silipigno. The

24 Unanimous Consent also reflected that the Silipignos' resignation

4 1 as officers was effective as of November 23, 1999.

2 On November 23, 1999, NFC and Bear entered into a letter

3 agreement (the "November 23 Agreement") formalizing the terms on

4 which they would agree to continue their business relationship.

5 Because Marcus had no experience managing a mortgage business,

6 NFC hired an individual named Bill Bradley to run NFC until it

7 was sold. Bear agreed to subordinate its claims against NFC to

8 Bradley's bonus in the event of NFC's sale or bankruptcy.

9 Bear also accepted stock pledge agreements from the

10 Silipignos representing their entire ownership interests in NFC

11 (in total, 96% of NFC's stock). The pledge agreements reflect

12 that Bear was entitled to exercise its rights at any time, upon

13 notice of its intent to the pledgors, but Bear never voted or

14 took any action with respect to the stock.

15 At this point, NFC needed new sources of funding.

16 BankBoston had terminated NFC's operating credit line in response

17 to NFC's fraud. Although the November 23 Agreement left NFC free

18 to seek other sources of capital (both from financing for loan

19 originations and from mortgage resales), NFC did not make much

20 (if any) effort to do so, believing that such efforts would be

21 futile given that word of NFC's fraud had spread through the

22 industry. Bear itself was no longer willing to continue its

23 warehouse line arrangement with NFC, but agreed that its

24 subsidiary EMC Mortgage Corp. ("EMC") would make outright

5 1 purchases of certain types of loans originated by NFC. Bear

2 hired the Clayton Group to evaluate the loans NFC proposed for

3 purchase by EMC. The Clayton Group, serving as Bear's

4 underwriter, performed these evaluations on-site at NFC after

5 NFC’s underwriters approved the loans in question.

6 While this arrangement enabled NFC to earn money from the

7 purchase premiums paid by EMC and the origination fees paid by

8 borrowers, NFC had no way as a practical matter to fund any loan

9 that EMC was unwilling to purchase. Specifically, EMC purchased

10 only loans falling within Bear’s "B/C subprime" criteria, and NFC

11 was therefore no longer able to originate and sell other types of

12 loans that had previously been part of its product mix.

13 In early December 1999, NFC could not meet its payroll.

14 Bear refused to loan any money to NFC for that purpose, but did

15 agree to a "forward purchase transaction." Under that procedure,

16 EMC advanced funds to NFC in the amount of payments EMC was about

17 to make for loans that were "in the pipeline" but had not yet

18 closed. NFC faced the same problem again with regard to its

19 December 23, 1999 payroll and asked for another forward purchase

20 transaction. This time, however, there were not enough loans "in

21 the pipeline" to secure the amount necessary to cover the full

22 payroll, and Bear refused to advance any amount that could not be

23 secured. According to Bradley’s deposition testimony, Bear

24 stated that it would not fund payroll again, regardless of how

6 1 much could be secured, because Bear was to serve as a funding

2 source for loans and not to cover payroll. Millie Freel-Mackin,

3 then a Principal Banking Examiner II of the New York State

4 Banking Department present at NFC pursuant to the Banking

5 Department's investigation of NFC following disclosure of the

6 fraud, attempted to obtain a loan to cover the payroll from a

7 company that had been a potential buyer of NFC, but was

8 unsuccessful.

9 Bradley and Freel-Mackin explained the situation to Marcus,

10 and on December 22, 1999, they saw no alternative but to close

11 NFC. However, the decision may have been made in substance at

12 least a day earlier, as Paul Friedman, a Bear executive, sent an

13 email on December 21, 1999, in which he stated that NFC would

14 close its doors on December 22. In addition, Bear issued a

15 notice of default to NFC, also dated December 21, stating that

16 "You [NFC] have also advised us that you are ceasing operations."

17 In any case, Marcus prepared a memo to NFC's employees announcing

18 NFC's closure, which was posted on NFC's door on December 23,

19 1999.

20 Appellants filed suit on December 20, 2002, and a class was

21 certified by stipulation and order on January 15, 2004. Bear

22 moved for summary judgment on April 25, 2005, as did appellants

23 on April 28, 2005. The district court entered judgment granting

24 Bear's motion and denying appellants' motion on October 17, 2005.

7 1 Coppola v. Bear Stearns & Co., No. 1:02-cv-1581,

2 (N.D.N.Y. October 17, 2005). Appellants appealed.

3 DISCUSSION

4 We review a grant of summary judgment de novo. “[S]ummary

5 judgment is appropriate where there exists no genuine issue of

6 material fact and, based on the undisputed facts, the moving

7 party is entitled to judgment as a matter of law.” D'Amico v.

8 City of New York,

, 149 (2d Cir. 1998), see also Fed.

9 R. Civ. P. 56. Material facts are those which "might affect the

10 outcome of the suit under the governing law," and a dispute is

11 "genuine" if "the evidence is such that a reasonable jury could

12 return a verdict for the nonmoving party." Anderson v. Liberty

13 Lobby, Inc.,

(1986). We view the facts in the

14 light most favorable to the non-moving party and resolve all

15 factual ambiguities in its favor. Cioffi, 444 F.3d at 162.

16 Section 2102 of WARN requires employers to give 60 days'

17 advance written notice before a plant closing or mass layoff. 29

. Section 2104 provides that "[a]ny employer who

19 orders a plant closing or mass layoff in violation of [the notice

20 requirements of] section 2102" is liable to affected employees

21 for back pay and benefits.

(a)(1). "Employer"

22 is defined as "any business enterprise that employs (A) 100 or

23 more employees, excluding part-time employees; or (B) 100 or more

24 employees who in the aggregate work at least 4,000 hours per week

8 1 (exclusive of hours of overtime)."

(a)(1).

2 The dispositive question on this appeal is whether Bear was

3 an "employer" within the meaning of WARN. Three circuits have

4 addressed the liability of a creditor under WARN for the plant

5 closing or mass layoff of its borrower. The test employed by the

6 Eighth and Ninth Circuits is whether, at the time of the plant

7 closing, the creditor was in fact "responsible for operating the

8 business as a going concern" rather than acting only to "protect

9 [its] security interest" and "preserve the business asset for

10 liquidation or sale." Chauffeurs, Sales Drivers, Warehousemen &

11 Helpers Union Local 572, Int'l Bhd. of Teamsters, AFL-CIO v.

12 Weslock Corp.,

(9th Cir. 1995) ("Weslock");

13 Adams v. Erwin Weller Co.,

(8th Cir. 1996)

14 ("Adams") ("Only when a lender becomes so entangled with its

15 borrower that it has assumed responsibility for the overall

16 management of the borrower's business will the degree of control

17 necessary to support employer responsibility under WARN be

18 achieved.").

19 This test accords with traditional principles of lender

20 liability. Under those principles, a creditor that has not

21 assumed the formal indicia of ownership may become liable for the

22 debts of its borrower if the lender’s conduct is such as to cause

23 it to become the debtor’s agent, partner, or alter ego. See

24 generally A. Gay Jenson Farms Co. v. Cargill, Inc.,

9 1 285 (Minn. 1981) (agency); Martin v. Peyton,

(N.Y.

2 1927) (partnership), Krivo Indus. Supply Co. v. Nat’l Distillers

3 & Chem. Corp.,

(5th Cir. 1973) (alter ego). On

4 each of these theories, an essential part of the inquiry is

5 whether the creditor has joined in or assumed control of the

6 borrower’s business as a going concern rather than as a means to

7 protect its security for repayment.

8 For example, in Cargill, the court affirmed a jury verdict

9 holding a lender, Cargill, liable for transactions entered into

10 by its borrower, Warren. 309 N.W.2d at 290. The court

11 emphasized that “Cargill was an active participant in Warren’s

12 operations [for some ten years] rather than simply a financier,”

13 id. at 292, and that “the reason for Cargill’s financing of

14 Warren was not to make money as a lender but, rather, to

15 establish a source of market grain for its [seed] business,” id.

16 at 293. In Martin, the New York Court of Appeals affirmed

17 judgment in favor of lender defendants and described the question

18 as “whether in fact [the lender defendants] agree[d] to so

19 associate themselves with the firm as to ‘carry on as co-owners a

20 business for profit.’”

. The court found that

21 no partnership had been created, even though the lenders had

22 imposed a complex of arrangements giving them substantial control

23 over the firm and its principals.1

24 The Third Circuit has adopted a different test, believing

10 1 that a “more targeted inquiry” than that found in general lender

2 liability cases “is appropriate” in the WARN context. Pearson v.

3 Component Tech. Corp.,

(3d Cir. 2001)

4 ("Pearson"). Pearson adopted the factors identified by the

5 Department of Labor ("DOL") as relevant to whether, for the

6 purposes of WARN, "independent contractors and subsidiaries . . .

7 are treated as separate employers or as a part of the parent or

8 contracting company," 20 C.F.R. 639.3(a)(2), as "an appropriate

9 method of determining lender liability as well as parent

10 liability."

. These factors are "(i) common

11 ownership, (ii) common directors and/or officers, (iii) de facto

12 exercise of control, (iv) unity of personnel policies emanating

13 from a common source, and (v) the dependency of operations." 20

(a)(2). Pearson reasoned that “by directing courts

15 to examine these particular factors, the Department of Labor was

16 highlighting those aspects of corporate functioning that are most

17 closely tied to the particular problems the WARN Act was intended

18 to address.”

. In addition, Pearson specified

19 that "if the evidence of the [defendant's] [de facto exercise of]

20 control with respect to the [challenged] practice is particularly

21 egregious . . . such evidence alone might be strong enough to

22 warrant liability."

.

23 Where lender liability under WARN is in issue, we believe

24 that the appropriate test is the one used by Weslock and Adams

11 1 and in the traditional principles of lender liability for the

2 debts of borrowers described above. With the exception of the

3 "de facto exercise of control," the DOL factors -- commonality of

4 ownership and directors/officers, unity of personnel policies,

5 and dependency of operations –- are standard “piercing the veil”

6 factors to be used in the case of related firms, MAG Portfolio

7 Consultant, GMBH v. Merlin Biomed Group LLC,

(2d

8 Cir. 2001), and have little direct bearing on paradigmatic

9 relationships between lenders and borrowers. Of course, the DOL

10 factors may be relevant to the question of whether the entities'

11 relationship is in fact that of parent and subsidiary rather than

12 debtor and creditor, or perhaps some combination of the two. See

13 Pearson,

(noting that "it will not always be

14 clear when a party should be characterized as a 'lender,' when a

15 party should be characterized as a parent or owner, and when a

16 party occupies both roles"). Similarly, the presence of some or

17 all of those factors in a putative debtor-creditor relationship

18 may be evidence that a lender has so entwined itself in the

19 management of the debtor’s business as to incur liability for the

20 debtor’s actions.

21 In our view, however, the dispositive question is whether a

22 creditor is exercising control over the debtor beyond that

23 necessary to recoup some or all of what is owed, and is operating

24 the debtor as the de facto owner of an ongoing business. For

12 1 reasons stated below, a creditor may exercise very substantial

2 control in an effort to stabilize a debtor and/or seek a buyer so

3 as to recover some or all of its loan or security without

4 incurring WARN liability. When the exercise of control goes

5 beyond that reasonably related to such a purpose and amounts to

6 the operation of the debtor as an ongoing business -- such as

7 when there is no specific debt-protection scenario in mind --

8 WARN liability may be incurred.

9 This test is consistent with both the text and policy of the

10 statute. “Employer” is not a word that commonly refers to

11 creditors -- even large creditors -- and at best covers

12 situations in which courts have found creditors to have

13 undertaken acts that made them “owners.”

14 Moreover, the policy of the statute would be turned on its

15 head by a test that imposed WARN liability based on the exercise

16 of control by creditors during a workout. WARN is intended to

17 cushion the blow to workers of mass layoffs or plant closures by

18 requiring 60 days’ notice by the employer. If creditors cannot

19 undertake a short-term workout that, as in the present

20 circumstances, requires an exercise of control without risking

21 WARN liability, there will be fewer workouts and more business

22 closures, many without WARN notice. Such control is essential to

23 inducing creditors to forbear and to attempt a workout. However,

24 the leverage that creditors have over businesses that can’t pay

13 1 their debts exists because everyone in such a business --

2 particularly its employees -- is better off with creditor

3 forbearance and support, even with stringent conditions, than

4 with the creditors deciding not “to throw good money after bad.”

5 For example, on the present record, there is every reason to

6 believe that the prospect of WARN liability would have caused

7 Bear to walk away in November 1999.

8 In fact, Congress foresaw that WARN liability and the needs

9 of a capital-starved business might be inconsistent and provided

10 a defense for employers where giving timely notice would have

11 impaired an employer's active efforts to obtain capital that

12 would eliminate the need for a shutdown.

(b)(1).

13 In our view, Congress could hardly have also intended an expanded

14 definition of employer that would impose WARN liability on

15 lenders who seek appropriate protective controls on borrower

16 behavior.

17 In the present case, the parties vigorously dispute the

18 events of November-December 1999. In appellants’ view, Bear took

19 over NFC and ran it: Bear fired NFC's officers, chose a

20 replacement, and regulated the loans NFC could make, effectively

21 controlling everything. In Bear’s view, it acted as a concerned

22 creditor, making suggestions here and there, and protecting

23 itself and NFC from the underwriting of improvident loans. If de

24 facto control were the question, it would, as appellants argue,

14 1 probably be a jury issue. But, even under appellants’ view, WARN

2 liability does not attach.

3 Appellants rely on a November 18, 1999 letter from NFC's

4 general counsel, Harvey Marcus, to Phil Cedar, one of Bear's in-

5 house lawyers, purportedly memorializing Bear's actions as of

6 that date, and (to some extent) Marcus's deposition testimony.

7 Appellants also make much of a November 16, 1999 memo (the

8 "Friedman Memo") from Paul Friedman, a Bear executive, to Bear’s

9 executive committee.

10 The Marcus letter, the veracity and even mailing of which is

11 disputed by Bear, states, inter alia, that Bear "took unilateral

12 control over and responsibility for the continued operations [of

13 NFC]," "unilaterally terminated the employment by NFC of

14 [certain] employees," “sent a team of its own” to underwrite and

15 purchase loans originated by NFC, and “install[ed] a

16 caretaker/manager at NFC’s Headquarters.” It also states,

17 however, that Bear’s purpose was “to facilitate [Bear’s] recovery

18 of $5.6 million unsecured and overdrawn on the Master Repurchase

19 Agreement.”

20 The Friedman Memo outlines Bear's possible response to the

21 NFC crisis and suggests some steps that would exert control,

22 i.e., firing NFC’s principals and installing an underwriter to

23 originate and purchase loans. However, the Friedman Memo’s plan

24 was intended to “allow the company to operate” for the “3-4 weeks

15 1 . . . it would take a prospective buyer to evaluate whether to

2 buy the company.”

3 Therefore, the evidence shows no more than that Bear exerted

4 the control necessary for it to attempt a workout possibly

5 resulting in the salvage of NFC. “[S]uch a power is inherent in

6 any creditor-debtor relationship and . . . the existence and

7 exercise of such a power, alone, does not constitute control for

8 the purposes of “WARN, just as it does not constitute control in

9 the ordinary alter ego context.” Krivo,

10 (internal quotation marks omitted). Viewing the facts in the

11 light most favorable to appellants, the control exerted by Bear

12 was indeed substantial but no more than was needed for a lender

13 who had been defrauded of $5.6 million by NFC’s management and

14 who was attempting to salvage a company bereft of cash.

15 We note that the facts here bear little similarity to cases

16 in which lender liability has been found, such as Cargill. Like

17 the present case, the lender there purchased all or nearly all of

18 the debtor’s output and the debtor’s operations were financially

19 dependent on the lender’s infusions of capital. 309 N.W.2d at

20 292. However, unlike the present case, the lender in Cargill did

21 so for ten years in order to get a steady supply of grain, id. at

22 288-89, while Bear took no long-term interest in the operation of

23 NFC as a business. Rather, the record shows that Bear’s conduct

24 was prompted solely by a short-term interest in facilitating the

16 1 sale of NFC as a means of salvaging some of the debt it had

2 extended. This is not sufficient to trigger WARN liability.

3 CONCLUSION

4 Accordingly, we affirm.

5

6

17 1 FOOTNOTES

2 3 1. We briefly summarize the loan agreement at issue in Martin.

In 1921, faced with mounting financial difficulties, the

brokerage firm of Knauth, Nachod & Kuhne (“KN&K”) obtained a loan

from the defendants consisting of $2,500,000 worth of liquid

securities.

. The terms of the agreement

provided the defendants with, inter alia, (1) a number of KN&K’s

own securities that were too speculative to “be used as

collateral for bank loans,” (2) 40 percent of the firm’s profits

until the return was made, and (3) an option to join the firm if

they expressed a desire to do so by a certain date.

.

Because the safety of the loan depended on KN&K’s success, the

terms of the deal granted the lenders substantial control over

the firm’s business activities.

. For example, two

of the defendants were to act as “trustees,” supervising all

transactions that affected the loaned securities.

.

Likewise, the trustees were to be consulted about other important

business matters, were entitled to any firm-related information

they sought, and were permitted to veto any transaction they

deemed too “speculative or injurious.”

Further, each member

of KN&K was “to assign to the trustees their interest in the

firm,” and agree to resign if the trustees thought “that such

resignation should be accepted.”

. As additional

18 security, the directing management of the firm was to be placed

in the hands of one particular KN&K partner -- a man whom the

defendants knew and trusted.

Despite these control

provisions, as well as several others, the court held that the

loan agreement was simply not enough to create a partnership.

19