Venture-capital and private-equity owners who control companies that end up in bankruptcy now have two notable precedents to cite if they are sued for mass layoffs where the employees were not given 60 days’ notice required by the federal Worker Adjustment and Retraining Notification Act, or WARN Act.
Although the venture capitalist was not a party to a WARN Act suit in bankruptcy court, Magistrate Judge Maria-Elena James of San Francisco held on April 11 that res judicata precluded the workers from suing the owner after the bankruptcy court had approved a settlement with the corporate debtor-employer.
In Czyzewski v. Jevic Transportation Inc. (In re Jevic Holding Corp.), 656 Fed. Appx. 617 (3d Cir. July 27, 2016), the Third Circuit held last July that workers suing an owner under the single-employer doctrine have a heavy burden to prove de facto control over a decision to shut down abruptly. To read ABI’s discussion of Jevic, click here.
The Later Suit Against the Owner
In the case before Magistrate Judge James, a company was owned and controlled by a venture-capital investor. When the owner decided to stop funding losses, the company fired all its workers and filed bankruptcy a week later.
Workers sued the bankrupt employer under the WARN Act. They did not sue the venture-capital owner, perhaps so the bankruptcy judge could enter final orders or to avoid withdrawal of the reference.
The workers’ suit against the corporate debtor was certified as a class action in bankruptcy court. The workers and the debtor agreed to a settlement, approved by the bankruptcy court, that paid the workers a portion of the wages they would have received in the 60-day period.
The settlement agreement released the corporate debtor but specifically excluded releasing the venture-capital owner.
After the settlement, the workers filed suit against the venture capital firm in district court seeking to recover the remainder of their wages. The workers contended that the owner was liable under the single-employer doctrine.
The case was assigned to Magistrate Judge James. The parties consented to having her conduct all proceedings and enter final judgment.
The workers’ complaint may have made a good case under the single-employer doctrine. The workers alleged facts to indicate common ownership, officers and directors, and de facto control. The debtor’s office was in the headquarters of the venture-capital firm.
Significantly, the complaint alleged that the head venture capitalist on his own decided to shut the company down without a board meeting or even informing the debtor’s chief executive in advance.
The Motion to Dismiss
In her April 11 opinion, Judge James granted the venture capitalist’s motion to dismiss, holding that res judicata precluded the workers from splitting their claims against the debtor and its owner.
Judge James cited the familiar elements of res judicata: identity of claims, final judgment on the merits, and privity between the parties. The first two requirements were easily met.
In substance, Judge James found privity because the very nature of the single-employer doctrine obliged the workers to allege an identity between the owner and the debtor, thus making them in privity with one another.
Consequently, the bulk of Judge James’ opinion analyzed whether there were any reasons not to apply the bar to splitting claims.
The workers argued that the settlement agreement explicitly preserved claims against the owner. However, the reservation of rights was not contained in the settlement-approval order. Judge James said there was no evidence that the bankruptcy judge considered or expressly reserved the workers’ ability to sue the owner.
The workers argued there was no privity at the time they later sued the owner. That didn’t work.
Judge James said that res judicata applied because there was privity between the owner and the debtor at the time of the WARN Act violation. She said that the workers could have sued the owner in bankruptcy court but did not.
“That the relationship [between the owner and the debtor] changed [after bankruptcy] does not preclude the application of res judicata to bar WARN Act claims,” Judge James said.
The workers contended that the corporate debtor, in the settlement agreement, consented to waiving the owner’s claim-splitting defense. Although privity may have existed when the workers were fired before bankruptcy, Judge James said that the owner no longer controlled the debtor after bankruptcy, thus ending privity and the ability to waive the owner’s rights.
Practice point: The workers might have been able to avoid dismissal if the bankruptcy court’s settlement-approval order had reserved the ability to sue the owner later. However, it is not entirely clear that a reservation of rights in an order would have been binding because the owner was not a party to the suit. On the other hand, requesting relief regarding non-waiver in the settlement motion, and serving the motion on the owner, might have been effective to avoid claim-splitting. Still, it is unclear whether an order would have been sufficient when the owner did not explicitly consent to waiving the defense of claim-splitting.