The appellants here filed a class-action lawsuit against appellees Bear Stearns & Co., Inc. (“Bear Stearns” or “Bear”), Bear Stearns Home Equity Trust, Bear Stearns International Limited, and EMC Mortgage Corporation, for violation of the Worker Adjustment and Retraining Notification Act (“WARN”), 29 U.S.C. §§ 2101-09. Appellants claim that Bear Stearns closed the principal offices of National Finance Corporation (“NFC”), their employer and a debtor of Bear Stearns, and terminated their employment without the advance written notice required by WARN. Judge Scullin granted appellees’ motion for summary judgment, holding that appellees had no liability under WARN because Bear *146 was not appellants’ “employer” within the meaning of the statute. We agree and affirm.
BACKGROUND
Given the procedural posture of this matter, we view the facts in the light most favorable to appellants.
Cioffi v. Averill Park Cent. Sch. Dist. Bd. Of Educ.,
NFC fell on hard times in the fall of 1998, and by February 1999, could not fund its continued operations. To obtain the needed funds, NFC, chiefly through David Silipigno, NFC’s then-President and CEO, retained money from sales of loans on the warehouse line that it should have paid to Bear Stearns. NFC covered its tracks by falsifying the weekly loan schedules it submitted to Bear, listing resold loans as unsold and still available as collateral on the warehouse line.
In August 1999, NFC’s misappropriations — which by that point amounted to $5.6 million of Bear’s money — were discovered by Westwood Capital (“Westwood”), a company NFC had hired to help sell NFC. In November 1999, Westwood persuaded NFC to disclose its conduct to Bear. NFC’s actions had placed NFC in default under the terms of the Master Repurchase Agreement (“MRA”) governing its relationship with Bear, and Bear consequently had the right under the MRA to seize all loans on the warehouse credit line to pay off the line. Instead, Bear pursued a workout strategy that would allow NFC to remain in business for a time in the hope of selling NFC and using the proceeds to repay Bear.
Bear refused, however, to continue to do business with the individuals responsible for the fraud. In response, David Silipig-no, Joseph Silipigno, and the other NFC personnel involved in the theft resigned as officers of NFC. Harvey Marcus, NFC’s General Counsel, volunteered to serve as the new President and CEO. He was confirmed in this position by a “Unanimous Consent” executed on November 24, 1999, by NFC’s board, which appears to have consisted solely of David and Joseph Sili-pigno. The Unanimous Consent also reflected that the Silipignos’ resignation as officers was effective as of November 23, 1999.
On November 23, 1999, NFC and Bear entered into a letter agreement (the “November 23 Agreement”) formalizing the terms on which they would agree to continue their business relationship. Because Marcus had no experience managing a mortgage business, NFC hired an individ *147 ual named Bill Bradley to run NFC until it was sold. Bear agreed to subordinate its claims against NFC to Bradley’s bonus in the event of NFC’s sale or bankruptcy.
Bear also accepted stock pledge agreements from the Silipignos representing their entire ownership interests in NFC (in total, 96% of NFC’s stock). The pledge agreements reflect that Bear was entitled to exercise its rights at any time, upon notice of its intent to the pledgors, but Bear never voted or took any action with respect to the stock.
At this point, NFC needed new sources of funding. BankBoston had terminated NFC’s operating credit line in response to NFC’s fraud. Although the November 23 Agreement left NFC free to seek other sources of capital (both from financing for loan originations and from mortgage resales), NFC did not make much (if any) effort to do so, believing that such efforts would be futile given that word of NFC’s fraud had spread through the industry. Bear itself was no longer willing to continue its warehouse line arrangement with NFC, but agreed that its subsidiary EMC Mortgage Corp. (“EMC”) would make outright purchases of certain types of loans originated by NFC. Bear hired the Clayton Group to evaluate the loans NFC proposed for purchase by EMC. The Clayton Group, serving as Bear’s underwriter, performed these evaluations on-site at NFC after NFC’s underwriters approved the loans in question.
While this arrangement enabled NFC to earn money from the purchase premiums paid by EMC and the origination fees paid by borrowers, NFC had no way as a practical matter to fund any loan that EMC was unwilling to purchase. Specifically, EMC purchased only loans falling within Bear’s “B/C subprime” criteria, and NFC was therefore no longer able to originate and sell other types of loans that had previously been part of its product mix.
In early December 1999, NFC could not meet its payroll. Bear refused to loan any money to NFC for that purpose, but did agree to a “forward purchase transaction.” Under that procedure, EMC advanced funds to NFC in the amount of payments EMC was about to make for loans that were “in the pipeline” but had not yet closed. NFC faced the same problem again with regard to its December 23, 1999 payroll and asked for another forward purchase transaction. This time, however, there were not enough loans “in the pipeline” to secure the amount necessary to cover the full payroll, and Bear refused to advance any amount that could not be secured. According to Bradley’s deposition testimony, Bear stated that it would not fund payroll again, regardless of how much could be secured, because Bear was to serve as a funding source for loans and not to cover payroll. Millie Freel-Mackin, then a Principal Banking Examiner II of the New York State Banking Department present at NFC pursuant to the Banking Department’s investigation of NFC following disclosure of the fraud, attempted to obtain a loan to cover the payroll from a company that had been a potential buyer of NFC, but was unsuccessful.
Bradley and Freel-Mackin explained the situation to Marcus, and on December 22, 1999, they saw no alternative but to close NFC. However, the decision may have been made in substance at least a day earlier, as Paul Friedman, a Bear executive, sent an email on December 21, 1999, in which he stated that NFC would close its doors on December 22. In addition, Bear issued a notice of default to NFC, also dated December 21, stating that “You [NFC] have also advised us that you are ceasing operations.” In any case, Marcus prepared a memo to NFC’s employees an *148 nouncing NFC’s closure, which was posted on NFC’s door on December 23, 1999.
Appellants filed suit on December 20, 2002, and a class was certified by stipulation and order on January 15, 2004. Bear moved for summary judgment on April 25, 2005, as did appellants on April 28, 2005. The district court entered judgment granting Bear’s motion and denying appellants’ motion on October 17, 2005.
Coppola v. Bear Steams & Co.,
No. 1:02-cv-1581,
DISCUSSION
We review a grant of summary judgment
de novo.
“[Sjummary judgment is appropriate where there exists no genuine issue of material fact and, based on the undisputed facts, the moving party is entitled to judgment as a matter of law.”
D’Amico v. City of New York,
Section 2102 of WARN requires employers to give 60 days’ advance written notice before a plant closing or mass layoff. 29 U.S.C. § 2102. Section 2104 provides that “[a]ny employer who orders a plant closing or mass layoff in violation of [the notice requirements of] section 2102” is liable to affected employees for back pay and benefits. 29 U.S.C. § 2104(a)(1). “Employer” is defined as “any business enterprise that employs (A) 100 or more employees, excluding part-time employees; or (B) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime).” 29 U.S.C. § 2101(a)(1).
The dispositive question on this appeal is whether Bear was an “employer” within the meaning of WARN. Three circuits have addressed the liability of a creditor under WARN for the plant closing or mass layoff of its borrower. The test employed by the Eighth and Ninth Circuits 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.”
Chauffeurs, Sales Drivers, Warehousemen & Helpers Union Local 572, Int’l Bhd. of Teamsters, AFL-CIO v. Weslock Corp.,
This test accords with traditional principles of lender liability. Under those principles, a creditor that has not assumed the formal indicia of ownership may become liable for the debts of its borrower if the lender’s conduct is such as to cause it to become the debtor’s agent, partner, or alter ego.
See generally A. Gay Jenson Farms Co. v. Cargill, Inc.,
For example, in
Cargill,
the court affirmed a jury verdict holding a lender, Cargill, liable for transactions entered into by its borrower, Warren.
The Third Circuit has adopted a different test, believing that a “more targeted inquiry” than that found in general lender liability cases “is appropriate” in the WARN context.
Pearson v. Component Tech. Corp.,
Where lender liability under WARN is in issue, we believe that the appropriate test is the one used by
Weslock and Adams
and in the traditional principles of lender liability for the debts of borrowers described above. With the exception of the “de facto exercise of control,” the DOL factors — commonality of ownership and directors/officers, unity of personnel policies, and dependency of operations- — are standard “piercing the veil” factors to be used in the case of related firms,
MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC,
In our view, however, the dispos-itive 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. For reasons stated below, 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. 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 when there is no specific debt — protection scenario in mind — WARN liability may be incurred.
This test is consistent with both the text and policy of the statute. “Employer” is not a word that commonly refers to creditors — even large creditors — and at best covers situations in which courts have found creditors to have undertaken acts that made them “owners.”
Moreover, the policy of the statute would be turned on its head by a test that imposed WARN liability based on the exercise of control by creditors during a workout. WARN is intended to cushion the blow to workers of mass layoffs or plant closures by requiring 60 days’ notice by the employer. If creditors cannot undertake a short-term workout that, as in the present circumstances, requires an exercise of control without risking WARN liability, there will be fewer workouts and more business closures, many without WARN notice. Such control is essential to inducing creditors to forbear and to attempt a workout. However, the leverage that creditors have over businesses that can’t pay their debts exists because everyone in such a business — particularly its employees — is better off with creditor forbearance and support, even with stringent conditions, than with the creditors deciding not “to throw good money after bad.” For example, on the present record, there is every reason to believe that the prospect of WARN liability would have caused Bear to walk away in November 1999.
In fact, Congress foresaw that WARN liability and the needs of a capital-starved business might be inconsistent and provid *151 ed a defense for employers where giving timely notice would have impaired an employer’s active efforts to obtain capital that would eliminate the need for a shutdown. 29 U.S.C. § 2102(b)(1). In our view, Congress could hardly have also intended an expanded definition of employer that would impose WARN liability on lenders who seek appropriate protective controls on borrower behavior.
In the present case, the parties vigorously dispute the events of November-December 1999. In appellants’ view, Bear took over NFC and ran it: Bear fired NFC’s officers, chose a replacement, and regulated the loans NFC could make, effectively controlling everything. In Bear’s view, it acted as a concerned creditor, making suggestions here and there, and protecting itself and NFC from the underwriting of improvident loans. If de facto control were the question, it would, as appellants argue, probably be a jury issue. But, even under appellants’ view, WARN liability does not attach.
Appellants rely on a November 18, 1999 letter from NFC’s general counsel, Harvey Marcus, to Phil Cedar, one of Bear’s in-house lawyers, purportedly memorializing Bear’s actions as of that date, and (to some extent) Marcus’s deposition testimony. Appellants also make much of a November 16, 1999 memo (the “Friedman Memo”) from Paul Friedman, a Bear executive, to Bear’s executive committee.
The Marcus letter, the veracity and even mailing of which is disputed by Bear, states, inter alia, that Bear “took unilateral control over and responsibility for the continued operations [of NFC],” “unilaterally terminated the employment by NFC of [certain] employees,” “sent a team of its own” to underwrite and purchase loans originated by NFC, and “install[ed] a caretaker/manager at NFC’s Headquarters.” It also states, however, that Bear’s purpose was “to facilitate [Bear’s] recovery of $5.6 million unsecured and overdrawn on the Master Repurchase Agreement.”
The Friedman Memo outlines Bear’s possible response to the NFC crisis and suggests some steps that would exert control, i.e., firing NFC’s principals and installing an underwriter to originate and purchase loans. However, the Friedman Memo’s plan was intended to “allow the company to operate” for the “3^4 weeks ... it would take a prospective buyer to evaluate whether to buy the company.”
Therefore, the evidence shows no more than that Bear exerted the control necessary for it to attempt a workout possibly resulting in the salvage of NFC. “[S]uch a power is inherent in any creditor-debtor relationship and ... the existence and exercise of such a power, alone, does not constitute control for the purposes of “WARN,” just as it does not constitute control in the ordinary alter ego context.”
Krivo,
We note that the facts here bear little similarity to cases in which lender liability has been found, such as
Cargill.
Like the present case, the lender there purchased all or nearly all of the debtor’s output and the debtor’s operations were financially dependent on the lender’s infusions of capital.
CONCLUSION
Accordingly, we affirm.
Notes
. 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.