Pearson v. Component Technology Corp.

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
4-13-2001
Pearson v. Component Tech Corp
Precedential or Non-Precedential:
Docket 00-3056
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Filed April 13, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-3056
THOMAS PEARSON; JOHN KOWALKOWSKI, on behalf of
themselves and all others similarly situated, Appellants
v.
COMPONENT TECHNOLOGY CORPORATION a/k/a
COMPTECH; GENERAL ELECTRIC CAPITAL
CORPORATION; TIFD VIII-R, INC.;
THOMAS P. AGRESTI, ESQ.; KENNETH CHESTEK, Trustees
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civ. No. 94-cv-00293)
District Judge: Honorable Maurice B. Cohill, Jr .
Argued: October 24, 2000
Before: BECKER, Chief Judge, SCIRICA and FUENTES,
Circuit Judges.
(Filed: April 13, 2001)
ROLF L. PATBERG, ESQUIRE
(ARGUED)
Patberg, Carmody & Ging
527 Court Place
Pittsburgh, PA 15219
RICHARD E. FILIPPI, ESQUIRE
Filippi & Nies
303 French Street
Erie, PA 16507
Counsel for Appellants
RICHARD A. LANZILLO, ESQUIRE
(ARGUED)
Know, McLaughlin, Gornall &
Sennett, P.C.
120 West Tenth Street
Erie, PA 16501
Counsel for Appellees GE Capital
Corporation and TIFD VIII-R Inc.
OPINION OF THE COURT
BECKER, Chief Judge.
The Worker Adjustment and Retraining Notification Act of
1988 (the WARN Act), 29 U.S.C. S 2101 et seq., mandates
that employers provide workers with 60 days' notice
(subject to certain exceptions not at issue in this appeal)
prior to a plant closing or mass layoff, and allows various
remedies for workers when closures ar e not preceded by
the requisite notification. Because a plant closure often
presages a corporation's demise, leaving workers with no
source of satisfaction from their employer , plaintiffs have
frequently sought damages from affiliated corporations. In
a parallel series of cases, plaintiffs with claims arising from
non-WARN Act sources of law against debt-laden or
bankrupt corporations have occasionally attempted to sue
the corporations' major secured lenders, on the theory that
the lenders have exercised such control over the
corporations that veil-piercing is appr opriate. This case
implicates both lines of precedent.
The question before us is whether the for mer employees
of Component Technology (CompTech), a now-defunct
company, have set forth sufficient evidence to cr eate a
genuine issue of material fact as to whether , under
standards we must fashion for this Circuit, CompTech's
major secured lender, General Electric Capital Corporation
(GECC), should incur WARN Act liability for CompTech's
unnoticed plant closure. This question, in tur n, requires us
to consider not only the prerequisites for parent/subsidiary
liability in the WARN Act context (as will be shown, that
2
jurisprudence is apposite here), but also whether the
prerequisites change in the context of lender/borrower
relationships.
The Department of Labor (DOL) has issued a r egulation
setting forth relevant factors for courts to use when
considering whether to impose WARN Act liability on a
parent corporation. See 20 C.F.R. S 639.3(a)(2). These
factors closely resemble, but do not pr ecisely mirror, the
"single employer" or "integrated enterprise" test, frequently
utilized for similar purposes in labor and employment law.
The Department has also issued a statement explaining its
intention that jurisprudence under the WARN Act not
deviate from "existing law" with r egard to liability for
affiliated corporations. See 54 Fed. Reg. 16,045 (Apr. 20,
1989). The tension between "existing law" and the
regulatory factors has led to considerable confusion among
courts as to the appropriate standards to apply for WARN
Act veil-piercing. Compare United Paperworkers Int'l Union
v. Alden Corrugated Container Corp., 901 F . Supp. 426,
436-39 (D. Mass. 1995), with Wholesale & Retail Food
Distrib. Local 63 v. Santa Fe Terminal Servs., Inc., 826 F.
Supp. 326, 334-35 (C.D. Cal. 1993). To further compound
the problem, when it comes to lenders rather than parents
in other areas of law, courts have been extr emely reluctant
to hold lenders liable for their borrowers' actions; usually,
some version of the "alter ego" or "instrumentality" test for
liability is used, often with an especial vigor . These tests are
far less hospitable to plaintiffs than labor law's "integrated
enterprise" test, and, apparently, than the Department of
Labor factors. Thus, the law is presently unsettled as to the
proper test for liability under the WARN Act, and as to the
significance for WARN Act purposes of an affiliated
corporation's status as "lender" or "par ent."
In this case, GECC loaned large sums of money to
CompTech, and CompTech fell into default. Exercising its
rights under the loan agreements, GECC voted CompTech's
stock and installed a new slate of directors and a new Chief
Executive Officer, to whom title of the stock was
transferred. For the next few years, GECC and CompTech
maintained a close relationship as CompT ech struggled to
survive as a going concern; when CompT ech finally was
3
unable to turn a profit, GECC declined to provide further
cash infusions. CompTech, unable to secur e new financing,
collapsed and shut down its operations without giving
WARN Act notice. A class of former CompTech employees
have now brought suit against GECC under the W ARN Act.
We conclude that the appropriate test to employ under
the WARN Act for affiliated corporate liability is the multi-
factored test promulgated by the DOL. W e believe that the
DOL's instruction that courts apply "existing law" to
questions involving intercorporate liability was not intended
to undermine the force of its own r egulation on the subject,
but was instead intended to instruct courts that existing
precedent applying other tests (such as the"integrated
enterprise" test) may be useful and appropriate to resolve
analogous questions arising under the WARN Act. We also
observe that the regulation indicates that the listed factors
are not an exhaustive list, which we interpr et as a reminder
that the test is one of balancing, and that, as with any
balancing test, a number of circumstances not specifically
enumerated may be relevant.
We must also determine whether GECC's initial status as
a secured lender affects the test we choose to employ for
WARN Act liability, and we must further decide whether,
under the appropriate test, the District Court erred in
concluding that plaintiffs had not put forth sufficient
evidence to create a genuine issue of material fact as to
GECC's liability. We ultimately hold that because the lines
separating "parents" from "lenders" are not often bright
ones, the simpler approach is to apply the same test for
liability regardless of the formal label the corporations have
attached to their association. Our conclusion is
strengthened by our recognition that deter mining liability
by reference to whether a lender has behaved in a "typical"
manner, as did the District Court in this case, carries with
it the risk of unintentionally altering what is"typical," as
lenders structure their relationships with borrowers to
respond to the practices that we ourselves have proclaimed
"typical." Therefore, we take a mor e functional approach to
determining whether or not to "pier ce the veil" under WARN
by focusing on the nature and degree of control possessed
by one corporation over another; in so doing, however,
4
particular weight must be accorded, wher e applicable, to a
lack of ownership interest between corporations.
Applying the DOL factors to the circumstances presented
in this case, we hold that even if GECC did, in the course
of its relationship with CompTech, technically become a
"parent" corporation, its actions never r eached the point
where even a more conventional par ent would become
liable. Therefore, the District Court's grant of summary
judgment to GECC was proper, and we will affirm the
judgment.
I. Facts and Procedural History
Component Technology, a Delaware corporation with
headquarters in Erie, Pennsylvania, was a custom injection
molder whose business was to manufacture plastic objects
in accordance with corporate customers' specifications,
principally in the business machine and medical pr oducts
markets. R&R Plastics (R&R) was, at that time, a wholly-
owned subsidiary of CompTech.
In June 1989, CompTech was poised to enter into a
profitable new arrangement with Kodak, wher eby
CompTech would manufacture plastic components for a
revolutionary new photocopier. In anticipation of the capital
expansion that the venture would requir e, CompTech
sought and obtained a $25,000,000 loan from GECC. The
loan was formally structured as a loan to the Chicago
Plastics Products Corporation (Chicago Plastics), a holding
company formed for the purpose of acquiring CompTech.
As security for its loan, GECC received pledge agreements
for all of the stock in Chicago Plastics, CompT ech, and
R&R, including the right to vote the stock in the event of a
default.
Shortly after Chicago Plastics purchased CompT ech, the
Kodak project was canceled due to "technical
obsolescence." CompTech's business immediately faltered,
resulting in default on the GECC loan in 1991. GECC
exercised its rights under the pledge agr eements and voted
its stock to install new boards of directors of the three
corporations. The new directors, in tur n, chose new
corporate officers. On July 10, 1991 GECC hir ed a
5
consultant with experience in the plastics industry, Thomas
Gaffney, to serve as Chief Executive Officer of Chicago
Plastics, CompTech, and R&R.
At some point in late 1991 or early 1992, GECC V ice-
President Jeanette Chen began to manage the CompTech
account. In March, she drafted an inter nal credit
memorandum outlining a proposed strategy to r estructure
CompTech's loans. The memo explained that for GECC to
"[m]aximize debt recovery" it would need to "hold[ ]
investment for sufficient time period to implement
merger/acquisition strategy, rebuild customer base, and
return Company to profitability." Pursuant to the
recommendations contained in the memo, GECC wr ote off
$20,000,000 of CompTech's debt and restructured the
remaining debt as term loans of $3,500,000, a revolving
line of credit of $3,500,000, and nonvoting pr eferred stock
of $4,000,000.
GECC then renewed its agreement with Gaf fney and
arranged for a private foreclosure sale of CompTech's stock
from Chicago Plastics. The stock was sold to Component
Technology Acquisition Company (Acquisition), a wholly-
owned subsidiary of Component Technology Holdings
Corporation (Holdings). Acquisition was then mer ged into
CompTech. Sixty percent of the stock in Holdings was
transferred to Gaffney; forty per cent was transferred to
Richard Brooks, the newly-appointed pr esident of
CompTech. GECC retained a pledge on all of the CompTech
common stock, and neither Gaffney nor Br ooks paid any
compensation for their stock. As part of the consulting
agreement, GECC indemnified Gaffney for all liabilities
(other than misconduct) arising out of his duties as CEO of
the companies and as shareholder of Holdings.
As a final step in the restructuring outlined in the Chen
memo, CompTech acquired a plastics company known as
Accuform and merged it with R&R. Thus, after these
maneuvers, all of CompTech's stock was owned by a single
holding company, Holdings, which, in turn, was owned by
Gaffney and Brooks. Gaffney, the CEO of CompTech, was
under contract to GECC to run the company, and had been
indemnified by GECC for liabilities arising both out of his
activities as CEO and his activities as a shar eholder.
6
The loan agreement, together with the $4,000,000 worth
of nonvoting preferred stock held by GECC, provided GECC
with a considerable amount of control over CompTech's
finances. The loan agreement and GECC's stock ownership
entitled GECC to receive certain scheduled payments and,
in the event of two consecutive defaults or four defaults
overall, to vote in new directors and assume control of
CompTech until the deficiency was paid. No dividends
could be paid on common stock until GECC had r eceived
its preferred payments. Without prior authorization from
GECC, CompTech was forbidden to engage in stock
reorganization, lending or borrowing, mergers or
acquisitions, large-scale capital expenditur es, or selling of
assets encumbered by liens securing GECC loans. Further,
GECC retained the right to approve any employee salaries
in excess of $100,000 per year -- a restriction apparently
intended to enable GECC to monitor the hiring of key
personnel. Finally, GECC received warrants on 75% of
CompTech's stock, 24% of which were to be gradually
returned to CompTech as the loans were repaid, although
there is no indication in the recor d of when, if ever, the
remaining 51% were to be relinquished. As it turned out,
CompTech was only able to pay a single dividend to GECC,
in 1993, by using monies drawn from the r evolving line of
credit.
As CompTech continued to operate with the new loans in
place, GECC exercised continuing oversight of its finances
pursuant to the loan agreement, occasionally agreeing to
waive penalties and extend further loans to the cash-
strapped company. CompTech, in accordance with the
agreement, sought approval of a number of its decisions,
including executive compensation and benefits, and the
sale of equipment. CompTech also provided GECC with
updates concerning its financial condition. GECC's
approval was required when CompT ech sought to create a
Mexican subsidiary to service one of its customers, and in
connection with the deal, GECC waived its security interest
in relevant equipment, receiving in r eturn a pledge on all of
the stock owned by CompTech in the new ventur e.
In early 1994, CompTech sold R&R, and the pr oceeds of
the sale were used to prepay GECC in accor dance with the
7
terms of the loan agreement. Later that year, Gaffney wrote
to GECC outlining CompTech's current status and its
proposed projects, seeking approval for those proposals
relating to the Accuform acquisition. The letter concluded
by saying "We need to know what G.E. wants us to do. We
are proceeding with items 2, 3 and 4, but we need to get
confirmation from G.E. on each one of these items.
Obviously, without G.E.'s help we cannot proceed to
complete our plans. I am prepared to do whatever G.E.
wants relative to CompTech."
The next month, GECC determined that as CEO of
CompTech, Gaffney was too focused on"grandiose
schemes" for the company and spent too little time on the
day-to-day operations. According to the deposition of GECC
Vice-President Ed Christie, it was for this reason GECC
elected not to renew Gaffney's contract and asked him to
step down as CEO. Gaffney had recentlyfired Brooks as
president and replaced him with Charles V illa; GECC chose
to hire Villa as the new president and CEO. In order to
transfer power from Gaffney to Villa, both Gaffney and
Brooks sold their stock back to Holdings for a nominal
price, and Holdings reissued the stock to V illa. Villa then
pledged the shares to GECC, and granted GECC the
unconditional power to transfer and assign the stock.
At some point after the plans for these transfers had
been laid, but before the shift in ownership had actually
taken place, Villa sent a letter to Chen detailing the current
status of CompTech's attempts to resuscitate its business
and requesting GECC's further support to finance its
growth and upgrade its facilities. The letter concluded by
stating that "G.E. needs to make decisions now on all the
issues outlined in this memo. How you respond will then
dictate what the management of COMPTECH will need to
do to accomplish the task at hand. We can either move
forward in an aggressive, systematic appr oach to take
advantage of industry dynamics and market windows
available now or we can remain stagnant and loose [sic] any
competitive edge that may exist resulting in a slow death of
a one-time INDUSTRY LEADER. The choice is yours to
make."
8
When the stock transfers finally were completed in late
June 1994, a number of new rights were granted to GECC.
At any time within the first six months, GECC could force
Villa to sell his shares to GECC for the same nominal
amount that he had paid (the Villa Call). Further, at any
time -- either before or after the first six months -- GECC
could force Villa to sell a portion of the stock for value,
either to GECC or to a GECC designee (the Bring-Along
Call). The purpose of the Villa Call was to enable GECC to
"assess Villa's abilities on a trial basis," and, should he
prove to be unsatisfactory, easily transfer the shares to a
new president. The stated purpose of the Bring-Along Call
was to allow GECC to sell CompTech if it so chose. Villa, as
the stockholder, had the right to vote the shares so long as
CompTech stayed current with loan payments; however, it
appears that CompTech was in default either at the time of
the transfer or shortly thereafter, so that in fact, GECC at
all times possessed the voting rights. GECC acknowledged
in its internal memoranda that, as a r esult of these options,
it was potentially responsible for the company's liabilities
under the Employee Retirement Income Security Act of
1974 (ERISA), 29 U.S.C. S 1001 et seq. However , because by
this time CompTech had frozen its benefits plans and could
not create new ones without GECC approval, there was no
risk that GECC would involuntarily become liable for
payments under ERISA.
Simultaneous with the stock transfer, GECC r equested
that CompTech hire Stuart Benton as an industry
consultant to "help assess the Company's ongoing cash
needs and determine an appropriate account strategy for
GECC going forward." Benton was also to function as a
"backup" president should Villa fail to meet GECC
expectations. Although Benton was formally under contract
to CompTech, several CompTech employees testified in
deposition that they understood him to be a GECC
representative.
Benton observed the CompTech operation for the next
few months, until the plant closed. Deposition testimony
from CompTech's upper-level managers demonstrates that
although he occasionally made suggestions to the
managers, Benton largely worked with V illa and did not
9
direct or interfere with the duties of the other management
personnel. None of the upper-level managers, including
Villa, reported any attempts by GECC to control
CompTech's operations, through Benton or through anyone
else. Other than the financial controls and stock interests
described above, GECC had no formal authority to control
CompTech's business decisions, including its strategic
planning, its relationships with clients, its marketing, its
product selection, its product design, or its quality control.
By August 1994, CompTech was contemplating a plant
closure, going so far as to contact its attor neys to inquire
about its WARN Act obligations. In September 1994,
CompTech informed GECC that it would r equire further
cash outlays to continue operations through the end of the
year. CompTech also sought financing from Citibank
Venture Capital Limited, but Citibank would only provide
financing if GECC continued to do so as well. GECC
refused to provide further funds, either with or without
Citibank's participation, and, on September 30, Chen
drafted an internal memorandum sketching out a proposal
for an "orderly liquidation" of the company. Negotiations for
CompTech's liquidation began in October 1994, and on
October 14, 1994, employees were formally notified of the
plant closing, effective immediately.
The former employees of CompTech filed this action
against GECC in the District Court for the W estern District
of Pennsylvania on November 2, 1994. On December 17,
1999, after discovery, the District Court granted GECC's
motion for summary judgment on the ground that the
plaintiffs had failed to demonstrate that GECC, as a lender,
had "exhibit[ed] such a high degree of control over the
debtor corporation" so as to become an "employer" within
the meaning of the WARN Act. Pearson v. Component Tech.
Corp., 80 F. Supp. 2d 510, 518 (W.D. Pa. 1999). The court
also rejected the plaintiffs' attempts to argue for veil-
piercing liability based on GECC's status as a parent
corporation of CompTech, reasoning that GECC was not a
parent and that its actions were "consistent with its role as
CompTech's secured creditor." Id. at 523.
On appeal, the plaintiffs argue that: (1) GECC was an
employer within the meaning of the WARN Act as a matter
10
of law by virtue of its ownership of CompTech stock
options; and (2) GECC was a parent corporation of
CompTech under circumstances justifying veil-piercing
under WARN Act standards. The District Court had
jurisdiction pursuant to 28 U.S.C. S 1331, and we have
jurisdiction pursuant to 28 U.S.C. S 1291. W e exercise
plenary review over a District Court's grant of summary
judgment. See Coolspring Stone Supply, Inc. v. American
States Life Ins. Co., 10 F.3d 144, 146 (3d Cir. 1993). We set
forth the familiar summary judgment standard in the
margin.1
II. Liability for Affiliated Corporations Under
the WARN Act
A. Introduction
In the wake of numerous plant closings and mer gers in
the 1970s and 1980s, Congress passed the W ARN Act. See
Hotel Employees & Rest. Employees Int'l Union Local 54 v.
Elsinore Shore Assocs., 173 F .3d 175, 182 (3d Cir. 1999).
The Act was intended to protect workers by r equiring that
companies with advance knowledge of an imminent closing
provide notice to employees, so as to allow"workers and
their families some transition time to adjust to the
prospective loss of employment, to seek and obtain
alternative jobs and, if necessary, to enter skill training or
retraining that will allow these workers to successfully
compete in the job market." 20 C.F.R.S 639.1(a). Thus, the
Act states that:
An employer shall not order a plant closing or mass
layoff until the end of a 60-day period after the
employer serves written notice of such an or der . . . to
_________________________________________________________________
1. Summary judgment is proper if ther e is no genuine issue of material
fact and if, viewing the facts in the light most favorable to the non-
moving party, the moving party is entitled to judgment as a matter of
law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317,
322
(1986). At the summary judgment stage, the judge's function is not to
weigh the evidence and determine the truth of the matter, but to
determine whether there is a genuine issue for trial. See Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).
11
each representative of the affected employees as of the
time of the notice or, if there is no such representative
at that time, to each affected employee. . . .
29 U.S.C. S 2102(a)(1).
The Act defines an employer as "any business enterprise"
that employs 100 or more employees. Id.S 2101(a).
Employers violating the Act are liable for backpay and back
benefits. See id. S 2104(a). Thus, the question presented by
this litigation is whether, under these facts, GECC was the
plaintiffs' employer. In order to make such a showing, the
plaintiffs must establish GECC to be a single"business
enterprise" with CompTech such that it is r esponsible for
CompTech's WARN Act obligations.
The question when affiliated corporations will be
considered a single employer for WARN Act purposes tends
to arise in two contexts: (1) when plaintiffs seek to impose
liability for violations on affiliates of insolvent corporations,
see, e.g., Local 397, Int'l Union of Electronic, Elec. Salaried
Mach. & Furniture Workers v. Midwest Fasteners, Inc., 779
F. Supp. 788 (D.N.J. 1992); and (2) when plaintiffs seek to
establish that two or more affiliated corporations should be
viewed as a single enterprise in order to meet the 100
employee WARN Act threshold, see, e.g., Watts v. Marco
Holdings, L.P., No. 3:95CV88-B-A, 1997 WL 578783 (N.D.
Miss. Aug. 8, 1997). The WARN Act itself does not address
such situations, but the Department of Labor r egulations
issued under the Act provide that:
Under existing legal rules, independent contractors and
subsidiaries which are wholly or partially owned by a
parent company are treated as separate employers or
as a part of the parent or contracting company
depending upon the degree of their independence from
the parent. Some of the factors to be consider ed in
making this determination are (i) common ownership,
(ii) common directors and/or officers, (iii) de facto
exercise of control, (iv) unity of personnel policies
emanating from a common source, and (v) the
dependency of operations.
20 C.F.R. S 639.3(a)(2). The five factors will hereinafter be
referred to as the "DOL factors."
12
The Department of Labor's "supplementary infor mation"
regarding its WARN Act regulations explains that:
The intent of the regulatory provision r elating to
independent contractors and subsidiaries is not to
create a special definition of these ter ms for WARN
purposes; the definition is intended only to summarize
existing law that has developed under State
Corporations laws and such statutes as the NLRA, the
Fair Labor Standards Act (FLSA) and the Employee
Retirement Income Security Act (ERISA). The
Department does not believe that there is any r eason to
attempt to create new law in this area especially for
WARN purposes when relevant concepts of State and
federal law adequately cover the issue.
54 Fed. Reg. 16,045 (Apr. 20, 1989).
The intersection of the regulatory factors and the
supplementary information has created considerable
confusion among courts searching for a single test to
determine the status of affiliated corporations. See Cynthia
Nance, Affiliated Corporation Liability Under the WARN Act,
52 Rutgers L. Rev. 495, 535-36 (2000) [her einafter Nance,
WARN Act] (describing contradictory holdings). The problem
arises because the jurisprudence contains several tests for
determining when two corporations compose a single entity
depending on whether the cause of action accrues under
state or federal law, as well as on the particular type of
claim at issue. Further, the DOL factors do not precisely
correspond to any of the established tests for such
determinations. Courts examining affiliated corporations
under the WARN Act have often applied two or more tests,
purporting to "average" the results, usually without any
systematic method for doing so. See, e.g., United
Paperworkers Int'l Union v. Alden Corrugated Container
Corp., 901 F. Supp. 426, 436-39 (D. Mass. 1995)
(conducting, inter alia, a state alter ego test, but ultimately
jettisoning the results on the ground that federal liability
standards should not turn on state pr otections for
corporations).
A further complication comes from the fact that we have
before us in this case not the traditional par ent/subsidiary
13
relationship but a relationship that began as an
arrangement between a secured lender and a borr ower -- a
situation unaddressed by either the Act or the regulations.
Thus, we must determine whether the "standard" WARN
Act test -- whatever test that might be -- is even applicable
under these circumstances. To that end, we will first briefly
sketch some of the methods available for deter mining
intercorporate WARN Act liability, ultimately concluding
that rather than simply choosing one of the "established"
tests and importing it to the WARN Act context, the
appropriate test is the one specifically delineated in the
DOL regulation. We further conclude that the
supplementary information provided by the Department of
Labor was not intended to encourage courts to choose a
different test, but was merely intended to clarify that courts
may draw on concepts in existing precedent when
interpreting and applying the DOL factors. W e will then
turn to the question whether the DOL factors should apply
to situations involving lenders rather than par ents,
ultimately concluding that the factors should be the same
for both.
B. Liability Between Parents and Subsidiaries
1. Traditional Veil-Pier cing Theories
The corporate form was created to allow shareholders to
invest without incurring personal liability for the acts of the
corporation. These principles are equally applicable when
the shareholder is, in fact, another corporation, and hence,
mere ownership of a subsidiary does not justify the
imposition of liability on the parent. See United States v.
Bestfoods, 524 U.S. 51, 69 (1998); American Bell Inc. v.
Federation of Tel. Workers of Pa., 736 F.2d 879, 887 (3d Cir.
1984). Nor will liability be imposed on the par ent
corporation merely because directors of the parent
corporation also serve as directors of the subsidiary. See
Bestfoods, 524 U.S. at 69. However, under both state and
federal common law, abuse of the corporate for m will allow
courts to employ the "tool of equity" known as veil-piercing,
i.e., disregard of the corporate entity to impose liability on
the corporation's shareholders. Publicker Indus., Inc. v.
14
Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979).
Courts have held veil-piercing to be appr opriate "when the
court must prevent fraud, illegality, or injustice, or when
recognition of the corporate entity would defeat public
policy or shield someone from liability for a crime," Zubik v.
Zubik, 384 F.2d 267, 272 (3d Cir. 1967), or when "the
parent so dominated the subsidiary that it had no separate
existence," New Jersey Dep't of Envtl. Pr ot. v. Ventron Corp.,
468 A.2d 150, 164 (N.J. 1983).
The Third Circuit alter ego test is fairly typical of the genre.2
It requires that the court look to the following factors: gross
undercapitalization, failure to observe corporate formalities,
nonpayment of dividends, insolvency of debtor corporation,
siphoning of funds from the debtor corporation by the
dominant stockholder, nonfunctioning of officers and
directors, absence of corporate recor ds, and whether the
corporation is merely a facade for the operations of the
dominant stockholder. See American Bell , 736 F.2d at 886.
Other (similar) formulations are set forth in the margin.3
_________________________________________________________________
2. Although the tests employed to determine when circumstances
justifying "veil-piercing" exist are variously referred to as the "alter
ego,"
"instrumentality," or "identity" doctrines, the formulations are generally
similar, and courts rarely distinguish them. See Phillip I. Blumberg, The
Law of Corporate Groups: Substantive Law S 6.01, at 111 (1987). The
most important differences across jurisdictions seem to reside largely in
two aspects of these different for mulations: first, whether an element of
"fraudulent intent," inequitable conduct, or injustice is explicitly
required, see id. S 6.02, at 115, and second, a general sense that federal
courts are more likely to pierce the veil in order to effectuate federal
policy, lest state corporate laws be permitted to frustrate federal
objectives, see Anderson v. Abbott, 321 U.S. 349, 365 (1944); United
Elec., Radio & Mach. Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d
1080, 1092 (1st Cir. 1992).
3. For comparison, the Massachusetts version r equires consideration of
common ownership, pervasive control, inter mingling of activity and
assets, undercapitalization, lack of corporate formalities, absence of
records, nonpayment of dividends, insolvency at the time of the relevant
transaction, siphoning of corporate assets by shar eholders,
nonfunctioning officers and directors, use of the corporation for the
transactions of dominant shareholders, and use of the corporation for
fraud. See Evans v. Multicon Constr. Corp., 574 N.E.2d 395, 398 (Mass.
App. Ct. 1991). The Illinois version considers the failure to maintain
records and formalities, commingling of funds, undercapitalization, and
one corporation treating the assets of the other as its own. See Van Dorn
Co. v. Future Chem. & Oil Corp., 753 F .2d 565, 570 (7th Cir. 1985).
15
The test, whether or not a particular version r equires an
element of fraudulent intent, see supra note 2, is
demonstrably an inquiry into whether the debtor
corporation is little more than a legal fiction. Such a
burden is notoriously difficult for plaintif fs to meet. For
instance, courts have refused to pierce the veil even when
subsidiary corporations use the trade name of the parent,
accept administrative support from the par ent, and have a
significant economic relationship with the parent. See, e.g.,
Jackson v. General Elec. Co., 514 P.2d 1170 (Alaska 1973).
Thus, in order to succeed on an alter ego theory of liability,
plaintiffs must essentially demonstrate that in all aspects of
the business, the two corporations actually functioned as a
single entity and should be treated as such. See RRX
Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 545 (9th Cir.
1985) (veil-piercing is appropriate when"the personalities of
the corporation and individual are no longer separate");
Akzona Inc. v. E.I. Du Pont De Nemours & Co., 607 F. Supp.
227, 237 (D. Del. 1984) (a subsidiary is an alter ego or
instrumentality of the parent when "the separate corporate
identities . . . are a fiction and . . . the subsidiary is, in fact,
being operated as a department of the parent").
2. "Integrated Enterprise" Test
Veil-piercing doctrine has been criticized for employing
the same formulations of the test across the different
contexts in which plaintiffs seek to impose liability. See
Phillip I. Blumberg, The Law of Corporate Groups:
Substantive Law S 6.01, at 107-08 (1987); cf. William H.
Lawrence, Lender Control Liability: An Analytical Model
Illustrated with Applications to the Relational Theory of
Secured Financing, 62 S. Cal. L. Rev. 1387, 1388 (1989)
[hereinafter Lawrence, Lender Contr ol Liability] (criticizing
the use of similar "indicia of control" for lender liability
cases regardless of context). It is often argued that because
public policy varies from contract to tort to property, for
example, veil-piercing standards should vary as well. See,
e.g., Robert B. Thompson, Piercing the Corporate Veil: An
Empirical Study, 76 Cornell L. Rev. 1036 (1991). These
concerns have been partially addressed through the
"integrated enterprise" test for the pr esence of a single
16
employer, a sort of labor-specific veil-piercing test, first
developed by the National Labor Relations Boar d.
Because the Board was concerned only with labor law
and policy, it developed a test for corporate "sameness"
that, likewise, concerned itself only with those aspects of
corporations having a direct relevance to labor relations.
So, for example, the integrated enterprise test is not
concerned with such traditional alter ego hallmarks as
"nonpayment of dividends," because such aspects of a
corporation's finances are not as dir ectly related to
management's labor policy as are other aspects of corporate
functioning. See Nance, WARN Act , supra, at 533. Rather,
the test looks to four labor-related characteristics of
affiliated corporations: interrelation of operations; common
management; centralized control of labor r elations; and
common ownership or financial control. See, e.g., Radio &
Television Broad. Techs. Local Union 1264 v. Broadcast
Serv. of Mobile, 380 U.S. 255, 256 (1965) (per curiam). No
single factor is dispositive; rather, single employer status
under this test "ultimately depends on all the
circumstances of the case." NLRB v. Br owning-Ferris Indus.
of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir . 1982).
As originally designed, the integrated enterprise test was
used by the National Labor Relations Board to determine
whether two firms were sufficiently r elated to meet its
jurisdictional minimum amount of business volume. See
Stephen F. Befort, Labor Law and the Double-Breasted
Employer: A Critique of the Single Employer and Alter Ego
Doctrines and a Proposed Reformulation , 1987 Wis. L. Rev.
67, 75. Later, the Board came to use the same test to
determine whether nominally separate fir ms constituted
"neutral" entities in the context of secondary boycotts, and
to determine whether an employer had imper missibly
"double-breasted" operations so as to avoid the obligations
of a collective bargaining agreement. See id. at 75-76.4
Since its initial formulation, the test has been applied by
courts in other employment contexts, including the Labor
_________________________________________________________________
4. In a "double-breasted" operation, a company divides its business into
union and nonunion shops. See Limbach Co. v. Sheet Metal Workers Int'l
Ass'n, 949 F.2d 1241, 1245 (3d Cir . 1991).
17
Management Relations Act, see International Bhd. of
Teamsters Local 952 v. American Delivery Serv. Co., Inc., 50
F.3d 770 (9th Cir. 1995); Title VII and the Age
Discrimination in Employment Act, see Frank v. U.S. West,
Inc., 3 F.3d 1357 (10th Cir. 1993); the Americans with
Disabilities Act, see EEOC v. Chemtech Int'l Corp., 890 F.
Supp. 623 (S.D. Tex. 1995); and the Fair Labor Standards
Act, see Takacs v. Hahn Auto. Corp., No. C-3-95-404, 1999
WL 33117265 (S.D. Ohio Jan. 4, 1999). But see Papa v.
Katy Indus., Inc., 166 F.3d 937, 940-43 (7th Cir. 1999)
(rejecting the integrated enterprise test in the context of
antidiscrimination law). Department of Labor r egulations
have also adopted the integrated enterprise test for the
Family Medical Leave Act. See 29 C.F .R. 825.104(c)(2).
The integrated enterprise test, with its focus only on
labor relations and its emphasis on economic r ealities as
opposed to corporate formalities, see Phillip I. Blumberg,
The Law of Corporate Groups: Problems of Parent and
Subsidiary Corporations Under Statutory Law of General
Application S 13.03, at 398 (1989), is demonstrably easier
on plaintiffs than traditional veil pier cing. Ultimately, "the
policy underlying the single employer doctrine is the
fairness of imposing liability for labor infractions where two
nominally independent entities do not act under an arm's
length relationship." Murray v. Miner , 74 F.3d 402, 405 (2d
Cir. 1996).
3. Direct Liability
Although not often employed to hold parent corporations
liable for the acts of subsidiaries in the absence of other
hallmarks of overall integration of the two operations, it has
long been acknowledged that parents may be"directly"
liable for their subsidiaries' actions when the"alleged wrong
can seemingly be traced to the parent thr ough the conduit
of its own personnel and management," and the par ent has
interfered with the subsidiary's operations in a way that
surpasses the control exercised by a par ent as an incident
of ownership. United States v. Bestfoods, 524 U.S. 51, 64
(1998) (quoting William O. Douglas & Carr ol M. Shanks,
Insulation from Liability Through Subsidiary Corporations,
39 Yale L.J. 193, 207 (1929)). In such situations, the parent
18
has not acted on its own (in which case ther e would be no
need even to consider the subsidiary's actions), nor has it
acted in its capacity as owner of the subsidiary; rather, it
has forced the subsidiary to take the complained-of action,
in disregard of the subsidiary's distinct legal personality.
See Esmark, Inc. v. NLRB, 887 F.2d 739, 756-57 (7th Cir.
1989). Thus, in the labor context, "direct" liability may
attach if the parent has overridden the subsidiary's
ordinary decision-making process and or dered it to
institute an unfair labor practice, or to cr eate
discriminatory hiring policies. See id. at 757. In this way,
direct liability functions essentially as a kind of
"transaction-specific" alter ego theory. Id. at 756.
Although direct liability is rarely used independently to
hold parents liable for their subsidiary's actions, it has
often been used in conjunction with the "integrated
enterprise" test for liability, particularly to satisfy the
"control of labor" prong. For instance, the Ninth Circuit in
UA Local 343 of the United Ass'n of Jour neymen &
Apprentices of the Plumbing & Pipefitting Industry of the
United States & Canada v. Nor-Cal Plumbing, Inc., 48 F.3d
1465 (9th Cir. 1995), held that the "contr ol of labor" prong
of the integrated enterprise test may be established either
by a showing of day-to-day control of labor , or by a showing
that the parent was specifically responsible for the labor
practice at issue in the litigation. See id. at 1471. Other
courts have explained that all four factors of the integrated
enterprise test are to be employed solely with an eye to
discerning which entity -- the parent or the subsidiary --
was the final decisionmaker for the challenged practice.
See, e.g., Hukill v. Auto Care, Inc. , 192 F.3d 437, 444 (4th
Cir. 1999); Lusk v. Foxmeyer Health Corp. , 129 F.3d 773,
777 (5th Cir. 1997). Thus, the "dir ectness" of a parent's
involvement in the employment decision under dispute may
be conceived as a sliding scale; if the parent has sufficiently
overwhelmed its subsidiary in taking the challenged action,
such a showing is sufficient to create liability; if the parent
was involved to a lesser degree, there must be some
demonstration of the presence of the other aspects of the
integrated enterprise test.
19
4. Choosing a Test for WARN Liability
Given these variations in the methods by which courts
determine when corporations shall be liable for the acts of
their affiliates, it is not surprising that ther e has been a
good deal of inconsistency among the courts attempting to
apply "existing law" in the context of the W ARN Act.5 In the
first reported case on the subject, Local 397, International
Union of Electronic, Electrical Salaried Machine & Furniture
Workers v. Midwest Fasteners, Inc., 779 F . Supp. 788
(D.N.J. 1992), the court employed three dif ferent tests --
Third Circuit federal veil-piercing, the integrated enterprise
test, and the DOL factors -- to determine whether parent
and grandparent corporations could be held liable for the
debts of a subsidiary. The court concluded that the
_________________________________________________________________
5. In addition to the tests for liability listed above, there are numerous
others that are employed less frequently, or only in specific contexts.
Sometimes courts will impose liability on a par ent for a subsidiary's
acts
based on a theory of "agency," i.e., that the subsidiary organization,
although (unlike an alter ego) possessed of a distinct legal personality
from the parent, has acted as the par ent's agent in a series of
transactions and therefore has the power to bind the parent. See, e.g.,
A.T. Massey Coal Co., Inc. v. International Union, United Mine Workers of
Am., 799 F.2d 142, 147 (4th Cir. 1986); Publicker Indus., Inc. v. Roman
Ceramics Corp., 603 F.2d 1065, 1070 (3d Cir. 1979); A. Gay Jenson
Farms Co. v. Cargill, Inc., 309 N.W .2d 285 (Minn. 1981).
Moreover, specific statutes have their own tests. For instance, the
Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. S 1381
et seq., treats as a single employer all businesses "under common
control," borrowing its definition of"common control" from the Internal
Revenue Code. That definition, in turn, looks purely to stock ownership
to define a "controlled group," and ownership in this context includes
stock options. See IUE AFL-CIO Pension Fund v. Barker & Williamson,
Inc., 788 F.2d 118, 123 (3d Cir. 1986). Cases construing the
Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), 42 U.S.C. S 9601 et seq., have also set forth standards for
determining when parent corporations will be responsible for the waste
management responsibilities of subsidiaries. See United States v.
Bestfoods, 524 U.S. 51 (1998). And cases under the Securities Act of
1933, 15 U.S.C. S 77a et seq., and the Securities Exchange Act of 1934,
15 U.S.C. S 78a et seq., have fashioned distinct standards of liability
for
entities that "control" businesses found to be in violation of the
securities laws. See Lawrence, Lender Control Liability, supra, at 1393.
20
corporations were separate under an "alter ego" analysis,
but identical under integrated enterprise analysis and the
DOL factors. In reconciling these differ ent outcomes, the
court ultimately explained that the WARN Act was enacted
to protect workers, and that the "wr ongdoer" should not
escape liability merely because "corporate formalities" were
observed -- a principle that the court noted had been
established in federal labor statutes generally. Id. at 800.
Thus, the court held that the outcomes of the integrated
enterprise and DOL factors would control the analysis,
rendering its entire discussion of alter ego not only
superfluous, but also inapposite.
Other courts have followed the multi-part Midwest
Fasteners approach, although the application of its
principles varies widely. For instance, in W atts v. Marco
Holdings, L.P., No. 3:95CV88-B-A, 1997 WL 578783 (N.D.
Miss. Aug. 8, 1997), the court chose to apply state, rather
than federal, veil-piercing analysis, all the while
acknowledging that, as Midwest Fasteners had stated, for
the purpose of determining whether two nominally separate
companies constituted a single employer, state law veil-
piercing was probably inappropriate. See id. at *2; see also
United Paperworkers Int'l Union v. Alden Corrugated
Container Corp., 901 F. Supp. 426, 436-39 (D. Mass. 1995)
(applying state corporate law, integrated enterprise, and the
DOL factors and concluding that because WARN is a federal
labor statute, the outcomes of the federal tests, rather than
the state alter ego test, should control).
On the opposite end of the spectrum, the court in
Wholesale & Retail Food Distribution Local 63 v. Santa Fe
Terminal Services, 826 F. Supp. 326 (C.D. Cal. 1993), also
applying state alter ego principles, rejected the plaintiffs'
assertions that state veil-piercing was less important under
WARN than the DOL factors, and chose not to employ the
integrated enterprise test at all. See id. at 334-35. In United
Mine Workers of America, District 2 v. Flor ence Mining Co.,
855 F. Supp. 1466 (W.D. Pa. 1994), the court, although
purporting to follow Midwest Fasteners, actually appeared
to apply only the DOL factors in concluding that two
corporations did not constitute a single employer for WARN
Act purposes. See id. at 1480. Finally, in International
21
Brotherhood of Teamsters Local 952 v. American Delivery
Service, 50 F.3d 770 (9th Cir. 1995), the Ninth Circuit
expressed doubts about the need to apply several different
tests for liability, yet still chose to apply both the integrated
enterprise test and the DOL factors, albeit concurr ently due
to the tests' similarity. See id. at 776. 6
The current trend toward applying mor e than one test for
affiliated corporate liability is manifestly unworkable. Not
only does this approach generate considerable uncertainty
for parties affected by the WARN Act (the briefs presented
to us are exemplars; they spend an inor dinate amount of
time simply running through differ ent possible tests for
liability), but it also obfuscates the purposes of the inquiry
itself, i.e., whether the affiliated corporation should be
legally responsible for issuing WARN notice. Further,
although the importation of state law standar ds into federal
law is permissible when state law is deemed to effectuate
federal policy, see Textile Workers Union of Am. v. Lincoln
Mills of Ala., 353 U.S. 448, 457 (1957), state veil-piercing
standards hardly seem likely to do so when such standards
may generate inconsistency in an area of law that has
always been characterized by insistence on unifor mity. Cf.
Antol v. Esposto, 100 F.3d 1111, 1115 (3d Cir. 1996)
(discussing the need for uniformity in the interpretation of
collective bargaining agreements). The use of state law
standards also has the potential to per mit "[t]he policy
underlying a federal statute" to be "defeated by . . . an
assertion of state power." Anderson v. Abbott, 321 U.S. 349,
365 (1944). Finally, the multi-test approach is both "unduly
complicated," American Delivery Serv., 50 F.3d at 776, and
ultimately yields no definitive answer to the question of
liability: When liability is uncertain enough to r esult in
different outcomes for each of the dif ferent tests, there is no
_________________________________________________________________
6. Just recently, in Hollowell v. Orleans Regional Hospital LLC, 217 F.3d
379 (5th Cir. 2000), the Fifth Circuit upheld a jury finding that several
corporations constituted a single employer for W ARN Act purposes where
the jury had been instructed to follow only the DOL factors. However, it
is unclear whether the court ultimately held that the DOL factors, and
only those factors, were the appropriate method of analysis, for it
refused
to consider the defendants' arguments that the wrong legal standard had
been applied. See id. at 389.
22
method of reconciling the results, much in the same way
that a man with one watch always knows what time it is,
but a man with two watches is never sure. Cf. Papa v. Katy
Indus., Inc., 166 F.3d 937, 940 (7th Cir . 1999) (criticizing
the integrated enterprise test on the ground that there is no
way to reconcile the results of the pr ongs).
Given these variations in the methods by which courts
determine when corporations shall be liable for the acts of
their affiliates, we decline to interpret the Department of
Labor's statement that it does not intend to cr eate "new"
law for WARN Act liability as a direction to courts to employ
multiple tests within a single case. Rather, we conclude
that the most prudent course is to employ the factors listed
in the Department of Labor regulations themselves. This
approach not only has the virtue of simplicity (if anything
in this area of law can be described as "simple"), but also
allows for the creation of a uniform standard of liability for
the enforcement of a federal statute. Cf. United States v.
Pisani, 646 F.2d 83, 87-88 (3d Cir . 1981) (holding that
federal veil-piercing standards ar e appropriate in Medicare
disputes due to the need for a uniform federal approach).
Finally, and most importantly, the DOL factors ar e the best
method for determining WARN Act liability because they
were created with WARN Act policies in mind and, unlike
traditional veil-piercing and some of the other theories,
focus particularly on circumstances relevant to labor
relations.
The DOL factors are quite similar to the integrated
enterprise test, which is understandable because the
integrated enterprise test was also specifically intended to
deal with labor relations. However, in addition to those
factors that are analogous to the integrated enterprise
factors, the Department of Labor's version has included a
fifth, catch-all factor -- that of "de facto exercise of control"
-- that has the potential to tip the balance in an otherwise
close case. This factor is arguably pr oblematic, because
read in isolation, it might well encourage the imposition of
liability merely as a result of the contr ol ordinarily
exercised by a parent corporation over a subsidiary by
virtue of its ownership. Such a result would cause a type of
liability that is not only at odds with the purpose of limited
23
liability in general, but also would be inconsistent with the
"existing legal rules" regarding par ental liability that the
Department of Labor would have courts apply. See
Bestfoods, 524 U.S. at 61-62 (describing as"hornbook" law
that a parent's exercise of control through ownership of
stock is not grounds for holding the par ent liable for the
subsidiary's actions).
In reconciling this apparent tension, we observe that the
DOL factors are, by their wording, mor e focused than their
integrated enterprise test counterparts. For instance, rather
than looking to "centralized control of labor relations" --
the factor that, in the integrated enterprise context, could
be satisfied either upon a showing that the par ent and
subsidiary functioned as a single entity, or , alternatively,
upon a showing that the parent directed the subsidiary to
institute the policy at issue -- the DOL for mulation is
"unity of personnel policies," a rendering that appears to be
more targeted toward discerning whether the nominally
separate corporations actually functioned as a single entity
with respect to such policies on a regular , day-to-day basis.
Similarly, the "common management" prong of the
integrated enterprise test, which allowed courts to focus not
only on employees holding formal officer positions or
directorships but also on employees occupying supervisory
positions, see, e.g., Hukill v. Auto Car e, Inc., 192 F.3d 437,
443 (4th Cir. 1999); Penntech Papers, Inc. v. NLRB, 706
F.2d 18, 25-26 (1st Cir. 1983), has been changed to
"common officers and/or directors," a facially more specific
requirement.
In light of these changes, and in light of the instruction
that the test should draw upon existing legal rules, we read
the "de facto exercise of control" factor as an endorsement
of the sort of hybrid direct liability analysis heretofore
employed in the context of the integrated enterprise test --
allowing consideration not only of whether the two
corporations shared the same labor policies, as the DOL's
"unity" factor would suggest, but also of whether the parent
company directly exercised control over the particular
policy at issue. We further conclude that the regulation's
specific instruction that the "factors" ar e a nonexhaustive
list is meant only as a reminder that the inquiry is a
24
balancing test, and that, as with most balancing tests, a
number of circumstances may be relevant. Just as the
integrated enterprise test is often described as ultimately
an inquiry into whether the two companies operated at
arm's length, see NLRB v. Browning-Ferris Indus. of Pa.,
Inc., 691 F.2d 1117, 1122 (3d Cir . 1982), we believe that
the Department of Labor's instructions are intended to
allow the consideration of evidence that might otherwise fall
outside of the listed factors in order to conduct such an
inquiry.
5. Conclusion
In the long history of the corporate form and limited
liability, both the common law and various pieces of
legislation have developed numerous methods for
determining when affiliated corporations should be treated
as unified or as distinct entities. These methods are often
quite different from each other , and vary across contexts. In
light of this history, if we were to interpr et the DOL's
instruction that courts apply "existing law" to determine
WARN Act liability for affiliated corporations as a literal
direction to employ the various tests that have been
developed over the years, we would find ourselves ensnared
in a web of complicated -- and conflicting -- lines of
jurisprudence. We cannot believe that the Department
intended such a result.
Rather, in our view, the Department intended for courts
to test for affiliated corporate liability under W ARN along
the dimensions specifically enumerated in its r egulation.
These dimensions, in turn, were adapted from other tests
developed for intercorporate liability, most notably labor
law's "integrated enterprise" test. In light of the similar
considerations inherent in the DOL factors and in other
such "veil-piercing" tests, we believe that the DOL's
instruction that courts apply "existing law" is intended only
to encourage courts to make use of established pr ecedent
in interpreting and applying its factors. Further, via its
statement that the factors are meant as a nonexhaustive
list, the DOL has made room for the exer cise of the
flexibility that this area of law requir es. Accordingly, in
determining whether two or more corporations constitute a
25
single "employer," the factfinder may consider not only the
aspects of corporate organization specifically listed in the
regulation, but also may consider the other indicia of
corporate "sameness" that have characterized this area of
the law, such as nonfunctioning of officers and directors,
gross undercapitalization, and other cir cumstances that
demonstrate a lack of an arm's-length r elationship between
the companies.
We also interpret the DOL's inclusion of the "de facto
exercise of control" factor to be an endorsement of the
hybrid direct liability analysis heretofor e employed in the
context of the integrated enterprise test. Thus, the"de facto
exercise of control" prong allows the factfinder to consider
whether the parent has specifically dir ected the allegedly
illegal employment practice that forms the basis for the
litigation.
C. Lender Liability Under the WARN Act
1. Discussion
The preceding discussion focused on the standar ds to be
employed for parent/subsidiary liability (or between sister
corporations). But at the time their venture began, GECC
was a major secured lender of CompTech, and not a parent.
Neither the WARN Act itself, nor the r egulations, explicitly
discuss the statute's applicability to lenders, but we agree
with both the Eighth and the Ninth Circuits that, under
some circumstances, a lender can become so entangled
with its borrower's affairs so as to engender WARN Act
liability. See Adams v. Erwin Weller Co. , 87 F.3d 269, 271
(8th Cir. 1996); Chauffeurs, Sales Drivers, Warehousemen &
Helpers Union Local 572 v. Weslock Corp., 66 F.3d 241, 244
(9th Cir. 1995). Thus, the question becomes what
circumstances must exist before such liability can attach.
Courts have grappled with the question of lender liability
in a wide variety of situations, such that the catch-phrase
"lender liability" has now taken on a br oad meaning to refer
to any kind of liability that can grow out of the
lender/borrower relationship. See, e.g., Lawrence, Lender
Control Liability, supra (describing various theories under
26
which lenders can be held liable either to their borrowers or
to third parties). For our purposes, the most r elevant lines
of precedent are those where thir d parties seek to impose
liability on major lenders on the theory that the lenders
have so controlled the borrowing corporation that the
corporation was functionally being run by the lenders, or
solely for the lenders' benefit, to the detriment of other
creditors. See, e.g., Krivo Indus. Supply Co. v. National
Distillers & Chem. Corp., 483 F.2d 1098 (5th Cir. 1973).
Often, these claims arise in the context of a bankruptcy
proceeding, whereby the creditors or the trustee seek
equitable subordination of the major lender's claims. See,
e.g., In re W.T. GrantCo., 699 F.2d 599 (2d Cir. 1983). In
other situations, creditors simply sue the major lender on
the theory that the lender's control over the borrower
rendered the lender the real party in interest for the
incurred debt. See, e.g., Combustion Sys. Servs., Inc. v.
Schuylkill Energy Res., Inc., Civ.A. 92-4228, 1993 WL
514496 (E.D. Pa. Dec. 1, 1993).
In these situations, the test usually applied is some
version of traditional veil-piercing, be it alter ego,
instrumentality, or some other formulation. See, e.g., In re
Clark Pipe & Supply Co., Inc., 893 F.2d 693, 699 (5th Cir.
1990) (explaining that, in the absence of fraud, a lender
must have used its debtor as an instrumentality to justify
equitable subordination); Great W est Cas. Co. v. Travelers
Indem. Co., 925 F. Supp. 1455, 1462-63 (D.S.D. 1996)
(utilizing state veil-piercing standards to determine whether
a lender would be liable to a third party for the debtor's
debts). This is precisely the test that was employed by the
District Court when it concluded that because GECC was a
lender and not a parent, the integrated enterprise test was
inapplicable. See Pearson v. Component T ech. Corp., 80 F.
Supp. 2d 510, 520 (W.D. Pa. 1999). We believe, however,
that traditional lender/borrower veil-pier cing jurisprudence
is inappropriate in the WARN Act context for many of the
same reasons that we rejected such jurisprudence in the
context of parent/subsidiary liability.
To begin with, the precedent on this point does not draw
as sharp a distinction between "lenders" and"parents" as
the District Court perceived. Although Krivo and its progeny
27
employed strict veil piercing standards to suits against
lenders, they did so in situations where even parents would
have been examined under such standards. The only
differences between parents and lenders came in the test's
application, both via the court's awareness of the changed
context, see Krivo, 483 F.2d at 1110 (observing that the
lender's "control" was limited to itsfinancial interest as a
major creditor), and the court's statement that the lack of
stock ownership is "a factor to be consider ed in assessing
the relationship between two companies," see id. at 1109;
see also Riquelme Valdes v. Leisure Res. Group, Inc., 810
F.2d 1345, 1353 (5th Cir. 1987) (explaining that complete
ownership is a "symptom but not the sine qua non of alter
ego status"). It follows that when the appr opriate test for
parental liability is something other than the strict alter ego
test, there should be a parallel change in the test for
liability for lenders.
Further, traditional veil-piercing jurisprudence tends to
sweep quite broadly, allowing liability to attach only when
there is complete unity of identity in all aspects of corporate
functioning. See, e.g., Krivo, 483 F .2d at 1105 (liability
attaches to lenders only when there has been"total control"
over the debtor). Although such an inquiry may be
appropriate for many types of claims, the mer e existence of
the integrated enterprise test demonstrates that in the
labor context, a more targeted inquiry is appropriate. We
acknowledge that the DOL factors are explicitly made
applicable in the WARN Act regulation only to "subsidiaries"
and not to borrowers, but do not read that reference as
precluding the application of the factors to lenders; rather,
we believe that by directing courts to examine these
particular factors, the Department of Labor was
highlighting those aspects of corporate functioning that are
most closely tied to the particular problems the WARN Act
was intended to address.7
_________________________________________________________________
7. In its own decision granting summary judgment to GECC, the District
Court relied on cases involving standar ds for equitable subordination in
the bankruptcy law context, such as In re W.T. Grant, 699 F.2d 599 (2d
Cir. 1983), and standards regar ding allegations that lenders have
breached fiduciary obligations to borrowers, such as in Temp-Way Corp.
28
Additionally, the problem with creating such a sharp
distinction in liability rules under the WARN Act for lenders
and for parents is that it will not always be clear when a
party should be characterized as a "lender ," when a party
should be characterized as a parent or owner , and when a
party occupies both roles. In the case befor e us, GECC
began its relationship with CompTech as a lender, but
subsequently foreclosed on the stock and, rather than
merely holding the stock for only a few days before the
plant closure (as was the case in W eslock), transferred it
(for no consideration) to CompTech's Chief Executive Officer
(then under contract to GECC), yet retained a considerable
amount of control over the stock for the next several years
as part of its plan to "hold" CompTech until the company
could be restored to profitability. Given the ease with which
Thomas Gaffney parted with the stock upon being asked by
GECC to relinquish his position with CompT ech, it is
certainly not clear that GECC should not be viewed as
having owned CompTech's stock from the date of
foreclosure until the date that the company was finally
liquidated.
Lenders may also occasionally be difficult to distinguish
from parents because, although generally the difference
between a "parent" and a "lender" is the existence of an
equity, rather than a debt, interest in the company, lenders
often structure their interests in hybrid ways. In this case,
in addition to traditional loans, GECC chose to structure
part of the debt by having CompTech modify its articles of
incorporation so as to create a class of mandatorily
_________________________________________________________________
v. Continental Bank, 139 B.R. 299 (E.D. Pa. 1992). See Pearson, 80 F.
Supp. 2d at 521. We do not believe that these precedents are particularly
instructive. Both sorts of claims set a high bar for plaintiffs because
the
causes of action rely upon an allegation of wr ongdoing by the lender.
WARN Act liability, by contrast, requir es no showing of fraud or even a
culpable mental state, although a court may, in its discretion, reduce
penalties if the employer proves good faith. See 29 U.S.C.
S 2104(a)(1)(B)(4). Therefore, the standards justifying equitable
subordination cannot be freely transferred. Cf. Lawrence, Lender Control
Liability, supra, at 1388 (criticizing courts' tendencies to apply similar
definitions of "control" for lender liability, no matter what the cause of
action).
29
redeemable preferred stock tailor ed to GECC's interest.
Such redeemable preferred stock is currently listed as
neither equity nor liability according to U.S. generally
accepted accounting principles. See Inter national
Accounting Standards, SEC Release Nos. 33-7801 & 34-
42430, 65 Fed. Reg. 8,896, 8,911 (Feb. 23, 2000). However,
it is sometimes classified as equity in SEC opinions, see,
e.g., The Southern Company, SEC Release Nos. 35-27323 &
70-8277, 2000 SEC LEXIS 2860 (Dec. 27, 2000), although
international accounting standards list such stock as a
liability, see International Accounting Standards, supra, and
federal regulations forbid such stock fr om being listed as
stockholders' equity, see 17 C.F.R.S 210.5-02. See
generally Anthony P. Polito, Useful Fictions: Debt and Equity
Classification in Corporate Tax Law, 30 Ariz. St. L.J. 761
(1998) (explaining the fluidity of the concepts of"debt" and
"equity").
Several federal statutes have defined the ter m "parent" in
such a way as to include GECC's interest. For instance, the
Internal Revenue Code at 26 U.S.C. S 1563 defines as
"parents" in a controlled gr oup those companies that own
eighty percent of the of the stock of other corporations in
the group, and 26 U.S.C. S 1202 r equires only fifty percent
ownership. Ownership, in turn, is defined throughout the
Code to include stock options. See, e.g., 26 U.S.C. SS 318,
544, 554, 1563. Under these definitions, GECC was a
parent of CompTech after the transfer to Charles Villa,
because GECC retained options on all of CompT ech's stock.
The Code of Federal Regulations also contains definitions of
"parent" and "subsidiary" that would include GECC's
relationship to CompTech as a result of its power to vote
the stock in the wake of CompTech's default. See 17 C.F.R.
S 210.1-02. And Pennsylvania law defines the term
"subsidiaries" for registered corporations as including those
corporations for which another corporation has obtained
options on fifty percent of the voting stock, see 15 Pa.
Cons. Stat. S 2542, a definition that would also apply to
GECC due to its calls obtained during the stock transfer to
Villa. That the Supreme Court of Delawar e described the
right to vote a majority of the board in the event of default
as a "creditor's remedy" in In r e Bicoastal Corp., 600 A.2d
343, 350 (Del. 1991), merely serves to highlight the hybrid
30
nature of such rights. Obviously, however , the regulatory
purposes of these statutes (and the WARN Act itself) vary
considerably.
Finally, we note that the commonly understood dif ference
between a "parent" and a "lender"-- i.e., the existence of
an equity interest -- is largely accounted for in the DOL
factors themselves, via the "common ownership" prong.
Although this factor is typically referr ed to as the "least
important" of the factors, International Bhd. of Teamsters
Local 952 v. American Delivery Serv., 50 F .3d 770, 775 (9th
Cir. 1995), these statements mean only that, by itself,
ownership -- and even ownership coupled with common
management -- is not a sufficient basis for liability, see
Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 778 (5th Cir.
1997). Although "financial control" will suffice to satisfy the
"common ownership" prong of the integrated enterprise
test, see, e.g., Frank v. U.S. W est, Inc., 3 F.3d 1357, 1362
(10th Cir. 1993), and it is likely that the DOL factors should
be interpreted similarly, there is nothing to prevent courts
from requiring a higher showing of contr ol in the absence
of true ownership, just as they have done in traditional veil-
piercing lender cases. See, e.g., Riquelme Valdes, 810 F.2d
at 1354.
2. Conclusion
All things considered, including the absence of a
satisfactory alternative, we are satisfied that the DOL
factors are an appropriate method of deter mining lender
liability as well as parental liability, and therefore hold that,
regardless of whether GECC took on the status of "parent"
in addition to its status of "lender" when it foreclosed on
the stock, its involvement with CompTech will be tested by
reference to those factors. We emphasize, however, that just
as Krivo and similar cases took special note of the unique
relationship between a lender and a borr ower, so should
courts do the same when utilizing the DOL factors. Thus,
courts should place special weight on a lender's lack of
stock ownership, and the mere fact that a lender has
loaned money to the borrower -- thus making the borrower,
in some sense, financially beholden to the lender-- will not
establish liability, or even "dependency of operations" as
31
that phrase is used in the DOL test, just as a par ent's
ownership of stock will not suffice to create liability for the
parent.
Our application of the DOL factors will not, however , be
dominated by an assessment of whether the defendant's
behavior was "typical" of a secured lender, as other courts
(including the District Court in this case) have done. See
Pearson, 80 F. Supp. 2d at 525; see also Adams, 87 F.3d
at 272 (refusing to hold a lender liable for W ARN Act
violations because the lender's control was not"unusual for
a lender loaning over eighteen million dollars"); Weslock, 66
F.3d at 245 (refusing to hold lender liable because the
control exercised was "consistent with the type of control a
secured creditor legitimately may exer cise over a defaulting
debtor" (quotations omitted)). "Typical" lender behavior is a
mutable concept, and it will respond to the liability rules
we put into place. See Robert E. Scott, A Relational Theory
of Secured Financing, 86 Colum. L. Rev. 901, 934 (1986)
(explaining that, if not for the liability rules currently in
place, creditors would exercise mor e control over debtors
than is now customary). Further, even total control of a
delinquent borrower's business might well be justified as an
effort to protect collateral. See id. Thus, although courts
should attend to the customary relationship between lender
and borrower (just as they have attended to customary
relationships between parents and subsidiaries in
determining liability), they should also make a functional
assessment of the amount of control involved.
D. Summary
Affiliated corporate liability under the W ARN Act is
ultimately an inquiry into whether the two nominally
separate entities operated at arm's length. Cf. NLRB v.
Browning-Ferris Indus. of Pa., Inc., 691 F.2d 1117, 1122 (3d
Cir. 1982). To that end, the Department of Labor has
specifically mandated consideration of: (1) common
ownership, (2) common directors and/or officers, (3) de
facto exercise of control, (4) unity of personnel policies
emanating from a common source, and (5) the dependency
of operations. We acknowledge that although these factors
do not correspond precisely to established tests for liability,
32
reliance on analogous precedent may often be useful in the
interpretation and application of those factors.
We believe that the DOL's caveat that the factors are a
nonexhaustive list is intended to allow the factfinder to
consider other evidence, if any, of a functional integration
between the two nominally separate entities -- with, as
always, an eye to the sorts of circumstances that courts
have considered relevant to "veil-pier cing" inquiries in the
past. So, although ordinarily such hallmarks of integration
as "nonfunctioning of officers and directors" and
"nonpayment of dividends" are not of gr eat importance in
the labor context, certainly the factfinder would be
permitted to take such arrangements into account when
determining WARN Act liability, as well as any other
arrangements that bear on the question whether the two
companies failed to maintain an arm's-length r elationship.
Further, the "de facto exercise of control" factor allows
the factfinder to consider, as has been done in the
"integrated enterprise" context, whether a par ent
corporation was the final decisionmaker for the challenged
practice. If the evidence of the parent's contr ol with respect
to the practice is particularly egregious -- for instance, if
the parent corporation has "disregar d[ed] the separate legal
personality of its subsidiary" in directing the subsidiary to
act, Esmark, Inc. v. NLRB, 887 F.2d 739, 757 (7th Cir.
1989) -- such evidence alone might be strong enough to
warrant liability.
Finally, we conclude that these factors, with their labor-
specific focus, are more appropriate than traditional veil-
piercing jurisprudence for gauging WARN Act liability with
respect to lenders. As has always been the case, when a
plaintiff seeks to hold one corporation liable for the debts of
another, particular attention must be paid to any lack of an
ownership interest between the two corporations, and such
a lack must be weighed heavily against a finding of liability
for the affiliated corporation. Further, just as a parent will
not be held liable solely because of its ownership of the
subsidiary, so too a lender will not be liable solely because
of the financial dependence that necessitated the loan in
the first place.
33
However, notwithstanding the importance of a lack of
ownership interest between two corporations, we believe
that in the application of the DOL factors, the ultimate
inquiry should not depend entirely on an assessment of
whether the lender has behaved in a "typical" fashion.
"Typical" lender behavior is a mutable concept, and it will
respond to the liability rules we put into place. Thus,
although the customary relationship between lender and
borrower is a relevant consideration (just as customary
relationships between parents and subsidiaries have always
been relevant to the determination of liability), there must
also be a functional assessment of the amount of control
exercised by the lender.
III. Applying the Test
Now that we have set forth the standard for liability, we
must determine whether plaintiffs have put forth enough
evidence that GECC and CompTech constituted a single
employer under the WARN Act to survive GECC's motion for
summary judgment. Therefore, we will analyze the
plaintiffs' evidence by reference to the DOL factors. We note
at the outset that our adoption of the DOL factors as the
proper test for WARN Act liability compels a rejection of the
plaintiffs' first contention, i.e., that solely by virtue of its
ownership of CompTech stock options, GECC was a WARN
Act employer.
In deciding that the DOL factors are appr opriate for
WARN Act veil-piercing, we also hold that the application of
those factors is a "factual" question rather than a "legal"
one. Although our own jurisprudence has been somewhat
opaque as to whether the veil-piercing/alter ego tests
present factual questions or legal ones, compare Craig v.
Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 148-49 (3d
Cir. 1988), with Carpenters Health & W elfare Fund v.
Kenneth R. Ambrose, Inc., 727 F.2d 279, 283 (3d Cir. 1983),
it is well established that the "integrated enterprise" test --
which is more akin to the DOL factors -- pr esents a factual
question, see, e.g., Limbach Co. v. Sheet Metal Workers Int'l
Ass'n, 949 F.2d 1241 (3d Cir. 1991). In light of our
treatment of the integrated enterprise test, as well as the
fact that most jurisdictions treat veil-pier cing inquiries as
34
factual, see Crane v. Green & Freedman Baking Co., 134
F.3d 17, 22 (1st Cir. 1998), we conclude that the WARN Act
test for intercorporate liability presents a question of fact.
Of course, as is always the case, our decision to
characterize it as such does not preclude an inquiry as to
whether plaintiffs have put forth enough evidence to create
a genuine issue of material fact so as to survive summary
judgment.
A. Common Ownership
After GECC purchased CompTech at a private foreclosure
sale, it immediately transferred the shar es to Gaffney and
Brooks. When Gaffney stepped down as CompTech's Chief
Executive Officer, Gaffney and Br ooks transferred their
shares back to Holdings, and the shares were reissued to
Villa. Technically, then, GECC was not the owner of
CompTech at the time of the unnoticed plant closure, but
we must acknowledge that the evidence, viewed in the light
most favorable to the plaintiffs, allows for the possibility
that these transactions were not bona fide transfers of
ownership. See, e.g., NLRB v. Big Bear Supermarkets # 3,
640 F.2d 924, 930 (9th Cir 1980) (upholding afinding of
single employer status in part due to the fact that the
transfer of ownership to an insider for no consideration did
not bear the hallmarks of a bona fide transaction).
Gaffney was under contract to GECC at the time he
received the shares; he paid no consideration for them,
pledged them to GECC as security for CompTech's loans,
and, in fact, was indemnified by GECC for any liability
arising out of his status as shareholder . He relinquished
the shares for only nominal consideration at GECC's
request. When Villa received the shares, he paid only
nominal consideration, pledged the shares and stock
powers to GECC, and took them subject to GECC's
extensive options. Finally, GECC's own restructuring memo
(authored by GECC Vice-President Jeanette Chen)
recommended both that CompTech be "held" until the
"investment" could be recouped, and that "ownership" be
transferred to the management team, suggesting that
GECC understood itself to be the true owner of the shares
35
despite the nominal vesting of title in Gaffney, Brooks, and
Villa.
We agree with the Ninth Circuit that a prerequisite for
lender liability is that whatever responsibility the lender
may have assumed for the borrower's business, such
responsibility must have been for the "or dinary operation"
of the business. Thus, as in bankruptcy law, the lender
may not be liable under WARN for "winding up" or
foreclosure activities not taken as part of an effort to
operate the business in the "normal commer cial sense,"
Weslock, 66 F.3d at 245, even if, as a result of the
foreclosure, the lender "owns" the shares for some period of
time. Cf. In re United Healthcare System, Inc., 200 F.3d 170,
179 (3d Cir. 1999) (holding that a fiduciary's "winding up"
activities in the course of a company's liquidation pursuant
to a bankruptcy filing cannot give rise to W ARN Act
liability). However, GECC's own documents demonstrate
that it was not involved with CompTech mer ely long enough
to wind up the affairs of the company; rather , in its own
words, it intended to "hold" CompT ech until its investment
could be recouped and for CompTech to continue to
conduct ordinary operations. For these r easons, we believe
that, for summary judgment purposes, drawing all
inferences in the plaintiffs' favor , the common ownership
prong is satisfied. GECC cannot escape the inference that
it "owned" CompTech simply by focusing attention on the
formal "ownership" of Gaffney, V illa, and Brooks, or by
characterizing its activities as those of a lender engaged in
liquidation.
B. Common Directors and/or Officers
This factor, which may be analogized to the integrated
enterprise test's "common management" factor , ordinarily
looks to whether the two nominally separate corporations:
(1) actually have the same people occupying officer or
director positions with both companies; (2) r epeatedly
transfer management-level personnel between the
companies; or (3) have officers and directors of one
company occupying some sort of formal management
position with respect to the second company. See, e.g.,
Frank v. U.S. West, Inc., 3 F.3d 1357, 1364 (10th Cir. 1993)
36
(finding no common management where the affiliated
corporations shared no officers and only a single officer of
the parent served in a managerial capacity with respect to
subsidiaries); Local No. 627, Int'l Union of Operating Eng'rs
v. NLRB, 518 F.2d 1040, 1047 (D.C. Cir . 1975) (finding the
common management prong satisfied by several
interchanges of higher-level managers and officers between
the corporations), overruled on other gr ounds by Southern
Prairie Constr. Co. v. Local 627, Int'l Union of Operating
Eng'rs, 425 U.S. 800 (1976) (per curiam). In this case, there
is no allegation that CompTech's top officers and directors
-- Gaffney, Brooks, and Villa-- ever occupied any sort of
director or officer position with GECC. Rather, the plaintiffs'
theory is that these three men functioned as"agents" of
GECC, and, because of that relationship, GECC's officers
and directors were also officers and dir ectors of CompTech.
Although we will discuss the application of agency
principles to WARN Act liability in mor e detail below, for
now we observe that the plaintiffs' interpr etation of this
particular prong is misdirected. The W ARN Act test -- like
the related integrated enterprise test -- is intended to
discover whether the two nominally separate entities
actually functioned as a single business, particularly with
regard to labor policy. See NLRB v. Br owning-Ferris Indus.
of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir . 1982); Armbruster
v. Quinn, 711 F.2d 1332, 1338 (6th Cir . 1983) (a finding of
single-employer status is justified when the corporations
are "highly integrated with respect to ownership and
operations" (citations omitted)). To that end, the "common
officers and/or directors" prong of the test should look only
to whether some of the same individuals comprise (or , at
some point, did comprise) the formal management team of
each company. See, e.g., Armbruster, 711 F.2d at 1339 (in
the integrated enterprise context, describing as"sketchy"
evidence of common management even where a single
person had served as president of both companies, and
where the subsidiary had formally r eleased decisionmaking
power to the parent).
The plaintiffs' theory, by contrast, is mor e appropriately
employed to satisfy other prongs of the test, such as the "de
facto exercise of control" factor , the factor relating to
37
personnel policy, or the factor relating to dependency of
operations. See, e.g., Frank, 3 F .3d at 1362-63 (evaluating
an allegation that the officers of the subsidiary were
controlled by the officers of the par ent in the context of the
interrelation of operations prong of the integrated enterprise
test). This is particularly true in light of the fact that the
DOL factors, rather than using the phrase "common
management" as is utilized by the integrated enterprise
test, instead specifically require the presence of common
directors or officers, a for mulation that is facially more
narrow. Plaintiffs have not demonstrated the existence of
any persons who, either simultaneously or in consecutive
periods, held a directorate or an officer position both with
CompTech and with GECC, and the "agency" theory with
respect to Gaffney and Villa -- which we discuss in more
detail below -- would not satisfy this requir ement even if
we were to accept its truth. Thus, we conclude that the
plaintiffs have not created an issue of fact with respect to
the presence of common directors or officers, and this
factor must be weighed in favor of the defendant.
C. Unity of Personnel Policies Emanating
from a Common Source
We begin by interpreting the language of this prong to
require the factfinder to focus the inquiry less on the
hierarchical relationship between the companies (as such
relationships may be considered in other aspects of the
test) than on whether the companies actually functioned as
a single entity with regard to its r elationships with
employees.
That GECC and CompTech did not share labor policies,
or even coordinate their labor policies, is essentially
undisputed.8 Affidavits fr om CompTech and GECC
employees demonstrate that CompTech had its own
personnel managers who never received any dir ection from
GECC regarding their duties, and no evidence has been
_________________________________________________________________
8. We believe that a "coordinated" labor policy would be as relevant as a
"unified" policy; for instance, in double-br easted operations, there is
obviously no "unity" of policy -- and yet this is precisely the type of
situation that the test is meant to capture.
38
offered to contradict these statements. But even were we to
accept the plaintiffs' theory that Villa, as GECC's agent, at
some level instituted all of CompTech's policies, including
labor policies, on GECC's behalf, such evidence is not
sufficient to satisfy this prong of the test in the absence of
indications that GECC had a particular inter est in how
CompTech's labor policies were designed, or issued specific
directives to Villa on the subject. The evidence that
plaintiffs have offered to demonstrate that GECC had an
interest in controlling the personnel policies at CompTech
is scant, and largely amounts to establishing that
CompTech, pursuant to the terms of the loan agreement
(and on a very few occasions) sought GECC appr oval for
decisions to institute bonus programs and to pay salaries
in excess of $100,000. Such limited monitoring of
compensation expenditures as part of a general loan
agreement requiring oversight of CompT ech's spending in a
number of areas is not sufficient to demonstrate a "unity of
personnel policies emanating from a common source."
There are some inconsistencies in the evidence submitted
by GECC. GECC submitted the affidavit of Jeanette Chen,
who swore that GECC had never attempted to control the
hiring or firing of CompTech employees, and that the loan
restriction preventing CompTech fr om paying salaries in
excess of $100,000 was intended to ensure that CompTech
maintained a frugal budget. But both of these statements
were contradicted by other pieces of evidence in this
litigation. Gaffney's letter to GECC specifically states that
he resigned his post as CEO of CompTech at GECC's
request, and other deposition evidence indicates that he
was asked to resign due to GECC's dissatisfaction with his
strategies for CompTech. Moreover , internal GECC
memoranda characterize the salary restriction as part of an
effort to ensure that GECC could monitor the hiring of
"key" personnel. Finally, the existence of the"Villa Call" and
the references to Benton as a "back up president" seem to
show that GECC, if nothing else, conceived itself as having
control over the hiring and firing of CompT ech's president.
Despite these inconsistencies, we do not believe that
plaintiffs have created a genuine issue of material fact as to
the existence of a "unity" of policy. Even if we were to
39
disregard Chen's affidavit entir ely and focus solely on the
other evidence, the fact that GECC may have contr olled the
hiring and firing of the company's president and chief
executive officer, and monitored the hiring of a few other
high-level managers (there is no evidence that GECC ever
suggested that a particular person other than Benton be
hired, or prevented a candidate fr om being hired), simply is
not enough to find a "unity" of personnel"policy."
The plaintiffs alternatively urge us to weigh this factor in
their favor on the ground that the analogous"centralized
control of labor" prong from the integrated enterprise test
permits an inquiry into whether the par ent corporation,
though perhaps not involved in day-to-day employment
policies, mandated the employment practice at issue.
Plaintiffs allege that GECC made the decision to close the
plant, and because the plant closing is the r elevant practice
giving rise to the litigation, submit that that decision is
enough to tip the balance. However, as explained above, we
believe that, for WARN Act purposes, allegations of this
kind of "direct" control are more appropriately considered
as part of the "de facto exercise of contr ol" factor, discussed
infra. We conclude that the plaintif fs have not created a
genuine issue of fact as to the existence of a unified
personnel policy, and we will weigh this factor in the
defendant's favor.
D. Dependency of Operations
We consider the "dependency of operations" factor to be
virtually identical to the integrated enterprise test's
"interrelation of operations" factor , and will consider it in
that light. When examining the "interrelation of operations"
factor, courts generally consider the existence of
arrangements such as the sharing of administrative or
purchasing services, see, e.g., Penntech Papers, Inc. v.
NLRB, 706 F.2d 18, 25 (1st Cir. 1983), interchanges of
employees or equipment, see Hukill v. Auto Car e, Inc., 192
F.3d 437, 443 (4th Cir. 1999), and commingled finances,
see UA Local 343 of the United Ass'n of Jour neymen &
Apprentices of the Plumbing & Pipefitting Indus. of the U.S.
& Can. v. Nor-Cal Plumbing, Inc., 48 F .3d 1465, 1472 (9th
Cir. 1995). No evidence of this sort was pr esented by the
40
plaintiffs. Instead, plaintiffs r eiterate their theory that Villa,
and Gaffney before him, were stooges, or at least agents, of
GECC, and that therefore all of their actions may be
attributed to GECC. Because certainly Villa and Gaffney
were routinely involved with the day-to-day operation of the
business, the plaintiffs maintain GECC was in the position
of general manager of the company.
We decide whether to apply agency principles to establish
liability under a federal statute in accordance with the
degree to which such principles effectuate the policies of
the statute. See AT&T v. Winback & Conserve Program, Inc.,
42 F.3d 1421, 1429-33 (3d Cir. 1994). This is not dissimilar
from the rules of common law, where ther e are different
types of agency relationships, and the degr ee to which the
actions of the agent are attributed to the principal vary for
each. See id. at 1434-35. Thus, if we ar e to import any
agency principles to the test for WARN Act intercorporate
liability, we must do so selectively, with an eye to
effectuating WARN Act purposes.
Plaintiffs argue that the "agency" relationships alleged to
exist between GECC and Gaffney, and later between GECC
and Villa, establish that GECC had contr ol over the day-to-
day operations of CompTech. Control over day-to-day
operations has been held to be indicative of interr elation of
operations. See, e.g., Lusk v. Foxmeyer Health Corp., 129
F.3d 773, 778 (5th Cir. 1997); Cook v. Arrowsmith
Shelburne, Inc., 69 F.3d 1235, 1241 (2d Cir. 1995).
However, the mere fact that the subsidiary's chain-of-
command ultimately results in the top officers of the
subsidiary reporting to the parent corporation does not
establish the kind of day-to-day control necessary to
establish an interrelation of operations. See Frank v. U.S.
West, Inc., 3 F.3d 1357, 1362-63 (10th Cir. 1993); Martin v.
Safeguard Scientifics, Inc., 17 F . Supp. 2d 357, 364 (E.D.
Pa. 1998) ("[I]t is never sufficient to establish only that a
chain of command eventually ends at the parent's
headquarters.").
Moreover, dependency of operations cannot be
established by the parent corporation's exer cise of its
ordinary powers of ownership, i.e., to vote in directors and
set general policies. See Lusk, 129 F .3d at 778. Therefore,
41
if "agency principles" are to be used to weigh the
"dependency of operations" factor in plaintif fs' favor, the
policies behind WARN Act liability -- and limited liability for
corporations generally -- require that the plaintiffs
establish that the scope of the agency relationship was
such that GECC had the right to direct and control the
manner in which Gaffney and Villa undertook their duties.
In other words, for such an all-encompassing factor such
as "dependency of operations" -- a factor which, by its
nature, looks to the daily functioning of the two companies
-- the plaintiffs must establish the existence of what was
known at common law as a "master-servant" agency
relationship. See AT&T, 42 F .3d at 1435.
Plaintiffs' evidence on this point consists of: (1) letters
and similar contacts from both Gaffney and Villa to GECC
requesting permission to take certain kinds of actions that
the loan documents would otherwise forbid; (2) the terms of
the consulting agreement between Gaffney and GECC and
the circumstances surrounding his employment; (3) the
circumstances surrounding the firing of Gaffney and his
replacement with Villa; and (4) the fact that consultant
Stuart Benton was brought in at GECC's r equest, and
apparently worked closely with Villa.
We do not believe that this evidence is sufficient to create
an issue of fact with regard to an agency relationship that
would support a finding of dependency of operations. At
most, the evidence establishes that Gaffney was something
of an independent contractor, hired, according to the terms
of his contract, to "exercise general executive authority over
all business operations of the companies subject at all
times to the control of the board of dir ectors." In other
words, Gaffney was to run the company as he saw fit, and
not in accordance with GECC directives. Under such
circumstances, Gaffney's actions ar e not attributable to
GECC merely by virtue of the existence of his consulting
agreement.
Further, because Villa was president and CEO of
CompTech at the time of the closing, as well as at the time
that plaintiffs argue that WARN Act notice should have
issued, it is his relationship with GECC that is more
relevant -- and Villa's relationship was even more tenuous
42
than Gaffney's. Villa was not under contract to GECC, and,
in fact, Chen attested (and the plaintiffs have not disputed)
that she was unaware that Gaffney had even replaced
Brooks with Villa until the chief financial officer mentioned
it to her in the course of conversation. Though GECC did
apparently view itself as having the power to r emove Villa
(hence the Villa Call), as we have stated, such general
powers of ownership are not a sufficient basis for a finding
of liability. Further, the right to hir e or fire does not, in
itself, distinguish a "master-servant" agency relationship
from any other sort of agency relationship. In fact, the most
plaintiffs are able to muster with r egard to an agency
relationship between Villa and GECC is the letter Villa
wrote asking GECC to "make decisions now" concerning the
requests he had outlined. These requests, however, were for
additional financing and (the letter is not entir ely clear)
perhaps permission for a large-scale merger. These are not
the kind of mine-run matters that would support afinding
that Villa was behaving as GECC's agent in his
management of CompTech.
The situation in Citibank, N.A. v. Data Lease Financial
Corp., 828 F.2d 686 (11th Cir. 1987), presents a useful
contrast. In that case, a corporation defaulted on its loans
and the major creditor exercised its rights to elect a new
slate of directors. The new directors allegedly mismanaged
the company, and the borrower brought suit against the
lender on the theory that the directors had acted as the
"agents" of the lender. See id. at 691. The court concluded
that the borrower had created a genuine issue of material
fact as to the existence of an agency relationship, basing its
decision in part on the deposition testimony of one of the
directors, in which he stated that he both worked for the
lender, and that he worked closely with the lender on all
major matters of policy. See id. at 692. Such evidence
stands in stark contrast to the situation befor e us, in which
the man alleged to be GECC's agent submitted an affidavit,
as well as deposition testimony, denying that GECC ever
controlled his actions, and the plaintif fs have produced no
specific instances of GECC control to r ebut his testimony.
As for Villa's and Gaffney's requests for GECC approval of
actions involving large-scale expenditur es, restructuring, or
43
the disposition of equipment in which GECC r etained a
security interest, these cannot form the basis of a
demonstration of "dependency of operations," as there is no
evidence that GECC ever did anything more than approve
or disapprove such requests, and no evidence that it was
involved in the details or manner of implementation of any
CompTech business plans. GECC was exer cising one of the
defining rights of a secured lender: the right to prevent the
transfer of its collateral. That GECC may also, at this point,
have been a "parent" of CompTech does not prevent it from
exercising such pedestrian creditor's rights without
incurring liability, any more than parental status prevents
a company from controlling its subsidiary's boards of
directors without incurring liability. Cf. Japan Petroleum Co.
(Nigeria) Ltd. v. Ashland Oil, Inc., 456 F . Supp. 831, 846 (D.
Del. 1978) (refusing to pierce the corporate veil in part
because the "control" alleged by the plaintiffs was
attributable to the fact that the parent corporation was a
major creditor of its subsidiary). We do not intend to create
a jurisprudence that discourages loans in general or
rescues of troubled business enterprises in particular.
Further, the fact that in an attempt to keep itself
operational, CompTech independently sought additional
financing from an outside lender to r eplace GECC cuts
against a conclusion that CompTech was closely integrated
with GECC itself.
If GECC's "loans" to CompTech had not been made at
arm's length (either because of a failur e to require interest
payments, a lack of formal documentation, etc), such
evidence would cut in favor of finding a dependency of
operations. See, e.g., Vance v. NLRB, 71 F.3d 486, 493 (4th
Cir. 1995) (per curiam) (finding an interr elation of
operations in part because of numerous inter est-free, or
unrepaid, "loans" between corporations). But there is
nothing to suggest that GECC's loans to CompT ech were
anything other than bona fide arm's length transactions. As
for the plaintiffs' final allegation, that Benton served as
something of a roaming GECC "enforcer ," once again,
plaintiffs have failed to submit any support for their claims.
Villa, Benton, and other top-level CompT ech managers all
attested that Benton did nothing more than observe and
occasionally make suggestions, only some of which were
44
followed. No evidence has been offered to suggest that
GECC was using Benton functionally to manage
CompTech's day-to-day activities.
Finally, we address the question whether ther e can be
said to have been "dependency" of operations due to the
fact that CompTech was financially dependent on GECC's
loans, and ultimately was unable to stay afloat without
them. As we remarked earlier, the loans were made in the
ordinary course of business, and there is no evidence that
they included especially favorable terms or bore other
indicia of a lack of legitimacy. Under such cir cumstances,
loans -- even from a parent to a subsidiary -- cannot be
sufficient to satisfy this prong, particularly in this context
where there is no serious dispute that GECC, rather than
attempting to establish a continuing relationship whereby
CompTech would be permanently dependent on GECC for
financing, was instead by this point conducting a"rescue"
operation in an attempt to "return Company to
profitability," We surely do not want to discourage
companies from attempting to keep their subsidiary
operations afloat with temporary loans by holding that the
mere fact that loans were even necessary establishes a
"dependency of operations" giving rise to liability. Cf. United
Elec., Radio & Mach. Workers of Am. v. 163 Pleasant St.,
960 F.2d 1080, 1094 (1st Cir. 1992) (r efusing to find
"inadequate capitalization" in alter ego inquiry where parent
repeatedly infused subsidiary with cash in an ultimately
unsuccessful attempt to resurrect a failing company).
The same logic holds true for GECC's enforcement of the
prepayment provisions of its loans upon CompTech's sale of
R&R Plastics. Regardless of whether GECC was
CompTech's parent as a result of its options or its stock
ownership, it also was indisputably a lender as a r esult of
the revolving lines of credit and the r epeated cash
advances. As such, an attempt to seek repayment of its
loans cannot be realistically characterized as a "siphoning"
of funds or as part of a deliberate attempt to keep
CompTech undercapitalized.
Therefore, we conclude that the plaintif fs have failed to
create a genuine issue of material fact with r espect to
CompTech's "dependency" on GECC. As we have explained,
45
there is no evidence that GECC's loans wer e intended as a
method of keeping CompTech deliberately under capitalized,
and if dependency of operations is to be proved solely by
the existence of an alleged "agency" r elationship between
the lender/parent corporation and the officers of the
borrower/subsidiary, plaintiffs must submit evidence of far
more oversight and control on the part of the principal than
has been done in this case.
E. De Facto Exercise of Control
As we have explained, the "de facto exercise of control"
factor is not intended to support liability based on a
parent's exercise of control pursuant to the ordinary
incidents of stock ownership. Nor may this factor be used
to create liability for a lender's general oversight of its
collateral. The factor is appropriately utilized, however, if
the parent or lender was the decisionmaker r esponsible for
the employment practice giving rise to the litigation.
Further, because the balancing of the factors is not a
mechanical exercise, if the de facto exer cise of control was
particularly striking -- for instance, wer e it effectuated by
"disregard[ing] the separate legal personality of its
subsidiary," Esmark, Inc. v. NLRB, 887 F .2d 739, 757 (7th
Cir. 1989) -- then liability might be warranted even in the
absence of the other factors.
In support of its allegations of "de facto" control by
GECC, the plaintiffs continue to point to GECC's general
monitoring of CompTech; the fact that GECC's approval
was required under the loan agreements for a number of
projects involving CompTech's finances, budgeting, and
GECC's collateral; the relationship among GECC, Villa, and
Gaffney; and the fact that CompTech ultimately closed as a
result of GECC's decision to call the loans. See Part I,
supra. Although, for the reasons discussed above, we do
not find GECC's monitoring of CompTech'sfinances or its
relationship with Villa and Gaffney particularly probative,
we are given pause by the extent of GECC's involvement in
the decision to close the plant.
CompTech was kept operational for three years solely as
a result of GECC's own decision to hold on to CompTech
46
and ensure the company's return to profitability. During
this time, CompTech was almost always behind in its
payments to GECC, and was only able to survive by
GECC's extension of due dates and additional financing.
Therefore, for three years, GECC was aware that its funding
was the only thing keeping a troubled company afloat. It
continued to invest, but when it finally concluded that
CompTech could not be saved, it immediately made the
decision, according to its internal documents, not to
"refus[e] to loan additional working capital," Adams v.
Erwin Weller Co., 87 F.3d 269, 273 (8th Cir. 1996), but
instead to "liquidate the company" -- thus forcing
CompTech to close its doors two weeks later . The decision
is thus arguably less like a subsidiary's independent choice
to terminate its business in the face of sever e cash
constraints than like the decision of a WARN Act employer
to close a single site of its operations.9
On the other hand, the evidence also demonstrates that
even before GECC decided to withdraw its support,
CompTech was contemplating closure and seeking legal
advice as to its labor obligations. CompTech's repeated
requests for financing, coupled with its war nings to GECC
that it would be forced to shut down without further cash
infusions, demonstrate that CompTech was acting as an
independent entity seeking further capital rather than as a
branch of GECC operating under GECC's direction. In the
absence of other indicia of a unified status between GECC
and CompTech, we cannot conclude that the evidence
supports an inference that GECC's decision to accept
CompTech assets as collateral on the loans manifested a
"de facto exercise of control" equivalent to an employer's
decision to close a work site.
_________________________________________________________________
9. Such a conclusion is strengthened by the fact that, although in many
disputes arising under labor legislation, the acts giving rise to
liability
are likely to be ones that are contr olled at the "local" level (for
instance,
acts of discriminatory hiring), the very natur e of the acts that give
rise
to WARN Act liability (a plant closure) are likely to result from
decisions
made from the highest levels within the corporate structure, rendering
an examination of a parent corporation's r ole in the decision more
important.
47
To be sure, the distinction between a decision to call a
loan and a decision to shut down a company is afine one,
and the fact that GECC in some sense "owned" CompTech
at the time of closure renders the distinction finer still. But
the business of judging is, in considerable measur e, one of
line-drawing. While the demarcation her e is not clear,
indeed is quite close, we think it falls on GECC's side of the
line. We acknowledge that large lenders-- whether or not
they are also parents -- cannot help but be aware of the
consequences of their decisions to foreclose and dispose of
collateral; in other areas of the law, a party is "presumed to
intend all the natural and probable consequences flowing
from his deliberate acts." United States v. Applewhite, 195
F.3d 679, 690 (3d Cir. 1999) (quotations omitted). However,
we must be scrupulous in our efforts to distinguish
between situations in which a parent/lender has ultimately
assumed responsibility for the continuing viability of a
company (thus incurring liability for WARN Act violations)
and situations in which the borrower has r etained the
ultimate responsibility for keeping the company active.
Here, CompTech's independent resear ch into its legal
obligations, its negotiations with GECC, and its attempts to
secure additional financing all reflect CompTech's own
vitality, and demonstrate that GECC's decision to cut off its
funding was not a "de facto exercise of control" over
CompTech's decision to close its doors. After consideration
of all of the evidence, we conclude that the plaintiffs have
not created a genuine issue of material fact as to whether
GECC exercised "de facto" control over CompTech
generally, or by virtue of its calling of the loan, and thus
this factor weighs in favor of the defendant.10
_________________________________________________________________
10. Plaintiffs argue that the doctrine of issue preclusion bars GECC from
denying that it exercised control over CompTech ever since the 1991
foreclosure. At that time, GECC moved in the District Court for the
Northern District of Illinois to enjoin the former CompTech directors
from filing for bankruptcy. In granting the motion, the court concluded
that under the loan agreements, GECC had the right to elect a new
board of directors upon a default, that GECC could only hope to recoup
its investment in CompTech if the business continued as a going
concern, and that if the former dir ectors were to file for bankruptcy,
GECC would be irreparably harmed. See General Elec. Capital Corp. v.
48
F. Summary
The DOL factors, like the integrated enterprise test,
require that two corporations be "highly integrated with
respect to ownership and operations" befor e they will be
considered a single employer for WARN Act purposes.
Armbruster v. Quinn, 711 F.2d 1332, 1338 (6th Cir. 1983)
(quotations omitted). The evidence prof fered by the
plaintiffs simply does not establish the high degree of
integration required by the analysis set forth in this
opinion. Though GECC may have monitored much of the
activity at CompTech, there is no question that at all times
CompTech remained an entirely separate business entity
that did not rely on GECC to supply it with personnel,
equipment, facilities, clients, administrative services, or any
of the other various resources typically"shared" between
companies that are ultimately found liable for each others'
debts. And, as we have discussed, there is a dearth of
evidence to support the plaintiffs' theory that GECC
effected a pervasive control over all of CompTech's
functioning by virtue of its relationship with CompTech's
CEOs.
Although the plaintiffs have created a genuine issue of
fact with respect to GECC's ownership of CompT ech, they
have failed to meet their burden with r espect to the other
facets of the DOL test. The existence of an "agency"
relationship between GECC and CompTech's CEOs would
not establish the existence of "common dir ectors and/or
officers," and, without evidence establishing not only that
an agency relationship existed, but also the scope of that
relationship, the plaintiffs cannot r ely on the "agency"
theory to establish "dependency of operations." Additionally,
under the circumstances presented her e, GECC's decision
_________________________________________________________________
Chicago Plastics Prods. Ltd. P'ship, No. 91C4291 (N.D. Ill. July 10,
1991).
As the District Court in this action properly concluded, the Illinois
court
did not purport to hold that GECC exercised"control" over CompTech at
all, much less the nature and degree of control relevant to an
assessment of WARN Act liability. See Pearson v. Component Tech. Corp.,
80 F. Supp. 2d 510, 526 (W.D. Pa. 1999). Thus, issue preclusion is
inapplicable. See Temple Univ. v. White , 941 F.2d 201, 212 (3d Cir.
1991).
49
to call its loan does not give rise to an infer ence of "de facto
exercise of control." Finally, the plaintiffs have not put forth
any additional facts not included in the DOL factors that
bear on the question of GECC's liability. Ther efore, the
District Court's grant of summary judgment to GECC will
be affirmed.11
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
11. In their final attempt to evade summary judgment, plaintiffs argue
that the District Court erred in excluding (without first conducting an in
limine hearing) the expert affidavit of Thomas Myers. Myers, a qualified
authority on banking practices and bank fraud, attested that in his
opinion, GECC "substantively operated" CompT ech after the foreclosure,
and that the controls it exercised over CompTech "were not primarily
limited to the financial controls nor mally exercised in a typical
debtor/creditor relationship." The District Court concluded on the basis
of the transcript of an eight-hour deposition that Myers's lack of
familiarity with CompTech corporate structur e, coupled with his lack of
familiarity with aspects of the loan agreement between GECC and
CompTech, rendered his opinion lacking in a sufficient factual basis to
be relevant to the plaintiffs' case. See Pearson, 80 F. Supp. 2d at 529.
We review a district court's decision to conduct a hearing regarding the
reliability of expert evidence, as well as its decision to admit or
exclude
such evidence, for abuse of discretion. See Oddi v. Ford Motor Co., 234
F.3d 136, 154 (3d Cir. 2000).
As we have discussed above, WARN Act liability does not turn on
whether a party is a "parent" or a "lender," or whether a "lender"
behaved in typical fashion. Indeed, we have alr eady acknowledged that
GECC may well have been a parent of CompT ech. Thus, because we
have declined to create separate standar ds of liability for lenders and
parents, regardless of whether the District Court was correct in
concluding that Myers's affidavit was lacking in a factual basis, his
opinion was ultimately not germane and no hearing was necessary. Cf.
Padillas v. Stork-Gamco, Inc., 186 F.3d 412, 418 (3d Cir. 1999) (holding
that in limine hearings are encouraged when courts are concerned with
the factual, rather than legal, dimensions of the evidence). We therefore
affirm the District Court's decision to exclude the affidavit.
50