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- Third Circuit Reversal Paves the Way For NextEra to Potentially Recover Administrative Expenses Incurred in Connection With Failed Merger
- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
- “Straddling the Line”: Delaware Bankruptcy Court Rules That Not All Tax Liabilities Incurred During a Debtor’s Petition Year are Eligible for Administrative Expense Priority
With High Bar For WARN Act’s “Single Employer” Standard, Delaware District Court Affirms Summary Judgment
Czyzewski v. Sun Capital Partners, Inc. (In re Jevic Holding Corp.), No. 13-1127-SLR (D. Del. Sept. 29, 2014)
[Update – On July 27, 2016, the Third Circuit Court of Appeals affirmed the “well-reasoned opinions of the District Court and Bankruptcy Court[.]”]
In this Memorandum, arising from the bankruptcy proceedings of Jevic Holding Corp. and its affiliates (together, the “Debtors”), Delaware’s District Court affirmed the Bankruptcy Court’s holding that appellee Sun Capital Partners, Inc. (“Appellee”) was not a “single employer” with debtor Jevic Transportation Inc. (“Jevic”) for purposes of claims asserted under the federal and New Jersey Worker Adjustment and Retraining Notification Act (collectively, the “WARN Act”). In line with Third Circuit precedent, the District Court agreed with the lower court that the allegations alleged and evidence proffered by Jevic’s former employees did not satisfy the standard required for inter-corporate liability under the WARN Act, which rests on whether the former employer and the target-company have become so entangled with one another’s affairs that they are more like divisions of a single enterprise.
In 2006, Sun Transportation, LLC, a wholly-owned subsidiary of the Appellee, acquired Jevic in a leveraged buyout. Jevic and Appellee entered into a management services agreement, pursuant to which the Appellee provided consulting services to Jevic in return for payment. Moreover, two of the Appellee’s employees served on Jevic’s board of directors. Ultimately, the Debtors experienced financial difficulties and the Appellee refused to invest additional capital in Jevic. Instead, Jevic developed and implemented a reorganization plan with help from consultants and, allegedly, the Appellee. Additionally, Jevic pursued an unsuccessful sales process. On May 19, 2008, Jevic’s employees received WARN notices and, the next day, Jevic filed a voluntary chapter 11 proceeding. WARN litigation quickly followed, and this appeal arose from the Honorable Brendan L. Shannon’s ruling on summary judgment that the Appellee could not be held liable for any WARN violations as a “single employer.”
At its core, the “single employer” doctrine will impose liability onto a company if it is functionally integrated with a WARN-violating employer (see recent Delaware Bankruptcy Insider post herediscussing the WARN Act, its policy, and standard for liability). At issue here were three of the five Department of Labor factors for evaluating “single employer” liability – (i) de facto exercise of control; (ii) unity of personnel policies emanating from a common source; and (iii) dependency of operations.
The relevant question for determining de facto control (i.e. whether the target company has specifically directed the allegedly illegal employment practice) is “who retains the ultimate responsibility for keeping the company alive.” Pearson v. Component Tech. Corp., 247 F.3d 471, 505 (3d Cir. 2001). While it was argued that Appellee’s decision to withhold funding directly caused Jevic’s closure, it was “undisputed that the Debtors made the decisions to shut down the company” and that Jevic was directly responsible for signing the WARN notices and terminating employees. Although some informal interference from the Appellee was alleged, it was not enough and, as noted by the District Court, the existence of overlapping boards by itself did not support a de facto control finding.
The second factor considered by the District Court – the “unity of personnel policies” – examines whether the two companies at issue have centralized hiring and firing, payment of wages, and recordkeeping. See In re APA Transp. Corp. Consol. Litig., 541 F.3d 233, 245 (3d Cir. 2008). The District Court rebuffed arguments that certain healthcare and insurance policies were shared, ultimately holding that there was a failure “to produce evidence that appellee directly hired or fired Jevic employees, paid the salaries of Jevic employees or shared a personnel or benefits recordkeeping system with Jevic.” Op. ¶ 20 (emphasis in original).
Finally, with respect to the third factor examined – the “dependency of operations” – the District Court considered whether there existed shared administrative services, interchanges of employees or equipment, or the commingling of funds, all outside an exercise of ordinary powers of the Appellee’s ownership. Pearson, 247 F.3d at 501. While it was argued that the Appellee immersed itself into Jevic’s management and implemented Jevic’s restructuring plan, the Court noted that Jevic maintained separate books and records, separate bank accounts, separate financial statements, and did not share any administrative functions or facilities with Appellee. It was held that Appellee acted pursuant to the terms of its agreement with Jevic and that there was insufficient evidence of “day-to-day involvement” resulting in liability. Op. ¶ 24.