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December 16, 1999


The opinion of the court was delivered by: Cohill, Senior District Judge.


This class action is one of several pieces of litigation resulting from the closure of the Component Technology Corporation plant ("Comptech") in Millcreek, Pennsylvania on October 14, 1994. The plaintiff class alleges that defendants General Electric Capital Corporation ("GE Capital"), and its subsidiary, TIFD VII-R Inc. ("TIFD"), (collectively "the GE Capital defendants"), had a duty to provide Comptech's employees with a sixty day notice of the closing as required by the Worker Adjustment Retraining Notification Act, 29 U.S.C. § 2101, et seq. ("the WARN Act").*fn1

The GE Capital defendants deny liability, asserting that they were not employers within the meaning of the WARN Act, and did not function as Comptech's parent or alter-ego. GE Capital maintains that at all times it was acting only in its capacity as a secured lender.

Before the Court are motions for summary judgment filed by the defendants (Doc. 84), and for partial summary judgment on the issue of liability by the plaintiff class (Doc. 93). Disposition of these motions requires that we determine whether, and under what circumstances, a lender may be considered an employer for purposes of liability under the WARN Act, which are questions of first impression in this circuit.

For the reasons set forth below, we will deny the plaintiffs' motion and grant summary judgment in favor of the defendants.

I. Factual Background

Comptech, a Delaware corporation with its headquarters in Erie, Pennsylvania, was in the business of designing custom injection molds and assembling precision plastic parts for business machines. GE Capital's involvement with Comptech began in June of 1989, when it entered into a loan agreement with Chicago Plastic Products Corporation ("Chicago Plastics"), Comptech, and Comptech's wholly-owned subsidiary, R & R Plastics Corporation ("R & R Plastics") (collectively "the borrowers"). The loan was evaluated and approved by the Chicago office of GE Capital's Corporate Investment Financing division, and was used to finance Chicago Plastic's acquisition of Comptech and R & R Plastics. Pls.' Ex. 77.

As security for a loan of approximately $25,000,000, GE Capital received pledge agreements from the borrowers' shareholders for all of the borrowers' stock, which included the right to vote that stock in the event of a default.

Chicago Plastics was in default by mid-1990, and GE Capital notified Chicago Plastics that these defaults would not be waived. On July 10, 1991, GE Capital declared that Chicago Plastics' obligations were due and owing, and exercised its rights under the loan agreement to vote the borrowers' stock. In accordance with that agreement, GE Capital replaced the board of directors of each borrower, and the new boards elected officers. Thomas Gaffney was elected to head Comptech's new management team as CEO and chairman of the new board of directors. Gaffney, who had extensive experience in the plastics industry, was hired pursuant to a consulting agreement. Pls.' Ex. 13. Gaffney appointed Richard H. Brooks, who was already serving as Comptech's executive vice-president, to serve as the company's president.

GE Capital also took an additional step on July 10, 1991 to secure its investment. Concerned that Comptech's former board of directors would initiate bankruptcy or receivership proceedings, the lender filed a motion for a temporary restraining order in the United States District Court for the Northern District of Illinois (Civil Action No. 91-C-4291). That court granted GE Capital's motion, and enjoined Comptech from filing for bankruptcy or receivership. Pls.' Ex. 162.

Beginning in late 1991 or early 1992, Jeanette Chen began to manage the Comptech account for GE Capital. Chen. Aff. at ¶ 5. At that time, Chen was a vice president in the portfolio group at GE Capital, and was responsible for monitoring numerous accounts. Chen Aff. at ¶ 4. In March of 1992, Chen wrote an internal credit memorandum which explained the history of GE Capital's loans to Comptech, and proposed restructuring the account. Pls.' Ex. 2. Chen's memorandum included a proposed merger and acquisition strategy, which she believed would help to expand Comptech's customer base and enhance its profitability. Pls.' Ex. 2.

In March of 1992, as outlined in Chen's memo, GE Capital restructured its loans. The lender wrote off in excess of $20,000,000 of Comptech's debt obligations, and restructured the remaining debt as three term loans, a revolving line of credit, and preferred stock. As security for its loans, under the reorganization GE Capital received 4000 shares of preferred stock, had a 100% pledge of Comptech stock, and had the right to take control of the Board of Directors after two dividend payments were missed.

The terms of the agreement ("the Loan Agreement")*fn2 include a number of provisions which were designed to protect GE Capital's investment. Most germane to the issues before us, under the "Negative Covenants" set forth in Section 7, the lender's approval was required before Comptech or a subsidiary could enter into any of the following transactions: merging with or acquiring another company; investing or making loans; incurring additional indebtedness; selling or transferring properties encumbered by the liens which secured GE Capital's loans, in excess of $50,000 aggregate value per year; changing the company's capital structure; creating any new liens on secured property or assets; making capital expenditures in excess of an annual approved amount; or paying annual compensation in excess of $100,000, except to certain employees. Pls.' Ex. 100 at 65-71.

The Loan Agreement also defined events of default, and provided that, in the event of a default, the lender could terminate any further revolving credit advances, and declare all outstanding obligations due and payable. Pls.' Ex. 100 at 76.

Thomas Gaffney's consulting contract was renewed, and he was again indemnified from liability as a shareholder and as chairman of the board of directors. Pls.' Ex. 11. Gaffney and Brooks purchased all of Comptech's common stock. On March 31, the Amended and Restated Certificate of Incorporation for Comptech, a Delaware corporation, was recorded. Pls.' Ex. 45.

Comptech made arrangements to acquire Accu-Form, Inc. ("Accu-Form"), a plastic injection molder specializing in medical, pharmaceutical, and electronic parts. Comptech, R & R Plastics, Accu-Form, and Frances W. Czulewicz, who was Accu-Form's sole shareholder and CEO, entered an Acquisition Agreement, in which the parties agreed that Accu-Form and R & R Plastics would merge. Pls.' Ex. 146.

Since GE Capital held a security interest in R & R Plastics, the lender had to approve that merger. An Amended and Restated Loan Agreement was entered on June 5, 1992, which essentially acknowledged that R & R Plastics and Accu-Form had merged, and that Accu-Form was replacing R & R Plastics as a party in the loan documents. The amended agreement gave GE Capital a security interest in Accu-Form to secure R & R's indebtedness. Pls.' Ex. 100.

With the new Loan Agreement in place, Comptech continued designing and marketing injection molds and GE Capital provided funding to finance the plant's operation. GE Capital, and particularly Jeanette Chen, closely monitored the Comptech account, and there is an extensive record of correspondence between the lender and borrower. On occasion, GE Capital made decisions to extend financing even though no payments had been made, and waived penalty interest on the unpaid loans. See e.g. Pls.' Ex. 8, 10. In accordance with the Loan Agreement, Comptech frequently had to request that the lender assent to certain business plans and arrangements where those plans would affect GE Capital's security interest.

In the fall of 1993, Comptech created a new subsidiary, Comptech de Mexico, S.A. de C.V. ("Comptech de Mexico") at the suggestion of one of its major customers, Mars Electronics, which was moving its manufacturing facility to Mexico. Mars agreed to provide start-up financing for the company, and Comptech negotiated with Mexican financial institutions regarding a loan for working capital. In addition, Comptech provided certain equipment to the venture. Comptech also negotiated the purchase of Phoenix International, a Mexican company, in connection with Comptech de Mexico. Pls.' Ex. 147.

Since the Loan Agreement required GE Capital's assent before Comptech could transfer any equipment in which the lender held a security interest, or before it could create a subsidiary corporation, GE Capital's assent was necessary before the Comptech de Mexico plan could be implemented. An amendment to the Loan Agreement was executed on November 23, 1993. Pls.' Ex. 153. In that document, the circumstances of Comptech de Mexico's creation were set forth, and GE Capital agreed to release its security interest in the equipment and to waive or amend certain provisions of the Loan Agreement. Comptech held 85% of its new subsidiary's stock, and pledged those shares to GE Capital as security on its loan. Pls.' Ex. 132.

In January of 1994, Comptech negotiated the sale of the remaining assets of its subsidiary, R & R Plastics, to Fulton Industries, and used the proceeds to prepay its term debt to GE Capital in accordance with prepayment provisions of the Loan Agreement. Pls.' Ex. 104.

In the spring of 1994, Gaffney, acting as chairman of the board, fired Brooks as Comptech's president and replaced him with Charles V. Villa. On May 16, 1994, Villa sent Chen a detailed update on Comptech's business plans, and asked for additional funds to cover operational losses and to finance new equipment. Pls.' Ex. 7.

In June of 1994, Gaffney and Brooks sold all of their Comptech stock to Villa, and Gaffney resigned. GE Capital had a call on all of Villa's shares of Comptech stock.

By late summer, it appears that Comptech was at least contemplating that the plant might have to be closed. Comptech asked its attorneys for advice as to whether it had an obligation to provide notice to the plant's employees before closing the facility. In a memo dated August 29, 1994, Comptech's attorney advised that, as the employer, Comptech would be obligated to give sixty days notice under the WARN Act. Pls.' Ex. 16.

On September 24, 1994, Comptech and Accu-Form notified GE Capital that they needed an additional $2 million in working capital in order to continue operations for the remainder of 1994. Pls.' Ex. 21. They were informed that the lender would not provide further funds. In an internal memo dated September 30, 1994, Chen recommended that GE Capital liquidate Comptech's assets as partial payment on the outstanding loans. Pls.' Ex. 4.

Comptech was also seeking financing from other sources, and Villa had discussions with CitiBank Venture Capital Limited regarding securing the $2 million needed to continue to operate Comptech through 1994.

In a letter to Ed Christie, GE Capital's senior vice president of Portfolio Development and Support, Comptech's sales director, Henry Makie, pleaded with the lender to continue to provide financing, and stated that "our management is working to complete a transfer sale to another financial entity." Pls.' Ex. 36. However, GE Capital decided not to extend further credit, and to accept Comptech's liquidated assets as collateral on unpaid loans. By early October, the outstanding principal balance on Comptech's loans was $6,650,000. Pls.' Ex. 24.

TIFD VIII-R was incorporated to conduct the liquidation, and GE Capital assigned its rights in the collateral to TIFD. Pls.' Ex. 113. Negotiations ensued between counsel for the creditor and counsel for Comptech, and drafts of the proposed agreements were circulated on October 11 and 12, 1994. These documents were drafted in accordance with Pennsylvania UCC § 9-505(b). They included an Asset Turnover Agreement, Pls.' Ex. 160, an Asset Retention and Purchase Agreement, and a Supplemental Funding Agreement to fund the wind-up costs, including accrued employee wages and benefits. The agreements were signed on October 13, 1994.

On October 14, Comptech's employees learned that the plant was closing, effective immediately, when Charles Villa posted the closing notice. Pls.' Ex. 50. Paragraph 6 of the notice gave this explanation of the closing:

Pls.' Ex. 50.

As agreed, Comptech turned over the assets pledged as collateral to TIFD, which conducted a liquidation of the assets. TIFD also attempted to fill outstanding orders. The proceeds partially satisfied Comptech's obligations to GE Capital, and the lender wrote off the balance of the debt in 1996.

This action, brought by former Comptech employees against Comptech and the GE Capital defendants, followed.

II. Summary Judgment Standard

Summary judgment is proper where there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c); Childers v. Joseph, 842 F.2d 689 (3d Cir. 1988). "Rule 56 mandates the entry of summary judgment, after adequate time for discovery and upon motion, against the party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A court considering summary judgment must examine the entire record in the light most favorable to the nonmoving party, and draw all reasonable inferences in its favor. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

III. Analysis

The WARN Act requires employers of 100 persons or more to give their employees sixty days written notice prior to a plant closing or mass layoff. 29 U.S.C. § 2102(a). An employer who violates WARN, and who is not protected by certain narrowly-construed exceptions, is liable to each aggrieved employee for back pay and benefits. 29 U.S.C. § 2102(a)(1). It is clear to us that the factual background of the Comptech closing establishes the essential elements of a WARN cause of action. It is undisputed that the closing of the Comptech facility was a "plant closing," which constituted a "WARN event" and caused an "employment loss" to the requisite ...

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