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PEARSON v. COMPONENT TECHNOLOGY CORP.
December 16, 1999
THOMAS PEARSON, JOHN KOWALSKI AND ON BEHALF OF THEMSELVES AND ALL OTHER SIMILARLY SITUATED, PLAINTIFFS,
COMPONENT TECHNOLOGY CORPORATION, A/K/A COMPTECH, A CORPORATION, GENERAL ELECTRIC CAPITAL CORPORATION, A CORPORATION, AND TIFD VII-R, INC., A CORPORATION, DEFENDANTS.
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.
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.
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
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.
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,
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:
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).
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 ...