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Cleary v. American Capital, Ltd

United States District Court, D. Massachusetts

November 14, 2014

GREGORY CLEARY and JOHN DANIELE, on behalf of themselves and all others similarly situated
v.
AMERICAN CAPITAL, LTD

Page 250

For Gregory Cleary, John Daniele, Rob Heindl, Jason McGee, Dennis Parrish, Gordon Taylor, Plaintiffs: David C. Tufts, Mary E. Olsen, LEAD ATTORNEYS, PRO HAC VICE, The Gardner Firm, P.C., Mobile, AL; Jesse Ian Redlener, LEAD ATTORNEY, Dalton and Finegold, LLP, Andover, MA; M. Vance McCrary, LEAD ATTORNEY, PRO HAC VICE, The Gardner Firm PC, Mobile, AL; Stuart J. Miller, LEAD ATTORNEY, PRO HAC VICE, Lankenau & Miller LLP, New York, NY.

For American Capital, Ltd., Defendant: David B. Bergman, John P. St. Leger, LEAD ATTORNEYS, PRO HAC VICE, Arnold & Porter LLP, Washington, DC; Matthew D. Keiser, Robert A. DeRise, LEAD ATTORNEYS, PRO HAC VICE, Arnold & Porter, LLP, Washington, DC; Andrew P. Botti, McLane, Graf, Raulerson & Middleton, P.A., Woburn, MA.

Page 251

MEMORANDUM AND ORDER ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

Richard G. Stearns, UNITED STATES DISTRICT JUDGE.

The issue in this case is whether a private equity firm seeking to protect its shareholders' stake in a failing company succeeded in negotiating the delicate boundary between permissible self-help and de facto corporate control so as to avoid liability as a " single-employer" under the Worker Adjustment and Retraining Notification (WARN) Act of 1988, 29 U.S.C. § § 2101-2109. Plaintiffs Gregory Cleary and John Daniele are former employees of Constar International, Inc. (Constar), a bankrupt electrical service contractor.[1] Cleary and Daniele were employed at a Constar facility in Norwood, Massachusetts. They were terminated on October 31, 2007, when Constar's Board of Directors voted to terminate all Constar employees at the close of business so as " to avoid incurring further payroll for which there [were] no funds available to pay." Def.'s Mem. at Ex. 28 (Constar Board minutes, Oct. 31, 2007). Cleary and Daniele seek to represent a class of former employees of Constar who were similarly terminated. They are attempting, through this Complaint, to recover unpaid WARN Act wages and benefits from American Capital, Ltd. (American Capital), a publicly traded Delaware private equity fund that, at the time of the bankruptcy, owned the majority share of equity and debt in NewStarcom Holdings, Inc. (NewStarcom), Constar's corporate grandparent. On February 28, 2014, in an order denying in part American Capital's motion to dismiss, the court undertook to consider, as a threshold matter, whether American Capital's involvement in Constar was of a level sufficient to render it a single employer for WARN Act purposes. At plaintiffs' request, the court authorized discovery limited to this question. The issue now fully briefed, the court heard oral argument on American Capital's motion for summary judgment on October 24, 2014.

BACKGROUND

Plaintiffs were employed as apprentice electricians by Constar, a commercial electrical contractor incorporated in Massachusetts

Page 252

in 1976. Constar's parent company, NewStarcom, was organized under the laws of Delaware. NewStarcom was a shell corporation housing three operating companies: Constar, Matco Electric Corporation (Matco), and Port City Electric, Inc. (Port City). From November 1, 2006, through April 23, 2007, Constar was a wholly-owned subsidiary of NewStarcom. From April 23, 2007, through the employment terminations on October 31, 2007, Constar was a wholly-owned subsidiary of NSC Holdings (NSC), as were the other two subsidiary companies. All of NSC's common stock was owned by NewStarcom.

Defendant American Capital has a significant presence in the equity markets with over $5 billion invested in some 130 portfolio companies. In 2007, NewStarcom was one of those companies. American Capital owned 70% of NewStarcom's shares until October 1, 2007 (and 59% thereafter), as well as a majority of its debt (at one point in May of 2007, America Capital held approximately 95% of NewStarcom's subordinated secured debt).

In late 2006, NewStarcom began to incur substantial losses on the operations of its subsidiaries. In April of 2007, American Capital invested $14 million in NewStarcom (including the purchase of approximately $10 million of its preferred stock). The injection of cash was intended to alleviate NewStarcom's short-term liquidity problems and to bring its vendor accounts current. The effort failed as NewStarcom's operating losses continued to compound. On June 4, 2007, NewStarcom's Chief Executive Officer Dennis Dugan was replaced by William Skibitsky.[2] Later (on August 21, 2007) Steven Cumbow replaced NewStarcom's Chief Financial Officer, John Kearney. By early October of 2007, American Capital had given up on the rescue effort, refusing to provide NewStarcom with a requested $6 to $7.8 million infusion of new capital. At the time that it made the decision to pull back on its investment, American Capital was aware that NewStarcom was in danger of being placed in default by Citizens Bank, its senior debt holder.

On October 11, 2007, NewStarcom's Board of Directors approved a last-ditch plan to save the company and its affiliates. The plan hinged on securing debt relief and refinancing from NewStarcom's key stakeholders, including Citizens Bank, CNA Surety, American Capital, and the largest of the vendor-creditors. The plan failed, when on October 30, 2007, negotiations with Citizens Bank floundered and the Bank declared a default. On October 31, 2007, the Boards of Directors of NewStarcom and Constar met and voted to terminate all employees.

DISCUSSION

Congress enacted the WARN Act in 1988 " in response to extensive worker dislocation that occurred in the 1970s and 1980s when employees lost their jobs, often without notice, as companies were merged, acquired or closed. The purpose of the WARN Act is to protect workers by obligating ...


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