By Samuel A. Schwartz, Shareholder at Brownstein Hyatt Farber Schreck
Litigation Risks Expanding for Plaintiffs
When considering pursuing litigation anywhere in the United States, potential plaintiffs should consider and canvass the potential defendants who may be culpable. Courts around the country are taking a broad view of what claim, issue and party preclusion means in litigation. Specifically, the Nevada Supreme Court recently took the view that any known party who could have been joined to litigation must be added, or the plaintiff risks losing its claims against those unnamed parties. See Weddell v. Sharp, 131 Nev.Adv.Op. No. 28 (May 28, 2015). This ruling in Nevada should be heeded closely by plaintiffs in fraud-related matters, as fraud often involves multiple parties, some of whom may not know they were involved in a fraudulent scheme, and arguably did nothing illegal. In other words, plaintiffs and their counsel should take extra care when bringing any legal action to make certain they thought through the ramifications of the facts supporting the case, and how they raise claims against third parties.
Litigation Risks Expanding for Officers and Directors
Similarly, some courts around the country are starting to take a broader view of breaches of fiduciary duties by directors and officers. See Stanziale v. MILK072011 LLC (In re Golden Guernsey Dairy LLC) 2015 Bankr. Lexis 3185 (Bankr. D. Del. Sept. 21, 2015). In Golden Guernsey, the U.S. Bankruptcy Court for the District of Delaware held that controlling owners, managers and officers could be personally liable for failing to provide appropriate advance notice of a layoff to the debtor’s employees under Wisconsin’s version of the Worker Adjustment and Retraining Notification (WARN) Act.
Golden Guernsey Dairy LLC operated a dairy and milk-processing facility in Wisconsin. It ceased operating on Jan. 5, 2013, and filed Chapter 7 on Jan. 8, 2013. The Wisconsin Department of Workforce Development filed a proof of claim on behalf of some of the debtor’s former employees, claiming damages of approximately $1.56 million under Wisconsin’s WARN Act. The Chapter 7 trustee filed a complaint against the debtor’s sole member, former manager and former president alleging breach of fiduciary duties for exposing the debtor to the WARN Act claims. The defendants filed a motion to dismiss the complaint, contending the debtor’s liabilities may have increased as a result of the claimed WARN Act violation, but that the debtor was insolvent before the WARN Act violation and became only more insolvent as a result of the WARN Act violation.
By way of background, directors and officers owe fiduciary duties to the company, which depend on state law and the form of the entity. When solvent, fiduciary duties might be enforced by the corporation or equity holders through derivative standing. In the context of a Chapter 7 case like Golden Guernsey Dairy, the Chapter 7 trustee has standing to enforce fiduciary duties.
In connection with the claims in the case, the WARN Act requires employers to provide notice to employees of plant shutdowns or layoffs in certain circumstances, and governs only employers with a workforce of 100 or more employees. 29 U.S.C. § 2102. Many states have mini-WARN Acts, such as Wisconsin’s, which was at issue in Golden Guernsey Dairy. The WARN Act subjects the employer to a civil penalty; however, the WARN Act does not provide for personal liability of directors, officers or employees—only the employer. In Golden Guernsey, the Chapter 7 trustee alleged that despite the statue’s language limiting liability to the employer, the failure of the company’s officers to issue a WARN Act notice was a violation of the officers’ fiduciary duties. As a result, the officers of Golden Guernsey Dairy faced personal liability because their company failed to comply with a statute, resulting in the company’s liability for damages due to the violation.
We are seeing similar claims relating to insolvent companies seeking to provide recoveries for their creditors in any scenario where directors or officers failed to follow a statute or ordinance. Examples include civil rights statutes addressing harassment and other discrimination in the workplace; nuisance laws; tax penalties; wage laws; securities laws; zoning ordinances; commission statutes; labor laws; and fraudulent transfer laws. If there are facts to suggest that either the directors or officers failed to properly act in the face of a potential statutory liability, representatives of the company may consider bringing a claim for breach of fiduciary duties, and corporate representatives need to be aware of the risks and should seek competent legal advice to comply with their duties of loyalty and care to the company.
Samuel A. Schwartz is a transactional attorney representing debtors and creditors in a broad range of business reorganization matters, including Chapter 11 cases, restructurings, workouts, mergers and acquisitions and general corporate representation. He can be reached at firstname.lastname@example.org or 702.382.2101.