Private Equity Firm and Owner Face Potential WARN Act Liability in Portfolio Companies’ Chapter 7 Bankruptcies

In Shameeka Ien v. TransCare Corp., et al. (In re TransCare Corp.), Case No. 16-10407, Adv. P. No. 16-01033 (Bankr. S.D.N.Y. May 7, 2020) [D.I. 157], the Bankruptcy Court for the Southern District of New York recently refused to dismiss WARN Act claims against Patriarch Partners, LLC, private equity firm (“PE Firm“), and its owner, Lynn Tilton (“PE Owner“), resulting from the staggered chapter 7 bankruptcies of several portfolio companies, TransCare Corporation and its affiliates (collectively, the “Debtors“).

While the Opinion is not dispositive of the PE Firm’s or PE Owner’s liability on the WARN Act claims–as it was decided on summary disposition–it does illustrate how a private equity firm or its owner may sometimes employ too much flexibility and/or control with respect to managing his, hers or its portfolio companies.


Portfolio Companies

The Debtors provided ambulance and paratransit transportation services in several  Northeastern states.  The PE Owner purchased a majority ownership of the Debtors through several personal investment funds (the “Funds“).

As part of the investment in the Debtors, the following transactions occurred:

  1. Two Funds purchased a majority equity interest in the Debtors.
  2. The PE Owner served as the Debtors’ sole director.
  3. The Funds made working capital loans to the Debtors (the “WC Loans“).
  4. Certain affiliates of the PE Firm (the “PE Affiliates“) that assisted in managing the investment in the Debtors.
  5. In 2003, the Debtors borrowed funds (the “Term Loans“), on a secured basis, from a group of term loan lenders (the “Term Lenders“), including one of the Funds.
  6. In 2006, an unaffiliated bank (the “ABL Lender“) extended an asset-based lending facility (the “ABL Facility“) to the Debtors.

Financial Distress

In 2015, the Debtors started facing severe financial distress, including having woefully insufficient working capital and substantial debt service obligations.

From October 2015 through January 2016, the following occurred:

  • the ABL Lender initially conditioned the renewal the ABL Facility on a $5.5 million capital infusion by the PE Owner or PE Firm and eventually froze the ABL Facility.
  • the Debtor’s then-CEO was terminated and not replaced, leaving the PE Owner, PE Firm and PE Affiliates to handle negotiations with the ABL Lender.
  • Carl Mark Advisory Group (“CMAG“) was hired to provide financial consulting services and reported that the Debtors required a capital infusion of $4.5 million to $6.5 million.
  • The Funds loaned $2 million to the Debtors.

By February 2016, the PE Owner told the ABL Lender she was meeting with bankruptcy counsel and it may be time for the ABL Lender to foreclose on the Debtors’ assets.

The Foreclosure/Bankruptcy Plan

Left with little options, the PE Owner devised a three-part plan (the “Foreclosure/Bankruptcy Plan“) where:

  1. The Term Lenders (represented by a PE Affiliate) would foreclose on their interests in certain Debtors that would continue to provide, post-foreclosure, certain ambulance and paratransit services in three states (the “Subsequent Debtors“);
  2. The Subsequent Debtors thereafter would transfer their interests to two new entities created by the PE Owner (the “New Entities“); and
  3. The remaining Debtors (the “Initial Debtors“) would wind down in chapter 11.

By early February 2016, the PE Owner and PE Firm were taking steps to implement the Foreclosure/Bankruptcy Plan, including hiring bankruptcy counsel, negotiating the transfer of a critical agreement with the Metropolitan Transit Authority (the “MTA“) to the New Entities, drafting Warn Act notices to employees, preparing a checklist for a business shutdown and drafting a transition services agreement with the Initial Debtors to provide the New Entities with certain essential services.

The PE Owner and PE Firm also negotiated a new $16.5 million credit facility with the ABL Lender, but that facility never closed because negotiations broke down.

By February 24, 2016, all steps necessary to implement the foreclosure component of the Foreclosure/Bankruptcy Plan were complete, including the execution of a bill of sale to transfer the Subsequent Debtors’ assets to the New Entities.

At the same time, the Initial Debtors filed chapter 7 bankruptcy and a trustee was appointed (the “Trustee“).  Because neither the ABL Lender or the PE Firm agreed to provide funding to keep the Initial Debtors operational, the Trustee elected to cease the operations of the Initial Debtors and started taking possession of all of the Debtors’ assets, including those necessary to allow the Subsequent Debtors to operate.

The Trustee’s resulting noncooperation jeopardized the Bankruptcy/Foreclosure Plan, because the Trustee was taking possession of property that was necessary to operate the ambulance and paratransit business of the New Entities.  Further, there was a complication in transferring MTA contract to the New Entities.  As a result of these unresolved issues, the PE Owner and PE Firm concluded, at some point, that the transfer of assets to the New Entities would also fail and the Subsequent Debtors needed to file bankruptcy.

On February 26, 2016, all the employees of the Subsequent Debtors were notified that they would be laid off.  This notice attributed the layoffs to the failure of the ABL Lender, CMAG and the Trustee to fund payroll.

On April 26, 2016, the Subsequent Debtors filed for chapter 7 relief, and the same Trustee was appointed in their cases.


On March 1, 2016, a former employee of the Debtors filed a class action against the PE Owner, PE Firm, Funds and PE Affiliates, claiming, among other things, violations of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. (the “WARN Act“), which requires an employer to give employees sixty-days’ written notice of a plant closing or mass layoff, and a similar New York statute (collectively, the “WARN Acts“).

The PE Firm, Funds, and PE Affiliates moved for summary judgment, contending that they were not subject to “single employer liability” under the WARN Acts and, even if they were, they could not be held liable because of “unforeseeable business circumstances.”

Judge Bernstein granted partial summary judgment in favor of the Funds and PE Affiliates, but not for the PE Firm.


To determine whether related entities constitute a single employer, the Second Circuit has adopted five non-exclusive factors:

  1. common ownership;
  2. common directors and/or officers;
  3. de facto exercise of control;
  4. unity of personnel policies emanating from a common source; and
  5. the dependency of operations.

Guippone v. BH S&B Holdings LLC, 737 F.3d 221, 226 (2d Cir. 2013).  While no one factor is controlling, see Vogt v. Greenmarine Holdings, LLC, 318 F. Supp.2d 136, 142 (S.D.N.Y. 2004), at the bottom of this test is “an inquiry into whether the two nominally separate entities operated at arm’s length.” Pearson v. Component Tech. Corp., 247 F.3d 471, 495 (3d Cir.), cert. denied, 534 U.S. 950 (2001).

De Facto Control

The key factor in single employer liability is whether there existed de facto control, the core of which “is whether one company was the decision-maker responsible for the employment practice giving rise to the litigation.”  Guippone, 737 F.3d at 227.  Ordinary incidence of stock ownership is generally not enough to support liability under this factor.  Id.

Here, the Court found that there was little issue that the PE Owner, who formulated the Foreclosure/Bankruptcy Plan, exercised sufficient control over the Debtors, because she supposedly directed the foreclosure and transfer of assets in favor of the New Entities, the termination of all the Debtors’ employees and the Debtors’ bankruptcy filings.  What was unclear was whether she was acting as an officer/agent of the PE Firm.

The Court also found that other PE Firm employees also appeared to have played important roles in the Foreclosure/Bankruptcy Plan, preparing checklists, handling all WARN Act issues, overseeing the transfer of employees and assets to the New Entities, accelerating the debt owed to the Term Lenders, coordinating the Article 9 foreclosure of the Subsequent Debtors’ assets, negotiating with the ABL Lender and listening to CMAG.

On the flip side, the Court found no evidence that the PE Affiliates exercised any control over the Foreclosure/Bankruptcy Plan or the Debtors generally, and the mere fact that the PE Owner controlled the PE Affiliates and the Debtors alone did not establish that they exercised de facto control over the Debtors.

With respect to the Funds, the Court utilized principles of lender liability, where “the dispositive question is whether a creditor is exercising control over the debtor beyond that necessary to recoup some or all of what is owed, and is operating the debtor as the de facto owner of an ongoing business.”  Cappola v. Bear Stearns & Co., 499 F.3d 144, 150 (2d Cir. 2007).  The Court found that, since the loans to the Funds were in default, the resulting foreclosure by the Term Lenders “was consistent with their right to collect an unpaid debt and [did] not evidence de facto control.”

Common Ownership

The common ownership factor asks “whether a parent or related entity directly
owns a separate corporate entity,” Garner v. Behrman Bros. IV, LLC, 260 F.Supp.3d 369, 367-77 (S.D.N.Y. 2017), but this factor is of “limited significance . . . since it is well established that stock ownership alone is not grounds for holding a parent liable for its subsidiary’s actions.” Vogt, 318 F.Supp.2d at 142.

The Court found that this factor was satisfied for the Funds because they owned direct equity interests in the Debtors, but not satisfied with respect to the PE Affiliates, because their indirect interests in the Debtors were small (5.6%) and remote.

Finally, the Court found that, because the PE Firm did not hold an equity stake in the Debtors, it did not meet the common ownership factor.

Common Director and/or Officers

The common directors and/or officers factor looks to whether two entities “(1)
actually have the same people occupying officer or director positions with both
companies; (2) repeatedly transfer management-level personnel between the
companies; or (3) have officers and directors of one company occupying some sort of
formal management position with respect to the second company.”  Garner, 260 F.
Supp.3d at 377.  Like the common ownership factor, this factor is of “limited importance” because it is “entirely appropriate for directors of a parent corporation to serve as directors of its subsidiary.”  Vogt, 318 F.Supp.2d at 142.

This factor was met for the PE Firm, Funds and PE Affiliates because the PE Owner was a director, chief executive officer and/or manager of those entities and was the sole director of the Debtors.

Unity of Personnel Policies

The “unity of personnel policies” factor is “analogous to the aspect in the federal
labor law test concerning ‘centralized control of labor operations,’ which the Second
Circuit has considered to include factors such as centralized hiring and firing, payment
of wages, maintenance of personnel records, benefits and participation in collective
bargaining.”  Vogt, 318 F. Supp.2d at 142-43.  “In the context of the WARN Act, the decision to effect a mass layoff is the single most important personnel policy.”  Id. at 143

Here, the Court found that there was a fact question as to whether the PE Firm satisfied this factor, because there was evidence that the Debtors’ HR personnel took direction from the PE Firm.  Additionally, the PE Firm supposedly oversaw the Debtors’ headcount, approved job descriptions, created the Debtors’ HR policies, posted the Debtors’  jobs on the PE Firm’s website, and oversaw the labor and WARN Act issues relating to the Foreclosure/Bankruptcy Plan.

Furthermore, there was a question as to how much the PE Firm participated in the execution of the Foreclosure/Bankruptcy Plan,  which included the layoffs of all of the Debtors’ employees.

Conversely, the Court found that there was no evidence that the Funds or PE Affiliates – entities without employees – participated in the execution of the Foreclosure/Bankruptcy Plan or shared any personnel policies with the Debtors.

Dependency of Operations

The “dependency of operations” factor addresses three areas of overlap between
two entities: “(1) sharing of administrative or purchasing services, (2) interchanges of
employees or equipment, or (3) commingled finances.”  Garner, 260 F.Supp.3d at 379.  “Control over day-to-day operations has been held to be indicative of interrelation of operations  . . .  However, the mere fact that the subsidiary’s chain-of-command ultimately results in the top officers of the subsidiary reporting to the parent corporation does not establish the kind of day-to-day control necessary to establish an interrelation of operations.”  Pearson, 247 F.3d at 501.

Further, loans that are “bona fide arm’s length transactions” do not establish that the borrower was operationally dependent on the lender.  Id. at 502-03.

Here, the Court found that there was some evidence showing that the PE Firm’s employees exerted control over the Debtors’ day-to-day operations, especially after the former CEO left the Debtors.  Specifically, there was some evidence that PE Firm employees frequently worked out of the Debtors’ offices, instructed the Debtors’ officers to selectively pay certain vendors and instructed the Debtors not to pay 2015 payroll taxes.  Thus, there were facts questions as to whether the Debtors were operationally dependent on the PE Firm.

There was also some evidence that indicated that the Debtors were financially dependent on the Funds, which made WC Loans to the Debtors when funding under the ABL Agreement became unavailable. In addition, the Court found some evidence that PE Firm officers directed the Debtors to repay the loans to the Funds ahead of other pressing obligations.  However, because the Funds were nothing more than the PE Owner’s personal bank accounts, the Court attributed any dependence on the loans provided by the Funds on the PE Owner, not the Funds themselves.

The Court finally found no evidence that the Debtors were dependent on the PE Affiliates or vica versa.

Unforeseeable Business Circumstances

The “unforeseeable business circumstances” defense (“UBC“) shields an employer from WARN Act liability when a mass layoff occurs before the conclusion of the notice periods under the WARN Acts, if the layoff was caused by business circumstances that were “not reasonably foreseeable as of the time that notice would have been required.”  29 U.S.C. § 2102(b)(2)(A); NYLL § 860 c(1)(b).   The UBC defense requires that the employer establish “(1) that the business circumstances that caused the layoff were not reasonably foreseeable and (2) that those circumstances were the cause of the layoff.”  Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.), 866 F.3d 515, 523 (3d Cir. 2017)

The UBC defense is generally fact intensive and thus not conducive to resolution through dispositive motion practice.  See, e.g., Conn v. Dewey & LeBoeuf LLP (In re Dewey & LeBoeuf LLP), 487 B.R. 169, 175 (Bankr. S.D.N.Y. 2013).

Every circuit court of appeals to consider the UBC defense has adopted the “probability” standard first set forth in Halkias v. Gen. Dynamics Corp., 137 F.3d 333, 336 (5th Cir.), cert. denied, 525 U.S. 872 (1998), where the Fifth Circuit held that:

We can only conclude that it is the probability of occurrence that makes a business circumstance ‘reasonably foreseeable’ and thereby forecloses use of the § 2102(b)(2)(A) exception to the notice requirement.  A lesser standard would be impracticable [because employers would be] put to the needless task of notifying employees [every time the possibility of a mass layoff exists].

Because of the other issues already resolved by the Court, the sole question here was whether the PE Firm could avail itself of the UBC defense in connection with the layoffs of the remaining employees of the Subsequent Debtors, when the Foreclosure/Bankruptcy Plan failed.

The PE Firm produced evidence of the reasonable probability that these employees would keep their jobs at the New Entities.  It points to the communications that were sent to the Debtors’ employees on February 24, 2016, stating that the Subsequent Debtors would continue operations.

While the PE Firm contends that the Trustee’s refusal to grant access to certain assets of the Initial Debtors was not reasonably foreseeable and caused the loss of jobs, the Court found this conclusion open to question, since the Debtors were on life support for nearly one year and depended on the Funds to cover shortfalls throughout 2015 and into 2016.

The Court also found that once the plan for a chapter 11 wind-down fell through, at some point, the PE Owner and PE Firm had to realize that the Initial Debtors would have to be liquidated through chapter 7 and that a chapter 7 trustee could present a problem.  The PE Firm specifically asked the Debtors’ bankruptcy counsel whether the trustee would allow the Initial Debtors to perform under the transition services agreement and whether the Subsequent Debtors would have access to the Initial Debtors’ assets (particularly the billing system, payroll account and checks) in the period between the chapter 7 filing and the appointment of the chapter 7 trustee.

In short, the Court found that the alleged unforeseen business circumstance could have become reasonably foreseeable at some point when it became apparent that a chapter 11 winddown would not work and the success of the Foreclosure/Bankruptcy Plan would depend on factors outside the PE Firm’s control.  This raised questions of fact that could not be resolved on a motion for summary judgment.


WARN Act liability for related entities of an employer depends on how much control the related entities exercises over the employer’s affairs.  While a mere parent/subsidiary relationship or mere stock ownership is generally not enough to impose liability on the related entity, the TransCare case reminds us that private equity firms, which operate with less rigidity that institutional investors, should be careful about how much flexibility they employ in situations where an insolvent subsidiary might be headed towards a potential liquidation and employees might be laid off.

As for the UBC defense, the TransCare opinion also provides insight as to the ability of a related entity to use the appointment of a chapter 7 trustee as a scapegoat for the entity’s financial demise.  Judge Bernstein’s Opinion seems to suggest that a related entity should consider the probability of negative outcomes with a trustee as soon as the related entity knows it may lose control of the process.

If you have read this far, the takeaway from TransCare may simply be that a private equity firm should often pause to evaluate how many hats it is wearing in acquiring and managing its portfolio companies, because, as Judge Bernstein reminds us, even the best laid plans of mice and men often go awry.