United States: Bank Not Liable as an ‘Employer’ Under WARN Act or ‘Fiduciary’ Under ERISA

A federal district court in Michigan has determined that a bank’s actions to protect its security interests were insufficient to convert the lender to employer status for purposes of the WARN Act, or to the role of fiduciary under ERISA.

The U.S. District Court for the Eastern District of Michigan held in Zawlocki v. Rama Tech, LLC, 2005 WL 3358855 (E.D.Mich. Dec. 9, 2005) that WARN Act and breach of fiduciary claims under ERISA were sufficiently pleaded against lender Comerica Bank to survive dismissal. However, the court further ruled that the lender was entitled to summary judgment on the merits for such claims because of its lack of sufficient involvement in the borrower’s day-to-day affairs (the criteria for establishing lender liability under the WARN Act) and its lack of discretionary authority and responsibility over the borrower defendant’s ERISA Plan.

In 2002, plaintiff-employees filed a class action lawsuit against, among others, their former employer, Rama Tech, formerly a local supplier to the automotive industry, and Rama Tech’s lender, Comerica Bank ("Comerica"). The plaintiffs alleged that Comerica and its agents made the decision to close Rama Tech and terminate its employees without giving notice as required under the Worker Adjustment and Retraining Notification Act ("WARN"), and failed to pay benefits in violation of the Employee Retirement Income Security Act of 1974 ("ERISA").

Comerica began its relationship with Rama Tech in 1999, ultimately providing a working capital line of credit to Rama Tech with a maximum loan balance of $6.5 million, a mortgage note and several term notes. In 2002, Rama Tech’s financial success had waned, and Rama Tech hired a new CEO to run the company. Despite the new hire, Rama Tech breached several covenants under Comerica’s line of credit and loan agreements.

In July 2002, Comerica agreed to enter into a forbearance agreement with Rama Tech, whereby the company was required to hire a workout consultant to provide day-to-day financial advice. As part of the forbearance agreement, Comerica required Rama Tech to remit all monies received to the Comerica cash collateral account, which sums were used to pay down the original line of credit extended by Comerica to Rama Tech, and further authorized overformula funding of $1 million, upon which checks only could be issued and sent with Comerica’s express approval.

In late 2002, Comerica learned of possible customer pullouts, and in conjunction with Rama Tech and its workout consultants, attempted to obtain commitment agreements with Rama Tech’s major creditors. Upon certain major creditors’ failures to agree to such commitment agreements, however, Comerica decided not to provide further loans to Rama Tech; and as asserted by Comerica, Rama Tech’s management decided to shut down its operations.

At the time operations ceased, an ERISA governed medical plan ("Plan") was in effect, that provided that Rama Tech would pay an administrative fee to American Medical Security ("AMS"), which processed claims under the Plan and advised Rama Tech of the amount of employee claims that needed to be paid. Employees contributed to the Plan through payroll deductions.

Rama Tech asserted that it sought Comerica’s approval to pay AMS’ administrative fee for December 2002, and Comerica refused to honor the check, which in turn resulted in AMS’ cancellation of its contract with Rama Tech, and a failure to fund Rama Tech’s employee medical claims under the Plan. Moreover, employees did not receive a refund of payroll contributions made towards the Plan.

Addressing Comerica’s motion to dismiss the WARN Act claims, the court noted that while neither the WARN Act nor the Department of Labor ("DOL") regulations explicitly authorize suits under the WARN Act against lenders, three U.S. Courts of Appeal (the Third, Eighth and Ninth Circuits) specifically have held that a lender may be liable under the WARN Act if its relationship with the indebted employer meets certain criteria—all of which involve an assessment of the degree of the lender’s involvement in the borrower’s affairs.

In the instant case, the court found that the plaintiffs’ allegations were sufficient to satisfy their pleadings burden as to the WARN claims against Comerica, and denied Comerica’s motion to dismiss on that issue.

Similarly, the court declined to grant Comerica’s motion to dismiss the ERISA claims. While Comerica was neither a plan nor a plan administrator under ERISA’s definitions (a statutory requirement for proceeding with a claim for denial of benefits under an ERISA plan), the plaintiffs contended that Comerica had breached its duties owed to the plaintiffs as their fiduciary.

However, the court granted Comerica’s motion for summary judgment on the WARN Act based on the merits. The court determined that Comerica, which had the burden on summary judgment to show as a matter of law that it was not an "employer" under the WARN Act, had provided unrefuted evidence that its control over Rama Tech was limited to protecting its security interest.

The plaintiffs were unable to produce evidence showing that Comerica had ever supervised or hired Rama Tech employees—despite the condition in the forbearance agreement that Rama Tech hire a workout consultant.

Applying the test articulated by the Eighth Circuit in Adams v. Erin Weller Co., 87 F.3d 269 (8th Cir. 1996), the court determined that Comerica’s de facto control over Rama Tech did not rise to the level sufficient to create liability under the WARN Act. Rather, the court held that Comerica’s influence over Rama Tech’s financial decisions during the period of delinquency constituted only indicia of a "major lender’s attempt to work with a troubled borrower and nurse it back to financial health" (citing Adams, 87 F.3d at 272) and thus, the notice requirements under the WARN Act did not apply to Comerica.

Likewise, the court granted Comerica’s motion for summary judgment on the ERISA claims based on the merits. The court observed that for ERISA purposes, Congress intended to limit the definition of "fiduciary" with respect to a plan to the extent that a person or entity:

1. exercises any discretionary authority or discretionary control respecting management of the plan or disposition of its assets
2. renders investment advice for a fee or other compensation with respect to any monies or other property of the plan, or has authority or responsibility to do so
3. has any discretionary authority or responsibility in the administration of the plan

See 29 U.S.C. §1002(21)(A).

Noting that other courts have imposed personal liability under ERISA, the Michigan District Court declined to find Comerica liable as plaintiffs’ fiduciary because there was no evidence to suggest that Comerica ever implemented a course of action to direct Plan assets (including, but not limited to, the employees’ payroll deductions for their portion of Plan costs) for payment of monies owed. The payroll dedutions/ERISA assets were not segregated by Rama Tech. As Plan Sponsor, sole liability for such failure to segregate Plan assets rested with Rama Tech.

Zawlocki is illustrative of the standards federal courts will apply to determine the extent to which lenders may protect their investments without becoming so entangled in the management of a company as to incur WARN Act and ERISA liability.

This article is presented for informational purposes only and is not intended to constitute legal advice.