Coppola v. Bear Stearns & Co., Inc.

Citation499 F.3d 144
Decision Date30 August 2007
Docket NumberDocket No. 05-6440-cv.
PartiesVincent J. COPPOLA, Michael Breslin, and Olin McDonald, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. BEAR STEARNS & CO., INC., Bear Stearns Home Equity Trust, Bear Stearns International Limited, and EMC Mortgage Corporation, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Cornelius D. Murray (Pamela A. Nichols, Michael D. Assaf, of counsel), O'Connell & Aronowitz, Albany, NY, for Plaintiffs-Appellants.

Neil L. Levine (Alan J. Goldberg, John P. Calareso, Jr., of counsel), Whiteman Osterman & Hanna LLP, Albany, NY, for Defendants-Appellees.

Before: WINTER, CABRANES, Circuit Judges, and KORMAN, District Judge.*

WINTER, Circuit Judge:

The appellants here filed a class-action lawsuit against appellees Bear Stearns & Co., Inc. ("Bear Stearns" or "Bear"), Bear Stearns Home Equity Trust, Bear Stearns International Limited, and EMC Mortgage Corporation, for violation of the Worker Adjustment and Retraining Notification Act ("WARN"), 29 U.S.C. §§ 2101-09. Appellants claim that Bear Stearns closed the principal offices of National Finance Corporation ("NFC"), their employer and a debtor of Bear Stearns, and terminated their employment without the advance written notice required by WARN. Judge Scullin granted appellees' motion for summary judgment, holding that appellees had no liability under WARN because Bear was not appellants' "employer" within the meaning of the statute. We agree and affirm.

BACKGROUND

Given the procedural posture of this matter, we view the facts in the light most favorable to appellants. Cioffi v. Averill Park Cent. Sch. Dist. Bd. Of Educ., 444 F.3d 158, 162 (2d Cir.2006). Appellants were employees of NFC until its closure on December 23, 1999. NFC's business consisted of the origination and resale of mortgages and home equity loans to residential customers. It earned revenue from fees charged for originating the loans and from premiums paid by purchasers of the loans in the secondary market. To conduct this business, NFC relied on two lines of credit: a short-term "operating" credit line from BankBoston ("BB"), and a longer-term "warehouse" credit line from Bear Stearns. NFC used the BB line to fund its origination of loans, which became collateral for the debt incurred to BB. If a loan on the BB line sold quickly in the secondary market, NFC would use the receipts to pay off its debt to BB. Otherwise, NFC would sell the loan to Bear and "sweep" it into the warehouse line, with the right and obligation to repurchase it from Bear in the event of resale or default on the part of NFC. When NFC sold a loan on the Bear warehouse line, it would pay Bear an agreed-on price to repurchase the loan from Bear and retain any profit earned from the sale. NFC paid off the amount owed on the BB line on an approximately weekly basis.

NFC fell on hard times in the fall of 1998, and by February 1999, could not fund its continued operations. To obtain the needed funds, NFC, chiefly through David Silipigno, NFC's then-President and CEO, retained money from sales of loans on the warehouse line that it should have paid to Bear Stearns. NFC covered its tracks by falsifying the weekly loan schedules it submitted to Bear, listing resold loans as unsold and still available as collateral on the warehouse line.

In August 1999, NFC's misappropriations — which by that point amounted to $5.6 million of Bear's money — were discovered by Westwood Capital ("Westwood"), a company NFC had hired to help sell NFC. In November 1999, Westwood persuaded NFC to disclose its conduct to Bear. NFC's actions had placed NFC in default under the terms of the Master Repurchase Agreement ("MRA") governing its relationship with Bear, and Bear consequently had the right under the MRA to seize all loans on the warehouse credit line to pay off the line. Instead, Bear pursued a workout strategy that would allow NFC to remain in business for a time in the hope of selling NFC and using the proceeds to repay Bear.

Bear refused, however, to continue to do business with the individuals responsible for the fraud. In response, David Silipigno, Joseph Silipigno, and the other NFC personnel involved in the theft resigned as officers of NFC. Harvey Marcus, NFC's General Counsel, volunteered to serve as the new President and CEO. He was confirmed in this position by a "Unanimous Consent" executed on November 24, 1999, by NFC's board, which appears to have consisted solely of David and Joseph Silipigno. The Unanimous Consent also reflected that the Silipignos' resignation as officers was effective as of November 23, 1999.

On November 23, 1999, NFC and Bear entered into a letter agreement (the "November 23 Agreement") formalizing the terms on which they would agree to continue their business relationship. Because Marcus had no experience managing a mortgage business, NFC hired an individual named Bill Bradley to run NFC until it was sold. Bear agreed to subordinate its claims against NFC to Bradley's bonus in the event of NFC's sale or bankruptcy.

Bear also accepted stock pledge agreements from the Silipignos representing their entire ownership interests in NFC (in total, 96% of NFC's stock). The pledge agreements reflect that Bear was entitled to exercise its rights at any time, upon notice of its intent to the pledgors, but Bear never voted or took any action with respect to the stock.

At this point, NFC needed new sources of funding. BankBoston had terminated NFC's operating credit line in response to NFC's fraud. Although the November 23 Agreement left NFC free to seek other sources of capital (both from financing for loan originations and from mortgage resales), NFC did not make much (if any) effort to do so, believing that such efforts would be futile given that word of NFC's fraud had spread through the industry. Bear itself was no longer willing to continue its warehouse line arrangement with NFC, but agreed that its subsidiary EMC Mortgage Corp. ("EMC") would make outright purchases of certain types of loans originated by NFC. Bear hired the Clayton Group to evaluate the loans NFC proposed for purchase by EMC. The Clayton Group, serving as Bear's underwriter, performed these evaluations on-site at NFC after NFC's underwriters approved the loans in question.

While this arrangement enabled NFC to earn money from the purchase premiums paid by EMC and the origination fees paid by borrowers, NFC had no way as a practical matter to fund any loan that EMC was unwilling to purchase. Specifically, EMC purchased only loans falling within Bear's "B/C subprime" criteria, and NFC was therefore no longer able to originate and sell other types of loans that had previously been part of its product mix.

In early December 1999, NFC could not meet its payroll. Bear refused to loan any money to NFC for that purpose, but did agree to a "forward purchase transaction." Under that procedure, EMC advanced funds to NFC in the amount of payments EMC was about to make for loans that were "in the pipeline" but had not yet closed. NFC faced the same problem again with regard to its December 23, 1999 payroll and asked for another forward purchase transaction. This time, however, there were not enough loans "in the pipeline" to secure the amount necessary to cover the full payroll, and Bear refused to advance any amount that could not be secured. According to Bradley's deposition testimony, Bear stated that it would not fund payroll again, regardless of how much could be secured, because Bear was to serve as a funding source for loans and not to cover payroll. Millie Freel-Mackin, then a Principal Banking Examiner II of the New York State Banking Department present at NFC pursuant to the Banking Department's investigation of NFC following disclosure of the fraud, attempted to obtain a loan to cover the payroll from a company that had been a potential buyer of NFC, but was unsuccessful.

Bradley and Freel-Mackin explained the situation to Marcus, and on December 22, 1999, they saw no alternative but to close NFC. However, the decision may have been made in substance at least a day earlier, as Paul Friedman, a Bear executive, sent an email on December 21, 1999, in which he stated that NFC would close its doors on December 22. In addition, Bear issued a notice of default to NFC, also dated December 21, stating that "You [NFC] have also advised us that you are ceasing operations." In any case, Marcus prepared a memo to NFC's employees announcing NFC's closure, which was posted on NFC's door on December 23, 1999.

Appellants filed suit on December 20, 2002, and a class was certified by stipulation and order on January 15, 2004. Bear moved for summary judgment on April 25, 2005, as did appellants on April 28, 2005. The district court entered judgment granting Bear's motion and denying appellants' motion on October 17, 2005. Coppola v. Bear Stearns & Co., No. 1:02-cv-1581, 2005 WL 2648033 (N.D.N.Y. October 17, 2005). Appellants appealed.

DISCUSSION

We review a grant of summary judgment de novo. "[S]ummary judgment is appropriate where there exists no genuine issue of material fact and, based on the undisputed facts, the moving party is entitled to judgment as a matter of law." D'Amico v. City of New York, 132 F.3d 145, 149 (2d Cir.1998), see also Fed. R.Civ.P. 56. Material facts are those which "might affect the outcome of the suit under the governing law," and a dispute is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). We view the facts in the light most favorable to the non-moving party and resolve all factual ambiguities in its favor. Cioffi, 444 F.3d at 162.

Section 2102 of WARN requires employers to give 60 days' advance written notice before a plant closing or mass...

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