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SJC-12515

  JILLIAN CALIXTO1 & another2    vs.   HEATHER COUGHLIN & others.3



         Middlesex.    November 8, 2018. - December 28, 2018.

  Present:     Gants, C.J., Gaziano, Lowy, Budd, Cypher, & Kafker,
                                  JJ.


Massachusetts Wage Act. Damages, Breach of fiduciary duty.
     Practice, Civil, Motion to dismiss.



     Civil action commenced in the Superior Court Department on
October 11, 2016.

     A motion to dismiss was heard by Maynard M. Kirpalani, J.

     The Supreme Judicial Court granted an application for
direct appellate review.


     Nicholas J. Rosenberg for the plaintiffs.
     David G. Thomas (Mian R. Wang also present) for the
defendants.

     1 Individually and on behalf of all others similarly
situated, and derivatively on behalf of ISIS Parenting, Inc.

     2 Kathryn Reynolds, individually and on behalf of all others
similarly situated, and derivatively on behalf of ISIS
Parenting, Inc.

     3 Heather Coughlin, Peter Delahunt, Gregg Dion, and S.
Brendan Coughlin.
                                                                   2


     The following submitted briefs for amici curiae:
     Christopher H. Lindstrom & Matthew P. Ritchie for Greater
Boston Chamber of Commerce.
     Ben Robbins & Martin J. Newhouse for New England Legal
Foundation.
     Arthur P. Murphy & Geoffrey P. Wermuth for Murphy, Hesse,
Toomey & Lehane, LLP.


    KAFKER, J.    The primary issue presented is the interplay,

if any, between two employee protection statutes:    G. L. c. 149,

§ 148 (Wage Act), and the Federal Worker Adjustment and

Retraining Notification Act, 29 U.S.C. §§ 2101-2109 (2018) (WARN

Act).   The defendant corporate officers (officers)4 directed ISIS

Parenting, Inc. (company), where the plaintiff employees

(employees) worked until it abruptly ceased operations and

terminated its entire workforce.   Alleging a WARN Act violation

for failure to provide them with sixty days' advance notice of

the company's shutdown, the employees brought a class action

lawsuit against the company in Federal court and received a

nearly $2 million default judgment.   Subsequently, the employees

brought a putative class action lawsuit against the officers in

State court under the Wage Act, claiming that the $2 million

WARN Act damages constitute wrongfully withheld "earned wages"

for which the officers are individually liable.     In addition,




    4  One defendant did not work at the company, but was named
only with respect to the fraudulent conveyance claim. The other
defendants were the president/chief executive officer, chief
financial officer, and corporate secretary.
                                                                   3


the employees argue that the officers committed a breach of

fiduciary duties that they owed to the company by allowing the

company to violate the WARN Act.   Because we conclude that WARN

Act damages are not "earned wages" under the Wage Act, and that

the employees have not asserted a viable claim for breach of

fiduciary duties, we affirm the dismissal of the employees'

case.5

     1.   Background.   We review the allowance of a motion to

dismiss de novo, accepting all well-pleaded facts in the

complaint as true, and taking into account any attached

materials.   See Cook v. Patient Edu, LLC, 465 Mass. 548, 549

(2013).   The employees were among the more than 200 people who

worked at the company, which operated for more than a decade and

had several stores in the Boston area.6   At some point the

company ran into financial difficulties, and its management

decided to stop operating.   On January 14, 2014, without any

prior warning, one of the officers informed the company's

employees that the company was shutting down and their

employment was terminated immediately.




     5 We acknowledge the amicus briefs of the Greater Boston
Chamber of Commerce; the New England Legal Foundation; and
Murphy, Hesse, Toomey & Lehane, LLP, in support of the
defendants.

     6 The company offered pre- and postnatal classes and
services and sold related products for children and parents.
                                                                   4


    That fall, the employees brought a class action lawsuit

against the company in the United States District Court for the

District of Massachusetts, alleging a violation of the WARN Act.

The WARN Act provides that an employer, defined as a "business

enterprise" that employs at least one hundred full-time

employees or at least one hundred full- and part-time employees

who collectively work at least 4,000 non-overtime hours per

week, 29 U.S.C. § 2101(a)(1), "shall not order a plant closing

or mass layoff until the end of a [sixty]-day period after the

employer serves written notice of such an order" on each

affected employee or the employees' representative, 29 U.S.C.

§ 2102(a).   If an employer fails to comply with the sixty-day

notice requirement, it "shall be liable to each aggrieved

employee who suffers an employment loss as a result of such

closing or layoff" for "back pay" and employee benefits covering

each day of the notice violation.   29 U.S.C. § 2104(a)(1).7

"Back pay" under the WARN Act is owed for each day of violation

and is set as the higher of the "average regular rate" received

during the employee's last three years of employment or the




    7  Exceptions to the sixty-day notice period apply when (1)
the employer, under certain circumstances, was actively seeking
capital at the time when the notice should have been given; (2)
business circumstances that were not foreseeable caused the
plant closing or mass layoff without sixty days' notice; (3) a
natural disaster caused the plant closing or mass layoff without
sixty days' notice. 29 U.S.C. § 2102(b) (2018).
                                                                      5


"final regular rate" received by the employee.      29 U.S.C.

§ 2104(a)(1)(A).     The WARN Act further provides that these

remedies "shall be the exclusive remedies for any violation of

this chapter."   29 U.S.C. § 2104(b).      The WARN Act also states

that "[t]he rights and remedies provided to employees by this

chapter are in addition to, and not in lieu of, any other

contractual or statutory rights and remedies of the employees,

and are not intended to alter or affect such rights and

remedies."   29 U.S.C. § 2105.

     The company did not defend the lawsuit, and the Federal

District Court judge eventually awarded a nearly $2 million

default judgment under the WARN Act to the employees.       After

failing to collect any of this judgment amount from the company

due to the company's insolvency, the employees brought this

putative class action in the Superior Court against the officers

directly.    The officers moved to dismiss the complaint for

failure to state a claim.8     The Superior Court judge granted the

motion, finding that the Federal District Court's WARN Act award

"does not qualify as 'earned wages' giving rise to a claim under

the Wage Act."     This appeal followed.

     2.   Discussion.    a.   Whether WARN Act damages are earned

wages under the Wage Act.     The Wage Act provides that "[e]very


     8 The employees voluntarily dismissed several counts of
their original complaint.
                                                                     6


person having employees in his service shall pay weekly or bi-

weekly each such employee the wages earned by him to within six

days of the termination of the pay period during which the wages

were earned if employed for five or six days in a calendar

week."    G. L. c. 149, § 148, first par.    It also provides that

outstanding wages shall be paid "in full on the day of [an

employee's] discharge."     Id.   To combat "unscrupulous employers"

who violate these requirements by withholding earned wages

(citation omitted), Segal v. Genitrix, LLC, 478 Mass. 551, 560

(2017), the Wage Act, with limited exceptions not relevant here,

provides a private cause of action, imposes personal liability

on certain corporate officers, and awards mandatory treble

damages and attorney's fees to a successful plaintiff.        See

Melia v. Zenhire, Inc., 462 Mass. 164, 170 (2012) (describing

these provisions of Wage Act).     It may also impose criminal

liability.     See G. L. c. 149, § 27C.

    Although the statute does not specifically define "wages

earned," we have adopted the "plain and ordinary meaning" of

those terms.    Awuah v. Coverall N. Am., Inc., 460 Mass. 484, 492

(2011).   Specifically, we explained there that "[w]here an

employee has completed the labor, service, or performance

required of him, therefore, according to common parlance and

understanding he has 'earned' his wage."      Id.   In   Massachusetts

State Police Commissioned Officers Ass'n v. Commonwealth, 462
                                                                  7


Mass. 219, 220, 226 (2012) (State Police), we provided further

guidance in the context of employees challenging a mandatory

furlough program that they contended should not have been

applied to them.   We rejected their argument that the

deprivation of wages they would or should have earned was the

deprivation of "earned wages" under the Wage Act.   Id. at 226.

We agreed with the employer that "the right to payment of

'earned' wages is secured by virtue of work or service actually

performed," id. at 225, and thus that "a prospective reduction

in the number of days to be worked," even if improper, "does not

deprive the plaintiffs of any wages 'earned'" under the Wage

Act, id. at 226.

    The same is true for the failure to pay the additional

compensation awarded to workers under the WARN Act if the sixty

days' notice of plant closure is not provided.   The payment is

not for work that has actually been performed but for work that

would have been performed had the sixty days' notice been

provided.   In fact, the WARN Act provides that the amount of

compensation "shall be reduced by . . . any wages paid by the

employer to the employee for the period of violation" (emphasis

added).   29 U.S.C. § 2104(a)(2)(A).   The extraordinary relief

the Wage Act provides -- individual liability, treble damages,

and possible criminal liability -- is directed at particularly

egregious behavior, i.e., not paying wages for work actually
                                                                   8


performed, and not at other employment violations.   See Segal,

478 Mass. at 560 (purpose of Wage Act is to prevent employers'

unscrupulous, long-term detention of wages).

    Furthermore, not only must the employees' work actually

have been performed, but the wages also must be presently -- not

just prospectively or potentially -- due to be paid by the

employer.   See, e.g., State Police, 462 Mass. at 225; Weems v.

Citigroup Inc., 453 Mass. 147, 153-155 (2009).   For example, we

recently held that accrued, unused "sick time" was not an

"earned wage" under the Wage Act where separating employees were

only entitled to compensation for that accrued sick time under

certain conditions.   See Mui v. Massachusetts Port Auth., 478

Mass. 710, 713 (2018).   We also rejected the argument that tax

deferred compensation was wages under the Wage Act that must be

paid within seven days of the end of the pay period, holding

that "[t]he Legislature's remedy for the evil of unreasonable

detention of wages is not applicable to deferred compensation

contributions," as "[t]he contributed funds are intended to be

held, out of the employee's possession, for an extended period."

Boston Police Patrolmen's Ass'n, Inc. v. Boston, 435 Mass. 718,

720 (2002).   The work must have been actually performed and wage

payments must be presently due to trigger the precise

requirements and severe penalties of the Wage Act.
                                                                    9


     Characterizing WARN Act damages as back pay does not alter

this analysis.   Earned wages are not the equivalent of back pay.

Back pay compensates a variety of different types of employment

law violations under State and Federal law.   In general, it

compensates employees for amounts that they "normally would have

earned" had a violation not occurred (emphasis added).   Phelps

Dodge Corp. v. National Labor Relations Bd., 313 U.S. 177, 197

(1941).   That can be for wages earned but unfairly compensated,

as in cases of unequal pay, or for wages not earned, due to the

failure to hire because of discrimination or the failure to

provide notice, as under the WARN Act.   See 4 N.P. Lareau, Labor

and Employment Law §§ 98.06, 109.03, 114.02, 125.03, 174.02

(2018) (discussing back pay awards for violations of various

Federal civil rights, antidiscrimination, and employee

protection statutes).   Regardless, back pay is not the same as

wages earned but not paid under the Wage Act, which has its own

particular and precise requirements.9


     9 The employees rely on Federal bankruptcy cases classifying
WARN Act damages as wages for purposes of bankruptcy creditor
priority. But these cases have concluded that "back pay under
WARN constitutes wages for the purposes of the Bankruptcy Code"
because the Code explicitly includes severance pay in the
definition of "wages," see 11 U.S.C. § 507(a)(4)(A) (2018), and
because WARN Act damages may be regarded as "statutory severance
pay." In re Hanlin Group, Inc., 176 B.R. 329, 334 (Bankr.
D.N.J. 1995). By contrast, severance pay is not mentioned in
the Wage Act, and it has not been deemed an "earned wage" under
the act. See Prozinski v. Northeast Real Estate Servs., LLC, 59
Mass. App. Ct. 599, 603–605 (2003) (holding that severance pay
                                                                  10


     In sum, an employee who is terminated with inadequate

notice and entitled to WARN Act damages for the amounts he or

she would have earned had proper notice been provided has not

"earned wages" for work actually performed and presently due as

required by the Wage Act.   We thus hold that WARN Act damages

are not wrongfully withheld wages for which the officers can be

held liable under the Wage Act.

     b.   Breach of fiduciary duties.   The employees further

argue that the officers committed a breach of their fiduciary

duties to the company by causing it to incur WARN Act liability.

As creditors of the company, the employees argue that they have

standing to bring this claim derivatively.10

     It is true that, under Delaware law, "the creditors of an

insolvent corporation have standing to maintain derivative

claims against directors on behalf of the corporation for

breaches of fiduciary duties."    North Am. Catholic Educ.




is not covered by Wage Act in part because it is not expressly
included in statute). See also Mui v. Massachusetts Port Auth.,
478 Mass. 710, 713 (2018) (citing Prozinski, supra, for its
holding that Wage Act does not cover severance pay); Weems v.
Citigroup Inc., 453 Mass. 147, 151 (2009) (same).

     10A derivative suit is "a suit by the corporation, asserted
by the stockholders on its behalf, against those liable to it.
. . . The fundamental purpose of a derivative action is to
enforce a corporate right that the corporation has refused for
one reason or another to assert." R.F. Balotti & J.F.
Finkelstein, Delaware Law of Corporations and Business
Organizations § 13.10 (3d ed. 2018 Supp.).
                                                                    11


Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.

2007).11   A court applying Delaware law has allowed such a suit

to be brought by a bankruptcy trustee alleging harm to a company

arising out of director misconduct that resulted in WARN Act

violations.   See In re Golden Guernsey Dairy, LLC, 548 B.R. 410,

413 (Bankr. D. Del. 2015).   But "individual creditors of an

insolvent corporation have no right to assert direct claims for

breach of fiduciary duty against corporate directors."      North

Am. Catholic Educ. Programming Found., Inc., supra at 103.     A

claim that a corporate officer committed a "breach of a duty

owed directly to the plaintiff" is a direct suit, not a

derivative one.   Branch vs. Ernst & Young U.S., No. Civ. A. 93-

10024-RGS (D. Mass. Dec. 22, 1995).

     As the Delaware Chancery Court has cautioned, "fiduciary

duty law" in the creditor context should be applied "quite

cautiously, to avoid unduly benefiting creditors by enabling

them to recover in equity when they could not prevail" on other

legal theories asserted directly against defendants.   Prod.

Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 801

n.88 (Del. Ch. 2004).   Accordingly, we conclude that the

employees' breach of fiduciary duty claim is improperly brought:




     11Under G. L. c. 156D, § 7.47, we apply the substantive law
of the jurisdiction where a foreign corporation is incorporated
-- in this case, Delaware -- to a derivative proceeding.
                                                                   12


while styled as a derivative claim, it simply repackages the

employees' primary argument that the officers committed a breach

of duties owed to them under the WARN Act.    By its express

terms, the WARN Act is the exclusive remedy for WARN Act

violations.   See 29 U.S.C. § 2104(b).   We therefore affirm

dismissal of the claim against the officers for breach of

fiduciary duty.12

     3.   Conclusion.   For the foregoing reasons, we affirm the

Superior Court judge's grant of the officers' motion to dismiss.

                                    So ordered.




     12Because we affirm the dismissal of the Wage Act and
breach of fiduciary duty claims, we also affirm the dismissal of
the fraudulent conveyance claim.
