The opinion
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
TROY FLEMING et al CIVIL ACTION
VERSUS NO: 20-1476
BAYOU STEEL BD HOLDINGS II SECTION: “J”(4)
LLC, et al
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Court held a bench trial on the merits in this matter on Monday, April 1,
2024 to decide one issue on remand from the Fifth Circuit Court of Appeals: “whether
[Black Diamond Capital Management L.L.C. (“Black Diamond”)] exercised de facto
control over Bayou Steel’s decision to close its LaPlace steel mill and order Plaintiffs’
layoffs.” Fleming v. Bayou Steel BD Holdings II L.L.C., 83 F.4th 278, 300 (5th Cir.
2023) (hereinafter “Fifth Circuit opinion”). After consideration of the testimony and
evidence submitted, and the arguments of counsel, the Court issues the following
Findings of Fact and Conclusions of Law pursuant to Fed. R. Civ. P. 52(a).
This case is a class action brought by former employees of BD LaPlace, LLC
(“Bayou Steel”) which operated a steel mill in LaPlace, Louisiana. Plaintiffs were
illegally terminated on September 30, 2019 without the advance notice they were
owed under the Worker Adjustment and Retraining Notification (WARN) Act which
“requires certain employers to provide affected employees with 60-days’ notice before
a plant closure or mass layoff.” Id. at 283 (citing 29 U.S.C. §2102(a)). Neither party
disputes that Plaintiffs were illegally terminated. The issue is rather who could be
held responsible for this illegal termination: Bayou Steel, the employer, or Black
Diamond, the company that owned the private equity fund that acquired Bayou Steel.
The WARN Act provides that non-employers may be held liable for illegal
termination when that entity can be found to have “acted as a ‘single employer’ with
the plaintiffs’ employer.” Fifth Circuit Opinion, at 284. The Department of Labor has
provided factors to be considered in determining whether a related entity can be
considered a single employer for purposes of WARN Act liability: (i) common
ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv)
unity of personnel policies emanating from a common source, and (v) the dependency
of the operations. 20 C.F.R. § 639.3(a)(2).
This Court previously granted summary judgment in favor of Black Diamond
(Rec. Docs. 110, 122), finding that Plaintiffs had not created a genuine issue of
material fact as to whether Black Diamond could be deemed legally responsible under
the WARN Act for the illegal terminations. Plaintiffs then appealed this dismissal.
The Fifth Circuit affirmed this Court’s conclusions on every DOL factor except the de
facto control factor.
The de facto control factor considers “whether the parent has specifically
directed the allegedly illegal employment practice that forms the basis for the
litigation.” Pearson v. Component Tech. Corp., 247 F. 3d 417, 503 (3d. Cir. 2001).
Therefore, the ultimate, and only, issue before the Court is “who specifically directed
the closing of the LaPlace mill without proper notice.” Fifth Circuit Opinion, at 298.
Black Diamond, through its private equity limited partnership Opportunity
Fund, IV LP, acquired Bayou Steel in April 2016. In addition to Black Diamond’s
funding, Bayou Steel also entered into a Senior Loan Agreement with Bank of
America and SunTrust who provided revolving loans totaling $75 million and letters
of credit totaling another $2.67 million. These loans were subject to a covenant
requiring Bayou Steel to always have at least $10 million dollars in cash available to
stave off default. After the acquisition and receipt of funding, Black Diamond
installed three of its employees, Phil Rayorodetsky, Sam Farahnak, and James
Hogarth1, and three “independent directors,” Robert Unfried, Terrence Taft, and
Robert Archambault as the Directors of the Board of Bayou Steel.
Over the course of Black Diamond’s ownership, Bayou Steel went through
several periods of financial upheaval which put them in jeopardy of dipping below the
$10 million dollar cash covenant. Black Diamond loaned Bayou Steel an additional
$33 million dollars over time as part of a Subordinated Loan Agreement. This cash
influx allowed Bayou Steel to remain operational and in compliance with its
agreement with Bank of America and SunTrust. However, in July 2018, Bayou Steel
suffered what would prove to be a catastrophic accident when molten steel burned
through a critical piece of equipment in the manufacturing process. This “burn-
through” destroyed a significant amount of electrical equipment and caused a domino
effect that led to a series of operational setbacks. In the aftermath, Black Diamond
1 Hogarth did not become a Bayou Steel Board Member until early 2019.
made a series of additional loans totaling $20 million to Bayou Steel to fund repairs
and address other financial issues.
Despite this additional funding, Bayou Steel’s financial condition was never
able to fully recover. The Company began holding weekly triage meetings to
determine which creditors they could afford to pay and in which order. The Company
was losing up to $3 million a month and could no longer afford the raw materials it
needed to operate. By August of 2019, the Company was again in danger of falling
below the $10 million dollar cash covenant, and on August 29th, Bank of America
informed Bayou Steel and Black Diamond that the Company was officially in default.
Sam Farahnak, one of the Black Diamond members of Bayou Steel’s board, continued
to negotiate with Bank of America, attempting to stave off acceleration of the loan.
He represented to the bank that Black Diamond would put up an additional $8
million dollars to support operations at the mill. The Senior Executives at Bayou
Steel were also under the impression that additional Black Diamond money would be
forthcoming. Black Diamond instead provided another $1 million dollar loan to Bayou
Steel to put them back above the cash threshold.
After this loan, Steve Deckoff, founder and managing principal of Black
Diamond, began to direct more personal attention to the plant. He and other Black
Diamond employees paid several visits to the LaPlace facility, first on September 5th
and later on September 18th and 19th, in order to assess the Company’s performance.
After the second visit, Deckoff concluded that continued funding of Bayou Steel would
be a bad investment and stated in an email on September 22nd to John Fontana, a
Black Diamond employee, that he didn’t want to put any additional money into the
plant.
Without any loans or funding from Black Diamond, it became inevitable that
the plant would face bankruptcy, a fact of which both Black Diamond and Bayou Steel
seemed aware. Bayou Steel had been failing for months before Deckoff ever made the
final decision to withhold further loans. The plant was losing $3 million a month, and
Bayou Steel had already reached its credit limit with the steel scrap suppliers who
provided the raw materials necessary to run the melt shop. In fact, on September 22,
the very day Deckoff concluded that Black Diamond would not be lending any more
money, the Bayou Steel board of directors met to discuss the financial situation facing
the company. Despite a lack of minutes from this or any other board meeting, all
agree that the Board unanimously voted to retain Polsinelli, PC as restructuring
counsel and Candlewood Partners, LLC as its financial advisor to prepare for
bankruptcy.
After this board meeting, Kristen Barney, Bayou Steel’s HR Manager, began
to work with Polsinelli to prepare WARN notices for the termination of the majority
of Bayou Steel’s employees. On September 25th, Barney circulated a draft of the
WARN notices indicating that layoffs wouldn’t occur until November 27th, 2019. This
time frame would have been compliant with the 60-day notice required under the
WARN Act. However, by September 27th, Barney circulated a new draft of the WARN
notices showing that terminations would occur on Monday, September 30th. Also on
September 27th, Bank of America and SunTrust informed Bayou Steel that they
would be accelerating their loans. A payment of the $41.2 million balance was due by
September 30th. Needless to say, Bayou Steel could not make this payment when it
lacked funds to purchase the raw materials needed to continue operating the plant.
The board held another meeting on the afternoon of September 27th where Polsinelli
and Candlewood communicated that bankruptcy was the only viable option. The
Black Diamond board members abstained from any bankruptcy vote, which left the
final, formal decision in the hands of the independent board members, Unfried, Taft,
and Archambault. The independent directors did not formalize this decision at the
September 27th board meeting. Instead, they refused to sign the bankruptcy
resolution until they had the opportunity to consult their own outside counsel and
until they could confirm that there was a Directors and Officers liability insurance
policy in place. Although no formal bankruptcy resolution had been signed by the
remaining board members, terminations of Bayou Steel employees began at 7:30 a.m.
on Monday, September 30th. None of these employees were given the notice they were
due under the WARN Act. Unfried, Taft, and Archambault signed the formal
resolution approving the bankruptcy later that afternoon.
At the trial on this matter, Plaintiffs submitted evidence that Black Diamond
was very involved in oversight of the operations at Bayou Steel. Such involvement in
the business leading up to its closure is certainly some circumstantial evidence that
Black Diamond may have ultimately ordered closure of the plant and termination of
300 employees. However, notably absent from the record in this case is any clear
evidence of what actually occurred between the 25th and the 27th to change the
WARN Act notice drafts from providing the 60-days required notice to causing the
terminations effective immediately on September 30th, without the required 60-day
notices. There was no testimony from any of the witnesses as to who decided that the
plant would be closed without the WARN notices required by law.
The only direct evidence before the Court about the decision to terminate the
employees was the testimony of Robert Archambault, one of the three independent
directors. When asked who made the decision to terminate the Bayou Steel
employees, Archambault testified, “From what I recall, it was a recommendation from
Candlewood, and the board approved the recommendation.” Archambault Deposition,
128:24-129:1. However, when pressed about the specifics of this decision,
Archambault stated he could not recall the timing or location of the decision. Id. at
186:17-18. No other director could recall whether this vote occurred.
Plaintiffs argue that this Court should hold Black Diamond liable based on
Deckoff’s decision to refuse additional loans for Bayou Steel, which made bankruptcy
and plant closure inevitable. Yet, plaintiff’s counsel admit that Black Diamond had
no legal obligation to continue loaning additional monies to Bayou Steel. Instead,
given the reality that the plant would be forced to close absent a cash infusion from
Black Diamond—which had been provided in previous states of financial strife—
counsel argue the decision not to provide additional funding is tantamount to a
decision to close the plant. Transcript, 319:3-4; 308:6-20.
In Pearson v. Component Tech. Corp., 247 F.3d 471 (3d. Cir. 2001), the
company at the center of the litigation was forced to close when a lender refused to
invest any more money in a failing company. Also like in this case, the lender in
Pearson was heavily involved in the operations of the business, including the hiring
of the company’s CEO, approval of all employee salaries in excess of $100,000 per
year, receiving regular updates on the company’s financial position, and drafting the
proposal for the liquidation of the company. Id. at 480, 481. When applying the de
facto control factor to this set of facts, the Third Circuit stated that this factor “is not
intended to support liability based on a parent’s exercise of control pursuant to the
ordinary incidents of stock ownership. Nor may this factor be used to create liability
for a lender’s general oversight of its collateral.” Id. at 503. The court recognized that
the company was kept operational for three years solely as a result of the lender’s
own decision to fund the business and that the lender’s decision to liquidate the
company forced its closure without proper WARN Act notice. Id. at 504. However, the
court found that the lender and company’s close relationship was not enough to
support WARN Act liability when the company was “contemplating closure and
seeking legal advice as to its labor obligations” as well as repeatedly requesting
financing from the lender. Id.
Like in Pearson, the managers of Bayou Steel were well aware of its financial
plight. Its board approved the hiring of Polsinelli and Candlewood to guide it through
bankruptcy; its CEO cleared out his office three days before the plant’s closure; its
President and Chief Operating Officer Alton Davis knew that the Company could not
survive without additional loans or funding from Black Diamond. “To be sure, the
distinction between a decision to call a loan and a decision to shut down a company
is a fine one. . . large lenders—whether or not they are also parents—cannot help but
be aware of the consequences of their decisions to foreclose and dispose of collateral.”
Id. at 504, 505.
As the Fifth Circuit stated, however, the ultimate issue before this Court is
“who specifically directed the closing of the [Bayou Steel] LaPlace mill without proper
notice.” Based on the evidence submitted at trial, the Court finds that Black Diamond
is not liable for closing the plant or terminating its employees without proper WARN
Act notices merely for its decision refusing to make additional loans to Bayou Steel.
The only reasonable inferences the Court draws from the evidence is that closing of
the plant was inevitable without further loans, which neither Black Diamond nor the
Senior Lenders were willing or required to provide. Once that became inevitable, the
independent directors of Bayou Steel apparently made the ultimate decision to close
the plant and immediately begin terminations, which caused the WARN Act violation
to occur.
For these reasons, Plaintiffs’ claims against BDCM (Black Diamond) are
DISMISSED with prejudice.
New Orleans, Louisiana, this 15th day of April, 2024.
ly KP
SAK /
CARL J. BARBIHR
UNITED ST iy DISTRICT JUDGE