Duane Morris Takeaways: Pursuant to Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015), the practice of settling lawsuits filed in district courts in the Second Circuit alleging unpaid wages under the Fair Labor Standards Act (“FLSA”) requires approval from either the Court or the U.S. Department of Labor to take effect. On September 14, 2023, Magistrate Judge James M. Wicks of the U.S. District Court for the Eastern District of New York approved a rather unique settlement request by the parties in such an unpaid wage case. Although nearly all wage & hour lawsuit settlements in the Second Circuit ultimately conclude with the business-employer defendant agreeing to pay a monetary amount in exchange for dismissal of the case and a release of the employees’ wage claims against the employer, in Gallagher v. Mountain Mortgage Corp. et al., Case No. 22-CV-0715 (E.D.N.Y. Sept. 14, 2023), the Court evaluated and signed-off on the parties’ proposed settlement structure whereby the plaintiff-employee, who worked as a loan processor and mortgage loan originator for a mortgage lender, agreed to resolve the matter in exchange for her receipt of a heavily-discounted purchase price and her agreement to buy the business itself. The Court’s decision serves as an interesting thought exercise for resolving unpaid wage lawsuits through unorthodox strategies, though potentially applicable only in particular circumstances under which the Court may find such resolution fair and reasonable.

Case Background

According to the Complaint, plaintiff-employee Nicole Gallagher (“Gallagher”) has over 25 years of experience in the mortgage banking industry and is licensed to originate mortgage loans in New York, New Jersey, Connecticut, and Florida. Gallagher alleged that she worked for a mortgage lender, Mountain Mortgage Corp. (“MMC”), for a little over a year and claimed that despite working around 85 hours per week, MMC did not pay her at all during certain months, never paid her overtime despite consistently working over 40 hours per week, and failed to provide her with accurate paystubs and weekly earnings statements or with a notice and acknowledgment of her pay rate as required by law. Specifically, Gallagher asserted that MMC paid her a set weekly salary and no overtime during the entire year of 2021, and that MMC did not compensate her at all during November and December 2020 or at any time in 2022. MMC claimed that at all relevant times, it understood that Gallagher was not an hourly employee, but instead “was an owner and officer” of MMC who was to be paid by commission no differently than other previously employed salespersons of MMC.

Magistrate Judge Wicks’ opinion noted that, prior to the filing of the lawsuit, Gallagher and MMC had entered into a purchase agreement whereby Gallagher was to purchase MMC for $500,000. The parties informed the Judge that Gallagher was employed at MMC in advance of her anticipated purchase of MMC, but that when no successful application for a change in ownership of MMC was submitted to the New York State Department of Financial Services by the deadline contemplated in the purchase agreement, the parties’ relationship soured, resulting in Gallagher filing the lawsuit.

As part of the lawsuit, the parties previously submitted a request for the Judge’s approval of a settlement on May 6, 2022, whereby Gallagher would purchase MMC for $100,000 rather than the $500,000 contemplated in the original purchase agreement. Judge Wicks ultimately denied the parties’ first request for settlement approval due to what he deemed to be a lack of essential information required for the Court to evaluate whether the proposed agreement was fair and reasonable as required by Cheeks. Such information included the bona fide details of the parties’ FLSA dispute, calculations of Gallagher’s potential recovery, and an explanation of what portion of the reduced purchase price of MMC constituted consideration for Gallagher’s FLSA claims. The decision of September 14 addressed the parties’ submission of a renewed settlement approval request.

The Decision

As noted by Magistrate Judge Wicks, in support of the parties’ renewed settlement agreement approval request, the parties aimed to kill two bird with one stone – resuscitate the parties’ failed transaction and settle Gallagher’s wage & hour claims against MMC. Id. at 6. This time around, Gallagher submitted detailed information to the Court concerning her purported unpaid wage damages, which she alleged to be approximately $295,000. This figure included alleged “underpayments, liquidated damages, pre-judgment interest, and penalties” owed to her by MMC. Id. at 4. Gallagher also provided the Court with the specific details of her alleged employment, including time periods, weekly hours worked, regular rate of pay, and periods during which she claims that she did not receive proper compensation.

Magistrate Judge Wicks noted that under the original settlement approval request, he had been unable to determine which portion of the $400,000 reduction in MMC’s purchase price, if any, was consideration for the release of Gallagher’s FLSA claims, and which portion was attributable to other factors. As part of the renewed approval request, Gallagher informed the Court that no formal valuation was conducted to reach the original $500,000 purchase price, and that her reduced purchase price of $100,000 was similarly not calculated based on a formal valuation. Instead, both figures were the product of advice from her attorneys, her experience in the industry, and her “sense of the value” of the mortgage banking licenses (whereby MMC’s New York Mortgage Banker’s license was in the process of being surrendered). Id. at 5. Gallagher submitted that she was unable to “break down exactly” what portions of the reduced purchase price were attributable to what specific single factor; however, in her view, the value of her FLSA claims and the loss of MMC’s New York license were both factors that were “in the mix” along with her desire to own MMC outright, avoid costly arbitration, avoid the stress and expense of the lawsuit, and generally “just move on” with her life. Id. at 5-6.

In evaluating and approving the renewed settlement request, Magistrate Judge Wicks noted his satisfaction with the fairness of the proposed settlement, giving due weight to Gallagher’s more than 25 years of experience in the mortgage banking industry and the fact that Gallagher herself worked at MMC with the intention of inevitably owning it (as opposed to a disinterested third-party purchase of a business). As such, although there was no formal valuation of MMC’s value conducted, Judge Wicks acknowledged that Gallagher’s experience and familiarity with the business was relevant to her comfort level with the reduced purchase price. The Court also gave weight to Gallagher’s desire to move on with her life and put these issues behind her.

Magistrate Judge Wicks further cited the fact that Gallagher now owns 100% of MMC, and that a trial loss should he not approve the settlement could potentially turn her status as 100% owner into a 0% owner with no remaining claims against MMC. The Court noted that no settlement amount was earmarked for payment of attorneys’ fees, as all of Gallagher’s attorneys except for one were paid on an hourly basis (rather than a contingency), that the one exception only represented Gallagher briefly and was replaced within 3 months of filing the case, and the attorney had not expressed any intention of asserting a lien over the reduced purchase price of MMC.

Based on all of these factors, the Court finally confirmed that the renewed settlement agreement properly revised and limited two troublesome provisions concerning non-disparagement and confidentiality – both of which are regularly found by courts to be inconsistent with the public policy intent underlying the FLSA.

Implications for Employers

The decision is an interesting thought experiment for small employers who are subject to unpaid wage lawsuits brought on behalf of a small number of plaintiffs. In this instance, the parties agreed that rather than separate Gallagher’s desire to purchase MMC and her alleged unpaid overtime wages and related penalties, a more logical solution was to combine the two and provide for one global resolution. Creative, innovative thinking along these lines likely saved MMC from incurring additional litigation expenses and the unknown of a jury trial verdict. Moreover, the parties ultimately were able to provide the Court with evidence from which the settlement could be deemed fair and reasonable.

Although potentially limited to specific factual situations along the lines of an experienced employee initially employed by a small business with the goal of owning the business, this decision illustrates that in evaluating the reasonableness of proposed unpaid wage case settlements, judges may be open to approving agreements when the parties think outside the box (as long as the parties are able to defend and support their actions).