WHITELY v. MORAVEC (February 16, 2011)

Waste Reduction, Inc. laid off several workers at its Indiana facilities in 2006 and filed for bankruptcy. It paid the workers' wage claims through the bankruptcy proceedings but had insufficient assets to satisfy the statutory penalty claims. Former employees filed suit against the company's ten largest shareholders pursuant to New York (where Waste Reduction was incorporated) law imposing employer liability on shareholders in some circumstances. Then-Judge Hamilton (S.D. Ind.) concluded that the defendants were entitled to judgment but kept the case open until the bankruptcy court resolved the wage claims. Once no wage claims existed, the court entered judgment. The plaintiffs appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Rovner affirmed. The Court first rejected the plaintiffs' argument that the district court abused its discretion in not remanding the case to state court once it decided the federal ERISA issues. On removal, a federal court has discretion to resolve both the federal and state issues, which is what the court did here. The Court turned to the merits. Under New York law, the ten largest shareholders of privately held companies are jointly and severally liable for "debts, wages or salaries . . . for services performed." The Court seemed to hold that the plaintiffs could not cobble together both the Indiana late wage penalty statute and the New York investor liability statute to create a hybrid statute (likening it to a jackalope or griffin). It decided the case on narrower grounds, however. The New York statute only imposes liability for debts "for services performed." The Indiana statutory penalty is not a debt "for services."