In the rich tapestry of American jurisprudence, each case offers its unique narrative and lessons, contributing to our understanding of the law’s dynamic nature. Among these, Conejo et al. v. Malwitz, case number 1:24-cv-00232 – USDC COLO, emerges as a particularly instructive, and interesting example, especially in the realm of class action litigation and personal liability of corporate actors. This case revolves around wage claims —a situation that unfortunately is not uncommon in various industries across the nation.

The specifics underlying the claims are not relevant in this discussion. In short, the workers allege they were not paid for hours worked, not paid a minimum wage, and that overtime pay was not paid properly. What makes this case interesting is the convergence of multiple issues from different areas of the law.

This case was filed by a group of five former employees of Steel Huggers LLC, a metal fabrication and construction company, for alleged unpaid wages against Steel Huggers sole member, Nicholas Malwitz. Steel Huggers is not a party because it has filed bankruptcy. You may be asking why Mr. Malwitz would be on the hook for claims against a bankrupt entity or whether he should be shielded by the Business Judgment Rule. Well, I will spoil the ending for you – he is liable. Read on to find out why.

This case got interesting when an amended complaint was filed. In the amended complaint, the plaintiffs allege a new entity, Galaxy Steel, should be liable as well. Well, it appears – or at least the plaintiffs want us to believe – Mr. Malwitz essentially just changed the name of his operation, to the detriment of the employees. They allege his family started Galaxy in what amounts to his garage.

I. A Closer Look at Class Action Lawsuits: What You Need to Know

As we delve into the Conejo case, it is crucial to understand the framework that governs class action lawsuits, as outlined by Rule 23 of the Federal Rules of Civil Procedure. These legal battles enable individuals to band together and challenge larger entities in an easier fashion through a collective action instead of many separate lawsuits. Here is a streamlined guide to the key principles that underpin class action eligibility, shedding light on the broader context of the case at hand.

The Core Criteria for Class Actions

Class actions in federal court are governed by F.R.C.P. 23. As with most federal rules, most states have a similar rule which mirrors or nearly mirrors the federal rule. This case involves a federal claim and state law claims which are bootstrapped into the federal court.

The class must be large enough that addressing each member’s case individually would be impractical. Although Conejo involves only five initial plaintiffs at this time, they allege there are at least 50 other similarly situated employees. as the company once operated with around 90 employees.[ii]

The plaintiffs must demonstrate common legal or factual challenges. In Conejo, the central issue of unpaid wages creates a common thread that binds the plaintiffs’ claims.[iii]

The case’s leaders—those who step forward to file the lawsuit—must have claims which mirror those of the broader group they aim to represent. This ensures that the litigation effectively addresses the collective interests of all involved.[iv]

It is essential the class action is led by individuals and represented by attorneys who can adequately protect the interests of the entire class. This involves a commitment to the cause and the expertise to navigate complex legal challenges.[v]

Beyond the Basics: Rule 23(b)’s Additional Tests

For a lawsuit to advance as a class action, it must also satisfy one of the specific conditions set forth under Rule 23(b). This can be accomplished by showing:

Risk of inconsistent adjudications: A class action is allowed if individual actions could lead to incompatible standards of conduct or if adjudications would substantially impair the interests of non-participating members.

Common grounds for relief: A class action is permitted if the party opposing the class has acted in a way which applies generally to the class, making final injunctive or declaratory relief appropriate for the entire class.

Predominance of common questions: A class action is justified if common legal or factual issues among class members outweigh individual concerns and if a class action is deemed superior to other methods for resolving the dispute. Factors considered in making this determination include the members’ interests in controlling separate actions, the ongoing litigation involving class members, the forum’s suitability, and the likely challenges in managing a class action.

Ultimately, class actions aim to provide a practical and effective way to address widespread grievances or violations in a single setting. Whether this actually occurs and whether the relevant parties are actually benefitted is a story for another day.

II. Navigating Personal Liability Amidst Corporate Protections

Back to Mr. Malwitz. As you likely remember, the entity Steel Huggers is not a party to this action and has filed bankruptcy.

One of the reasons why a corporation is a beneficial legal structure for its members and directors is it generally shields individuals from liability for the business’s actions and debts when those actions are untaken in good faith.^[vi] This is often referred to as the Business Judgment Rule. The rule “reflects the reality that courts ‘are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments.’”^[vii]

This, however, is not the whole story, and you should be cautious – becoming a corporation does not mean there is no alternative path to liability beyond the piercing of the corporate veil. For example, members, directors, and similar are subject to personal liability for wage claims under the Fair Labor Standards Act of 1938.^[viii] State laws, such the Colorado laws^[ix] pled here, can also extend liability even when circumstances to pierce the corporate veil do not exist.

Thus, when defending corporate entities, be mindful that there are exceptions beyond piercing the corporate veil that allow liability to extent to the members and similar.

III. Allegations of Continuity: Galaxy Steel and the Challenge of Successor Liability

Plaintiffs allege Galaxy Steel is just a continuation of Steel Huggers and was set up by family members of Mr. Malwitz. They allege it uses assets of the former entity and that it also happens to operate out of his home address.

Generally, successor entities or newly founded “separate” entities are not liable for the debts or obligations of the prior business.[x] However, successor corporations have been held liable if: (1) there is an express or implied assumption of liability; (2) the transaction results in a merger or consolidation of the two corporations; (3) the purchaser is a mere continuation of the seller; or (4) the transfer is for the fraudulent purpose of escaping liability.[xi]

Plaintiffs here allege Galaxy is simply a continuation of Steel Huggers. “The mere continuation exception applies when there is a continuation of directors, management, and shareholder interest and, in some cases, inadequate consideration.”[xii] Thus, the test whether this exception applies looks to whether the purchasing corporation is, in effect, a continuation of the selling corporation, and not whether there is a continuation of the seller’s business operation.[xiii]

This issue will be sorted out with discovery, but if the facts are true and this is a company doing the same business, with many of the assets of Steel Huggers, is run by Mr. Malwitz’s family, out of his home, and he has some operational involvement, it would be difficult to find this is not a continuation. The bankruptcy court may also have some questions for him.

IV. Key Takeaways: Unraveling the Legal Tapestry in Conejo et al. v. Malwitz et al.

In the complex legal landscape explored through Conejo, the case unravels into a multifaceted narrative involving class action lawsuits, the intricacies of constructive merger, and the potential personal liability of corporate members and directors. As we navigate through the layers of class action basics, the nuanced criteria for eligibility, and the additional tests under Rule 23(b), the story expands to delve into the realm of personal liability protection afforded by the Business Judgment Rule.

However, the narrative doesn’t end there. It took a fascinating turn with the introduction of Galaxy Steel, where the plaintiffs assert a continuation of operations from Steel Huggers. This brings to the forefront the nuanced concept of successor liability and exceptions to the general rule that newly founded entities are not liable for the obligations of their predecessors. As we await further developments through discovery, the case serves as a reminder to legal practitioners and observers alike that the intricacies of law often unfold in unexpected ways, weaving together various legal doctrines and principles into a rich tapestry of litigation.

The case serves as a reminder that legal narratives are dynamic, often unfolding unexpectedly. It highlights the constant need for claims professionals to ensure they are working with practitioners who are ready to delve into shadows, uncovering hidden issues and arguments for a comprehensive legal strategy.

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Sources

[i] Conejo et al. v. Malwitz, case number 1:24-cv-00232 (USDC COLO)

[ii] F.R.C.P. 23(a)(1)

[iii] F.R.C.P. 23(a)(2)

[iv] F.R.C.P. 23(a)(3)

[v] F.R.C.P. 23(a)(4)

[vi] See, e.g., Curtis v. Nevens, 31 P.3d 146, 151 (Colo. 2001).

[vii] Hirsch v. Jones Intercable, Inc., 984 P.2d 629, 638 (Colo. 1999) (quoting Auerbach v. Bennett, 47 N.Y.2d 619, 630, 393 N.E.2d 994, 1000 (1979)).

[viii] 29 U.S.C. § 201, et seq.; Boucher v. Shaw, 572 F.3d 1087, 1093 (9th Cir. 2009) (“the managers are independently liable under the FLSA, and the automatic stay has no effect on that liability.”); see also Donovan v. Agnew, 712 F.2d 1509, 1514 (1st Cir. 1983).

[ix] Colorado Wage Claim Act, §8-4-101, et seq.; Colorado Minimum Wage Act, C.R.S. §8-6-101, et seq.; Colorado Minimum Wage Order; and the Colorado Overtime and Minimum Pay Standards Orders.

[x] Bd. of Cty. Comm’ns v. Park Cty. Sportsmen’s Ranch, LLP, 271 P.3d 562, 572-73 (Colo. App. 2011).

[xi] CMCB Enterprises, Inc. v. Ferguson, 114 P.3d 90, 93 (Colo. App. 2005) (citing Alcan Aluminum Corp. v. Elec. Metal Prods., Inc., 837 P.2d 282, 283 (Colo.App.1992); Ruiz v. ExCello Corp., 653 P.2d 415 (Colo.App.1982))

[xii] Alcan Aluminum Corp. v. Elec. Metal Prods., Inc., supra, 837 P.2d at 283; see also Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1458 (11th Cir.1985) (purchasing corporation is merely a “new hat” for the seller, with the same or similar management and ownership).

[xiii] Id.