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Maria Arteaga, Ofelia Arteaga v. Kevin Lynch and Michael Lynch

September 6, 2012

MARIA ARTEAGA, OFELIA ARTEAGA, MARIA AVINA, ROSA BRISENO, KIMBERLY CAMBRA, JOSE DELGADO, MIKE DICKEY, MARIA GONZALEZ, BRYAN HODSON, ADALBERTO JIMENEZ, MARIBEL JIMENEZ, GARY KRAMER, MARIA MADRID A/K/A MARIA ZUNIGA, DONNA MAGNUSON, MONICA MARES, PABLINO MARTINEZ, GUADALUPE MENDOZA, SILVIA PEREZ, ROBIN RITCHEY, BRENDA RODRIGUEZ, IRMA RODRIGUEZ, JESENYA RODRIGUEZ, JUAN RODRIGUEZ, DOROTHEA SCHMIDT, PATRICIA SEIDL, RUDOLPH SEIDL, KENNETH SOCKI, WILLIAM VAN DUSEN, MARIA VAZQUEZ, FELIPE ZUNIGA, CHARMAINE SCHALLMO, MARGARET LORDAN, AGATA TOMAS, AND PATRICK BACA PLAINTIFFS,
v.
KEVIN LYNCH AND MICHAEL LYNCH, DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiffs bring this action against Defendants Kevin Lynch and Michael Lynch to recover unpaid wages under the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq., the Illinois Minimum Wage Law ("IMWL"), 820 ILCS 105/1 et seq., and the Illinois Wage Payment and Collection Act ("IWPCA"), 820 ILCS § 115/1 et seq. Defendant Kevin Lynch was formerly the president and sole owner of Duraco Products, Inc. ("Duraco"), the manufacturing company which employed Plaintiffs until it ceased operations in February 2010. Defendant Michael Lynch assisted his brother Kevin in the management of Duraco. Plaintiffs assert various claims against Defendants for failure to pay minimum wages, overtime wages, vacation pay, and also for retaliatory discharge. In this motion, Plaintiffs seek summary judgment on Defendants' legal status as employers and liability under the aforementioned statutes. They concede that a trial will be necessary to determine damages. For the reasons explained herein, the court grants Plaintiffs' motion in part and denies it in part with respect to Kevin Lynch, but denies summary judgment on all claims against Michael Lynch.

FACTUAL BACKGROUND

I. History of Duraco Products, Inc.

Defendant Kevin Lynch is the sole owner and manager of U.S. Composites, a corporation that purchased Duraco in May 2007. (K. Lynch Dep. (2011), Ex. B to Pl.'s 56.1, 9:5-15.)*fn1 Duraco was a "plastic injection molding facility" that sold "plastic plantware," such as watering cans and flower pots, to customers throughout the North America. (K. Lynch Dep. (2011) 5:18-6:6.) When Kevin Lynch acquired Duraco, the company was already losing "a lot of money." (K. Lynch Dep. (2011) 10:22-23.) Kevin Lynch testified that, within six months of assuming ownership of Duraco, he learned the company carried roughly $35 million in previously undisclosed liabilities. (K. Lynch Dep. (2011) 46:10-48:5.) In an attempt to turn the company around, Kevin Lynch initiated significant cost-cutting measures. (K. Lynch Dep. (2011) 48:20-23.)

Simultaneously with his acquisition of Duraco, Kevin Lynch entered into a factoring agreement, on Duraco's behalf, with Franklin Capital Corporation ("Franklin"). (K. Lynch Dep. (2011) 50:7-8; Factoring Agreement, Ex. N to Pls.' 56.1.) Under the factoring agreement, Franklin purchased Duraco's accounts receivable at a discounted rate. Franklin would advance to Duraco 80 percent of the amount owed on each receivable invoice, collect the full payment from the customer, and then turn over the remaining 20 percent, less interest and Franklin's fees, to Duraco. (K. Lynch Dep. (2011) 49:14-50:21.) Unfortunately for Duraco and its employees, Kevin Lynch claims, Franklin "never honored [the] agreement." (K. Lynch Dep. (2011) 52:13.) He stated that, "three or four months into ownership," he realized that Franklin was routinely underfunding Duraco. (K. Lynch Dep. (2011) 52:14-23.) He gave an example: "You generate [$100,000] in receivables. You're looking for $80,000. You get wired $40,000. You try to meet with [Franklin] the next morning to figure out what happened to the remaining $40,000, and they don't account for it." (K. Lynch Dep. (2011) 52:18-23.) Kevin Lynch described Duraco's relationship with Franklin as "a fight" that ultimately resulted in Duraco's hiring an accounting firm to conduct a forensic accounting of Franklin's records, and, as explained below, the termination of the factoring agreement. (K. Lynch Dep. (2011) 53:16-24.)

Because of its ongoing financial instability, Duraco began to struggle to meet its payroll obligations. According to Plaintiffs, Duraco first failed to make full payment of wages to its employees in March 2008 (Pl.'s 56.1 ¶ 28); they cite a March 21, 2008 check payable to Bryan K. Hodson that the bank returned for insufficient funds. (Check No. 121044 of Sampling of Returned Employee Checks, Ex. O to Pl.'s 56.1, at 5.) The record includes other employees' paychecks that were returned for insufficient funds dated August 22, 2008; August 29, 2008; September 5, 2008; September 12, 2008; October 3, 2008; November 14, 2008; and September 25, 2009.*fn2 (See Sampling of Employee Checks.) In further support of this assertion, Plaintiffs submitted America United Bank statements for Duraco's commercial checking account which, Plaintiffs claim, show "gaps between cashed check numbers[] with numerous Pro/Data payroll[-]issued checks remaining uncashed . . . ."*fn3 (American United Bank Statements, Ex. Q to Pls.' 56.1; Pls.' 56.1 ¶ 28.) The bank statements do show gaps in check numbers indicating uncashed checks, as well as some checks that were returned for insufficient funds, but it is not obvious that any uncashed checks were necessarily payroll checks or that they were uncashed because they were not distributed to employees.

Defendants offer no explanation for the gaps, but Kevin Lynch did acknowledge that paychecks were not always distributed; he testified that "when we didn't hand out payroll checks, those checks that should have gone out were put aside." (K. Lynch Dep. (2010), Ex. G to Pls.' 56.1, 52:19-21.) On those occasions, Dorothea Schmidt would hold onto the checks "in an office," but, Kevin Lynch stated, he did not know what she did with them. (K. Lynch Dep. (2010) 52:24-53:18.) Nevertheless, Kevin Lynch "sometimes" had "access" to the undisbursed checks, and he acknowledged that he could issue one of the checks if he chose to do so. (K. Lynch Dep. (2010) 53:19-23.) For their part, Plaintiffs have submitted copies of a number of employee paychecks they describe as "undisbursed" (Sampling of Undisbursed Employee Checks, Ex. P to Pls.' 56.1 [109]), though they have not shown that any of the checks numbers of those undisbursed checks fall in the check number gaps shown on the bank statements.

Plaintiffs do, however, submit other evidence demonstrating that Duraco failed to make payroll from time to time. They submitted a spreadsheet, identified by Kevin Lynch at his deposition as a spreadsheet that recorded "what employees told [him] they were owed." (K. Lynch Dep. (2010) 69:22-24; Pre 11/18/08 Payroll Issues Spreadsheet, Ex. R to Pls.' 56.1.) The spreadsheet lists 31 employees who reported being owed money by Duraco, and includes individual entries for each paycheck that was returned for insufficient funds or never received in the first place. (See Pre 11/18/08 Payroll Issues Spreadsheet.) Defendants contend that the spreadsheet represents merely a record of Plaintiffs' allegations of monies owed rather than an accounting of actual unpaid wages. Notably, however, when Kevin Lynch created the spreadsheet, he marked with an asterisk the entries for back pay claims where "no documentation was provided to show [insufficient funds] for check." (Pre 11/18/08 Payroll Issues Spreadsheet at 3.) For roughly half the unpaid checks listed there is no asterisk; the court infers that, for those entries, the employee did provide Kevin Lynch with documentation demonstrating that the check was returned by the bank. Moreover, a second spreadsheet labeled "Checks Not Received: Reconciliation" lists at least 37 employees who, on at least one occasion, if not more, did not receive a paycheck they were owed.*fn4 (See Undistributed Checks Spreadsheet, part of Ex. R to Pls.' 56.1.) The Undistributed Checks Spreadsheet lists payroll checks, complete with dates and check numbers, undistributed by Duraco and totaling $52,545.96.*fn5 (Undistributed Checks Spreadsheet at 4.)

The record also includes e-mail messages from Duraco employees Kimberly Cambra and Donna Magnuson to Kevin and Michael Lynch, documenting the paychecks that Cambra and Magnuson believed Duraco owed them. (Dec. 8, 2009 E-Mail From Kimberly Cambra to Kevin and Michael Lynch, Ex. S to Pls.' 56.1; Dec. 6, 2009 E-Mail from Donna Magnuson to Kevin and Michael Lynch, also in Ex. S to Pls.' 56.1.) In her December 8, 2009 message, Cambra stated that, including $183 in fees incurred as a result of her inability to timely pay bills, Duraco owed her $5,679.04. (Dec. 8, 2009 E-Mail from Kimberly Cambra.) Just the day before, Kevin Lynch had written a letter to Kimberly Cambra's mortgagor explaining that Cambra was an employee in good standing at Duraco, but that "[d]ue to the financial restructuring and refinancing of [Duraco], Kimberly is behind several paychecks." (Dec. 7, 2009 Letter from Kevin Lynch to America's Servicing Company, Ex. T to Pls.' 56.1.) The letter promised that "Duraco intends to make good on those checks in the forthcoming weeks" and implored the mortgagor to forgive Cambra's late mortgage payment, "as it [was] through no fault of her own that the mortgage payment [was] late." (Id.)

Kevin Lynch had a similar exchange with Donna Magnuson. On December 6, 2009, Donna Magnuson sent Kevin Lynch an e-mail in which she claimed to be owed more than $20,000 in back wages and business expenses. (Dec. 6, 2009 E-Mail from Donna Magnuson.) Kevin Lynch then wrote a letter, addressed generally to Magnuson's creditors, in which he declared that Duraco owed Magnuson for "several payroll periods," but that it intended to fulfill its obligations by the end of January 2010. (Dec. 30, 2009 Letter from Kevin Lynch Regarding Donna Magnuson, Ex. T to Pls.' 56.1.) The letters to Cambra's mortgagor and Magnuson's creditors are on Duraco letterhead and are signed by Kevin Lynch. And as further proof of Duraco's failure to fully compensate its employees, Plaintiff Bill Van Dusen testified that he ultimately resigned his position because "[he] wasn't getting paid."*fn6 (Van Dusen Dep., Ex. V to Pls.' 56.1, 65:23-24.)

Defendants offer little evidence to the contrary. Indeed, Kevin Lynch plainly acknowledges that, from time to time, some Duraco employees did not receive their paychecks.*fn7 (See, e.g., K. Lynch Dep. (2010) 31:4) (expressing frustration that he could not "make payroll"); (see also K. Lynch Dep. (2011) 68:8-19, 85:22-86:2, 88:4-6.) He testified that Duraco first started to "get behind on its payroll" in March 2009, because that was when Franklin stopped funding Duraco "completely." (K. Lynch Dep. (2011) 68:11-19.) When asked if there was a point before March 2009 when Duraco could not make payroll, he replied, "I want to say no. We were pretty consistent. There may have been a check or two. I don't know." (K. Lynch Dep. (2011) 68:14-17.) But he also stated that "there were times during the Chapter 11 bankruptcy [filed in November 2008] when employees of Duraco . . . got behind on pay."*fn8 (K. Lynch Dep. (2011) 58:7-9, 69:5-7.)

Michael Lynch's testimony concerning Duraco's alleged failure to fully compensate its employees was inconsistent, at best:

Counsel: Mr. Lynch, can we agree that at a certain point between 2008 and February of 2010, Duraco Products was unable to make payroll at various points, and by making payroll, I mean that was [sic] unable to compensate all of its employees for their earned wages in given weeks?

M. Lynch: I can't agree with that.

Counsel: Could you explain to me why you disagree with that statement?

M. Lynch: Because the company was profitable.

Counsel: Is it your testimony that employees got paid every work week for their earned wages?

M. Lynch: No.

Counsel: That's really what I am trying to get to. Can we agree there were weeks when employees were not paid their earned wages?

M. Lynch: I can't agree to that.

(M. Lynch Dep. 59:7-23.) Neither Defendant made any attempt to submit evidence demonstrating that Duraco's employees had, indeed, been paid all the wages they were owed. The only exhibits Defendants attach to their Statement of Additional Facts are the deposition transcripts from their May 2011 depositions.

Defendants did not equivocate, however, when it came to identifying the culprit they believed responsible for Duraco's financial woes: Franklin. Both Kevin and Michael Lynch accused Franklin of "stealing money" from Duraco. (See, e.g., K. Lynch Dep. (2011) 88:15-16, 111:3-7; M. Lynch Dep. 54:14-18, 65:14-24.) Kevin Lynch testified that Franklin stole "millions of dollars" from Duraco, even while Duraco was undergoing bankruptcy proceedings. (K. Lynch Dep. (2011) 118:8-12.) He also claimed that Franklin threatened to cut off funding if Lynch paid the employees before paying Duraco's vendors, and that his contacts at Franklin expressly told him, "[o]n more than one occasion . . . 'You don't make payroll. You pay these vendors. If you make payroll, we're not funding you.'" (K. Lynch Dep. (2011) 109:7-11.) Thus, according to Kevin Lynch, "[t]here were times vendors were paid before employees, and that was at the sole direction of Franklin."

(K. Lynch Dep. (2011) 88:2-3.) No other evidence in the record corroborates Kevin Lynch's account of these threats from Franklin.

If a pay day arrived and Kevin Lynch "had trouble getting money from Franklin," he would instruct the shift supervisors, John Cirillo and Bill Sasser, not to distribute the paychecks. (K. Lynch Dep. (2011) 82:7-11.) Lynch concedes that on those occasions when he made the decision to withhold paychecks because of insufficient funds, he never did anything to ensure that the employees were eventually compensated for the wages owed them. (K. Lynch Dep. (2011) 93:16- 20.) Kevin Lynch acknowledged, further, having received complaints from employees about paychecks returned for insufficient funds, though he doesn't recall when or how often he received any such complaints. (K. Lynch Dep. (2011) 83:10-22.) As required by the bankruptcy proceedings, Kevin signed and filed operating reports detailing Duraco's finances, but he admitted that he did not confirm that the employees' paychecks had cleared the operating account before signing those reports. (K. Lynch Dep. (2011) 119:24-120:4.)

Duraco's financial troubles also affected Plaintiffs' health insurance coverage. When an employee opted into Duraco's Blue Cross/Blue Shield ("BCBS") health insurance plan, Duraco would deduct the employee's contribution toward the premiums from his or her paycheck.

(K. Lynch Dep. (2011) 127:10-17.) In late January 2010, insured Plaintiffs, such as Donna Magnuson, William Van Dusen, and Kenneth Socki, were surprised to receive notification from BCBS that their insurance coverage had been cancelled as of May 1, 2009-Duraco never informed them of the policy's termination and was, in fact, still deducting payments for premiums from their paychecks. (Certificates of Group Creditable Coverage, Ex. Y to Pls.' 56.1, at 1-3; Pls.' 56.1 ¶¶ 47, 48.) Indeed, Plaintiffs submitted copies of paychecks dated May 29, 2009, through January 15, 2010, demonstrating a deduction for "Medical," i.e., health insurance coverage. (Copies of Plaintiffs' Paychecks, Ex. X to Pls.' 56.1, at 1-14.)

For his part, Kevin Lynch admitted that Duraco actually missed a premium payment in August or September 2009, prompting BCBS to file a motion seeking termination of the policy, which the bankruptcy court ultimately denied. (K. Lynch Dep. (2011) 129:12-16.) He stated, further, that BCBS's attempts to terminate the policy continued through December 2009 and were still pending before the bankruptcy court when the proceedings were converted from Chapter 11 to Chapter 7 in February 2010. (K. Lynch Dep. (2011) 130:6-20.) Lynch nevertheless claimed ignorance of the reason(s) the coverage was canceled as of May 2009. (K. Lynch Dep. (2011) 129:23-130:8.) He testified that BCBS had "[n]o valid reason" for terminating the policy, but admitted he "didn't devote a whole lot of time" to investigating the matter. (K. Lynch Dep. (2011) 130:9-11, 134:11-135:4.) Kevin Lynch did not explain why Duraco continued to deduct premium payments from employees' checks after the coverage had ended, or whether he had taken any steps to reimburse employees for the erroneous deductions.*fn9

Sometime in 2009, Duraco obtained a release from its factoring agreement with Franklin and entered into a new factoring agreement with Bibby Financial Services ("Bibby"). (K. Lynch Dep. (2011) 50:11-13.) Kevin Lynch described the agreement with Bibby as "very similar" to the Franklin factoring agreement. (K. Lynch Dep. (2011) 51:19.) Even under the new agreement, though, Duraco was unable to make ends meet. On February 17, 2010, the bankruptcy judge issued an order converting Duraco's Chapter 11 bankruptcy to a Chapter 7 bankruptcy.*fn10 (Feb. 17, 2010 Order Converting Case Under Chapter ...


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