[Reported by Law360.com]
WILMINGTON, Del. -- The Southern California division of limousine giant Carey International Inc. parked itself in bankruptcy on Tuesday after getting hit with a $4.5 million arbitration award for treating its drivers as independent contractors rather than full-fledged employees.
Los Angeles-based Carey Limousine L.A. Inc. listed assets of under $500,000 against debts of around $150 million in documents filed in Delaware bankruptcy court.
The company resorted to Chapter 11 to secure “breathing room” after 16 of its drivers won a $4.5 million arbitration award in a lawsuit claiming they had been misclassified as independent contractors and were entitled to additional wages and benefits as employees, according to a declaration from CII Chief Financial Officer Mitchell Lahr.
The potential damage from the arbitration award was compounded in January when California stiffened penalties on employers for misclassification, Lahr said.
“The debtor does not agree that the [independent operator] plaintiffs, or its other independent operators should be classified as employees,” he said. “However, the existence of the arbitration award, and the recent changes to California law, make it highly likely that the debtor will become subject to numerous 'copy cat' misclassification claims, and potential liabilities well beyond the company's ability to pay.”
The recent changes to California labor law may also permit the chauffeurs to convert the arbitration award to a judgment and go after the debtor's assets directly, which could be “disastrous” for the business, according to the declaration.
Signed by California Gov. Jerry Brown in 2011, the new law — maligned by critics as the “Job Killer Act” — allows the state labor commissioner to levy penalties between $5,000 and $25,000 for each violation where a company “willfully misclassifies” an employee as an independent contractor.
Carey L.A. owes $146 million in secured debt stemming from its guarantee of a term loan taken out by its parent companies in a 2011 recapitalization, according to court documents. Its largest unsecured claim, by far, is the $4.5 million arbitration award.
Lahr said the company wants to create a “centralized process” through the bankruptcy to efficiently manage the liabilities arising from the disputes with its drivers. He added that, in light of the litigation, the company is transitioning away from its independent contractor model and will own its own cars in the future and hire chauffeurs as employees.
To keep the debtor's fleet running while under court protection, parent CII has agreed to advance up $4.5 million to its subsidiary, interest-free and on an unsecured basis, according to court documents.
Founded in 1921 by J.P. Carey, Washington-based CII operates limousine services in 550 cities and 60 countries. It was the world's first limousine company and is credited with such innovations as devising the first vehicle air conditioning system and building the first extended sedan — the “Carey Car” — to increase legroom and comfort for its customers, according to the company.
Carey Holdings Inc., CII's parent, is majority-owned by investment manager Highland Capital Management LP, with a significant minority stake held by private equity firm Ableco LLC, according to court documents.
Carey L.A. is represented by Marc Abrams, John C. Longmire and Jennifer J. Hardy of Willkie Farr & Gallagher LLP and Donald J. Brown and Matthew Barry Lunn of Young Conaway Stargatt & Taylor LLP.
The case is In re: Carey Limousine L.A. Inc., case number 1:12-bk-12664, in the U.S. Bankruptcy Court for the District of Delaware.