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Lawlor v. District of Columbia

September 07, 2000

JAMES J. LAWLOR, ET AL., APPELLANTS,
V.
DISTRICT OF COLUMBIA, APPELLEE,
AND
ROY LITTLEJOHN, ET AL., APPELLANTS,
V.
JAMES J. LAWLOR, ET AL., APPELLEES.



Before Wagner, Chief Judge, and Terry and Schwelb, Associate Judges.

The opinion of the court was delivered by: Schwelb, Associate Judge

Appeals from the Superior Court of the District of Columbia Hon. Judith E. Retchin, Motions Judge Hon. José M. López, Trial Judge

Argued November 16, 1999

At all times relevant to these appeals, the J.B. Johnson Nursing Home, a long-term care facility owned by the District of Columbia, housed 244 residents in need of intensive nursing care. In the mid-1980's, the District awarded a multi-million dollar contract for its day-to-day management and operation to Urban Shelters & Healthcare, Inc. (Urban Shelters), a private corporation of which Roy Littlejohn owned all of the stock. Mr. Littlejohn's wife, Marilyn A. Littlejohn, served on Urban Shelters' Board of Directors and was the corporation's Secretary/Treasurer.

In 1995, the Internal Revenue Service (IRS) placed a lien on Urban Shelters' assets and instituted proceedings to collect more than $1,400,000 in unpaid withholding taxes. During the financial emergency that ensued, employees of the Home began to receive paychecks from Valrob, Inc., a corporation which was managed by Roy Littlejohn and of which Roy Littlejohn's daughter, Robin Littlejohn, owned all of the stock. As a result of the Home's unfavorable financial condition, 297 employees received no compensation for work that they performed between October 25 and November 18, 1995. For a brief period, the District government took over the operation of the Home. The Home then came under new management, but the employees have not been compensated for their services during that three and a half week period.

On April 1, 1996, James Lawlor and several other employees sued Urban Shelters, Valrob, and Roy, Robin, and Marilyn A. Littlejohn for unpaid wages and benefits. Shortly thereafter, on May 20, 1996, the employees intervened as plaintiffs in a suit brought by Urban Shelters against the District of Columbia for breach of contract. The employees alleged, inter alia, that they were known third-party beneficiaries to the contract between Urban Shelters and the District. The employees further claimed that high-ranking officials of the District had orally promised "that payments to the contractor would be made in timely fashion so that the employees could get paid," that this oral promise constituted an enforceable contract, and that the District was liable to the employees on a "quantum meruit" theory. *fn1 The cases were consolidated for trial.

On April 10, 1998, shortly before the trial was scheduled to begin, the motions judge, Honorable Judith E. Retchin, dismissed the case against the District on the ground, inter alia, that the Contract Appeals Board (CAB) had primary jurisdiction over the contract claim. Following a bench trial on the employees' claims against Roy, Marilyn A. and Robin Littlejohn, Urban Shelters, and Valrob, *fn2 the trial judge, Honorable José M. López, held that each of the individual defendants was liable to the plaintiffs in his or her capacity as a corporate officer, for unpaid wages and other relief. The judge further concluded that the corporate veils both of Valrob and of Urban Shelters must be pierced, and that Roy and Robin Littlejohn were therefore liable as stockholders for the obligations of the corporations. Finally, the judge held that Urban Shelters and Valrob, as well as all three individual defendants, were liable to the employees for violating the District's Wage Payment Law. D.C. Code § 36-108 (1997). The judge entered judgment against all of the defendants, jointly and severally, in the amount of $1,447,651.99.

In these consolidated appeals, the employees argue in No. 98-CV-963 that the motions judge erred in dismissing their claims against the District because, according to the employees, the Superior Court, and not the CAB, had jurisdiction over the employees' claim that the District had breached an oral contract. The Littlejohns appeal in No. 98-CV-797 from the trial judge's decision holding them individually liable to the employees. The Littlejohns argue that the record does not support the piercing of the corporate veil of either corporation, and that the judge erred as a matter of law by holding Roy, Robin, and Marilyn A. Littlejohn personally liable for their alleged conduct as corporate officers.

We reverse the judgment against Marilyn A. Littlejohn. In all other respects, we affirm.

I.

A. Background.

Urban Shelters' relationship with the District began when the corporation was awarded a contract to operate the J.B. Johnson Nursing Home in 1984. *fn3 In 1990 and 1991, the contract was renegotiated after the District had entertained competitive bids. The new contract provided that Urban Shelters would continue to operate the Home for one year, and the District was authorized to renew the agreement pursuant to four one-year options. At the end of the first year, however, the District did not exercise its one-year renewal option, but instead began a practice of extending the contract for various shorter periods. *fn4 In its complaint against the District, Urban Shelters alleged that these sporadic extensions made the status of its relationship with the District unclear, and that its precarious financial situation was compounded by the District's failure to make timely payments to Urban Shelters of money due under the contract.

In 1992, Urban Shelters began to experience difficulty both in paying its employees and in meeting its payroll tax obligations. In an unorthodox attempt to resolve its cash flow problems, the corporation discontinued the payment of federal and state withholding taxes. As the trial judge found, Urban Shelters continued to deduct withholding taxes from its employees' paychecks. In fact, the employees' W-2 forms reflected the withholding of taxes which, in reality, were never paid to the appropriate taxing authority. As Urban Shelters' tax arrearage grew, and as each unpaid tax bill accumulated penalties and interest, the company's problems inevitably snowballed until the situation careened out of control.

Urban Shelters' financial house of cards had been constructed on a foundation of unpaid taxes, and in 1995 it began to crumble. In February of that year, the IRS served Roy Littlejohn with a Notice of Tax Levy for more than $1,400,000 in unpaid withholding taxes. *fn5 The IRS placed a lien on Urban Shelters' assets. Payments due to Urban Shelters under the corporation's contract with the District were assets subject to the lien. Urban Shelters had also failed to pay withholding taxes due to the District of Columbia and to other taxing authorities. The trial judge found that, in all, Urban Shelters owed almost $2,000,000 in unpaid taxes. Once the lien had been placed on its assets, Urban Shelters lacked the resources both to care for the residents of the Home and, at the same time, to pay its employees. Care for the residents thus continued, but the employees were not paid.

In an effort to salvage the operation, Roy Littlejohn contacted representatives of the District and suggested that the J.B. Johnson contract be "novated." He proposed that another corporation which he controlled, Metropolitan Healthcare, Inc., be permitted to assume responsibility for Urban Shelters' obligations. At trial, Mr. Littlejohn explained that, under his proposal, payments to Metropolitan would not have been subject to the IRS lien, and that Metropolitan would therefore have been able to manage the Home without interference from the government.

Mr. Littlejohn testified, however, that he received no response from the District regarding the foregoing suggestion. With this stratagem for avoiding a two-million dollar debt apparently unavailable, Mr. Littlejohn attempted another manipulation of his family's corporate holdings to achieve that end. Specifically, he enlisted the assistance of his daughter, Robin Littlejohn, in transferring money from Urban Shelters to Valrob, Inc., another Littlejohn-controlled company whose assets were not subject to the IRS levy. Mr. Littlejohn instructed Robin to endorse checks payable to Urban Shelters so that they could be deposited into checking accounts maintained in the name of Valrob. From March to October, 1995, Urban Shelters employees were compensated with checks drawn on the Valrob account, and money was transferred as needed between Valrob and Urban Shelters.

By the fall of 1995, the employees had become aware of Urban Shelters' financial difficulties. According to the testimony, their paychecks sometimes arrived late, and on some occasions checks were returned for insufficient funds. In late October, the financial condition of Urban Shelters and Valrob deteriorated further. From October 25 to November 18, 1995, the employees continued to perform their duties at the Home, but they received no compensation at all.

In the middle of November, according to the employees' complaint against the District, some of the employees held a protest at the Mayor's office. They threatened to walk off the job if the District would not guarantee that they would be paid. As the employees note in their brief, "[s]uch a walk-off would [have] create[d] an immediate life threatening situation, because the employees [were] essential to providing the most basic care for the residents of J.B. Johnson, including food, water, medication and assistance with personal hygiene."

On the day after the protest, in response to the employees' demands, several high-ranking District officials *fn6 met with a group of employees at the Home. According to the employees, these officials assured them that Urban Shelters would be paid, that the employees would be compensated, and that the IRS would not prevent Urban Shelters from paying its workers. The employees alleged that, in reliance on these assurances, they remained on the job.

When the District officials allegedly made these promises of payment, they may have had some basis for believing that a negotiated resolution of the problem was possible. Mr. Hawkins and Roy Littlejohn had been discussing a proposal under which the District would have paid $50,000 to the IRS each month towards Urban Shelters' arrearage. The District would also have paid Urban Shelters any additional sums due under the contract for the operation of the Home.

These discussions were, however, overtaken by a series of events that materially altered the system of government in the District of Columbia. The employee protest and the meeting with District officials coincided with the assumption by the new federal Financial Control Board of the responsibility for contracting and procurement for the District government. See Shook v. District of Columbia Fin. Responsibility and Mgmt. Assistance Auth., 328 U.S. App. D.C. 74, 76, 132 F.3d 775, 777 (1998). In the process of streamlining the District's procurement practices, then Chief Financial Officer (now Mayor) Anthony Williams concluded that the District's relationship with Urban Shelters was too strained to continue. In his pretrial deposition, Mr. Williams explained that notwithstanding the hardship to employees of the Home, he saw no reasonable alternative to ending the District's contract with Urban Shelters. In late November, 1995, the District placed its own lien on Urban Shelters' accounts for back taxes owed to the District. A month after District officials had pleaded with J.B. Johnson employees to stay on the job, the District took ...


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