Facing the possibility of bankruptcy, managers of the business face a dilemma created by the federal Worker Adjustment Retraining Notification Act, known as the WARN Act. To avoid liability for back pay, the WARN Act requires giving workers 60 days’ written notice of plant closings or mass layoffs.

However, giving a WARN Act notice to avoid liability could quickly turn the possibility of bankruptcy into reality, by driving away customers and workers.

On December 19, Bankruptcy Judge Craig T. Goldblatt of Delaware surveyed the law nationwide and wrote a 67-page opinion telling company executives how to behave and what to write to workers to avoid WARN Act liability.

The Precipitous Liquidation

The business in question was Yellow Corp., once one of the country’s largest truckers. In precarious financial condition, the company had hired an investment banker to hunt down new investment or modify existing loan agreements. Facing a liquidity crunch, the company asked the union pension fund for a deferral of a contribution. The pension fund refused.

When the company didn’t make the payment, the union gave notice of a strike in 72 hours. Both sides saw the strike notice as a bluff, but customers reacted otherwise. Daily shipments fell from about 45,000 to almost nothing in a matter of days. New financing or modification of loan agreements no longer feasible, the company filed a chapter 11 petition to liquidate.

In chapter 11, individuals, unions and pension funds filed proofs of claim under the WARN Act. In addition, the debtor was named as a defendant into two adversary proceedings professing WARN Act liability. Following discovery, both sides filed motions for summary judgment.

Ruling on summary judgment, Judge Goldblatt dealt with statutory exceptions to WARN Act liability.

The First Two Exceptions

Judge Goldblatt first dealt with the so-called faltering company exception in 29 U.S.C. § 2102(b)(1). As the judge said, it provides an exception to the notice requirement if “as of the time that notice would have been required,” the employer (a) “was actively seeking capital or business which, if obtained would have enabled the employer to avoid or postpone the shutdown” and (b) “the employer reasonably and in good faith believed that giving the notice required would have precluded the employer from obtaining the needed capital or business.”

When notice ultimately is given, Judge Goldblatt said that it “must contain a brief statement explaining why one or more of the exceptions applies.”

With regard to the first exception, Judge Goldblatt said that “the summary judgment record clearly indicates that the debtors’ efforts, through [the company’s investment banker], to explore options either to refinance existing indebtedness or to attract new capital was sufficient to fall within the faltering company exception.” He added, “Retaining an investment banker that is actively engaged in exploring the market for sources of new liquidity is precisely the kind of activity that qualifies under the faltering company exception.”

The second exception is in 29 U.S.C. § 2102(b)(2). As Judge Goldblatt said, it provides an exception to the requirement of 60 days’ notice “if the layoff is ‘caused by business circumstances that were not reasonably foreseeable as of the time’ notice would have been required.”

To determine whether the event was not reasonably foreseeable, Judge Goldblatt quoted the Third Circuit, which said that “the court must ask, applying an objective standard, ‘whether a similarly situated employer’ using its ‘commercially reasonable business judgment would have foreseen’ the businesses’ closure as of the date notice would have been required.”

On summary judgement, Judge Goldblatt said that the “record makes clear that the debtors’ shut down was caused by an unforeseeable business event,” namely, the “history of brinksmanship.” The debtor, he said, “had every reason to believe . . . that the [the union] would come to the table before the clock ran out.” He added that the business failure was caused, “at least in substantial part, by the [union’s] miscalculation about the effect of sending a strike notice.”

Judge Goldblatt ruled that “the summary judgment record makes clear that the layoffs were ‘caused by business circumstances that were not reasonably foreseeable at the time,’ within the meaning of the WARN Act.”

The Notices Fall Short

For either exception to apply, Judge Goldblatt said that the accompanying regulations require the that the debtor “must ‘give as much notice as is practicable and at that time shall give a brief statement of the basis for reducing the notification period.’”

When the company eventually gave the notices, Judge Goldblatt said they “did not contain enough facts adequately to justify the reduced notice.” The first notice was “devoid of actual facts,” and the second notice was “a closer question” but did not contain “language specific to the company’s circumstances.”

Judge Goldblatt therefore held that the debtor “may not validly invoke the WARN Act’s faltering company exception.”

The Liquidating Fiduciary Exception

The company had another escape hatch, the liquidating fiduciary exception that arises under the WARN Act’s definition of an “employer” as a “business enterprise” with more than 100 employees. Judge Goldblatt cited the federal Department of Labor’s commentary in saying that “a fiduciary ‘whose sole function in the bankruptcy process is to liquidate a failed business … does not succeed to the notice obligations.’”

The question, Judge Goldblatt said, “is whether, at the time of the layoffs, the debtors were still engaged in their usual business activity.” Applying caselaw, he concluded that “the debtors were no longer ‘employers’ within the meaning of the WARN Act after they had both stopped picking up new shipments and delivered the final shipment.”

On the earlier date when nonunion employees were fired, Judge Goldblatt found “no dispute” that the debtors were employers. A few days later, when union workers were fired, the record was unclear, and he was unable to grant summary judgment one way or the other, given “a genuine dispute of material fact.”

Waivers of WARN Act Liability

Initially, the debtor agreed to pay severance to employees who signed waivers of WARN Act liability. Later, but still before bankruptcy, the debtor decided to pay severance to everyone. The question arose as to whether the waivers were enforceable.

As a matter of contract law, Judge Goldblatt said that the record did not support summary judgment for either side, because it “boils down to whether the debtors made a knowingly false statement when they represented to employees that they were required to sign the release in order to obtain the severance payment.”

‘Good Faith’ Could Preclude Liability

Judge Goldblatt said that Section 2104(a)(4) “allows courts to, in their discretion, reduce a company’s liability under the Act if the employer shows that the violative ‘act or omission’ was ‘in good faith and that the employer had reasonable grounds for believing that the act or omission was not a violation’ of the WARN Act.”

While the record could not justify granting summary judgment, Judge Goldblatt told the parties that he “views the debtors’ violation of the WARN Act in this case to be something of a technical one.” Therefore, he said, “the parties should appreciate that if the evidence at trial is broadly consistent with the existing record, there is a substantial prospect that the Court will exercise the discretion afforded to it by § 2104(a)(4).”

Judge Goldblatt granted and denied summary judgment in part.