WARN Act Pre-emption of State Law Helps Secured Creditors

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Feb 2000

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Imagine this scenario: You represent a secured creditor who holds a first priority lien on all the
assets of a troubled manufacturing business. The borrower has 150 employees and has been
searching for a buyer for a number of months as a solution to its financial troubles. Finally,
after months of frustration on both the company's part and the creditor's, the decision is made
to shut down the business and liquidate the assets.

One of the concerns for both the company and creditor has been the payment of employee wages.
The company was concerned because without happy (i.e., paid) employees, it might be a less
attractive acquisition. The creditor was concerned because unpaid employees in some states have
claims under state wage laws that grant the employees a superior lien on the company's assets
for unpaid wages. The creditor and employer have ensured that all wages have been timely paid
so that on the last day of the month, the employees are given their final paychecks, informed
that the business is closed and told not to return to work on Monday.

Two weeks later, an attorney writes on behalf of all of the employees and demands an additional
two months' worth of wages and benefits for violating the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Worker Adjustment and Retraining Notification Act (WARN Act), 29 U.S.C. §§2101-2109</a>, and further alleges those
wages are secured by a super-priority lien under the state wage lien law.

This is essentially the situation that occurred in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bluffton Casting Corp., 186 F. 3d 857
(7th Cir. 1999)</a>, when, after Bluffton Casting filed a chapter 11 petition, its employees
commenced an adversary proceeding against the two secured creditors to determine the priority
of their claims. Fortunately for the secured creditor in Bluffton Casting, the Seventh Circuit
Court of Appeals affirmed the lower court decisions, holding that the WARN Act's exclusive
remedy provision pre-empted the state wage claim law, and therefore, while WARN Act damages
may be owed, they were not secured by a paramount lien on the company's assets.

<h3>The WARN Act and Its Exclusive Remedy</h3>

The WARN Act was passed in 1988 to address the perceived problem of a company abruptly
closing or laying off substantial numbers of employees without any prior notice. The act,
which applies to companies with at least 100 employees, requires that the company give each
affected employee (or its representatives) written notice at least 60 days prior to closing a
plant or implementing a layoff that affects at least 50 employees. Failure to give the notice, or
giving the notice less than 60 days prior to the plant closing or mass layoff, subjects the
employer to liability for damages, including back pay and lost benefits, for a period equal to the
number of deficient days of notice. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §2104(a)(1)</a>. In addition, employees may recover
costs and attorneys' fees. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §2104(a)(6)</a>.

<blockquote><blockquote>
<hr>
<big><center>
...the pre-emption argument based on §2104(b) of
the act should provide substantial comfort in
defeating most of those claims.
</center></big>
<hr>
</blockquote></blockquote>

The WARN Act has been the subject of litigation in bankruptcy cases. Those cases have generally
established the following:

<ol>
<li>WARN Act damages arise on the date employees are laid off or terminated without any notice
or less than the statutorily required amount of notice. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cargo Inc., 138 B.R. 923, 927
(Bankr. N.D. Iowa 1992)</a>.

</li><li>If the termination or shutdown occurs pre-petition, the WARN Act claims are entitled to
priority pursuant to §507(a)(3), up to the requisite dollar amount as severance pay in lieu of
notice. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

</li><li>If the termination occurs post-petition, WARN Act damages are entitled to administrative
expense priority pursuant to §507(a)(1). <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hanlin Group Inc., 176 B.R. 329, 334
(Bankr. D. N.J. 1995)</a>.
</li></ol>

The WARN Act also contains two seemingly inconsistent provisions. The first, §2104(b),
provides that "the remedies provided for in this section shall be the exclusive remedies for any
violation of this chapter." The remedies in §2104 are the back pay, lost benefits, costs and
attorneys' fees mentioned above. However, the next section of the WARN Act provides that "the
rights and remedies provided to employees by this chapter are in addition to, and not in lieu of,
any other contractual or statutory rights and remedies of the employees, and are not intended to
alter or affect such rights and remedies..." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §2105</a>. The interaction of these two
provisions was at the heart of the Bluffton Casting case.

<h3>The Bluffton Casting Case</h3>

In Bluffton Casting, the company filed a chapter 11, which was subsequently converted to
chapter 7. At the time of the initial filing, the plant shutdown had already occurred and the
employees had claims for unpaid wages, vacation pay, health care expenses, pension
contributions, disability and claims relating to the plant closing under both the WARN Act and
their collective bargaining agreement. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 859</a>. Although the timing is not entirely
clear, at some point the employees filed wage claims under Indiana state law in an attempt to
secure their WARN Act claims.

The Indiana wage lien statute provides that the employees have a first and prior lien on the
corporate property and earnings of the corporation for all work and labor done and performed.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Code §32-8-24-1</a>. The statute further provides that the lien is "prior to any and all
liens created or acquired subsequent to the date of the employment of the employees by the
corporation." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Although not disclosed in the opinion, presumably some of the employees at
issue began their employment prior to the time the secured creditors in the case perfected their
liens.

The Seventh Circuit affirmed the bankruptcy court and district court determinations that the
employees' claims under the WARN Act are limited to the exclusive remedies set forth in the Act
in accordance with §2104(b). The court pointed out that the WARN Act does not have any
provision for securing the damages awarded thereunder with any sort of lien. Rather than
construing the state wage lien statute as a vehicle to enhance the remedies available under the
WARN Act, the court stated that granting a wage lien would be akin to an additional remedy not
authorized by the specific language of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Act. 186 F.3d at 861</a>. The court specifically
observed the employees were trying to use the wage lien statute to displace the secured
creditors' priority position. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

The court distinguished, but did not necessarily disagree with, cases cited by the employees
where prejudgment interest was awarded for WARN Act damages. Even though the WARN Act
itself has no provision for prejudgment interest, the Seventh Circuit stated that prejudgment
interest is compensation for the time value of the damages explicitly provided for under the
WARN Act. Accordingly, it's "a necessary adjunct to the damages remedy available under
§2104(a)." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 861</a>. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Ampex Corp., 61 F.3d 757, 773 (10th Cir.
1995)</a> (award of prejudgment interest furthers Congress's intent to provide compensation in
lieu of notice); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Dist. Council v. Dillard Dep't Stores Inc., 15 F.3d 1275, 1288 (5th
Cir. 1994)</a> (same). The court felt that awarding prejudgment interest was vastly different
from granting a super-priority lien.

The Seventh Circuit implicitly disapproved of another case that stated, in dicta, that a
preliminary injunction was available under the WARN Act. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… 397, International Union of
Elec. Workers v. Midwest Fasteners Inc., 763 F. Supp. 78 (D. N.J. 1990)</a>, the district court,
although ultimately refusing to grant an injunction on the merits, held that §2104(b)'s
exclusive remedy provision did not preclude, in a proper case, a court from granting an
injunction to protect a future damages award. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F. Supp. at 81</a>. Despite Midwest Fasteners'
suggestion that a court might be able to grant an injunction to prevent the dissipation or
consumption of assets that might otherwise satisfy a WARN Act award, the Seventh Circuit
apparently ended the discussion based on §2104(b)'s exclusive remedy provision.

The Seventh Circuit's final direction on when to determine whether a particular remedy is
pre-empted under the WARN Act is as follows:

<blockquote>
When the substantive basis for a claim is the WARN Act, the sole remedies available are
those provided in §2104(b). On the other hand, claims based on the same set of facts, yet
arising out of another substantive right, are not pre-empted pursuant to §2105. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
F.3d at 861</a>.

</blockquote>

<h3>Conclusion</h3>

While secured creditors should still be wary of WARN Act damages that could rise to the status
of administrative claims, the Seventh Circuit's decision in Bluffton Casting should provide
persuasive authority to preclude any attempt to elevate a WARN Act claim to a secured position
using a state wage lien statute. No doubt creative arguments remain that could be used to elevate
a WARN Act claim under certain other scenarios. However, the pre-emption argument based on
§2104(b) of the act should provide substantial comfort in defeating most of those claims.

Journal Authors

David I. Cisar

Samuel C. Wisotzkey

Journal Date

Tuesday, February 1, 2000 - 12:00