When a business is in financial distress, the breaking point sometimes comes with little or no warning. An event such as a termination of funding, the falling through of a crucial transaction, or the loss of a key customer can be difficult to predict, and may result in a distressed business being forced to cease operations abruptly, without providing its workers with the advance notice required under the Federal WARN Act.[1]
For this reason, debtors who have ceased all, or a significant part, of their operations frequently find themselves the targets of WARN Act claims. In general terms, the WARN Act requires companies with 100 or more employees to provide affected workers with 60 or more days’ advance notice prior to a mass layoff or plant closure. An employer who provides less than the required 60 days’ notice may be held liable under the WARN Act to each aggrieved employee for damages in the form of that employee’s daily pay and benefits multiplied by the number of days in the violation period (i.e., the time period beginning with the late provision of notice and extending back to the 60th day prior to the mass layoff or plant closure). Where no notice at all has been provided, each aggrieved employee’s damages will comprise the full 60 days’[2] worth of pay and benefits.
In a bankruptcy case, WARN Act claims against the debtor/former employer are entitled to priority up to the statutory wage cap of 11 U.S.C. § 507(a)(4). As a result, WARN Act claims can take a significant bite out of general unsecured creditors’ recoveries, especially if large numbers of employees are affected.
However, the WARN Act contains certain exceptions, under which an employer may be excused from its notice obligations. The U.S. Bankruptcy Court for the District of Delaware recently issued an opinion holding that one such exception — the so-called “unforeseeable business circumstances exception” — excused the debtor’s obligation to provide notice to its employees.
In Varela v. Eclipse Aviation Corp. (In re AE Liquidation Inc.),[3] the debtor commenced a chapter 11 case with DIP financing provided by its largest shareholder, and continued operations, hoping to sell its business as a going concern under § 363. The same shareholder emerged as the stalking-horse bidder and represented that a certain Russian state-owned bank would finance the sale. Soon after, the court approved an APA between the debtor and the stalking horse for a going-concern purchase of the business, in which the representations regarding the financing were memorialized, and entered an order approving the sale.
Despite its repeated assurances that it would be able to obtain the financing, the stalking horse ultimately failed to so do, and the sale failed to close. Because no other bidders had come forward and the debtor had by then exhausted its funds, the debtor was forced to cease operations and terminate all of its employees. The case was then converted to one under chapter 7.
A group of former employees brought WARN Act claims against the debtor’s chapter 7 estate, alleging that the debtor had terminated their employment without providing any advance notice, and they asserted damages representing 60 days’ pay and benefits.
The chapter 7 trustee did not dispute that the debtor had failed to provide notice prior to the terminations. However, the trustee disputed liability on the ground that the “unforeseeable business circumstances exception” excused the debtor from the obligation to provide notice. That exception, set out at 29 U.S.C. § 2102(b)(2), provides:
An employer may order a plant closing or mass layoff before the conclusion of the 60-day period if the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.
The Delaware bankruptcy court explained:
Deciding what qualifies as unforeseeable is a fact-intensive inquiry. The regulations do not offer examples of circumstances that are per se unforeseeable. However, an important indication of such circumstances is a “sudden, dramatic, and unexpected action or condition outside of the employer’s control.”
The test is an objective one: “When determining whether a closing was caused by unforeseeable business circumstances, we evaluate whether a ‘similarly situated employer’ in the exercise of commercially reasonable business judgment would have foreseen the closing.”[4]
Applying these standards, the court found that the layoffs were caused by the stalking horse’s failure to obtain financing and resulting failure to close the sale, and that these events were not “reasonably foreseeable” to the debtor. The court found that “it was reasonable for [the debtor] to conclude that funding would be forthcoming and the sale would close.”[5] The court pointed to “repeated assurances” from the stalking horse that it would obtain the funding, to the fact that the stalking horse had already sunk $20 million into the sale process in the form of DIP financing, and to the fact that the stalking horse’s chairman had testified at the sale hearing that it “had lined up the necessary financing commitments and that, aside from the entry of the sale order, there were no contingencies in connection with the purchase.”[6]
In rejecting the plaintiffs’ argument that the debtor had acted unreasonably in relying on the proposed financing, the court explained, “As the case law clarifies, ‘in determining whether a crippling business circumstance is foreseeable, we must bear in mind that it is the probability of occurrence that makes a business circumstance reasonably foreseeable, rather than the mere possibility of such a circumstance.’”[7] The court concluded that under the circumstances, it was not “probable” that the sale would fail. Accordingly, the court found that the failure of the sale to close was not foreseeable to the debtor, and held that the “unforeseeable business circumstances exception” applied to shield the estate from WARN Act liability.
From a policy perspective, the court cautioned that “rushing notice of a layoff can mean that ‘employees may overestimate the risk of closing and prematurely leave their employer, forfeiting (among other things) seniority and unvested benefits.’ Such a reaction by some employees can doom the proposed sale and result in the loss of jobs for all.”[8]
The circumstances that led to the debtor’s demise in Eclipse Aviation are not uncommon in the bankruptcy context, where the unexpected termination of a company’s operations often goes hand-in-hand with a petition filing or case conversion. Consequently, as the Eclipse Aviation decision illustrates, the “unforeseeable business circumstances exception” may frequently apply in this context.
[1] The Federal Worker Adjustment and Retraining Notification Act (WARN Act) is codified at 29 U.S.C. §§ 2101-2109.
[2] Cases are not consistent as to whether it is 60 days or the number of workdays within the 60-day period.
[3] AP No. 09-50265 (MFW), 2014 WL 6460805 (Bankr. D. Del. Nov. 18, 2014).
[4] Id. at *4 (quoting 20 C.F.R. § 639.9(b)(1) and Hotel Employees & Restaurant Employees Int’l Union Local 54 v. Elsimore Shore Assocs., 173 F.3d 175, 186 (3d Cir. 1999)).
[5] Id. at *5.
[6] Id. at *4.
[7] Id. at *5 (quoting Roquet v. Arthur Anderson LLP, 398 F.3d 585 (7th Cir. 2005)).
[8] Id. (citing In re Jevic Holding Corp., 496 B.R. 151, 163 (Bankr. D. Del. 2013)).