Disagreeing with the Third Circuit, Chicago Bankruptcy Judge Timothy A. Barnes ruled in substance that the so-called liquidating fiduciary exception to the federal Worker Adjustment and Retraining Notification Act, or WARN Act, does not apply if a chapter 11 debtor makes representations about attempting to reorganize, as opposed to liquidating.
The decision may end up giving $4 million in administrative expense claims to fired workers. Judge Barnes admitted that his approach would “detrimentally affect liquidating chapter 11 cases” by giving large claims to workers that must be paid in full ahead of unsecured claims.
The case involved a corporate debtor that fired its workers immediately after filing a chapter 11 petition. The WARN Act makes an employer liable for 60 days’ wages if workers were not given advance notice of mass layoffs. Assuming there was a valid WARN Act claim, Judge Barnes concluded that it would be entitled to administrative expense priority under Section 503(b)(1)(A)(ii).
The difficult question for Judge Barnes was deciding whether there was a valid claim under the WARN Act, 29 U.S.C. § 2101-2109.
The statute itself contains several provisions absolving employers of liability even if they did not give 60 days’ notice. There is no liability if the company was seeking capital or if the shutdown was caused by a “natural disaster” or “business circumstances that were not reasonably foreseeable.”
In commentary issued in connection with the statute, the U.S. Department of Labor created what’s known as the “liquidating fiduciary exception,” which says that WARN Act liability does not attach to a “fiduciary whose sole function in the bankruptcy process is to liquidate.” The commentary goes on to say, “In other situations, where the fiduciary may continue to operate the business for the benefit of creditors, the fiduciary would succeed to the WARN obligations of the employer precisely because the fiduciary continues the business in operation.”
Judge Barnes said that the validity of the liquidating fiduciary exception was a case of first impression in the Seventh Circuit because it “exists nowhere in the statute itself.” Since the Seventh Circuit has said in other contexts that the Labor Department’s commentaries should be given “significant weight,” Judge Barnes had “little hesitation” in following other courts that have “uniformly concluded” that the exception does exist.
Applying the exception, Judge Barnes looked to the plain language of the commentary just as he would analyze the words of a statute. He focused on the requirement that the fiduciary’s “sole function” must be to liquidate. Chapter 7 trustees, he said, automatically qualify.
In chapter 11, the sole function of a trustee or debtor in possession is not to liquidate. Unless the bankruptcy court has limited the trustee’s ability to operate the business under Section 1108, Judge Barnes said that the liquidating fiduciary exception would not apply in chapter 11.
To depart from the “plain words” of the commentary “would be to legislate from the bench,” Judge Barnes said.
However, the Third Circuit upheld use of the exception in Official Comm. of Unsecured Creditors of United Healthcare Sys., Inc. v. United Healthcare Sys., Inc. (In re United Healthcare Sys., Inc.), 200 F.3d 170 (3d Cir. 1999). A bankruptcy court in New York did the same in the liquidation of MF Global Holdings Ltd.
In his Feb. 24 opinion, Judge Barnes said that the Third Circuit focused on the debtor’s intent to liquidate rather than on the debtor’s powers. He said that the appeals court and the court in New York did not constrain themselves “to the plain language” of the Department’s commentary. Instead, he said, those courts used “hindsight” to “create a new, court-made liquidating fiduciary exception that is not in line with the specific language of the commentary itself.”
Even were he to follow the Third Circuit, Judge Barnes ruled that the debtor was not eligible for the exception in view of the record in the bankruptcy court. He rejected the argument that the debtor always intended to liquidate.
Although the debtor did liquidate, Judge Barnes said “it is not clear that was their intent or sole course.” He pointed to the financing order, which said that credit was needed “to operate the business.” Without cash collateral, the debtor said it could not “operate its business,” eliminating the possibility of a “successful reorganization.”
Likewise, the debtor got permission to pay prepetition wages because failing to do so would “jeopardize its ability to reorganize.” In addition, the motion to sell assets “repeatedly” referred to a “going concern” sale.
Even using the Third Circuit’s retrospective analysis, Judge Barnes concluded that the debtor would not qualify for the exception because the debtor “acted in a manner inconsistent with liquidation.”