Third Circuit Joins Other Circuits in Holding WARN Act Exception’s Standard Is “Probable,” not “Possible”

Given the media saturation, it is virtually impossible for any American to be unaware of the allegations that Russia and President Putin interfered in the 2016 presidential elections. But only a much smaller subset of the population likely knows that Russia and then-Prime Minister Putin also played a key role in Eclipse Aviation Corp.’s bankruptcy case seven years earlier.

As a result of the unexpected failure of a bank controlled by the Russian government to provide previously promised financing to a buyer who intended to purchase Eclipse’s operations as a going concern in its chapter 11 case, Eclipse was forced to abruptly shutter its operations and convert its case to one under chapter 7, in the process laying off hundreds of employees with no advance notice. The sudden layoffs triggered a WARN Act suit, culminating in a recent opinion from the U.S. Court of Appeals for the Third Circuit, In re AE Liquidation Inc.,[1] wherein the court applied the “unforeseeable business circumstances” exception to WARN Act liability.

The WARN Act requires employers to give 60 days’ notice to employees or their representatives prior to a mass layoff or closing of a location, subject to various codified exceptions excusing an employer from having to give notice under certain circumstances. Under the “unforeseeable business circumstances” exception, an employer must demonstrate that the closing or layoff was “caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.”[2] Courts have distilled this exception into two discrete elements: (1) that the business circumstances causing the layoff were not reasonably foreseeable; and (2) that those circumstances were the cause of the layoff.[3]

Following their abrupt termination and the bankruptcy case’s conversion, the employees filed a class action against Eclipse’s chapter 7 trustee asserting a violation of the WARN Act, and the parties filed cross-motions for summary judgment. The trustee argued that the “unforeseeable business circumstances” exception precluded WARN Act liability, as the layoffs were caused by the Russian bank’s unexpected failure to provide the purchaser with the financing necessary to consummate its purchase of Eclipse’s operations as a going concern. The bankruptcy court agreed and granted the trustee’s summary-judgment motion. The district court affirmed, and the employees then appealed to the Third Circuit, arguing, among other things, that the “unforeseeable business circumstances” exception should not apply because the bank’s failure to close the sale had not been “unforeseeable.”

In analyzing the meaning of the word “unforeseeable” for purposes of the exception, the U.S. Court of Appeals for the Third Circuit began by noting that the WARN Act’s implementing regulations “provide that an ‘unforeseeable business circumstance’ is one that was ‘not reasonably foreseeable’” at the time when notice would have been required, but that the regulations “do not define what makes a business circumstance ‘not reasonably foreseeable.’”[4] The court also noted that there was no Third Circuit decision on how the term “reasonably foreseeable” should be interpreted. After reviewing the decisions of five other circuit courts on the subject,[5] the court joined its sister courts in holding that the exception ceases to apply — and that a business must provide notice to employees — once a mass layoff “becomes probable — that is, when the objective facts reflect that the layoff was more likely than not.” [6] The court rejected the employees’ contention that a layoff should be deemed “reasonably foreseeable” when it is merely “reasonably possible.”[7]

The court focused on the facts surrounding the failed sale and found it significant that the proposed purchaser had provided “constant assurances” to Eclipse that it would provide the funding necessary to close the sale.[8] The court determined that 60 days prior to the termination — when the notice would have been due to the employees under the WARN Act — Eclipse was preparing to be sold on a going-concern basis. The sale was then approved by the bankruptcy court about a month later, and therefore, Eclipse could not have known that the sale was going to fail on, or prior to, the date on which the sale was approved. The court reasoned that if the sale was likely to fail, the bankruptcy court surely would not have approved it.

Shortly after sale approval, the bank unexpectedly became insolvent. Even then, however, the court agreed that Eclipse still had little reason to believe that the sale would not close, based on constant assurances received from the purchaser that the bank would be recapitalized by the Russian government. The Russian parliament approved a government recapitalization of the bank, a Russian governor appeared telephonically at an Eclipse board meeting and expressed optimism that the funding would “occur rapidly,” and by all accounts the funding still seemed likely to materialize.[9] The only remaining hurdle was that Prime Minister Putin’s “final signoff” for the recapitalization was still needed.[10] All parties concerned expected this signoff to occur by Feb. 21, 2009, just in time to allow the sale to close before Eclipse ran out of cash. “Contrary to all prior representations,” and despite last minute attempts to reach him, Prime Minister Putin failed to issue his approval in time to allow the sale to close, and on Feb. 24, 2009, Eclipse ran out of money and was forced to terminate its employees.

Considering these circumstances, the court held that the purchaser’s failure to obtain the financing necessary to close the sale was not probable prior to Eclipse’s decision to lay off its employees. The court concluded that it had been commercially reasonable for Eclipse to believe it was at least equally likely that the sale would close versus fall through.

Accordingly, because the trustee had demonstrated that the company’s closing had not been “probable” until the day it occurred, the “unforeseeable business circumstances” exception applied, and Eclipse’s bankruptcy estate could not be held liable for management’s failure to give notice to the employees under the WARN Act.

By deciding that WARN Act notice obligations are triggered when a mass layoff becomes probable, the court adopted a standard that “strikes an appropriate balance in ensuring employees receive the protections the WARN Act was intended to provide without imposing an ‘impracticable’ burden on employers that could put both the employers and their employees in harm’s way.”[11] The court also recognized the impact of a premature warning, stating, “When the possibility of a layoff — while present — is not the more likely outcome, such premature warning has the potential to accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided.”[12] Employers should take comfort in the fact that the court adopted the higher threshold of “probability” of a pending layoff, instead of only a “possibility,” to trigger an obligation to notify employees under the WARN Act.