WARN Act Liability Requires Probability of Closure

By Jeffrey Rhodes Sep 13, 2017
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​A jet manufacturer that failed to obtain funding in bankruptcy that would have allowed it to reorganize rather than liquidate was not liable under the Worker Adjustment and Retraining Notification (WARN) Act, according to the 3rd U.S. Circuit Court of Appeals.

Eclipse Aviation Corp. was a manufacturer of airplanes until it closed its doors in February 2009. Eclipse filed for bankruptcy in November 2008, but it had reached an agreement to sell the company to its largest shareholder, European Technology and Investment Research Center (ETIRC). This purchase agreement would have allowed Eclipse to continue its operations.

The sale, however, required significant funding from Vnesheconombank (VEB), a state-owned Russian bank, and this funding never materialized. For a month, Eclipse waited for the deal to go through with almost daily assurances that the funding was imminent and the company could be saved. Eventually, however, those assurances failed to bear fruit and Eclipse had to completely cease operations.

The former employees of Eclipse filed suit against it in the Bankruptcy Court under the WARN Act. They claimed that Eclipse should have known that closure and layoff of employees was a significant possibility. Eclipse filed a motion for summary judgment claiming that it did not have to provide WARN Act notice because of the unforeseen business circumstances exception to the WARN Act.

[SHRM members-only toolkit: Managing Downsizing by Means of Layoffs]

The WARN Act requires most employers with 100 or more employees to provide 60 calendar days of advance notice of plant closings and mass layoffs of employees. A mass layoff is defined as an employment loss of 50 or more employees during any 30-day period. Liability under the WARN Act includes back pay and benefits for the period of violation, up to 60 days, plus civil monetary penalties and attorney fees. However, the WARN Act has numerous exceptions. One of these exceptions is the unforeseen business circumstances exception.

The Bankruptcy Court found that the exception applied and granted summary judgment to Eclipse concerning the employees' WARN Act claims. The district court upheld the decision on appeal, and the employees further appealed to the 3rd U.S. Circuit Court of Appeals.

The 3rd Circuit closely analyzed the facts leading up to the decision to liquidate the company in bankruptcy. The largest shareholder of Eclipse, ETIRC, was seeking funding from VEB throughout the negotiations in bankruptcy. While ETIRC reserved the right not to hire all of the Eclipse employees, it offered to buy Eclipse as a going concern through a process called a "stalking horse" asset purchase. The process was designed to obtain a high-enough purchase price for Eclipse's assets to enable business to continue.

During the months of preplanned negotiation, ETIRC sought assurances from the Russian government that VEB would provide funding. Its efforts included numerous communications with high-level government officials reporting to Russian President Vladimir Putin. Ultimately, Putin did not to grant permission to VEB, and thus the sale fell through. When Eclipse learned that approval would not be forthcoming on Feb. 24, 2009, it filed for liquidation and gave notice to employees by e-mail that day, followed by written notice.

The employees argued that Eclipse should have known that there was a significant risk that negotiations with ETIRC and VEB would fall through. Recognizing that there was some risk, the 3rd Circuit ruled that the unforeseen business circumstances exception would apply unless there was a probability of a mass layoff, which was not the case for Eclipse.

The 3rd Circuit reasoned that such a probability should be required for WARN Act liability because a lesser standard would often result in notices being sent out that would hasten a company's demise. This would tend to harm employees more than help them, which is the purpose of the WARN Act requirements.

The employees argued that Eclipse's failure to obtain written assurances from ETIRC to keep them employed was enough to create a duty of notice under the WARN Act. The 3rd Circuit disagreed, finding that it is common for purchasers to try to disclaim liability to the selling company's employees even when they expect to retain the employees after purchasing the business.

In re AE Liquidation Inc., 3rd Cir., No. 16-2203 (Aug. 4, 2017).

Professional Pointer: The WARN Act imposes a requirement on large companies going through an economic downturn to give notice to employees before a layoff or closure. Nevertheless, the act contains certain exceptions so that companies will not become automatically liable simply by suddenly going out of business.

Jeffrey Rhodes is an attorney with Doumar Martin in Arlington, Va.

 

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