Providing Employees with Notice of Layoffs in Chapter 11 Cases

by BakerHostetler

The "WARN Act" (Worker Adjustment and Retraining Notification Act) requires that larger employers provide 60 days' notice in advance of plant closings or other mass layoffs. This has long been in conflict with bankruptcy practice. A recent Fifth Circuit decision, In re Flexible Flyer Liquidating Trust, 2013 WL 586823, at *1 (5th Cir. Feb. 11, 2013), confirms that exceptions to the WARN Act apply in bankruptcy and interprets these exceptions more broadly than previous decisions.

The purpose of the WARN Act is to offer workers and their families the opportunity to adjust to the prospective loss of employment, seek and obtain alternative jobs, and enter into any necessary retraining. An employee can sue for damages if he or she shows the employer ordered a plant closing or mass layoff and failed to give to the plaintiff 60 days' notice of the closing or layoff. There are exceptions to the Act. The most notable, for bankruptcy practitioners, is the "faltering company" exemption, which allows shortened notice resulting from "unforeseen business circumstances." If the exemption applies, employers are required to give only "as much notice as is practicable."

The Fifth Circuit has now ruled that the faltering company exception applies even where the company was already in lender "workout" negotiations for some time before the lender "pulled the plug." Flexible Flyer was a manufacturer of swing sets, hobby horses, go-carts, utility vehicles and fitness equipment. It sold to a number of retailers such as Wal-Mart, Toys-R-Us, K-Mart, and Sam's Club. It was owned by a hedge fund and was funded through capital infusions from the fund and through a factoring arrangement with a lender.

In 2005, Flexible Flyer's already tenuous financial position worsened following a product recall and purchaser deferments by key clients. Some months thereafter, its lender reduced and then ended its funding arrangement, and the hedge fund denied further funding. As a result, Flexible Flyer filed for bankruptcy and notified its employees that it was ceasing operation and would be laying off all employees. Some employees sued, alleging that Flexible Flyer had failed to provide 60 days' notice of the layoffs as mandated by the WARN Act. The bankruptcy court determined, and the district court affirmed, that Flexible Flyer was excused from providing notice because the shutdown was the result of unforeseeable business circumstances. The employees appealed to the Fifth Circuit.

The Fifth Circuit, stating that closings and layoffs are not foreseeable when they are caused by a sudden, dramatic and unexpected action outside of the employer's control, upheld the application of the exception. The Court found that 60 days prior to the shutdown, there was no indication that operations would soon cease. The Court found that it was the fact that Flexible Flyer's funding was abruptly cut off that precipitated the filing, rejecting the employees' argument that notice should have been provided after the product recall. Because the company acted in good faith and operated on the well-grounded hope that closings and layoffs would not take place, the WARN Act did not apply. The Court held that WARN Act regulations were meant to protect a company's exercise of business judgment in situations where the company acts reasonably and Flexible Flyer was well within this ambit.

The Fifth Circuit's broad application of the exception and deference granted to the business judgment of the company is at odds with a 2008 Third Circuit decision. In In re APA Transport Corp. Consolidated Liquidation, the Third Circuit stated that WARN Act exceptions should be narrowly construed so as to prevent the exceptions from swallowing the statute. APA Transport involved consideration of the "faltering company" exception following the shutdown of a trucking business nine days after notice was given to employees. The Court determined that the debtor could not satisfy the requirements of the exception because the debtor failed to demonstrate that (i) it was actively seeking financing at the time at which notice was required, and (ii) providing such notice earlier would have impacted the company's ability to obtain financing. The Third Circuit held that the WARN Act exception was an affirmative defense and to carry its burden thereon, APA Transport would have to prove the specific steps it had taken at or shortly before the time notice would have been required to obtain a loan or secure new business. The Court concluded that a narrow interpretation was appropriate when the language of the statute was unambiguous.

It remains to be seen whether Flexible Flyer signals a move away from a more stringent application of the WARN Act exceptions. Interestingly, though the Fifth Circuit in In re Flexible Flyer based its analysis on the "unforeseen business circumstance" exception, the factors that the court considered had less to do with unforeseen business circumstances and more to do with the company's "good faith, well-grounded hope, and reasonable expectations," whereas in APA Transport, the Third Circuit emphasized the language of the statute itself. This suggests that at least from the Fifth Circuit's perspective, the WARN Act is also meant to encourage companies to take reasonable actions to preserve the company and jobs. The Fifth Circuit used Flexible Flyer as an example in explaining that if the rule was different, it would encourage companies like the debtor to abandon all hope even where there is some probability of success. In any event, companies facing mass layoffs or plant shutdowns should be aware of the requirements under the WARN Act and the exceptions that apply.

In situations where a company is engaging in the orderly ceasing of operations or mass layoffs, the WARN Act presents issues that require the assistance of counsel. The manner in which the WARN Act is interpreted varies from court to court, as seen in the In re Flexible Flyer and In re APA Transport Corp. decisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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