In Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.), 866 F.3d 515 (3d Cir. 2017), the U.S. Court of Appeals for the Third Circuit became the sixth circuit court of appeals to rule that a "probability standard" applies in determining whether an employer is relieved from giving 60 days’ advance notice to employees of a mass layoff under the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act"). The court upheld lower court rulings that a chapter 11 debtor-employer could rely on the WARN Act’s "unforeseeable business circumstances" exception because a proposed sale of the company as a going concern under section 363(b) of the Bankruptcy Code collapsed due to the failure of a Russian bank to honor its commitment to provide the buyer with acquisition financing.
The WARN Act
Enacted in 1988, the WARN Act protects workers, their families, and communities by requiring most employers with 100 or more employees to provide notification of plant closings and mass layoffs 60 calendar days prior to the event. See 29 U.S.C. § 2102(a).
U.S. Department of Labor regulations prescribe when an employer must give WARN Act notice, whom the employer must notify, how the employer must give notice, and what information the notice must contain. See 20 C.F.R. §§ 639 et seq.
According to 29 U.S.C. § 2104(a), an employer failing to give WARN Act notice shall be liable to each aggrieved employee who suffers an employment loss as a result of a plant closing or mass layoff for, among other things, back pay for each day during the period of the violation.
However, if an employer can prove that it shut down operations because either it was a "faltering company" or the shutdown was due to business circumstances "that were not reasonably foreseeable," it need not comply with the WARN Act’s 60-day notice provisions. See 29 U.S.C. §§ 2102(b)(1) and (b)(2)(A); 20 C.F.R. § 639.9. Twenty-nine U.S.C. § 2102(b)(1) and (2)(A) provide as follows:
(1) An employer may order the shutdown of a single site of employment before the conclusion of the 60-day period if as of the time that notice would have been required the employer was actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown and the employer reasonably and in good faith believed that giving the notice required would have precluded the employer from obtaining the needed capital or business.
(2)(A) 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.
In addition, 29 U.S.C. § 2102(b)(2)(B) provides that "[n]o notice under [the WARN Act] shall be required if the plant closing or mass layoff is due to any form of natural disaster, such as a flood, earthquake, or the drought currently ravaging the farmlands of the United States."
Finally, a court-fashioned "liquidating fiduciary" exception provides that a liquidating fiduciary in a bankruptcy case (e.g., a trustee or other estate representative) does not fit the definition of "employer" for purposes of the WARN Act. See 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 healthcare debtor that filed for chapter 11 as a business liquidating its affairs rather than a business operating as a going concern was not an "employer" under the WARN Act, even though it retained its 1,200 employees for 16 days after the petition date); Conn v. Dewey & LeBoeuf LLP (In re Dewey & LeBoeuf LLP), 487 B.R. 169 (Bankr. S.D.N.Y. 2013).
The unforeseeable business circumstances exception is an affirmative defense. The employer must demonstrate that: (i) the business circumstances causing the layoff were not reasonably foreseeable; and (ii) those circumstances caused the layoff. See Calloway v. Canaco Pharm. Labs., Ltd., 800 F.3d 244 (6th Cir. 2015); 20 C.F.R. § 639.9(b).
Under the implementing regulations, closings and layoffs are not foreseeable when "caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control." 20 C.F.R. § 639.9(b)(1). The regulations also provide that, in assessing the foreseeability of business circumstances, the focus should be "on an employer’s business judgment" and that an employer is required only to "exercise such commercially reasonable business judgment as would a similarly situated employer in predicting the demands of its particular market." 20 C.F.R. § 639.9(b)(2).
Five circuit courts of appeal have ruled that, in order to be "reasonably foreseeable" as this phrase is used in the WARN Act, an event must be probable rather than merely possible. See United Steel Workers of Am. Local 2660 v. U.S. Steel Corp., 683 F.3d 882, 887 (8th Cir 2012) (an employer’s knowledge that an economic downturn would hurt demand for its product did not preclude the unforeseeable business circumstances exception because "[n]othing in the record suggests that the extent of the economic downturn and its effects on the steel industry were probable any time before [the time notice was given]"); Gross v. Hale-Halsell Co., 554 F.3d 870, 876 (10th Cir. 2009) ("[W]e do not rely on the mere possibility that layoffs will occur, but rather look for their probability."); Roquet v. Arthur Andersen LLP, 398 F.3d 585, 589 (7th Cir. 2005) (ruling that although it was "[c]ertainly possib[le]" that the accounting firm rather than its individual officers would be indicted, that possibility never rose to the level of "probable," and thus the unforeseeable business circumstances exception applied); Watson v. Mich. Indus. Holdings, Inc., 311 F.3d 760, 765 (6th Cir. 2002) (adopting the probability standard and noting that "WARN was not intended to force financially fragile, yet economically viable, employers to provide WARN notice . . . when there is a possibility that the business may fail at some undetermined time in the future"); Halkias v. General Dynamics Corp., 137 F.3d 333, 336 (5th Cir. 1998) (noting that anything less than probability would be "impracticable" and reasoning that, if the mere possibility of layoffs were enough to trigger the WARN Act, contractors "would be put to the needless task of notifying employees of possible contract cancellation and concomitant lay-offs" every time cost overruns caused the cancellation of contracts, even though layoffs were not likely).
Even if the exceptions in 29 U.S.C. § 2102(b)(1) and (b)(2)(A) apply, an employer is not completely relieved of its obligation to notify employees. The employer can give less than 60 days’ WARN Act notice, provided that the notice contains certain "basic" information (see 20 C.F.R. § 639.7) and the reasons the employer could not provide the full 60 days’ notice. See 29 U.S.C. § 2102(b)(3).
If an employer is selling all or part of its business, the WARN Act provides that the seller is responsible for providing employees with notice of any mass layoff "up to and including the effective date of the sale," after which that responsibility shifts to the buyer. 29 U.S.C. § 2101(b)(1). If the sale is on a going-concern basis, it is presumed that the sale "involves the hiring of the seller’s employees unless something indicates otherwise," whether or not the sale agreement expressly provides for retention of the seller’s employees. Wilson v. Airtherm Prods., Inc., 436 F.3d 906, 912 (8th Cir. 2006).
The Third Circuit addressed the unforeseeable business circumstances exception in AE Liquidation.
Eclipse Aviation Corp. ("EAC") manufactured specialty aircraft. Beginning in 2007, EAC customer European Technology and Investment Research Center ("ETIRC") acquired a significant percentage of EAC’s preferred stock and provided EAC with financial support in the form of loans.
In late 2007, EAC and ETIRC entered into an agreement whereby ETIRC was to purchase aircraft kits from EAC to be assembled by a factory in Russia. Financing for the arrangement was to be provided by Vnesheconombank ("VEB"), a state-owned Russian bank. In June 2008, the Russian factory deal was delayed and EAC began to run out of cash, prompting ETIRC, whose chairman was appointed EAC’s chief executive officer, to lend EAC an additional $25 million.
Continued delays in the closing of the factory deal caused a liquidity crisis. EAC’s board considered a bankruptcy filing to sell the company’s assets or liquidate the company.
EAC filed for chapter 11 protection on November 25, 2008, in the District of Delaware with the intention of selling substantially all of its assets as a going concern at auction, with ETIRC acting as the stalking-horse bidder. The proposed purchase agreement provided that VEB would finance the acquisition with a $205 million loan to ETIRC. The agreement further provided that EAC was to continue operating its business and retain its employees prior to the closing, but the agreement did not expressly obligate ETIRC to take on the employees as part of the transaction. In addition, in boilerplate language, the agreement expressly provided that ETIRC: (i) was not obligated to pay any claims or liabilities of EAC’s employees, including salaries and severance pay; and (ii) was "under no obligation to employ or continue to employ any individual for any period."
The bankruptcy court approved the sale transaction with ETIRC (as the only qualified bidder) in January 2009.
The closing of the sale transaction was delayed multiple times during the next two months. VEB needed, among other things, to be recapitalized, which could be approved only by then-Russian Prime Minister Vladimir Putin. During that two-month period, Russian officials repeatedly assured EAC, ETIRC, and an ad hoc committee of EAC’s noteholders that the recapitalization would occur.
EAC became administratively insolvent on February 6, 2009, and the company’s board was informed on February 17 that, without additional funding, EAC would run out of cash on February 27. EAC’s board informed the company’s employees on February 18, 2009, that the sale was taking longer than expected and that, although the board believed that the closing was "well within reach," all employees were being furloughed indefinitely to make the company’s cash last as long as possible.
Additional assurances that the VEB recapitalization was imminent were also illusory. Accordingly, the noteholders’ committee and EAC’s board adopted a resolution directing management to file a motion to convert the chapter 11 case to a chapter 7 liquidation on February 24 if the Russian government did not commit to closing the transaction on VEB’s behalf prior to that date.
The conversion motion was filed on February 24. That same day, EAC informed its employees by email that, despite its best efforts, "closing of the sale transaction has stalled and our company is out of time and money." The notice further stated that, because of the "dire circumstances in today’s global marketplace" and the lack of any additional funding, EAC’s bankruptcy case was being converted to a liquidation, meaning that the prior furlough had been converted into a layoff, effective February 19. Finally, the notice provided that employees would receive information regarding their benefits packages by mail later that week.
EAC’s employees filed a class action adversary proceeding in the bankruptcy court, alleging that the company’s failure to give them 60 days’ notice prior to the layoff violated the WARN Act. The bankruptcy court granted EAC’s motion for summary judgment, ruling that the unforeseeable business circumstances exception barred WARN Act liability.
The district court affirmed on appeal, and the employees appealed to the Third Circuit.
The Third Circuit’s Ruling
A three-judge panel of the Third Circuit affirmed the rulings below.
Writing for the panel, circuit judge Cheryl Ann Krause rejected each of the arguments made by the employees—namely: (i) EAC was ineligible for the exception because it never provided employees with proper notice under the WARN Act; (ii) EAC could not demonstrate that the purported unforeseeable business circumstance (its failure to close the sale to ETIRC) caused the mass layoff; and (iii) the exception did not apply because the failure to close was not "unforeseeable," but instead could have been anticipated on many different occasions during the 60-day period prior to the layoff.
Explaining that 20 C.F.R. §§ 639.7(a)(4) and 639.8 provide that notice to employees must be "based on the best information available to the employer at the time the notice is served" and delivered in a manner "designed to ensure receipt," the panel concluded that EAC’s notice was not deficient.
The Third Circuit panel also found that failure to close the sale to ETIRC caused the layoff. According to Judge Krause, notwithstanding the boilerplate language in the sale agreement, the evidence supported "the presumption that [EAC’s] employees would have retained their jobs had the sale been finalized, and the District Court did not err in concluding as a matter of law that the failure to obtain financing for the sale was the cause of the layoff." Such boilerplate language, she wrote, addressed a buyer’s "typical litigation concerns over successor liability and third-party beneficiary claims" rather than undermining the intent that the sale transaction proceed on a going-concern basis, including the retention of EAC employees.
Finally, turning to whether the collapse of the sale was reasonably foreseeable, the Third Circuit panel acknowledged that it had never addressed the "probability standard" directly. However, Judge Krause noted, the adoption of that standard found support in the court’s sole previous precedential ruling on the unforeseeable business circumstances exception. In Hotel Employees & Restaurant Employees Int’l Union Local v. Elsinore Shore Assocs., 173 F.3d 175 (3d Cir. 1999), she explained, the court held that a casino’s closure by the state casino control commission was not reasonably foreseeable and that, because of the exception, the casino was not required to give its employees 60 days’ WARN Act notice. According to Judge Krause, although the court did not explicitly address whether the closure was probable or merely possible, the facts indicated that the court was "applying a higher standard more akin to a probability test." Moreover, in dicta, the Third Circuit in Elsinore endorsed the logic of that standard, observing that the WARN Act was not intended to "require an economically viable employer to provide notice of a possible—but unlikely—closing." Id. at 185 n.7.
"[R]equiring such premature notice," Judge Krause wrote in AE Liquidation, "could have the perverse effects of causing creditors to refuse to provide the struggling company with further credit or prompting employees to unnecessarily leave their jobs—potentially forfeiting valuable future assets such as unvested benefits." Such unintended consequences would also "increase the chance that an employer will be forced to close and lay off its employees, harming precisely those persons WARN attempts to protect" (quoting id.).
The Third Circuit panel joined its sister circuits in holding that "the WARN Act is triggered when a mass layoff becomes probable—that is, when the objective facts reflect that the layoff was more likely than not." According to Judge Krause, this approach strikes an appropriate balance in ensuring that employees receive the protections of the WARN Act without imposing an "impracticable" burden on employers:
Companies in financial distress will frequently be forced to make difficult choices on how best to proceed, and those decisions will almost always involve the possibility of layoffs if they do not pan out exactly as planned. If reasonable foreseeability meant something less than a probability, nearly every company in bankruptcy, or even considering bankruptcy, would be well advised to send a WARN notice, in view of the potential for liquidation of any insolvent entity. . . . [S]uch premature [and costly] warning has the potential to accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided.
Applying the foreseeability analysis to the facts, the Third Circuit panel concluded that EAC met its burden of demonstrating that ETIRC’s failure to obtain the financing necessary to close the sale was not probable prior to EAC’s decision to lay off its employees. Among other things, the panel found that, although a close call in some cases, EAC’s reliance on assurances regarding VEB’s continued commitment to funding the sale transaction was "commercially reasonable."
With its ruling in AE Liquidation, the Third Circuit joins the Fifth, Sixth, Seventh, Eighth, and Tenth Circuits in adopting the heightened probability standard in determining whether an employer should be relieved under the unforeseeable business circumstances exception from complying with the 60-day notice period prescribed in the WARN Act. This is doubtless a welcome development for employers, both financially distressed and otherwise, because it brings greater certainty to an important issue.
AE Liquidation is also notable because the Third Circuit ruled that, when a corporation is sold as a going concern, there is a presumption that the buyer will be hiring the seller’s employees as part of the sale, "regardless of whether the seller has expressly contracted for the retention of its employees." The Third Circuit thereby aligned itself with the Eighth and Ninth Circuits, which adopted a similar approach in Wilson and Int’l All. of Theatrical & Stage Employees & Moving Picture Mach. Operators, AFL-CIO v. Compact Video Servs., Inc., 50 F.3d 1464 (9th Cir. 1995), respectively.
Finally, the ruling demonstrates the interaction between the WARN Act and the Bankruptcy Code. Had EAC filed for chapter 11 protection for the purpose of liquidating the company, rather than for the purpose of selling it as a going concern under section 363(b) of the Bankruptcy Code or pursuant to a chapter 11 plan, no WARN Act notice would have been required under the "liquidating fiduciary" exception. Because EAC’s proposed sale as a going concern under section 363(b) collapsed, the unforeseen business circumstances exception was still available to the company.