United States: Employer's Failure To Issue WARN Notification Excused Due To Abrupt Termination Of Financing

Despite the increasing prominence of pre-packaged or pre-negotiated chapter 11 cases in recent years, not every bankruptcy filing by or against a company is a carefully planned event orchestrated over a period of months or even years to achieve a workable reorganization, sale, or liquidation strategy. Sometimes, unanticipated circumstances precipitate a bankruptcy filing. If the debtor employs a substantial workforce that is dismissed (pre- or post-bankruptcy) because the debtor either ceases operating or significantly reduces the number of its employees, state and/or federal law other than the Bankruptcy Code may impose obligations on the debtor in connection with the workforce dismissals or plant closures.

A recent unpublished ruling by the Fifth Circuit Court of Appeals examines a debtor-employer's responsibilities under the federal Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. ("WARN"). In Angles v. Flexible Flyer Liquidating Trust (In re Flexible Flyer Liquidating Trust), 2013 BL 35609 (5th Cir. Feb. 11, 2013), the court affirmed a bankruptcy court determination that a debtor-employer was not required to give a 60-day WARN notification to its employees because a sudden, unanticipated termination of financing which forced the company to file for bankruptcy protection satisfied WARN's notification exception for "unforeseeable business circumstances."

WARN

Enacted in 1988, WARN protects workers, their families, and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs. Twenty-nine U.S.C. § 2102(a) provides that:

[a]n employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order ‒
(1) to each representative of the affected employees as of the time of the notice or, if there is no such representative at that time, to each affected employee.

Twenty-nine U.S.C. § 2101(a)(2) defines "plant closing" as:

the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees.

"Mass layoff" is defined in 29 U.S.C. § 2101(a)(3) as a reduction in the workforce that is not the result of a plant closing and results in an employment loss at a single site of employment during any 30-day period of a specified percentage or aggregate number of employees.

Twenty-nine U.S.C. § 2101(a)(1) defines "employer" as "any business enterprise that employs ‒ (A) 100 or more employees, excluding part-time employees; or (B) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime)." However, 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 an employer for purposes of WARN. 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); Conn v. Dewey & LeBoeuf LLP (In re Dewey & LeBoeuf LLP), 2013 BL 39061 (Bankr. S.D.N.Y. Feb. 13, 2013).

The U.S. Department of Labor has prescribed regulations to implement WARN. Among other things, the regulations prescribe when an employer must give WARN notice, who 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.

Twenty-nine U.S.C. § 2104(a) provides that an employer who fails to give WARN notice shall be liable to each aggrieved employee who suffers an employment loss as a result of such plant closing or mass layoff for, among other things, back pay for each day during the period of the violation. It also states that the employer's liability "shall be calculated for the period of the violation, up to a maximum of 60 days, but in no event for more than one half the number of days the employee was employed by the employer."

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 WARN's 60-day notice provisions. Twenty-nine U.S.C. § 2102(b) provides 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 [WARN] 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."

Even if the exceptions in 29 U.S.C. § 2102(b)(1) and (b)(2)(A) apply, an employer is not relieved of its obligation to notify employees altogether. When an employer ceases operating due to "not reasonably foreseeable" business circumstances or because it is a "faltering company," the employer can give less than 60 days' WARN notice, provided 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).

Twenty C.F.R. § 639.9(b)(1) states that closings and layoffs are not foreseeable when "caused by some sudden, dramatic, and unexpected action or condition outside the employer's control." 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." See 20 C.F.R. § 639.9(b)(2).

Some states have enacted laws similar to WARN that impose enhanced employee-notification requirements. See, e.g., New York State Worker Adjustment and Retraining Notification Act, N.Y. LAB. L. §§ 860‒860-i; art. 25-A, pt. 921 (2009); CAL. LAB. CODE § 1400‒1408 (2003), 820 ILL. COMP. STAT. 65/et seq. (2005).

The Fifth Circuit addressed the unforeseeable-business-circumstances exception to the federal WARN notification requirement in Flexible Flyer.

Flexible Flyer

Private-equity fund Cerberus Capital Management Corp. ("Cerberus") formed FF Acquisition Corp., d.b.a. Flexible-Flyer ("Flexible Flyer") in 1997 to purchase the Flexible Flyer assets out of bankruptcy. At the time, Flexible Flyer manufactured swing sets, hobby horses, go-carts, utility vehicles, and fitness equipment, in addition to the iconic Flexible Flyer sled, sold by a variety of retailers, including Walmart, Toys "R" Us, Kmart, and Sam's Club.

Flexible Flyer never made a profit and constantly lost money. It was funded almost entirely by Cerberus, which infused Flexible Flyer with $85 million in capital. However, late in 2000, the company entered into a factoring arrangement with CIT Group Commercial Systems, LLC ("CIT"). Under the factoring agreement, CIT advanced funds equal to 80 percent of Flexible Flyer's receivables.

Each year, Cerberus informed Flexible Flyer that it would shut down the company if it did not become profitable within the coming year, but Cerberus never made good on the threat and continued to provide Flexible Flyer with capital. In 2005, Flexible Flyer experienced several financial reverses, including a product recall due to defective parts. The company notified its employees in April 2005 of possible layoffs in the affected division. Retailers also informed Flexible Flyer that they would be deferring purchases of millions of dollars' worth of products.

Management took steps to triage the damage and remained optimistic that the company could weather the storm, especially in light of a bankruptcy filing by Flexible Flyer's primary competitor in the U.S. swing-set market. In August 2005, Flexible Flyer consulted professionals to explore a range of options, including divestiture of unprofitable divisions and a bankruptcy filing.

Soon afterward, CIT reduced its credit line by cutting advances to 50 percent of receivables. Two weeks later, CIT informed Flexible Flyer that it would cease advancing credit altogether. After Cerberus refused a request for additional capital, Flexible Flyer filed for chapter 11 protection in Mississippi on September 9, 2005. That same day, the company informed its employees (by means of an abridged WARN notification) that it would be terminating business operations, resulting in company-wide layoffs. Shortly afterward, Flexible Flyer sold substantially all of its assets, including the Flexible Flyer® trademark.

A group of more than 100 former employees filed an adversary proceeding in the bankruptcy court alleging that Flexible Flyer was liable under WARN for failing to give them the required 60-day layoff notice. The bankruptcy court ultimately determined that Flexible Flyer was excused from providing advance notice because it had demonstrated that the layoffs were the result of an unforeseeable business circumstance. The court also found that, under the circumstances, Flexible Flyer had provided WARN notification to its employees "at the earliest practical date that such a notice could be provided." The district court affirmed the ruling on appeal.

The Fifth Circuit's Ruling

A three-judge panel of the Fifth Circuit affirmed the rulings below in an unpublished decision. Focusing on the foreseeability issue, the court explained that "where it only is possible that the business circumstance at issue may occur, such circumstances are not reasonably foreseeable." Rather, the court wrote, "it is the probability of occurrence that makes a business circumstance 'reasonably foreseeable' and thereby forecloses use of the [unforeseeable business circumstances] exception."

The Fifth Circuit did not fault the bankruptcy court's conclusion that the closing of Flexible Flyer's business was not reasonably foreseeable. All of the evidence, the Fifth Circuit stated, "shows that the focus of Flexible Flyer's management was on saving the company, not planning for an upcoming shutdown." The court also determined that the bankruptcy court committed no clear error in concluding that management's exercise of its business judgment to keep Flexible Flyer operating and its expectation that it would continue operations into the following year were "completely reasonable," despite the fact that "Flexible Flyer's financial condition was perilous for much of its eight-year existence." According to the Fifth Circuit, "[i]t was only when CIT and Cerberus both decided to cut off funding completely, and did so almost simultaneously without warning, that the shutdown became inevitable."

In affirming the rulings below, the Fifth Circuit observed that the case before it presented a "convincing example" of an event satisfying the unforeseeable-business-circumstances exception, consistent with the underlying purpose of WARN:

[WARN] allows good faith, well-grounded hope, and reasonable expectations. Its regulations protect the employer's exercise of business judgment and are intended to encourage employers to take all reasonable actions to preserve the company and the jobs. Holding Flexible Flyer liable for a [WARN] violation on the facts found by the bankruptcy court would serve only to encourage employers to abandon companies even when there is some probability of some success.

Outlook

In certain respects, Flexible Flyer is a cautionary tale. Employers confronting problems that may lead to workforce reductions, mass layoffs, or the shuttering of a business altogether should be aware of their obligations under WARN and comparable state laws. If WARN notification, even in an abridged form, is not possible due to unforeseen circumstances, management should be prepared to demonstrate not only that the events in question were unanticipated, but also that business decisions made during the period leading up to a plant closure or mass layoff were reasonable under the circumstances. According to the Fifth Circuit's analysis, the probability, rather than the possibility, of the occurrence of the business circumstance that forces the shutdown is the determinative factor.

Interestingly, although the bankruptcy court in Flexible Flyer also ruled that the company satisfied the "faltering company" exception in 29 U.S.C. § 2102(b)(1), the Fifth Circuit never reached the issue on appeal. Explaining that the bankruptcy court found the unforeseeable-business-circumstances exception to be "by far the most compelling," the court of appeals declined to express any views on this alternative exception to the WARN notification requirements.

The debtor in Flexible Flyer may also have been exempt from the 60-day WARN notification requirement as a liquidating fiduciary, especially given that the company never attempted to reorganize in chapter 11 instead of shutting down immediately upon the bankruptcy filing. However, the issue was apparently never raised in either the bankruptcy or appellate courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark G. Douglas
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.