Large employers intending to lay off a significant number of their employees are required by the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act") to give the targeted employees 60 days' advance notice of the layoffs. However, there are certain exceptions to the notice requirement in cases where the employer is a "faltering business" or a "liquidating fiduciary," or where "unforeseeable business circumstances" or a "natural disaster" make it impracticable or impossible to provide 60 days' advance notice of a mass layoff.
The U.S. Bankruptcy Court for the District of Delaware recently examined the scope of these exceptions in a case involving mass layoffs by a company that filed for chapter 11 protection to liquidate its assets at the beginning of the COVID-19 pandemic. In In re Art Van Furniture, LLC, 638 B.R. 523 (Bankr. D. Del. 2022), the court ruled that, although a debtor-employer did not qualify as a liquidating fiduciary because it continued operating after the petition date, the debtor was excused from full compliance with the WARN Act notification requirement due to the COVID-19 pandemic, which represented both an unforeseeable business circumstance and a natural disaster.
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 ("DOL") 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 is 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. In particular, 29 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.
Also, 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."
The WARN Act defines an "employer" as "any business enterprise that employs: (i) 100 or more employees, excluding part-time employees; or (ii) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime)." 29 U.S.C. § 2101(a)(1).
DOL commentary to WARN Act regulations (the "DOL Commentary") addresses whether a debtor in bankruptcy qualifies as an "employer" under the WARN Act:
[T]he term "business enterprise" used in the statute includes public and quasi-public entities which engage in business (i.e., take part in a commercial or industrial enterprise; supply a service or good on a mercantile basis, or provide independent management of public assets, raising revenue and making desired investments)….
[T]he Department does not think it appropriate to [exclude all debtors in bankruptcy from the definition of "employer"]. Further, DOL agrees that a fiduciary whose sole function in the bankruptcy process is to liquidate a failed business for the benefit of creditors does not succeed to the notice obligations of the former employer because the fiduciary is not operating a "business enterprise" in the normal commercial sense. In other situations, where the fiduciary may continue to operate the business for the benefit of creditors, the fiduciary would succeed to the WARN obligations of the employer precisely because the fiduciary continues the business in operation.
54 Fed. Reg. 16042, 16044-45 (Apr. 20, 1989).
This language is the genesis of a court-fashioned "liquidating fiduciary" exception, which 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 health care 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 Third Circuit explained the parameters of the exception in United Healthcare as follows:
[W]hether a bankrupt entity is an "employer" under the WARN Act depends on the nature and extent of the entity's business and commercial activities while in bankruptcy, and not merely on whether the entity's employees continue to work "on a daily basis." The more closely the entity's activities resemble those of a business operating as a going concern, the more likely it is that the entity is an "employer"; the more closely the activities resemble those of a business winding up its affairs, the more likely it is the entity is not subject to the WARN Act.
United Healthcare, 200 F.3d at 178.
In order to satisfy the "unforeseeable business circumstances" exception, 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 DOL 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).
Six circuit courts of appeals 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 Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.), 866 F.3d 515, 531-32 (3d Cir. 2017) (upholding 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); 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 one of the exceptions in 29 U.S.C. § 2102(b)(1) and (b)(2)(A) applies, 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 Delaware bankruptcy court addressed the liquidating fiduciary, unforeseeable business circumstances and natural disaster exceptions in Art Van.
After defaulting on one of its secured loans in the wake of a 2017 leveraged buyout and failing to obtain alternative financing or attract a going-concern buyer, brick-and-mortar furniture and mattress retailer Art Van Furniture, LLC (together with its affiliates, "AVF") announced that it was liquidating on March 5, 2020. The same day, AVF issued a WARN Act notice to approximately 1,400 employees in its 169 stores located in Michigan, Indiana, Ohio, Illinois, Pennsylvania, Maryland, Missouri, and Virginia. The notice informed employees that their employment would terminate on May 5, 2020, or within two weeks thereafter. From March 5 to March 8, 2020, AVF conducted going-out-of-business ("GOB") sales at certain stores.
AVF filed for chapter 11 protection on March 8, 2020, in the District of Delaware, citing extreme market conditions for the filing and listing more than $200 million in secured debt. The company filed for bankruptcy with plans to shutter all but 44 of its stores and to sell the remaining stores as a going concern.
However, AVF closed all 169 of its retail locations on March 19, 2020, after the governors of Michigan, Maryland, Pennsylvania, and certain other states imposed restrictions on the operation of nonessential businesses in an effort to slow the advance of COVID-19. The shutdowns stopped the store-closing sales, and AVF abandoned its plan for a going-concern sale.
Also on March 19, 2020, AVF issued a second WARN Act notice to some of its employees stating in part that, due to "unforeseen events" precipitated by the pandemic, "the Company can no longer support the wind-down of its retail operations through the originally projected termination date" and that all employees would be terminated as of March 20, 2020 (the "March 20, 2020 layoff").
On March 23, 2020, two former AVF employees filed a class action adversary proceeding in the bankruptcy court alleging that AVF failed to comply with the WARN Act when it terminated its employees as part of the March 20, 2020, layoff.
In early April 2020, AVF filed a motion seeking conversion of its chapter 11 cases to chapter 7, stating that, although it initially wished to seek court authority "to 'mothball' [its] remaining assets and operations and to suspend substantially all activity in these chapter 11 cases until such time as the broader economic and public safety situations stabilized and hopefully improved," AVF abandoned this course of action after "no viable path forward in chapter 11 emerged that would garner the support of [AVF's] senior secured lenders and certain other stakeholders." The bankruptcy court granted the conversion motion on April 6, 2020.
The chapter 7 trustee moved for summary judgment against the plaintiffs in the WARN Act adversary proceeding. He argued that: (i) at the time of the layoffs, AVF was a "liquidating fiduciary" and therefore not an "employer" under WARN Act regulations subject to WARN Act liability; or (ii) either the "unforeseen business circumstances" or the "natural disaster" exception to WARN Act liability applied. The plaintiffs countered that AVF operated as an "employer" under the WARN Act by using its employees to hold postpetition GOB sales or to keep certain stores operating pending a bulk sale, and that there were disputed issues of material fact concerning the cause of the layoffs that precluded summary judgment.
The Bankruptcy Court's Ruling
The bankruptcy court granted the trustee's motion for summary judgment.
U.S. Bankruptcy Judge Christopher S. Sontchi explained that applying the liquidating fiduciary exception in a chapter 11 case "requires careful analysis of the particular facts and circumstances … to determine whether the entity's activities resemble a business enterprise operating as a going concern or a business enterprise engaged in the winding-up of its affairs." Art Van, 638 B.R. at 535. Although AVF announced its intention to liquidate prior to filing for chapter 11 protection, Judge Sontchi noted, it continued operating after the petition date for the benefit of creditors. Guided by the Third Circuit's decision in United Healthcare and the DOL Commentary, he accordingly ruled that AVF did not qualify for the liquidating fiduciary exception and was therefore subject to an employer's WARN Act notice obligations.
However, Judge Sontchi concluded that the unforeseen business consequences exception did apply. He explained that it was undisputed that: (i) AVF was in dire financial straits leading up to the bankruptcy filing and filed for chapter 11 to pursue an "orderly wind down" of operations and liquidation of assets; and (ii) in mid-March 2020, the pandemic caused several states where AVF operated to issue "stay at home" or "shelter in place" orders that unquestionably impacted AVF's operations. Given these undisputed facts, Judge Sontchi wrote, the plaintiff's argument that the pandemic "was merely a pretext for the mass layoffs is tenuous at best." Id. at 539. He concluded that "COVID-19 was the proverbial 'straw that broke the camel's back' and caused the March 20, 2020 layoff." Id. Judge Sontchi also found that the second WARN Act notice sent by AVF adequately described the reason for the March 20, 2020, layoff and the abbreviated notice.
Finally, Judge Sontchi held that the natural disaster exception also applied to the case before him. He explained that several other courts have concluded that COVID-19 qualifies as a natural disaster. Judge Sontchi declined to decide whether a "proximate cause" standard or a less-stringent "but for" standard applied in this case, but he noted that, even under the more stringent standard, "[t]he undisputed facts in this case support the finding that the COVID-19 was an immediate cause of the March 20, 2020 layoff." Id. at 542.
Art Van provides important guidance on the impact of a chapter 11 filing on a debtor-employer's obligation to satisfy the WARN Act's notification requirements, particularly when mass layoffs are caused entirely or in part by the COVID-19 pandemic or analogous situations. The exceptions to that obligation—the faltering company, unforeseeable business circumstances, liquidating fiduciary, and natural disaster exceptions—are premised on the idea that WARN Act notification, either timely or at all, may simply not be possible under certain circumstances. This represents a balance between the goal of protecting the rights of employees and recognition of the difficulties faced by many employers confronting financial distress or cataclysmic events that render compliance impracticable or impossible.
The Delaware bankruptcy court's decision in Art Van also illustrates that determinations regarding the satisfaction of any of these exceptions depend on the facts of each particular case. In fact, the court recognized that not all debtors operating in liquidating chapter 11 cases will be subject to WARN Act notification obligations. Instead, it noted that "[e]ach case must be evaluated on its own merits," and in a case in a Third Circuit jurisdiction, the facts and circumstances "must be evaluated in light of United Healthcare to determine whether there is an immediate shutdown and the fiduciary's sole function is liquidation." Id. at 536 n.86.
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