BAPCPA and WARN Act Back Pay Now Timing Isnt Everything

BAPCPA and WARN Act Back Pay Now Timing Isnt Everything

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Among the many troublesome aspects of the Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA), the one most likely to impact a number of mid-cap and small-cap chapter 11 cases is BAPCPA's creation of several new administrative expense claims, or at least potential administrative claims. In one such provision, BAPCPA arguably converts many, if not most, Worker Adjustment and Retraining Notification (WARN) Act "back pay" claims into expenses of administration regardless of whether or not the layoff or plant closing occurred pre- or post-petition. If so construed, the provision, Code §503(b)(1)(A), will create substantial administrative claims in many liquidating or partially liquidating chapter 11 cases, burying other priority and unsecured claims beneath a sizable "post-petition" debt and, indeed, threatening administrative insolvency in many cases. This article will first examine the pre-BAPCPA case law and the status of such claims and then analyze the impact of "new" §503(b)(1)(A).

The WARN Act's Basic Provisions and Key Exceptions

With certain exceptions, the WARN Act2 requires an "employer," as defined in the Act, to provide its employees with 60 days' notice of a "plant closing" or "mass layoff."3 If a qualifying employer fails to provide the requisite notice, it may be liable for up to 60 days' back pay.4 To be an "employer" under the Act, the entity must employ the requisite number of personnel (generally 100 or more at the affected location) and must be a "business enterprise"—a term not defined in the statute.5

Two exceptions contained in the Act excuse strict compliance with the 60-day notice requirement. The first, known as the "unforeseeable business circumstances exception, " provides as follows:

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.6

The second exception, known as the "faltering business exception," excuses strict compliance if all of the elements of the exception are present:

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 believed that giving the notice would have precluded the employer from obtaining the necessary capital or business.7

The faltering-business exception applies to a search for a buyer who will continue the business as a going concern.

The reported cases illustrate the difficulty most chapter 11 debtors-in-possession (DIPs) or trustees have in complying with the requirements of either exception. If the chapter 11 case is preceded by a period of financial decline—as is usually the case—the "unforeseeable business circumstances" exception will not be available.8 In Riker Industries, the trustee alleged that the facility closing resulted from a sudden loss of financing. The court rejected this argument, stating that "withdrawal of that financing should have been anticipated by [the] debtor as it was, no doubt, aware of its precarious financial condition."9 In United Healthcare, the bankruptcy court held that the "unforeseeable business circumstances" exception was not available because there were "months of warning signals" that placed the debtor's board on notice that debtor was "in financial extremis."10 The court noted that the debtor had suffered substantial losses for over a year and had received warnings from its secured lender about its financing.11

With respect to the "faltering business" exception, the "capital or business" sought must be such that it would prevent or postpone the plant closing, and there must be a reasonable chance that the capital, financing or sale will occur.12 Of the two exceptions, the "faltering business" exception will generally show the most promise to chapter 11 debtors.

The availability of either exception, however, does not excuse giving at least some notice of the closing. While the exceptions allow less than 60 days' notice, the employer is required to give as much notice as is practicable and must explain in the notice why less notice was given.13 Under appropriate circumstances, same-day notice is permissible. However, the failure to give any notice will render both exceptions unavailable.14 The Jamesway court held that "[b]ecause [the debtor] failed to give WARN notice to the plaintiffs, it cannot assert either the 'not reasonably foreseeable business circumstances' or 'faltering company' exception to the Act as a defense to liability...."15

A debtor that is not a WARN Act "employer" because it is not a "business enterprise" but rather a "liquidating fiduciary" need not comply with the notice requirement. The Department of Labor regulations defining "employer" make clear that not all companies in bankruptcy are excluded from the definition of "employer."16 The same regulations further provide 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.17

Thus, a bankruptcy trustee succeeds to WARN notification obligations only when he continues the business in operation.18

The decision of the Third Circuit Court of Appeals in United Healthcare suggests that a DIP that "operates to liquidate" may be a liquidating fiduciary, and therefore not an "employer" for WARN Act purposes.19 The United Healthcare court emphasized the "absence of any evidence United Healthcare structured its bankruptcy petition and the furlough of its employees to avoid WARN Act liability,"20 suggesting that the outcome might have been different had such evidence existed. One court has found that where the WARN Act violation occurred pre-petition, the debtor's subsequent filing of a chapter 11 case and subsequent assumption of "liquidating fiduciary" status will not excuse the earlier violation, and the back-pay obligation will have arisen as a consequence of the earlier violation.21 Moreover, whether or not a debtor is a liquidating fiduciary is a question of fact.22

Status of WARN Act "Back-Pay" Claims Pre-BAPCPA

Pre-BAPCPA, when the duty to give WARN notice arose pre-petition because the relevant plant closing or layoff was pre-petition, the back-pay award was at best a wage priority under Code §507.23 Now, when the duty to give WARN notice arises post-petition because the layoff or closing is post-petition and full notice is not given, the entire back-pay award arising therefrom is entitled to treatment as an administrative expense.24

Thus, in a typical pre-BAPCPA scenario, the debtor pursues a rescue plan, such as an equity infusion or refinancing, that fails. Alternatively, an unexpected market or financial shock occurs, driving the debtor into financial crisis. The debtor then closes its facility without giving 60 days' notice under the WARN Act (but giving some limited notice under WARN), and subsequently files a petition for relief under chapter 11. A large portion of the 60-day period runs and expires post-petition. When the union or non-union employee group files a proof of claim seeking WARN Act back pay, the debtor objects to the claim or claims asserting one or more of the exceptions or defenses enumerated above. If, after trial in the bankruptcy court, the court found for the employees, the court would allow the claim, but as to each employee, the claim would be allowed only as a priority claim to the extent of the statutory limits, and an unsecured claim as to the balance.25 Thus, timing was everything with respect to the plant closing or layoff, and other creditors often actively pressured the debtor to accomplish the facility closing or mass layoff prior to filing for exactly this purpose, to avoid an administrative claim.

BAPCPA's New Back-Pay Administrative Expense

A BAPCPA amendment to §503 (b)(1)(A) provides a first-priority administrative expense to:

wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the [NLRB] as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of federal or state law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title....26

This section would appear to create the risk of substantial administrative expenses in the case of many pre-petition plant shutdowns or layoffs where full WARN Act notice was not given and all or a portion of the 60-day notice period runs and expires post-petition. Assume our example above: The debtor closes a plant, lays off the workers and files a chapter 11 petition a few days later, but the debtor, due to the circumstances (or the belief that an exception applies), does not provide the requisite 60-day notice under the WARN Act or its state law equivalent, but provides some complying notice. Under prior law, the fact that the closing occurred pre-petition and the workers had stopped working would have prevented the resulting back-pay awards from being granted administrative claim status. The claim arose pre-petition when the violation occurred and no services were rendered after commencement of the case. Under the BAPCPA amendment, if the bankruptcy court allows a claim for WARN Act damages or another back-pay award following a claims objection contested matter ("wages and benefits awarded pursuant to a judicial proceeding"), the 50-plus days of back pay for the period of mandatory notice that expired post-petition under both federal and state law will constitute a first-priority administrative claim, unless the court finds that causing payment will increase the likelihood of further layoffs or loss of jobs. If the closed plant was the debtor's only facility, the "likelihood of further layoffs" exception will not apply. In many liquidating chapter 11 cases, this could be a very large claim (given the prospect of "stacking" state and federal claims) and will further reduce recoveries to unsecured creditors. Moreover, the prospect of such a claim will undoubtedly affect the debtor's ability to obtain adequate post-petition financing or use of cash collateral, and will certainly affect the terms of such financing or cash collateral usage.

The legislative history on this new subsection is sparse. BAPCPA §329 is entitled "Clarification of Post-petition Wages and Benefits." The available legislative comment simply provides that the provision "amends Bankruptcy Code §503(b)(1)(A) to accord administrative expense status to certain back-pay awards."27 WARN Act back pay is not mentioned specifically. However, since in our example the WARN Act 60-day period runs out post-petition, the back pay is arguably "attributable to [a] period of time occurring after commencement of the case...[and] as a result of a violation of federal...law by the debtor...." "Plain meaning" advocates will have little trouble applying this section to create administrative claim status for WARN Act back-pay awards arising out of pre-petition layoffs or facilities closings where the notice period runs, and the liability for and amount of the back-pay award is adjudicated post-petition.


Footnotes

1 Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

2 29 U.S.C. §2101, et seq. Return to article

3 29 U.S.C. §2102. Return to article

4 29 U.S.C. §2104(a). Return to article

5 29 U.S.C. §2101(a)(1). Return to article

6 29 U.S.C. §2102(b)(2)(A). Return to article

7 29 U.S.C. §2102(b)(1). Another relevant exception applies if the closing is caused by a natural disaster. 29 U.S.C. §2102(b)(3). Return to article

8 In re Riker Indus. Inc., 151 B.R. 823 (Bankr. N.D. Ohio 1993). Return to article

9 Id. at 827. Return to article

10 200 F.3d at 174. Return to article

11 Id. See, also, In re Organogenesis Inc., 316 B.R. 574, 587-588 (Bankr. D. Mass. 2004) (exception not established on facts); Snider v. Commercial Financial Services Inc., 288 B.R. 890 (N.D. Okla. 2002) (same). Return to article

12 In re United Healthcare System Inc., 200 F.2d 170, 175 (3d. Cir. 1999) (bankruptcy court held that exception not available because depth of debtor's financial difficulties prevented it from reasonably believing new capital or business would allow it to remain open.); Organogenesis, 316 B.R. at 585-586. But, see In re Parke Imperial Canton Ltd., 1994 WL 842777 (Bankr. N.D. Ohio) at *7 (debtor actively seeking capital to keep hotel open excused under "faltering business exception"). Return to article

13 29 U.S.C. §2102(b)(3); 29 C.F.R. §639.7; 29 C.F.R. §639.9; 29 C.F.R. §639.2. Return to article

14 Organogenesis, 316 B.R. at 584; Barrett v. Jamesway Corp. (In re Jamesway Corp.), 235 B.R. 329, 342 (Bankr. S.D.N.Y. 1999). Return to article

15 Id. at 343. Return to article

16 54 Fed. Reg. at 16045. Return to article

17 Id. This exception has been criticized as unnecessary and unworkable. Bartell, L., "Why Warn? The Worker Adjustment and Retraining Notification Act in Bankruptcy," 18 Bankr. Dev. J. 243 (2002). Return to article

18 Hotel Employees Restaurant Employees Int'l. Union Local 54 v. Elsinore Shore Associates, 724 F.Supp. 333, 335 (D. N.J. 1989). Return to article

19 United Healthcare System, 200 F.3d at 177-78. Return to article

20 200 F.3d at 179. Return to article

21 Jamesway Corp., 235 B.R. at 343. Return to article

22 Cain v. Inacom Corp., 2001 Bankr. LEXIS 1299 (D. Del.). Return to article

23 International Brotherhood of Teamsters, AFL-CIO v. Kitty Hawk Int'l. Inc. (In re Kitty Hawk Inc.), 255 B.R. 428 (Bankr. N.D. Tex 2000) (no administrative claim treatment for WARN Act back pay where closure or layoff pre-petition); Jamesway Corp., supra (same); In re Sher-Del Foods Inc., 186 B.R. 358 (Bankr. W.D.N.Y. 1995) (WARN Act back pay equals pre-petition wage priority claim under §507(a)(3) where closure or layoff pre-petition); In re Riker Indus., 151 B.R. 823 (Bankr. N.D. Ohio 1993) (same). Return to article

24 See, e.g., In re Jamesway Corp., 242 B.R. 130 (Bankr. S.D.N.Y. 1999); In re Beverage Enterprises Inc., 225 B.R. 111 (Bankr. E.D. Pa. 1998); Oil Chemical & Atomic Workers, AFL-CI0-CLC v. Hanlin Group Inc. (In re Hanlin Group Inc.), 176 B.R. 329 (Bankr. D. N.J. 1995). Return to article

25 See, e.g., Organogenesis, 316 B.R. at 589. Return to article

26 11 U.S.C. §503(b)(1)(1)(A)(ii). Return to article

27 H.R. Rep. 109-31(I), *84, 2005 U.S.C.C.A.N. 88, *150. Return to article

Journal Date: 
Thursday, December 1, 2005