This month's "On the Edge" column provides a variation on the theme brought up in a recent article, "WARN Act Pre-emption of State Law Helps Secured Creditors," 19 ABI Journal 10 (February 2000), by David Cisar and Samuel Wizotzkey. This month, consider the following scenario: a health care provider is in dire financial straits with insufficient cash flow such that it is unable to obtain critical supplies, including blood. The debtor has been unsuccessfully searching for years to find a merger partner or other source of capital infusion in order to continue providing health care services to its patient base. However, during the search for new capital, the board of directors did not believe it would be forced to close the debtor, and continued to keep the employees generally informed about the financial difficulties. Due to continued losses, the secured lender notifies the debtor that it is in default under the terms of the loan agreement and refuses to advance any additional funds, resulting in the debtor being unable to continue its operations and meet daily expenses within days. The debtor makes the decision to take the best sale option available, surrenders its "certificate of need," closes its facility, transfers its remain-ing patients, files for bankruptcy and begins an orderly liquidation.

In an effort to comply with what it believes its obligation to be under the Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C. §§2101-2109, after filing for bankruptcy, the chapter 11 debtor provides notice to all of its employees that their jobs will be terminated in 60 days. Well prior to the expiration of the WARN notice period, the unsecured creditors' committee files a motion with the bankruptcy court seeking an order directing the debtor to terminate all of the employees. Rather than have the motion go to a hearing, the debtor immediately terminates all but a handful of its employees. The debtor seeks to have the wage claims of the terminated employees for the balance of the WARN period paid as administrative expenses. Naturally, the unsecured creditors' committee opposes the debtor's motion.

This is essentially the situation in In re United Healthcare Systems Inc., 200 F.3d 170 (3rd Cir. 1999). The bankruptcy court granted the debtor's motion; the district court affirmed. The debtor's position, which finds support in In re Hanlin Group Inc., 176 B.R. 329, 334 (Bankr. N.D.N.J. 1995), and In re Beverage Enterprises Inc., 225 B.R. 15 (Bankr. E.D. Pa. 1998), would have resulted in a $5.1 million administrative claim. The unsecured creditors' committee, on the other hand, argued that any claims pursuant to the WARN Act were merely pre-petition unsecured claims. The Third Circuit Court of Appeals reversed and concluded that the debtor was not an employer within the meaning of that term as used by the WARN Act, because it was no longer operating as an ongoing concern at the time that it filed. United Healthcare, 200 F.3d at 178.

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While the parties to a bankruptcy case should still endeavor to comply with the WARN Act, the United Healthcare case provides another argument for the parties to use in an effort to reduce the priority of claims for WARN Act violations in a liquidation scenario in a chapter 11 case.

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WARN Act

As was noted by Cisar and Wizotzkey, the WARN Act was passed in 1988 to address the perceived problem of a company abruptly closing or laying off substantial numbers of employ-ees without any prior notice. In general terms, the WARN Act applies to com-panies with at least 100 employees and requires that a company give each affected employee (or its representative) written notice at least 60 days prior to the closing of a plant or implementing a layoff that affects at least 50 employees. Failure to give notice, or giving the notice less than 60 days prior to the plant closing or a mass layoff, subjects the employer to liability for damages, including back pay and lost benefits, for a period equal to the number of deficient days of notice. 29 U.S.C. §2104(a)(1). In addition, employees may recover costs and attorney fees. 29 U.S.C. §2104(a)(6). See "WARN Act Pre-emption of State Law," 19 ABI Journal at 10. See, also, United Healthcare, 200 F.3d at 176.

The WARN Act also contains certain exceptions to the requirement of notice, including the "unforeseeable business circumstances exception," which excuses an employer from providing more notice if its closing is not reasonably foreseeable 60 days in advance (29 U.S.C. §2102(b)(2)(A)), and the "faltering business exception," which permits an employer to withhold notice if it is actively seeking capital or business that would allow it to postpone or avoid closing and reasonably believes that giving notice would prevent it from obtaining capital or business (29 U.S.C. §2102(b)(1)). United Healthcare, 200 F.3d at 175.

United Healthcare Was Not an Employer

The Third Circuit focused on the threshold question of whether, based on the facts of the case, United Healthcare continued as an employer within the meaning of the WARN Act. The court began by initially reviewing the definition of the term "employer." The WARN Act defines an "employer" as "any business enterprise" that employs—

1. 100 or more employees, excluding part time employees;
2. 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). From this language, the Third Circuit noted that there are two requirements for an employer: an employer must employ a certain number of employees, and it must also be a business enterprise. United Healthcare, 200 F.3d at 176. In the United Healthcare case, the debtor had more than 100 employees. Thus, the court focused its analysis on the term "business enterprise," a term that the WARN Act does not define. The court noted that it was not clear that the debtor continued to be a business enterprise after it surrendered its certificate of need, stopped accepting patients and filed for bankruptcy in order to liquidate its assets. Thus, the court concluded that the plain language of the WARN Act did not resolve the issue of whether the debtor was an employer. United Healthcare, 200 F.3d at 174.

The court, therefore, reviewed the agency regulations, comments and case law in order to interpret the term "employer." The court noted:

Department of Labor's comments to its regulations implementing the WARN Act suggest that whether an entity (bankrupt or otherwise) is an "employer" under the WARN Act depends in part on the nature of the entity's activities.

[T]he term "employer" includes public and quasi-public entities which engage in business (i.e., take part in commercial or industrial enterprise, supply a service or good on a mercantile basis, or provide independent management of public assets, raising revenue and making desire investments)...

20 C.F.R. §639.3(a)(1)(ii), 54 Fed.Reg. 16042, 16065 (1989). Thus, in determining whether an entity is an "employer," we will consider whether an entity was "engage[d] in business" during the time prior to the plant closing or mass layoff. Elsewhere, the commentary specifically addresses entities in bankruptcy at the time the closing or layoff occurred:

[T]he department does not think it appropriate to [exclude all bankrupt companies 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. at 16045. Thus, the question for us to resolve is whether United Healthcare, as the debtor-in-possession, was operating as an ongoing business enterprise, or whether it was merely engaged in the liquidation of assets. As discussed in the Department of Labor commentary, merely filing for bankruptcy does not exempt an entity from the WARN Act. Instead, the commentary's focus on the bankruptcy fiduciary's responsibilities indicates that whether a bankrupt entity is an "employer" under the WARN Act depends in part on the nature and extent of the entity's business conduct and activities while in bankruptcy.

In light of the Department of Labor commentary to the regulations and the cases cited, we believe that whether 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 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 177-178. Based on this analysis, the court concluded that United Healthcare was not an employer within the meaning of the WARN Act at the time it filed. The court's decision was based on its conclusion that while the debtor-in-possession was a fiduciary under 11 U.S.C. §1102, it was not operating the business as a going concern but was liquidating. United Healthcare, 200 F.3d at 178. The court emphasized that its decision was based on its conclusion that (1) the debtor did not know in advance that it would be forced to close, (2) the debtor had disclosed its financial difficulties to its employees and (3) the debtor did not file for bankruptcy to avoid its WARN Act liability. United Healthcare, 200 F.3d at 178-179.

Conclusion

While the parties to a bankruptcy case should still endeavor to comply with the WARN Act, the United Healthcare case provides another argument for the parties to use in an effort to reduce the priority of claims for WARN Act violations in a liquidation scenario in a chapter 11 case.