WARN Act Pre-emption of State Law Helps Secured Creditors

WARN Act Pre-emption of State Law Helps Secured Creditors

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Imagine this scenario: You represent a secured creditor who holds a first priority lien on all the assets of a troubled manufacturing business. The borrower has 150 employees and has been searching for a buyer for a number of months as a solution to its financial troubles. Finally, after months of frustration on both the company's part and the creditor's, the decision is made to shut down the business and liquidate the assets.

One of the concerns for both the company and creditor has been the payment of employee wages. The company was concerned because without happy (i.e., paid) employees, it might be a less attractive acquisition. The creditor was concerned because unpaid employees in some states have claims under state wage laws that grant the employees a superior lien on the company's assets for unpaid wages. The creditor and employer have ensured that all wages have been timely paid so that on the last day of the month, the employees are given their final paychecks, informed that the business is closed and told not to return to work on Monday.

Two weeks later, an attorney writes on behalf of all of the employees and demands an additional two months' worth of wages and benefits for violating the Federal Worker Adjustment and Retraining Notification Act (WARN Act), 29 U.S.C. §§2101-2109, and further alleges those wages are secured by a super-priority lien under the state wage lien law.

This is essentially the situation that occurred in In re Bluffton Casting Corp., 186 F. 3d 857 (7th Cir. 1999), when, after Bluffton Casting filed a chapter 11 petition, its employees commenced an adversary proceeding against the two secured creditors to determine the priority of their claims. Fortunately for the secured creditor in Bluffton Casting, the Seventh Circuit Court of Appeals affirmed the lower court decisions, holding that the WARN Act's exclusive remedy provision pre-empted the state wage claim law, and therefore, while WARN Act damages may be owed, they were not secured by a paramount lien on the company's assets.

The WARN Act and Its Exclusive Remedy

The WARN Act was passed in 1988 to address the perceived problem of a company abruptly closing or laying off substantial numbers of employees without any prior notice. The act, which applies to companies with at least 100 employees, requires that the company give each affected employee (or its representatives) written notice at least 60 days prior to closing a plant or implementing a layoff that affects at least 50 employees. Failure to give the notice, or giving the notice less than 60 days prior to the plant closing or 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 attorneys' fees. 29 U.S.C. §2104(a)(6).

...the pre-emption argument based on §2104(b) of the act should provide substantial comfort in defeating most of those claims.

The WARN Act has been the subject of litigation in bankruptcy cases. Those cases have generally established the following:

  1. WARN Act damages arise on the date employees are laid off or terminated without any notice or less than the statutorily required amount of notice. In re Cargo Inc., 138 B.R. 923, 927 (Bankr. N.D. Iowa 1992).
  2. If the termination or shutdown occurs pre-petition, the WARN Act claims are entitled to priority pursuant to §507(a)(3), up to the requisite dollar amount as severance pay in lieu of notice. Id.
  3. If the termination occurs post-petition, WARN Act damages are entitled to administrative expense priority pursuant to §507(a)(1). In re Hanlin Group Inc., 176 B.R. 329, 334 (Bankr. D. N.J. 1995).

The WARN Act also contains two seemingly inconsistent provisions. The first, §2104(b), provides that "the remedies provided for in this section shall be the exclusive remedies for any violation of this chapter." The remedies in §2104 are the back pay, lost benefits, costs and attorneys' fees mentioned above. However, the next section of the WARN Act provides that "the rights and remedies provided to employees by this chapter are in addition to, and not in lieu of, any other contractual or statutory rights and remedies of the employees, and are not intended to alter or affect such rights and remedies..." 29 U.S.C. §2105. The interaction of these two provisions was at the heart of the Bluffton Casting case.

The Bluffton Casting Case

In Bluffton Casting, the company filed a chapter 11, which was subsequently converted to chapter 7. At the time of the initial filing, the plant shutdown had already occurred and the employees had claims for unpaid wages, vacation pay, health care expenses, pension contributions, disability and claims relating to the plant closing under both the WARN Act and their collective bargaining agreement. 186 F.3d at 859. Although the timing is not entirely clear, at some point the employees filed wage claims under Indiana state law in an attempt to secure their WARN Act claims.

The Indiana wage lien statute provides that the employees have a first and prior lien on the corporate property and earnings of the corporation for all work and labor done and performed. Indiana Code §32-8-24-1. The statute further provides that the lien is "prior to any and all liens created or acquired subsequent to the date of the employment of the employees by the corporation." Id. Although not disclosed in the opinion, presumably some of the employees at issue began their employment prior to the time the secured creditors in the case perfected their liens.

The Seventh Circuit affirmed the bankruptcy court and district court determinations that the employees' claims under the WARN Act are limited to the exclusive remedies set forth in the Act in accordance with §2104(b). The court pointed out that the WARN Act does not have any provision for securing the damages awarded thereunder with any sort of lien. Rather than construing the state wage lien statute as a vehicle to enhance the remedies available under the WARN Act, the court stated that granting a wage lien would be akin to an additional remedy not authorized by the specific language of the WARN Act. 186 F.3d at 861. The court specifically observed the employees were trying to use the wage lien statute to displace the secured creditors' priority position. Id.

The court distinguished, but did not necessarily disagree with, cases cited by the employees where prejudgment interest was awarded for WARN Act damages. Even though the WARN Act itself has no provision for prejudgment interest, the Seventh Circuit stated that prejudgment interest is compensation for the time value of the damages explicitly provided for under the WARN Act. Accordingly, it's "a necessary adjunct to the damages remedy available under §2104(a)." 186 F.3d at 861. See Frymire v. Ampex Corp., 61 F.3d 757, 773 (10th Cir. 1995) (award of prejudgment interest furthers Congress's intent to provide compensation in lieu of notice); Carpenters Dist. Council v. Dillard Dep't Stores Inc., 15 F.3d 1275, 1288 (5th Cir. 1994) (same). The court felt that awarding prejudgment interest was vastly different from granting a super-priority lien.

The Seventh Circuit implicitly disapproved of another case that stated, in dicta, that a preliminary injunction was available under the WARN Act. In Local 397, International Union of Elec. Workers v. Midwest Fasteners Inc., 763 F. Supp. 78 (D. N.J. 1990), the district court, although ultimately refusing to grant an injunction on the merits, held that §2104(b)'s exclusive remedy provision did not preclude, in a proper case, a court from granting an injunction to protect a future damages award. 763 F. Supp. at 81. Despite Midwest Fasteners' suggestion that a court might be able to grant an injunction to prevent the dissipation or consumption of assets that might otherwise satisfy a WARN Act award, the Seventh Circuit apparently ended the discussion based on §2104(b)'s exclusive remedy provision.

The Seventh Circuit's final direction on when to determine whether a particular remedy is pre-empted under the WARN Act is as follows:

When the substantive basis for a claim is the WARN Act, the sole remedies available are those provided in §2104(b). On the other hand, claims based on the same set of facts, yet arising out of another substantive right, are not pre-empted pursuant to §2105. 186 F.3d at 861.


While secured creditors should still be wary of WARN Act damages that could rise to the status of administrative claims, the Seventh Circuit's decision in Bluffton Casting should provide persuasive authority to preclude any attempt to elevate a WARN Act claim to a secured position using a state wage lien statute. No doubt creative arguments remain that could be used to elevate a WARN Act claim under certain other scenarios. However, the pre-emption argument based on §2104(b) of the act should provide substantial comfort in defeating most of those claims.

Journal Date: 
Tuesday, February 1, 2000