When Federal Laws Collide Chapter 7 of the Bankruptcy Code versus the WARN Act

By: Reshma Shah
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In In re Century City Doctors Hospital, LLC (“Century City”), the Bankruptcy Court for the Central District of California held that the chapter 7 trustee who assumed control of the debtor’s business operations solely to liquidate assets was not required to abide by the Worker Adjustment and Retraining Notification (“WARN”) Act.[1] In Century City, a hospital with over one hundred employees, filed for chapter 7 relief and, within two hours of the hospital’s filing, the trustee assigned to wind down the hospital’s operations conducted a mass lay off of employees.[2] After the admitted patients had been transferred into appropriate health care facilities,[3] the remaining staff was also terminated.[4] None of the hospital’s employees received notice prior to being laid off.
 
The WARN Act, enacted by Congress in 1988 provides that, with certain exceptions, employers must provide their workers with at least 60 days of advance notice prior to a plant closing or mass layoff.[5] An employer is defined as a business enterprise that employs a hundred or more employees, exclusive of part-time employees. Failure to comply with the WARN Act’s notification provision may result in the employer being compelled to pay its former employees up to sixty days of back pay.[6]
 
In Century City, the plaintiffs, former employees of the hospital, brought an adversary complaint against the estate for violation of the WARN Act.[7] The issue addressed by the court in this case was whether the WARN Act applies when a company is undergoing bankruptcy. While it is clear that the WARN Act applies to employers, the answer is not as clear when dealing with a chapter 7 bankruptcy, where instead of an employer, there is a trustee in place.[8] Section 704 of the Bankruptcy Code, which lists the various duties of a trustee, does not include a requirement that notice be provided to the employees of the business enterprise undergoing bankruptcy.[9] Furthermore, the only duty particular to hospitals is that the trustee must “use all reasonable efforts to transfer patients from a closing health care business to another appropriate heath care business.”[10]
 
The issue of whether a trustee qualifies as an employer under the WARN Act hinges on the nature and extent of the entity’s business and commercial activities while undergoing a chapter 7 bankruptcy.[11] In Century City, during the first week that the trustee was in charge, most of the patients were discharged and those remaining were transferred to other hospitals.[12]   When a trustee merely takes control for the exclusive purpose of liquidating the business for the benefit of the creditors, the trustee is not likely to be considered an employer under the WARN Act.[13] Here, based on the trustee’s actions, the court found that the trustee did not operate the hospital in the normal commercial sense and instead “operated solely for the purpose of shutting down the Debtor’s operations and complying with government regulations relating to disposal of medical waste and hazardous materials.”[14] Consequently, the court held that the trustee was not an employer within the meaning of the WARN Act and therefore did not succeed to the notice obligations of the former employer.[15] 
 
The court in Century City based its holding and rationale on two cases, one from the Third Circuit and one from the Ninth Circuit. Those Circuits have held that trustees who operate the businesses for only a short period of time (between one to two weeks) and do so only to wind down the businesses, do not qualify as employers under the WARN Act.[16] While the trustees in those cases were not held to be employers, the courts did not foreclose the possibility of a trustee qualifying as an employer under the WARN Act.[17] In this instance where two federal laws have come into conflict, the Bankruptcy Code has trumped the WARN Act.


[1] See In re Century City Doctors Hosp. LLC, No. LA08-23328SB, 2009 WL 2567021 (Bankr. C.D. Cal. Aug. 17, 2009).
[2] Id. at *1.
[3] Id.; 11 U.S.C. § 704(a)(12) (2006).   
[4] See In re Century City Doctors Hosp., 2009 WL 2567021, at *1.
[5] See 29 U.S.C. § 2102(a) (2000) (“An 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 . . . .”).
[6] See 29 U.S.C. § 2104(a)(1)(A).
[7] See In re Century City Doctors Hosp., 2009 WL 2567021, at *1.
[8] 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); Chauffeurs Sales Drivers, Warehousemen & Helpers Union Local 572 v. Weslock Corps., 66 F.3d 241 (9th Cir. 1995).
[9] See 11 U.S.C. § 704 (2006).
[10] See 11 U.S.C. § 704(a)(12) (2006).
[11] See In re Century City Doctors Hosp. LLC, No. LA08-23328SB, 2009 WL 2567021, at *2 (Bankr. C.D. Cal. Aug. 17, 2009).
[12] Id. at *1.
[13] Id. at *3; Worker Adjustment and Retraining Notification, 20 C.F.R. pt. 639 (1989).
[14] See In re Century City Doctors Hosp., 2009 WL 2567021, at *3.
[15] Id.
[16] See id. at 245; United Healthcare Sys., 200 F.3d at 178.
[17] See United Healthcare Sys., 200 F.3d at 179.