The Bottom Line:

The Third Circuit, in In re AE Liquidation, Inc., Case No. 16-2203 (3d Cir. Aug 04, 2017) held that the Debtors were not liable under the WARN Act for failing to warn employees of furloughs and layoffs until those furloughs and layoffs occurred, due to unforeseeable business circumstances. The Court determined that the appellant’s suggested lower standard of unforeseeable circumstances being circumstances which were merely possible, and not probable, imposed too great a burden on companies. The Court conducted an extensive factual analysis to determine that the Debtors gave WARN Act notice at the appropriate time, i.e. that the Debtors were excused from giving earlier WARN Act notice because unforeseeable business circumstances made sudden layoffs unavoidable. The Third Circuit joins a majority of other circuit courts by adopting a more practical standard to afford businesses the flexibility of not sending out WARN notices at a sooner point in a sale process that, if such notices were sent, could disrupt the debtor’s ability to preserve operations and sell the business as a going concern.

What Happened:

In In re AE Liquidation, Inc., Case No. 16-2203 (3d Cir. Aug. 04, 2017), the Third Circuit followed five other circuits in affirming the judgments of the Bankruptcy Court and the District Court, and holding that an employer’s liability under the federal Worker Adjustment and Restraining Notification Act (the “WARN Act”) becomes triggered when a mass layoff becomes ‘more likely than not,’ and not at the appellant’s proposed lowered threshold. Under the federal WARN Act, employers are liable for 60 days wages if they fail to give employees advance notice of mass layoffs. (Note that some states have WARN laws that cover a longer period of time.) Importantly, the WARN Act has certain exceptions where the required notice need not be provided, including the unforeseeable business circumstances exception which was at issue in this case.

The Debtors, Eclipse Aviation Corporation, unexpectedly shut down and implemented mass layoffs in late February 2009. The shutdown came after a protracted saga following Eclipse’s late 2008 bankruptcy filing. The Debtors had reached an agreement with their largest shareholder, European Technology and Investment Research Center (“ETIRC”), to sell Eclipse’s operations to ETIRC, in a transaction to be funded by Vnesheconomban (“VEB”), a state-owned Russian bank. VEB was to provide ETIRC with a $205 million loan, which ETIRC would use to purchase substantially all of Eclipse’s assets at auction. Substantially all of Eclipse’s employees would retain their jobs under this arrangement.

While the auction in late January 2009 was successful, the promised Russian funding never materialized. The Court conducted a fact-intensive analysis of the circumstances, finding that “[i]n the month that followed, VEB took ETIRC and Eclipse on a roller coaster ride of promises and assurances that never came to fruition.” In re AE Liquidation, at 8. Execution of the loan required approval from Russian Prime Minister Vladimir Putin, as VEB had become unexpectedly insolvent. The promised approval never came and the proposed transaction fell through, and as a result, the Debtors became administratively insolvent and were forced to make the decision to furlough substantially all of their employees. The case was converted into a Chapter 7 liquidation shortly thereafter, and all employees were ultimately laid off.

The employees alleged that the business circumstances surrounding the Debtors’ financial decline were not unforeseeable, and therefore the exception to WARN Act liability does not apply. The Court observed that: “For the unforeseeable business circumstances exception to apply, Eclipse must demonstrate that the allegedly unforeseeable event was, in fact, the cause of the layoff.” Id. At 21. The Court made an extremely fact-intensive analysis of the conditions surrounding the Debtors’ furloughs and eventual layoffs, examining the decisions that the Debtors made based on the information available to them at the time. The buyer required the Debtor to continue operating “as a going concern” and preserve employees. “These terms, which expressly contemplate a going concern transaction and prevent Eclipse from disturbing any aspect of its operations or employment relationships strongly indicate that, had the sale been consummated, ETIRC intended to continue Eclipse’s operations largely as is.” Id. At 22.

In its analysis, the Third Circuit reviewed language in the asset purchase agreement that gave the buyer the right to decline offering employment to any particular employees. The Court concluded that this did not support an argument that, because employment was not assured, WARN still applied:

Although these terms freed ETIRC from any binding obligation to retain Eclipse’s employees and prevented it from incurring liabilities were it not to retain them, we agree with the District and Bankruptcy Courts that these terms are mere “boilerplate language address[ing] a buyer’s typical litigation concerns over successor liability and third-party beneficiary claims.” …. While such boilerplate language perhaps signifies that the sustained employment of Eclipse’s workforce was not a foregone conclusion, it does not rebut the presumption in favor of continued employment in a going concern sale—especially in light of the significant evidence that ETIRC intended to carry on Eclipse’s operations had the sale been finalized.

Id. at 25-26.

The Court proceeded to address what standard should be applied when assessing “reasonable foreseeability” for the exception to noticing to apply. After consider what other circuits have held, the Third Circuit concluded that it would:

join our Sister Circuits in holding that the WARN Act is triggered when a mass layoff becomes probable—that is, when the objective facts reflect that the layoff was more likely than not.11 This standard strikes an appropriate balance in ensuring employees receive the protections the WARN Act was intended to provide without imposing an “impracticable” burden on employers that could put both them and their employees in harm’s way.

Id. at 30-31, citing Halkias v. General Dynamics Corp., 137 F.3d 333, 336 (5th Cir. 1998). In explaining its rationale, the Court reasoned:

Companies in financial distress will frequently be forced to make difficult choices on how best to proceed, and those decisions will almost always involve the possibility of layoffs if they do not pan out exactly as planned. If reasonable foreseeability meant something less than a probability, nearly every company in bankruptcy, or even considering bankruptcy, would be well advised to send a WARN notice, in view of the potential for liquidation of any insolvent entity. And, as we explained in Elsinore, there are significant costs and consequences to requiring these struggling companies to send notice to their employees informing them of every possible “what if” scenario and raising the specter that one such scenario is a doomsday. 173 F.3d at 185 n.7. When the possibility of a layoff—while present—is not the more likely outcome, such premature warning has the potential to accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided. See Roquet, 398 F.3d at 589 (“[T]he WARN Act is not intended to deter companies from fighting to stay afloat . . . .”); Elsinore, 173 F.3d at 185 n.7. Thus, we join the many courts that have held this is not the burden the WARN Act was meant to impose and that a layoff becomes reasonably foreseeable only when it becomes more likely than not that it will occur.

Id. at 32. Applying the foreseeability analysis to the facts of the case, the Court concluded that Debtor has met its burden of demonstrating that ETIRC’s failure to obtain the financing necessary to close the sale was not probable prior to the Debtor’s decision to lay off its employees on February 24, 2009. The Court looked at the process in stages. “As it could hardly be said that the failure of the sale appeared probable to Eclipse on the very day the Bankruptcy Court approved it, Eclipse cannot be held liable for its failure to provide WARN Act notice to its employees prior to January 23, 2009.” Id. at 33. With respect to the period post-sale hearing, the Court observed that the Debtors’ board took reasonable steps in monitoring the progress towards closing. Notably, ETIRC’s repeated promises that funding was on the way “were not grandiose promises from a stranger, but assurances from a credible business partner . . .” Id. at 36. From the Court’s perspective, the Debtors reasonably assumed that the deal would soon close, and that the delay in funding was merely a political hiccup, shortly to be resolved. Id. Given these circumstances, the sudden failure of VEB to obtain financing approval was an unforeseeable event. Id. at 36-39.

The Court also held that pursuant to the WARN Act, the Debtors’ employees were properly noticed, and the unforeseeable business circumstances were the cause of the mass layoffs.

Why the Case is Interesting:

The Third Circuit now follows the Fifth Circuit and four other Circuits, holding that for an event to be ‘reasonably foreseeable,’ it must be probable. Id. at 27. The Third Circuit declined to set the lower suggested standard of whether an event was merely ‘reasonably possible.’ Id at 27-28. The Court reasoned that setting a lower ‘possibility’ standard would require employers to give WARN Act notice each time a company was in financial distress, and noted that its prior opinions on the subject implicitly supported the ‘probability’ standard. “This standard strikes an appropriate balance in ensuring employees receive the protections the WARN Act was intended to provide without imposing an ‘impracticable’ burden on employers that could put both them and their employees in harm’s way.” Id. at 31, citing Halkias v. General Dynamics Corp., 137 F.3d 333 (5th Cir. 1998). In following its sister circuits, the Third Circuit takes the (practical) view that the potential upside to employees of more frequent WARN Act notices sent each time a company is in financial distress is outweighed by the potential burden and cost to those companies of frequent, and perhaps unnecessary WARN Act notices. With a lower ‘possibility’ standard, companies might be disincentivized from trying to ‘stay afloat’ or successfully emerge from Bankruptcy, as premature warnings may often accelerate a company’s demise. In re AE Liquidation, Inc., at 32. The decision affords companies more flexibility in delaying when notices need to be sent while pursuing a sale transaction even if there are degrees of risk inherent in that sale transaction closing. Of course, the inquiry is ultimately fact-specific and companies (and creditors affected by WARN claims) need to proceed carefully.