The Third Circuit Court of Appeals issued a significant decision on August 4, 2017, Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.), No. 16-2203 (3rd Cir. Aug. 4, 2017), that highlighted the interplay between the federal Bankruptcy Code and the federal WARN Act. Charged with determining the correct standard for the “unforeseeable business circumstances” exception to a bankrupt employer’s obligation under the WARN Act to provide 60 days’ prior notice of a mass layoff, the Third Circuit adopted, for the first time, the standard used by the Fifth, Sixth, Seventh, Eighth and Tenth Circuits: an employer’s WARN obligations are triggered only when the mass layoff was probable, i.e., more likely than not, when WARN Act notice would otherwise have been required, rather than merely foreseeable.
On February 24, 2009, Eclipse Aviation Corporation (“EAC”) conducted a mass layoff of its employees when EAC unexpectedly closed its doors. The shutdown was not expected because EAC had filed a petition for bankruptcy under chapter 11 of Bankruptcy Code in November 2008. EAC, however, had also reached an agreement to sell itself to its largest shareholder, European Technology and Investment Research Center (“ETIRC”). If that agreement had closed as planned, EAC would have been able to continue its operations and EAC would not have laid off its employees. The sale, however, required significant funding from Vnesheconomban (“VEB”), a state-owned Russian Bank. The funding never materialized; for a month, EAC waited for the transaction to go through with almost daily assurances that the funding was imminent and EAC could be saved. Eventually, however, as those assurances failed to bear fruit, EAC was forced to cease operations altogether on February 24, 2009; EAC converted the bankruptcy from a chapter 11 reorganization to a chapter 7 liquidation and terminated its employees without providing the requisite 60 days’ prior notice required under the Worker Adjustment and Retraining Notification (“WARN”) Act, 29 U.S.C. § 2102(a).
EAC’s employees filed a class action complaint in an adversary proceeding in the Bankruptcy Court alleging that EAC’s failure to afford them 60 days’ notice prior to the mass layoff violated the WARN Act. EAC argued that it was excused from the notice requirement under the WARN Act’s “unforeseeable business circumstances” exception. Id. § 2102(b)(2)(A). The Bankruptcy Court granted summary judgment to EAC, holding that the “unforeseeable business circumstances” exception barred WARN Act liability, and the District Court affirmed on appeal.
Third Circuit Decision
The Third Circuit affirmed the District Court’s opinion. The Court explained that an employer seeking to use the “unforeseeable business circumstances” exception must prove that the mass layoff was (1) caused by business circumstances (2) that were “not reasonably foreseeable” at the time that notice would have otherwise been required under the WARN Act, i.e., 60 days before the layoff.
The Court had little trouble affirming the District Court’s finding of causation. The Court noted that the WARN Act provides that in the case of a sale of part or all of an employer’s business, the seller is responsible for providing employees notice of any mass layoff “up to and including the effective date of the sale,” at which point that responsibility shifts to the buyer. When a sale proceeds on a “going concern” basis, it is presumed that the sale “involves the hiring of the seller’s employees unless something indicates otherwise,” regardless of whether the seller has expressly contracted for the retention of its employees. The Court agreed with EAC’s position that because ETIRC had agreed to purchase EAC as a going concern and nothing indicated otherwise, the District Court’s finding that the employees would have been retained rather than laid off (i.e., the layoff would not have occurred but for ETIRC’s failure to obtain the financing necessary to finalize the sale) was correct.
The Court focused on, among other evidence in the record, a provision in the asset purchase agreement, entitled “Conduct of Business Prior to the Closing Date,” that expressly required EAC to “use commercially reasonable efforts to . . . continue operating the Business as a going concern,” to “maintain the business organization of the Business intact, including its agents, employees, consultants and independent contractors,” and to “preserve the goodwill of the manufacturers, suppliers, contractors, licensors, employees, customers, distributors and others having business relations with the Business,” while prohibiting EAC from “offer[ing] employment for any period on or after the Closing Date to any employee or agent of the Business unless [ETIRC] has determined not to make an offer of employment” or “otherwise attempt[ing] to persuade any such employee or agent to terminate his or her relationship with the Business.” These terms, the court held, which expressly contemplate a going concern transaction and prevent EAC from disturbing any aspect of its operations or employment relationships strongly indicate that, had the sale been consummated, ETIRC intended to continue EAC’s operations largely as is.
The Court then tackled the foreseeability issue – whether the failure of the sale of EAC was reasonably foreseeable before February 24, 2009 – the date on which EAC notified its employees of the layoff. The Court noted that the WARN Act’s implementing regulations provide that an “unforeseeable business circumstance” is one that is “not reasonably foreseeable at the time that 60–day notice would have been required,” but the regulations do not define what makes a business circumstance “not reasonably foreseeable.” The terminated employees contended that “reasonably possible outcomes” is the correct standard, i.e., where two outcomes are equally possible – in a game of roulette, for example, where the ball will land on either black or red – both must be considered “reasonably foreseeable” even though neither crosses the more-likely-than-not threshold.
The Court rejected the employees’ argument and, instead, adopted the standard set forth by the Fifth Circuit in Halkias v. General Dynamics Corp., 137 F.3d 333, 336 (5th Cir. 1998), requiring that in order to be “reasonably foreseeable,” an event must be “probable.” The Court explained that 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, the Court explained, 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. 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.
Applying this foreseeability analysis to the facts, the Court concluded that EAC met its burden of proving that ETIRC’s failure to obtain the financing necessary to close the sale was not probable prior to EAC’s decision to lay off its employees on February 24, 2009. The first relevant date for WARN Act purposes was is December 26, 2008, the 60-day mark at which WARN Act notice would have been due for a mass layoff on February 24, 2009. At that point in time, ECO was preparing to be sold on a going concern basis via auction procedures approved by the Bankruptcy Court, with ETIRC serving as a stalking horse bidder. When no additional bidders materialized, the Bankruptcy Court held a sale hearing at which it heard multiple days of testimony before ultimately approving EAC’s sale to ETIRC under the terms of the amended asset purchase agreement on January 23, 2009. Because, as the Court noted, it could hardly be said that the failure of the sale appeared probable to EAC on the very day the Bankruptcy Court approved it, EAC could not be held liable for its failure to provide WARN Act notice to its employees prior to January 23, 2009.
The Court also held that EAC met its burden of proving that the mass layoff was not “probable” during the month-long period between the Bankruptcy Court’s approval of the sale on January 23 and EAC’s ultimate demise on February 29, although that presented a more difficult question. Notwithstanding that EAC’s disinterested directors were demanding a more “concrete funding commitment” from VEB as early as February 2nd and were considering converting EAC’s bankruptcy to a chapter 7 liquidation on February 4th if such a commitment did not materialize, and although no direct “concrete” commitment from VEB ever came, EAC’s executives and its board received constant assurances from ETIRC’s CEO and another ETIRC executive who sat on EAC’s Board that funding was forthcoming in a matter of weeks and, as EAC began to run out of money, in a matter of days. While EAC’s disinterested directors were clearly perturbed by VEB’s delays and continued to discuss the possibility of liquidating the company without more definite financial commitments, they ultimately deemed the continual oral assurances they received from those two executives to be compelling enough to continue on a path towards closing.
The Court commented that, while these assurances may look like empty promises in hindsight, the Court was compelled to consider EAC’s decisions made based on the information available to it at the time and in light of the history of the business and of the industry in which that business operated. This history included EAC’s and ETIRC’s extensive business relationship for years prior to the sale, with ETIRC taking on an even more active role in EAC’s affairs in the months leading up to the bankruptcy, and the fact that two aforementioned executives, while acting as representatives of ETIRC through much of the sale process, were both members of EAC’s Board. Thus, by the time the companies began to negotiate the sale, ETIRC and its representatives had repeatedly expressed their desire to keep EAC operational, and had proven their willingness to act in furtherance of that goal – filling board seats and providing financial assistance on multiple occasions to help keep EAC afloat. The Court found this longstanding relationship significant in its assessment of EAC’s expectations in the face of ETIRC’s continual reports that funding was on the way. As the Court noted, “these were not grandiose promises from a stranger, but assurances from a credible business partner with a demonstrated commitment to Eclipse’s survival.”
Companies in bankruptcy must be vigilant about the WARN Act when planning mass layoffs or plant closings in order to minimize their potential exposure under that statute. Whether or not an employer is required to provide the Act’s 60-day notice to employees slated for layoff or alternatively will excused under the Act’s “unforeseen business circumstances” exception will depend in the particular facts of each case. Employers should bear in mind the Third Circuit’s warning that the “probability” test it adopted is an objective one. Put another way, WARN Act liability may not be avoided by an employer “clinging to a glimmer of hope that it will remain open against improbable odds” and that “[even the most well-intentioned subjective beliefs will not excuse failure to comply with the WARN Act’s notice requirement if they are not ‘commercially reasonable’ in light of the facts that were available to the company in the sixty-day period prior to the layoff.” [citing 20 C.F.R. § 639.9(b)(2)].