The Bankruptcy Protector

Chapter 11 debtors operate under various levels of uncertainty. Often a company is dependent upon others to provide financing or close transactions necessary for the company’s survival. Such was the case of Eclipse Aviation, which filed for Chapter 11 bankruptcy in November 2008, with an (apparent) agreement to sell itself to its largest shareholder.

The sale was to be financed by a state owned Russian Bank with the financing requiring approval of the Russian Parliament, and as a practical matter, then Prime Minister Vladimir Putin. According to the debtor’s CEO, the Russian government had assured him that there was a “high likelihood” that the funding for the proposed sale would be approved in early February 2009. Under the sale agreement, either party could terminate if closing did not occur by the end of February 2009. Several delays occurred, which began to call the financing into greater question, and the company furloughed its employees in an effort to conserve money. Ultimately, with the company running out of cash, the board voted to seek conversion to chapter 7 in the event a commitment from the Russian Government had not been received by February 24. The commitment did not come and the motion to convert was filed.

Upon the filing of the motion to convert, the debtor emailed its employees to inform them that “closing of the sale transaction has stalled and our company is out of time and money” and that the prior furlough was now a layoff. Shortly thereafter, the company’s employees filed a class action complaint under the Worker Adjustment and Retraining Notification Act (“WARN Act”). In general terms, the WARN Act requires employers to provide sixty (60) days’ notice to employees in advance of a mass layoff or plant closing.

Eclipse Aviation could not contest that it failed to provide the requisite notice or that its circumstances constituted a mass layoff or plant closing under the WARN Act. However, it argued that a statutory exception to the notice requirement applied – the “unforeseeable business circumstances” exemption. Under the WARN Act, this exception applies where “the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.” Even where the exception applies, employers must still “give as much notice as is practicable.” The Bankruptcy Court granted summary judgment with respect to this defense, the District Court affirmed, and the employees appealed to the Third Circuit.

Three issues were raised on appeal: (i) the sufficiency of the termination notice; (ii) causation; and (iii) foreseeability. The Third Circuit found that the notice met the technical requirements under the WARN Act, and that the mass layoff was caused by the failure of the sale to close. The bulk of the Third Circuit’s opinion was devoted to “whether the failure of the sale was reasonably foreseeable before February 24, 2009 – the date Eclipse notified its employees of the layoff.”

The Third Circuit first addressed the appropriate standard for determining foreseeability. The employees argued for a low threshold such that a reasonably probable outcome although not more likely than others would lead to the notice requirement. The debtor argued that notice is required only where the mass layoff becomes probable. The debtor’s position was supported by the other circuit courts to consider that matter, and the Third Circuit agreed, holding that “the WARN Act is triggered when a mass layoff becomes probably – that is, when the objective facts reflect that the layoff was more likely than not.” In doing so, the court realized the practical difficulties in determining when to provide such a notice, stating “[i]f 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.” The consequences of requiring such a notice when the layoff is not the likely outcome could “accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided.”

In analyzing the standard with the facts of the case, the Third Circuit found that the various assurances provided to the company as well as official acts provided the debtor with “a reliable basis to believe that it was more likely than not the funding would receive Prime Minister Putin’s final approval on February 21st and be dispersed shortly thereafter.” While the court believed that the three day period from February 21st to February 24th was a closer call, “it was commercially reasonable for Eclipse to believe that the sale was still at least as likely to close as to fall through before February 24, so that no WARN Act notice was required prior to that time.” For these reasons, the Third Circuit affirmed the decision of the lower courts and concluded that the debtor was entitled to judgment on the unforeseeable business circumstances exception.

According to the Third Circuit, the debtor made the correct call in giving the WARN notice at precisely the time that proposed transaction became less likely to close. Trustees and Chapter 11 debtors should take note of the unforeseeable business circumstances exception to the WARN Act when facing such a lawsuit. However, the Eclipse Aviation case demonstrates the importance of sending a WARN Act notice at the time it appears that a layoff is the likely outcome and not waiting in the hope that a transaction can be salvaged.

The Third Circuit’s decision is In re AE Liquidation, Inc., 866 F.3d 515 (3d Cir. 2017).