As bankruptcy courts continue to play a key role in restructuring the U.S. economy, courts appear to be at odds as to whether WARN Act claims should proceed through adversary proceedings or through the bankruptcy claims process. While courts have come to differing conclusions on the issue, a commonality appears to be that generally courts will lean toward resolving WARN Act claims through whichever process is the most efficient in a particular case.

For example, the U.S. District Court for the District of Arizona recently affirmed the District of Arizona Bankruptcy Court's dismissal of a WARN Act class action adversary proceeding as duplicative of the bankruptcy claims process. Binford v. First Magnus Fin. Corp. (In re First Magnus Fin. Corp.), 403 B.R. 659 (D. Ariz. 2009). In light of significant law to the contrary, however, the First Magnus decisions may be of limited use in an attempt to force WARN Act claimants out of a class action and into the bankruptcy claims process.

The District of Arizona Bankruptcy Court dismissed the WARN Act adversary proceeding primarily because all eight of the plaintiffs also filed proofs of claim for the same damages sought in the adversary proceeding. "Therefore," the bankruptcy court stated, "it seems to be a waste of judicial resources to move forward on [the] adversary complaint when the claims process is moving the same issues down a parallel track."1

The bankruptcy court also noted that principles of estoppel played a role in its decision.2 The court viewed the plaintiffs' filed proofs of claim as an election to have their claims resolved through the claims process. The court's decision was primarily focused on conservation of judicial resources and its discretion to manage its own docket. For these reasons, the bankruptcy court dismissed the adversary proceeding, thereby forcing the plaintiffs to litigate their claims through the bankruptcy claims process.

Duplicative Process

On appeal, the district court held that the bankruptcy court's decision was not clearly erroneous and agreed with the bankruptcy court that the WARN Act adversary proceeding was duplicative of the normal bankruptcy claims process. The district court noted the bankruptcy court's broad discretion to control its docket and its inherent powers under section 105(a) of the Bankruptcy Code to dismiss a case on its own initiative if necessary or appropriate to perpetuate "the proper use of the bankruptcy mechanism."3

The district court focused on the large number of claims filed in the First Magnus bankruptcy case and stated, "[t]he high number of claims filed indicates that any concerns regarding persons holding small claims not seeking to prosecute them absent class procedures are unfounded."4

The bankruptcy court's dismissal of the First Magnus WARN Act class action in favor of the bankruptcy claims process, and the district court's affirmation thereof, may be contrary to the weight of authority on the subject.

The district court applied the bankruptcy court's narrow interpretation of cases from various bankruptcy and district courts around the country that have allowed WARN Act class actions to proceed for the sake of efficiency. Like the bankruptcy court, the district court limited the usefulness of those cases to "the particular facts of those cases."5

Numerous other cases on the subject, however, provide a more thoroughly reasoned basis for allowing WARN Act claims to continue as class action adversary proceedings.

Adversary Proceedings

Other bankruptcy courts have consistently reasoned that WARN Act claims are properly brought as an adversary proceeding pursuant to Rule 7001(7) of the Federal Rules of Bankruptcy Procedure as an action for equitable relief.6 This analysis is premised on law stating that (i) a WARN Act claim is essentially a claim for back pay,7 and (ii) back pay, as a form of restitution, is an equitable remedy.8

These courts also have focused on the efficiency of a class action adversary proceeding versus resolution of individual proofs of claims for large groups of aggrieved employees.

At least one court subsequently has limited the bankruptcy court's dismissal of the First Magnus WARN Act adversary proceeding to the specific facts of that case. In In re Bill Heard Enterprises, Inc.,9 the Bankruptcy Court for the Northern District of Alabama focused on the fact that First Magnus involved eight plaintiffs, all of whom already had filed a proof of claim.

In Bill Heard, by contrast, the proposed class of aggrieved employees was composed of approximately 2,300 claimants. Without reaching the substantive legal issues addressed above, the Bill Heard court allowed the class action to proceed because to do so would "be more efficient than handling same in a piecemeal fashion through the claims process."10

It therefore appears that principles of judicial economy and efficiency will dictate whether, in a given case, WARN Act claims are allowed to proceed through an adversary proceeding or the bankruptcy claims process. At first glance, the First Magnus class action appears to have been dismissed for the same reasons that other WARN Act adversary proceedings have been allowed to proceed. It may be safe to predict that whichever process is more efficient under the circumstances will be the process chosen to resolve WARN Act claims in a given case.