A recent federal trial court decision out of Delaware, In re AE Liquidation, Inc. v. Burtch, No. 14-1492-LPS (D. Del. Mar. 31, 2016), illustrates how, even in the context of a very troubled business, the Worker Adjustment and Retraining Notification (WARN) Act’s “unforeseeable business circumstance exception” (UBC) still may be used as a defense to WARN liability.
The case involved Eclipse Aviation Corporation, which designed, manufactured, and sold jet aircrafts. In 2008, Eclipse defaulted on its secured notes; its cash accounts were frozen, and its board evaluated liquidation. However, the board decided to sell the business as a going concern through a chapter 11 bankruptcy approved sale to an affiliate of its principal shareholder, European Technology and Investment Research Center (ETIRC). ETIRC provided $20 million in debtor-in-possession financing to fund the chapter 11 proceeding and worked to structure a sale to an affiliate, EclipseJet, with financing through a Russian state-owned bank.
Unfortunately, and in spite of a completed asset purchase agreement, a January 23, 2009 court order approving the sale, repeated assurances that financing was forthcoming and confirmation that Prime Minister Vladimir Putin had approved the transaction, the sale did not close because the financing fell through.
To preserve cash and stretch its resources while closure was pending, on February 18, 2009, Eclipse sent its employees an email announcing a furlough until further notice. On February 24, 2009, immediately after the transaction tanked and the secured creditors moved to convert the chapter 11 bankruptcy proceeding into a chapter 7 proceeding, Eclipse threw in the towel and sent another email to its employees advising them that their furlough had been converted into a layoff and essentially, announcing the termination of their employment. On the following day, Eclipse followed up by mailing employees their termination packages.
Contending that they received untimely and inadequate notice of the closure, the employees sued for WARN Act violations.
The UBC Exception
The bankruptcy trustee opposed the employees’ claims, arguing that the unforeseeable business circumstances exception to the WARN Act applied because the circumstance that ultimately caused the closure and layoffs, i.e., the failure of the sale, was not reasonably foreseeable 60 days in advance of the closure.
In spite of a truly dire change of circumstances preceding Eclipse’s ultimate failure, the court rejected the plaintiffs’ claims. In an unlikely ruling for the defendant— given the death spiral that Eclipse was facing—the court offered some employer-friendly lessons about the UBC exception.
- No Narrow Construction. Unlike most exceptions to remedial statutes (including exceptions under the WARN Act), which are to be construed narrowly, the UBC is specifically not to be narrowly construed, taking the proverbial “thumb off the scale” that favors plaintiffs and often frustrates employers’ attempts to rely upon exceptions to the application of protective laws.
- No Hindsight. Similar to the process that courts must undertake to evaluate a fiduciary breach claim, reviewing courts must evaluate use of the UBC objectively, from the perspective of the time when the decisions were made and without the benefit of hindsight. The fact that a business failed does not govern the evaluation of whether actions leading up the failure were reasonable.
- Entrepreneur Leeway. In rejecting the plaintiffs’ claim that the WARN Act required Eclipse to give earlier notice given the company’s dire circumstances, the court was unsympathetic. It admonished the plaintiffs that the WARN Act was not intended to force fragile, yet still viable, employers to “pull the plug” and provide notice just because of a “possibility” of future failure at “some undetermined time.” Rather, the act “allows leeway” for exercise of reasonable business judgment because its regulations “are intended to encourage employers to take all reasonable actions to preserve the company and the jobs.”
- Foreseeability. An employer must establish that the precipitating circumstance that caused layoffs was “unforeseeable.” This implies “sudden, dramatic or unexpected” but is an objective test without regard for hindsight that focuses upon whether a “similarly situated employer in the exercise of commercially reasonable business judgment would have foreseen the closing.” It is the probability that a circumstance will occur that makes it foreseeable, not its mere possibility. Here, substantial evidence in the form of an executed asset purchase agreement, repeated assurances of financing, a court-approved sale, and ETIRC’s willingness to commit $20 million in financing justified a reasonable belief that failure was not “probable.”
Moreover, the court emphasized that “unforeseeable” does not mean “out of the blue” and while Eclipse was failing and potential for layoffs was well know, it had an asset purchase agreement and sufficient cash in place to weather the storm until the deal was expected to close
Application of the UBC
Use of the UBC is conditioned upon an employer (1) still providing as much notice as practicable and (2) offering a clear statement of the reason for reducing the notice period. While the court found that Eclipse had satisfied these requirements, lessons can be gleaned from the facts and the court’s decision.
- Timing. Here, the notice was provided “after the fact” of closure, always a dangerous position for an employer. However, as the court noted, even the U.S. Department of Labor has acknowledged that after-the-fact notice may be as much notice as is possible.
- Content. The employer gave employees three separate notices (two emails and a termination package) over seven days. While the court found these sufficient, the result was not necessarily predictable. Employers in a similar situation will want to provide a notice that follows the formulaic notice regulation and include a statement explaining why they did not provide 60 days’ notice. The reasons should be clearly stated so that a trier of fact will not need to search for the critical nuggets in multiple communications.
- Email Communication. A final lesson to be learned here is that email communication may work. The applicable WARN regulation states that “any reasonable method of delivery which is designed to ensure receipt,” such as first-class mail, is acceptable. While the court did not hold as a matter of law that email works, it concluded based upon the facts that email worked here.
This case provides employers with is a clear lesson on how the UBC may be applied even in the face of known adversity.