The Worker Adjustment and Retraining Notification (WARN) Act in the U.S. requires that employers give sixty days’ notice to its employees before effecting a mass layoff. The WARN Act contains exceptions to the notice requirement, including the “unforeseeable business circumstances” exception, excusing notice if “the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time the notice would have been required.” What exactly constitutes reasonably foreseeable – is it once the layoff becomes probable (more likely than not) or is it if there is a foreseeable possibility that a layoff may occur? The Third Circuit recently answered this question with the former, finding that a probability of layoffs is necessary to trigger WARN Act notice requirements in Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.).

Background

Eclipse Aviation Corporation (“Eclipse”) was experiencing a liquidity crisis in mid-2008. In November 2008, Eclipse filed for bankruptcy with a negotiated asset purchase agreement to sell substantially all of its assets to its largest shareholder, European Technology and Investment Research Center (“ETIRC”). In order for ETIRC to close the sale, it was to receive a US$205 million loan from Vnesheconomban (“VEB”), a state-owned Russian Bank to fund the purchase. The bankruptcy court approved the sale on January 23, 2009, and at the time of closing it was still anticipated that VEB would provide ETIRC with funding to finance the sale. The sale was originally scheduled to close on January 29, 2009, but it did not move forward on that date because VEB was unexpectedly insolvent.

In the month that followed, VEB provided almost daily assurances to ETIRC and Eclipse that VEB’s funding was imminent. Eclipse was informed by ETIRC’s chairman that then-Russian Prime Minister Vladimir Putin would personally make a decision on February 2, 2009 as to whether VEB would fund the sale. A few days later, Eclipse was informed that VEB would be recapitalized on February 5, 2009. And while that recapitalization was approved by the Russian legislature, the funding still did not occur. ETIRC’s chairman traveled to Moscow on February 10, 2009 to finalize the funding. He met with Prime Minister Putin’s deputy and reported to Eclipse his belief that the funding would occur.

In the absence of such funding, however, Eclipse became administratively insolvent and in mid-February, Eclipse’s board considered whether a conversion to Chapter 7 was necessary. After receiving assurances from a Russian Governor that the funding would occur soon and that the Eclipse project was one of Prime Minister Putin’s top priorities, the board decided the Chapter 7 filing was unnecessary. The board, however, decided to furlough employees on February 18, 2009, as Eclipse was running out of money. The furlough was intended to be temporary as the company believed the closing was within reach. On February 19, 2009, it was reported to Eclipse’s CFO that VEB had approved all documentation, that the money had been allocated, and all that was needed was the final signoff from Prime Minister Putin. It was not until February 22, 2009, that Eclipse was informed that there were problems with the financing.

On February 24, 2009, when it became clear that the funding may never come, Eclipse filed a motion to convert to Chapter 7 and the company ceased operations. On the same day, Eclipse emailed its employees that the prior furlough had been converted to a layoff.

Eclipse’s employees filed a class action complaint alleging that Eclipse’s failure to give them sixty days’ notice prior to the layoff violated the WARN Act. The bankruptcy court and district court agreed with Eclipse, holding that unforeseeable business circumstances barred WARN Act liability. The employees appealed.

The Court’s Analysis

The key issue on appeal was whether the failure of the sale was reasonably foreseeable before February 24, 2009, the date Eclipse notified its employees of the layoff. The WARN Act does not define what makes a business circumstance “not reasonably foreseeable.” Eclipse urged the Third Circuit to adopt the Fifth Circuit test (adopted by four other Circuits), requiring that in order to be “reasonably foreseeable,” an event must be “probable.” The employees, on the other hand, contended that the WARN Act did not set such a high a threshold for notice and that the standard should be whether an event was a “reasonably possible outcome.”

The Third Circuit agreed with Eclipse, finding 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.” The Court found that this standard strikes an appropriate balance in ensuring employees receive WARN Act protections without imposing a burden on struggling employers to notify employees of every possible layoff scenario. If the Court were to adopt the employees’ standard, the Court reasoned, almost every company considering bankruptcy would be well advised to send a WARN Act notice. Such premature warning, the Court held, had the potential to accelerate a company’s demise and bring to fruition layoffs that may have otherwise been avoided.

After finding that the standard was a probable one, the Third Circuit affirmed the lower courts and found that Eclipse had met its burden of demonstrating that ETIRC’s failure to obtain the funding from VEB was not probable prior to Eclipse’s decision to lay off employees on February 24, 2009. In reaching this conclusion, the Court noted that the longstanding close relationship between Eclipse and ETIRC, as well as the continued assurances from VEB, made it commercially reasonable for Eclipse to believe that the sale was still at least as likely to close as to fail through February 24, 2009, so that no WARN Act notice was required prior to that time.

Implications

The AE Liquidation decision provides companies that are contemplating a bankruptcy filing with some assurance that whether circumstances causing a layoff are reasonably foreseeable under the WARN Act is a more likely than not standard. That being said, the analysis underlying the probable standard is a fact-sensitive one, and companies that are contemplating bankruptcy must be aware that they may have obligations under the WARN Act if such circumstances causing a layoff are, in fact, probable.

Read the decision »