One week after Aegis Mortgage Corp. filed for chapter 11 in Delaware, a group of former employees filed their complaint seeking class certification over allegations that Aegis Mortgage Corporation, Aegis Wholesale Corporation and Cerberus Capital Management, L.P.—all allegedly acting as their employer—violated the Worker Adjustment and Retraining Notification (WARN) Act when they failed to give over 400 employees 60 days' notice prior to a mass termination by Aegis Mortgage on August 7, 2007. Aegis Mortgage Corporation, along with 10 of its affiliates, filed for bankruptcy under chapter 11 in the Delaware bankruptcy court on August 13.
The class action complaint alleges that although the terminated employees were on the payroll of Aegis Mortgage, Aegis Wholesale and Cerberus acted as a "single employer" under WARN and seeks class certification for all the employees terminated and payment of 60 days' wages and additional ERISA and other fringe benefits. In addition, the complaint seeks to have any WARN damages awarded declared to be an administrative priority of the Aegis Mortgage and Aegis Wholesale bankruptcy estates. The former employees' assertion of administrative priority treatment of their claim, if successful, will provide a first priority, full distribution to them ahead of other unsecured creditors.
The complaint illustrates the impact of WARN even if the employer is in bankruptcy and highlights the need for WARN compliance even in the face of insolvency. This is significant because an employer who violates the WARN provisions by ordering a plant closing or mass layoff without providing appropriate notice is liable to each aggrieved employee for an amount including back pay and benefits for the period of violation, up to 60 days.
WARN requires employers to provide notice 60 days in advance of covered plant closings and covered mass layoffs. In general, employers are covered by WARN if they have 100 or more employees, not counting employees who have worked less than six months in the last 12 months, and not counting employees who work an average of less than 20 hours a week. Employees entitled to notice under WARN include hourly and salaried workers, as well as managerial and supervisory employees. Business partners are not entitled to notice.
A covered employer must give notice in the event of a plant closing if an employment site will be shut down, and the shutdown will result in an employment loss for 50 or more employees during any 30-day period. A covered employer must give notice if there is to be a mass layoff which does not result from a plant closing but which will result in an employment loss at the employment site during any 30-day period for 500 or more employees, or for between 50 and 499 employees if they make up at least 33% of the employer's active workforce. Employees who have worked less than six months in the last 12 months or employees who work an average of less than 20 hours a week for that employer are not counted, however these employees are entitled to notice.
The employer must give written notice to the chief elected officer of the exclusive representative(s) of affected employees and to unrepresented individual workers who may reasonably be expected to experience an employment loss. The employer must also provide notice to the state dislocated worker unit and to the chief elected official of the unit of local government in which the employment site is located.
The exceptions to the 60-day notice are the faltering company exception that only applies to plant closings which covers situations where a company has sought new capital or business in order to stay open and where giving notice would ruin the opportunity to get the new capital or business, the unforeseeable business circumstances that applies to closings and layoffs that are caused by business circumstances that were not reasonably foreseeable at the time notice would have been required, and where a closing or layoff is the direct result of a natural disaster, such as a flood, earthquake, drought or storm.
The Aegis Mortgage complaint seeks to have all of the terminated employees' claims declared administrative in nature under a provision of the Bankruptcy Code allowing for administrative priority, i.e., payment in full. In the event that all of the wages and benefits are not accorded administrative priority, the complaint asks that the terminated employees each receive $10,950 pursuant to another provision of the Bankruptcy Code allowing for priority distribution amongst unsecured (as opposed to administrative) creditors for wages and benefits earned within 180 days of the filing of the bankruptcy.
Under the Bankruptcy Code, a plan must provide for full payment of all allowed administrative claims as a condition of confirmation. Administrative claims include the actual, necessary costs and expenses of preserving the estate, which generally—although not always—encompass claims for post-petition services provided to the debtor in the ordinary course of business operations. In addition to the requirement of full payment on the effective date of a plan as a condition to confirmation, allowed administrative expense claims have statutory priority in payment over pre-petition general unsecured claims.
Circuit Court decisions—relying on a 1989 U. S. Department of Labor commentary published to accompany the final regulations under WARN—have recognized a "liquidating fiduciary" status that excuses a chapter 11 debtor in possession of WARN's obligations. Referring to this commentary, some bankruptcy courts have ruled that chapter 11 debtors are not "business enterprise[s]" under WARN and excused those debtors for penalties under WARN. WARN applies only to "employers" that are "business enterprises" and the DOL commentary provides that a bankruptcy fiduciary whose sole function is to liquidate a failed business for the benefits of creditors does not succeed to the former employer's WARN obligations. That same DOL commentary does state that the DOL "does not think it appropriate" to exclude all bankruptcy companies from the definition of an "employer" under WARN. Determination of a business' status as a liquidating fiduciary will be determined by timing of the layoffs and the decision to cease ongoing business operations and file for bankruptcy protection. The timing of such decisions and the timing of the filing of the bankruptcy petition can be outcome determinative of the treatment of WARN claims within the bankruptcy distribution scheme.
If the act triggering the application of WARN occurs prior to the filing of the petition, bankruptcy courts generally have held that the employee's recovery against the employer under WARN will be paid as an unsecured claim on a third priority basis up to $10,950. Alternatively, if the triggering act or event occurs post-petition, bankruptcy courts generally have held that the employee's claims against the employer will be paid as a first priority administrative expense. In contrast, if the business enterprise will not be reorganizing under chapter 11 but seeking to control liquidation through a "liquidating plan," those businesses may be deemed "liquidating fiduciaries" of the bankruptcy estates and avoid the imposition of any WARN liability.
Whenever faced with the possibility of bankruptcy, it is important to consider the employment aspects of the decision. As soon as possible, it is critical to ask:
- Will there be a plant closing?
- How many employees will lose their jobs?
- Will the company's assets be sold?
- If so, does the purchase agreement address WARN responsibility?
- Do one of WARN's exceptions apply, such as "faltering company" or "unforeseeable business circumstances"?