In a matter of first impression in the U.S. Third Circuit, a federal bankruptcy court held in October that claims under the Worker Adjustment and Retraining Notification Act (“WARN Act”) accrue in their entirety the moment employees were terminated without notice.  

Because the workers were terminated before their employers filed for chapter 11 relief, their WARN Act claims were pre-petition claims that were not entitled to second-level priority as administrative claims, but only to fourth-and fifth-level priority as wage claims. In re Powermate Holding Corp., 394 B.R. 765 (Bankr. D. Del. 2008).  

The debtors filed for chapter 11 bankruptcy relief March 17, 2008 (the “Petition Date”). Approximately one week prior to the Petition Date, the debtors closed one of their operating facilities and terminated all the employees working at that facility. On the Petition Date, and prior to the bankruptcy filing, the debtors terminated all of their remaining employees without prior notice.  

A former employee filed a complaint against the debtors on behalf of himself and other discharged employees, alleging violation of the WARN Act and claiming entitlement to wages, and ERISA and other benefits. The plaintiff further claimed these damages were entitled to administrative priority under section 503(b)(i)(A)(ii) of the Bankruptcy Code (the “BAPCPA Wage Provision”), which was added to the Bankruptcy Code pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  

The debtor filed an answer, moved to dismiss the complaint, and further requested that the bankruptcy court find that any damages attributable to the alleged Warnarnarn Act violations would not be entitled to administrative expense priority, and instead be assigned fourth or fifth priority status under the section 507(a)(4)-(5) of the Bankruptcy Code.  

Claims Priority

Although a determination had not been made as to whether the debtor had violated the WARN Act, the Bankruptcy Court for the District of Delaware found the issue of claims priority was ripe for review. This was so, the court reasoned, because in the event that WARN Act violations were determined to have occurred, these claims would be of such a magnitude that if they also were found to be entitled to administrative expense priority, there would be no funds remaining for the debtor to distribute to other creditors.  

The court found that it was appropriate to consider the issue so the debtors could proceed with their bankruptcy case, formulate a plan of reorganization, and negotiate with creditors. Having decided that the issue was ripe for determination, the court then examined whether damages under the WARN Act were entitled to administrative expense priority the under BAPCPA Wage Provision.  

With certain exceptions, the Warnarnarn Act provides that affected employees are entitled to at least 60 days’ notice of a potential termination. If an employer fails to give the appropriate notice, the affected employees are entitled to as much as 60 days back pay and benefits. The bankruptcy court noted that Warnarnarn Act claims are prioritized under various provisions governing wage claims.  

Administrative Expense Claims

Section 503 of the Bankruptcy Code states that claims that either preserve the estate in reorganization or facilitate winding-down in liquidation are deemed administrative expense claims. Such claims are entitled to second priority under section 507(a)(2) of the Bankruptcy Code, because they are viewed as benefiting all creditors by encouraging lenders and others to continue or commence doing business with the debtor.  

There are nine types of claims that may receive administrative expense status. Of note, the BAPCPA Wage Provision provides as follows:  

(b) there shall be allowed, administrative expenses…including  

(1) (A) the actual, necessary costs and expenses of preserving the estate including…  

(ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title.  

Prior to the BAPCPA Amendments, Warnarnarn Act claims occasionally were granted administrative expense priority under a prior version of 11 U.S.C. § 503(b)(1)(A). More typically, bankruptcy courts held that Warnarnarn Act claims were entitled to fourth and/or fifth priority status under section 503(a)(4)-(5) of the Bankruptcy Code, which provides priority for wage claims up to a maximum dollar amount. Any wage claims in excess of the maximum cap are treated as general unsecured claims.  

Warn Act Claims

In In re Powermate Holding Corp., the bankruptcy court examined what impact, if any, the BAPCPA Amendments had on the priority status of Warnarnarn Act claims. The court began by looking at the plain language of the statute, and determined that the pivotal statutory language for its analysis was: “(b)…there shall be allowed, administrative expenses … including … (1)(A) the actual, necessary costs and expenses of preserving the estate, including- (i) wages, salaries…; and (ii) wages and benefits awarded.” 11 U.S.C. 503 (emphasis in original).  

The only other bankruptcy court to examine this provision found the use of the word “and” in this provision necessitated the two clauses being read in conjunction with each other. The court in Powermate, however, found the use of the word “and” connoted categories within a particular subset of allowable administrative expense claims.  

Based on its reading of the statue, the bankruptcy court found the relevant consideration is the moment at which the right to back pay accrues or such claims vest—and how this time relates to the petition date. If a claim vests pre-petition, the back pay is attributable to the time occurring prior to the commencement of the case and is not an administrative expense claim.

Alternatively, if a claim vests post-petition, the back pay is attributable to the time occurring after commencement of the case and is an administrative expense claim.  

The court found that when the unlawful conduct occurred and/or when services were rendered is irrelevant to the analysis. The payment due date similarly is irrelevant because accrual may occur before or after the payment date.  

Turning to the case before it, the court noted that the Warnarnarn Act is designed to provide a form of severance pay.  

The U.S. Court of Appeals for the Third Circuit has held that there are two types of severance pay: (1) payment at termination in lieu of notice; and (2) payment at termination based on length of employment. In terms of priority, a severance claim only will have administrative expense priority to the extent it is based on post-petition services. Pay at termination of employment vests at the time of notice. An entire claim qualifies as an administrative expense in a post-petition discharge. Conversely, a claim for severance pay for a pre-petition termination is not entitled to administrative expense status.  

Courts routinely have found that Warnarnarn Act claims are like payment at termination in lieu of notice. Therefore, Warnarnarn Act claims accrue in their entirety upon termination. In the current case, the plaintiff’s claims vested at termination, which occurred pre-petition, and therefore were not administrative expense claims. As such, the plaintiff’s Warnarnarn Act claim was entitled to treatment under section 507(a)(4-5).  

BAPCPA History  

The court noted that its examination of the legislative history of the BAPCPA Amendments was not necessary for its analysis, but nonetheless found that the legislative history further supported its conclusion. Case law under the pre-BAPCPA Amendment Bankruptcy Code held that Warnarnarn Act damages based upon pre-petition terminations only were entitled to fourth or fifth level priority status. Claims arising from post-petition terminations were given administrative expense priority. The rationale behind this distinction was that administrative expense status could only extend to wages for services rendered post-petition. The bankruptcy court noted that if administrative expense status was extended to pre-petition terminations, the value of wage claims would rise at such an extreme rate so as to effectively cripple the debtors’ efforts for an equitable reorganization or liquidation. It was the bankruptcy court’s view that if Congress intended such a drastic change, there would be significant legislative history; however, the record on this provision is nearly silent. The court found that the lack of legislative history further supported its interpretation of this provision.