Layoff must be probable, not just possible, to trigger WARN Act notice obligations
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Tuesday, August 8, 2017

Layoff must be probable, not just possible, to trigger WARN Act notice obligations

By Lorene D. Park, J.D.

Adopting the same standard used by sister circuits, the Third Circuit held that, with respect to the “unforeseeable business circumstances” exception to WARN Act notice requirements, a layoff must become probable—more likely than not—to trigger a business’s WARN Act obligation to notify employees of a pending mass layoff. The mere possibility of a business closure or layoff is not enough. Here, the employer expected to sell, as a going concern, its business to another company with which it had a longstanding relationship and, given repeated assurances that funding for the purchase was coming through, the business closure and layoffs were not probable until the day they occurred (Varela v. AE Liquidation, Inc., August 4, 2017, Krause, C.).

Chapter 11 bankruptcy and asset purchase agreement. In November 2008, Eclipse Aviation Corporation, a jet aircraft manufacturer, filed a petition for Chapter 11 bankruptcy along with an asset purchase agreement to sell the company to its largest shareholder, European Technology and Investment Research Center, (ETIRC). Although the asset purchase agreement did not expressly require ETIRC to take on Eclipse’s employees, it provided that Eclipse was to continue operating its business and retain its employees through closing. It also stated that a state-owned Russian bank had delivered a fully executed commitment letter confirming it would provide ETIRC with a $205 million loan to finance the sale. On January 23, 2009, the bankruptcy court entered an order approving the purchase agreement, which did not have a specific closing date but gave the parties the option to terminate if closing did not occur by February 28.

Funding never materializes. During that interim month, the Russian bank took ETIRC and Eclipse on what the court described as “a roller coaster ride of promises and assurances that never came to fruition.” At a February 11 board meeting, Eclipse’s CFO reported that the company had become administratively insolvent as of February 6 and was on pace to run out of money the week of February 20. Due to dwindling finances, Eclipse’s directors resolved that if the funding was not received by February 16, it would recommend Chapter 7 liquidation or recommend that all but a handful of Eclipse employees be furloughed to preserve money while awaiting financing. On February 17, the directors were again assured funding was coming. Based on that information, they proceeded with a furlough and informed employees on February 18. When the funding never materialized Eclipse was forced to cease operations altogether.

Furlough converted to layoff. The motion to convert the bankruptcy to a Chapter 7 liquidation was filed on February 24. Once that was filed, Eclipse emailed employees informing them that, despite its best efforts, “closing of the sale transaction has stalled and our company is out of time and money.” It also stated that due to “dire circumstances in today’s global marketplace” and the lack of additional funding, the noteholders and directors had decided to convert the bankruptcy to Chapter 7 liquidation, and the furlough had been converted to a layoff, effective February 19.

Lawsuit. Eclipse’s employees filed a class action adversary proceeding in bankruptcy court, claiming the failure to give 60 days’ notice of the layoff violated the WARN Act. They then moved for partial summary judgment, asserting that Eclipse could invoke neither the “faltering company” nor the “unforeseeable business circumstances” exceptions to excuse its lack of notice. Eclipse also moved for summary judgment, arguing that the “unforeseeable business circumstances” exception barred WARN Act liability. The bankruptcy court granted summary judgment for Eclipse and the district court affirmed. This appeal followed.

Unforeseeable business circumstance. Addressing the employees’ three main challenges, the Third Circuit ultimately explained that, while it was undisputed Eclipse did not comply with the WARN Act’s notice requirement, the closing and layoff was caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.

Belated notice included all required information. The employees first argued that Eclipse was ineligible for the exception because, even after the fact, the contents and method of delivery of the notice were deficient. To the court, though, all requirements were met because the notice included: the name and address of the site of the mass layoff; a statement that the planned action was permanent; the expected date of the separation; the positions affected; and a reason why less than 60 days’ notice was given. Also, the notice was based on the “best information available to the employer at the time” and delivered in a manner “designed to ensure receipt.”

Failure of sale actually caused layoff. The appeals court also rejected the employees’ argument that Eclipse could not show the purported unforeseeable business circumstance—its failure to close its proposed sale to ETIRC—was, in fact, the cause of the mass layoff. The court noted that the asset purchase agreement expressly contemplated a going concern transaction and prevented Eclipse from disturbing operations or employment; strongly indicating ETIRC intended to continue operations as is. This conclusion was also supported by other evidence.

Layoff not “reasonably foreseeable” before February 24. Finally, the employees argued that the failure of the purchase could have been anticipated in the 60 days before the layoff. While it had not previously spoken on the standard for “reasonable foreseeability,” the Third Circuit agreed with sister circuits that it requires more than mere possibility, it requires “probability.” Thus, the WARN Act is triggered when a mass layoff becomes “more likely than not.”

Applying that standard here, the appeals court found that Eclipse met its burden of demonstrating that ETIRC’s failure to obtain financing necessary to close the sale was not probable prior to Eclipse’s decision to lay off its employees on February 24, 2009. At the 60-day mark in December, Eclipse was preparing to be sold as a going concern, and it could hardly be said that the failure of the sale appeared probable on January 23, the day the bankruptcy court approved it.

While the probability question was more difficult as to the month between the approval of the sale and its demise, it was significant that Eclipse’s board was receiving constant assurances from ETIRC executives that funding was coming soon. While these look like empty promises in hindsight, Eclipse’s decisionmaking had to be considered based on the information available to it at the time, and in light of the history of the business and industry. That history included Eclipse and ETIRC’s business relationship for years before the sale. That longstanding relationship bore heavily in assessing Eclipse’s expectations in the face of ETIRC’s continual reports that funding was on the way, said the court. Based on the foregoing, the court concluded that it was commercially reasonable for Eclipse to believe that the sale was still at least as likely to close as to fall through before February 24th, so no WARN Act notice was required before that time.

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