WARN Act Case Decisions: Update

Gross v. Hale-Halsell Co., 554 F.3d 870 (2009).  Plaintiffs were employed by Hale-Halsell Co. (“HHC”). HHC owned fifty percent of United Supermarkets, which was also HHC’s largest customer. At times, HHC failed to meet orders that United requested. United terminated the relationship, and HHC began experiencing financial troubles.  In January 2004, HHC met with some of its employees informing them of impending layoffs. Approximately two hundred employees were to be laid off the very next day. The plaintiffs brought this action and HHC moved for summary judgment on the basis that it was excused from the WARN Act requirements based on the unforeseeable business circumstance exception and the faltering company exception.  The district court granted the summary judgment holding that the termination of the United-HHC relationship was unforeseeable and caused the mass layoffs. The plaintiff appealed.

The Court of Appeals recognized that in asserting the unforeseeable business circumstance exception, the company has the burden of proving the circumstances faced were not reasonably foreseeable and that the unforeseeable circumstances was in fact the cause of the layoffs. The court concluded that the evidence showed that HHC could not reasonably foresee that United would terminate their relationship, which would make the circumstance unforeseeable.  The court then went on to discuss the causation issue.

With regard to causation, the court concluded that HHC’s decision to shut down came shortly after termination of the relationship with United. From this, the court held that United’ withdrawal was the cause of HHC’s decision to layoff its workers. Because the requirements of the unforeseeable business circumstances exception found to have been met. The court affirmed the decision of the district court.

In re Continental AFA Dispensing Co., 403 B.R. 653 (Bkrtcy.E.D.Mo.,2009).  In July 2008, Debtors terminated the majority of their 743 employees and in August 2008 filed for Bankruptcy.   On August 11, 2008 Joshua Bridges, Plaintiff, filed a class action adversary proceeding complaint on behalf of himself and a class of similarly situated employees seeking damages under the WARN Act.

The main issue the court dealt with was whether an employee terminated pre-petition by a debtor can be granted an administrative expense claim for back pay under the WARN Act.  The granting of administrative expense status gives those claims top priority for payment.   The court found that to be granted administrative expense claim status under the Bankruptcy Code the plaintiffs had to show that the services were rendered post-petition, and those services provided a direct and substantial benefit to the Debtor’s estate.  The Debtors admitted that they had breached the 60 day requirement under the WARN Act by terminating the employees, but argued that the termination occurred pre-petition, and therefore, the plaintiff’s services were not performed to preserve the estate. The court denied the claim for administrative expense status, stating that a WARN Act claim, for an employee terminated pre-petition, is not “an actual and necessary expense of preserving an estate.” 

In re Powermate Holding Corp., 94 B.R. 765 (Bkrtcy.D.Del.,2008).  On March 10, 2008, the Debtor Defendants sold their Minnesota assets and terminated the employment of all the workers at that location.  On March 17, 2008 the Debtor Defendants eliminated an additional 260 employees without prior notice, and then filed for Chapter 11 Bankruptcy.      Plaintiffs filed a claim charging violations of the WARN Act.  The Debtor Defendant moved for a dismissal or a determination that those damages were not entitled administrative expense priority status. 

In light of the 2005 changes to the United States Bankruptcy Code, the court first determined how the amendment of 11 USC § 503(b)(1)(A)(i) and (ii) should be interpreted.  Within these sections, the court found the two subsections (i) and (ii) as categories within a particular subset of allowable administrative expenses that were “actual, necessary costs and expenses of preserving the estate.” § 503(b)(1)(A). Therefore the court held that the amendment was to be independently evaluated in determining whether the WARN Act claims were administrative expense claims. This was in contrast to In re First Magnus Financial Corp., 390 B.R. 667 (Bkrtcy.D.Ariz.,2008), which interpreted that conjunction “and” to mean that both provisions, (i) and (ii), should be read together, requiring both sections to be satisfied for a claim to qualify as an administrative expense.

The court found that the decisive factor in determining whether a claim should receive administrative expense status was the relation of the petition date to the time when the rights or claims to back pay vested.  If the claim vested pre-petition the claim would not be entitled to administrative expense status because the back pay would be attributable to the time occurring prior to the commencement of the bankruptcy case. If the claim vested post-petition the claim would be entitled to administrative expense status because the back pay would be attributable to the time occurring after the commencement of the case.

The court concluded that WARN Act claims vest at the time of termination. Therefore the Plaintiff and employees claims vested entirely when they were terminated pre-petition, and were not entitled to administrative expense claim status in this case. The court also stated that other courts had consistently held that pre-petition claims, such as the present claims, were entitled to fourth or fifth level priority status pursuant to 11 U.S.C. § 507(a)(4) and (5).