The United States Court of Appeals for the Fifth Circuit affirmed a bankruptcy court ruling that a debtor’s sudden loss of operating capital constituted a “unforeseeable business circumstance,” giving rise to an exception to the 60-day notice provision of the WARN Act. Angles, et al., v. Flexible Flyer Liquidating Trust; In re Flexible Flyer Liquidating Trust, ___ F.3d ___, ___ B.R. ___, 2013 U.S. App. LEXIS 2050 (5th Cir. 2013).
Flexible Flyer was a manufacturer of recreational equipment. It encountered multiple financial difficulties, exacerbated in 2005 by a large product recall. The company took several actions, including adjusting payment terms with vendors and customers and addressing possible asset sales. At this same time, its primary competitor had filed for bankruptcy protection, leaving Flexible Flyer as the only U.S. manufacturer of swing sets at the time.
The company consulted legal counsel about many options, including bankruptcy. Shortly thereafter, its operating lender slashed the company’s available line of credit, followed two weeks later by a complete cutoff. Flexible Flyer filed for bankruptcy protection two days after termination of its credit facility.
On the petition date, “Flexible Flyer notified its employees that it would be terminating business operations, resulting in company-wide layoffs.”
A group of former employees filed an adversary proceeding in the bankruptcy, alleging Flexible Flyer was liable under the WARN Act for failing to provide the required 60-day layoff notice.
The bankruptcy court determined that Flexible Flyer was excused from the notice requirement because it established that its shutdown was the result of an “unforeseeable business circumstance.” The bankruptcy court found that the shutdown and resulting layoffs “were not planned, proposed, or foreseeable,” and that Flexible Flyer had provided notice at “the earliest practical date that such a notice could be provided.”
The district court affirmed, and the employees appealed to the Fifth Circuit.
The Fifth Circuit explored the WARN Act, which is codified at 25 U.S.C §§ 2102-2109. Generally, the WARN Act requires covered employers to provide affected employees with 60 days advance notice of a plant closing or mass layoff. The regulations under the WARN Act require only, “as much notice as is practicable.” 20 C.F.R. § 639.9.
The issue apparently was whether the business circumstances were reasonably foreseeable. Under the regs, layoffs are not foreseeable when “caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control.” Id. at §639.9(b)(1). The regs also include a “business judgment test.”
The court referred to its earlier decision in Halkias v. General Dynamic Corp., 137 F.3d 333 (5th Cir. 1998), in which the Fifth Circuit concluded that the knowledge of the board of directors of the employer that a potential business circumstance – in that case, contract cancellation – could occur did not make the actual occurrence “reasonably foreseeable.” Although contract cancellation in that case was a possible outcome, it was not necessarily probable, “and it was a circumstance outside of the board of directors’ control.”
The Fifth Circuit ultimately found that the Flexible Flyer bankruptcy court did not err in its fact findings, because the company was pursuing numerous options to try to save its business “up until the sudden termination of all funding…” Thus, the Fifth Circuit concluded that this situation (the sudden funding cutoff, followed by the bankruptcy filing) presented “a convincing example of an event that meets the unforeseeable business circumstance exception.”
This case is more significant in an employment law rather than a bankruptcy context. It invokes a relatively common sense approach found in certain of the regulations, and it will also appear to allow companies to pursue available alternatives in trying to restructure or save a business without the fear of a harsh outcome under the WARN Act.
What is less than clear from the opinion is what the employees would have recovered given the bleak situation facing Flexible Flyer and its bankruptcy case. Presumably, they may have been entitled to a form of priority treatment for what would have been an award of wages for the 60-day period under the WARN Act.
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This article is written by Roger Cox, a shareholder with the Underwood Law Firm, is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization and a member of the American Bankruptcy Institute. Mr. Cox is a co-author of Bankruptcy Road Map, and a former contributor to the SMU Law Review. This article is for general information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.
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