Illinois Bankruptcy Court Narrowly Construes WARN Act’s “Liquidating Fiduciary” Exception

By Peter D. DeChiara

pdechiara@cwsny.com

Posted March 2017

Does an employer in Chapter 11 bankruptcy have to comply with the WARN Act if the employer has no intention of continuing to operate its business?  Some courts have held that a Chapter 11 debtor has no obligation to give advance notice to employees of a plant closing or mass layoff if the debtor has shown that it does not intend to continue operating.  But a recent decision by the bankruptcy court for the Northern District of Illinois parted company with those cases, concluding that the WARN Act applies to Chapter 11 debtors regardless of their intentions about the future of the business.  See In re World Marketing Chicago LLC, Case No. 15-32968 (Bankr. N.D. Ill. Feb. 24, 2017). 

The WARN Act, which requires advance notice to employees of a plant closing or mass layoff, only applies to employers who fit the definition of a “business enterprise.”  29 U.S.C. §2101(a)(1).  Some courts have taken the position that when an employer in Chapter 11 has demonstrated an unequivocal intention to close the business, it ceases to function as a “business enterprise,” and therefore no longer has any obligations under the WARN Act.  In United Healthcare System, Inc., 200 F.3d 170 (3d Cir. 1999), the lead case on this point, the Third Circuit reversed a WARN Act judgment against a hospital and healthcare services corporation that had filed for Chapter 11, when, at the time it terminated most of its employees, the Chapter 11 debtor had discharged its patients and was admitting no new ones, and its remaining employees were performing tasks solely aimed at the company’s liquidation.  The appeals court reasoned that, under those circumstances, the company was no longer operating as an ongoing business enterprise subject to the WARN Act.

In World Marketing, the recent decision from the bankruptcy court for the Northern District of Illinois, bankruptcy judge Timothy A. Barnes acknowledged the existence of the “liquidating fiduciary” exception to the WARN Act that had been applied in United Healthcare and its progeny.  He also acknowledged that the exception undoubtedly applied in Chapter 7 cases, where a court-appointed trustee winds down the debtor’s affairs.  But, in contrast to the United Healthcare line of cases, the judge took the position that the exception had no application in Chapter 11 cases, regardless of the employer’s intentions about the future of the business.

In reaching this position, the Illinois bankruptcy court relied on a 1989 U.S. Department of Labor regulation, 20 CFR Part 639, 54 Fed. Reg. 16042-01 (April 20, 1989), that explained that a fiduciary has no WARN obligations if its “sole function in the bankruptcy process is to liquidate a failed business.”  Judge Barnes reasoned that because debtors in Chapter 11 have the right to continue the business and attempt to reorganize, liquidating is not their “sole function.”  Therefore, according to the court, the plain language of the DOL regulation precludes application of the “liquidating fiduciary” exception to a Chapter 11 debtor, unless the bankruptcy court issues an order constraining the debtor’s right to operate its business.

Judge Barnes’ analysis was dictum, since he went on to hold that even under the United Healthcare analysis, the “liquidating fiduciary” exception had no application to the debtors in the World Marketing case.  He found no unequivocal evidence of the debtors’ intention to discontinue the business, even though the debtors had emailed their employees hours after filing for bankruptcy that they were “shutting down operations.”  The court noted that, despite this announcement, the debtors had filed motions to use cash collateral, claiming the cash was necessary “to operate its business,” had filed motions to pay payroll, so as not to jeopardize their asserted “ability to reorganize,” and had filed a motion for a “going concern” sale of the business.  These motions, the court concluded, left the evidence of the debtors’ intentions about the future of their business “muddied at best.”

World Marketing constitutes a welcome effort to contain the scope of the “liquidating fiduciary” exception to the WARN Act, to prevent it from spilling over from Chapter 7, where it belongs, into Chapter 11, where it does not.  The DOL regulation on which the court relied offers a helpful basis for the analysis.  But the language of the WARN Act itself supports banishing the “liquidating fiduciary” exception from Chapter 11 cases:  whatever its intentions regarding the future of its operations, a business enterprise doesn’t stop being a business enterprise simply because it files for Chapter 11 protection.