Pre-petition WARN Violation Can Give Rise to Administrative Expense Claim, According to Virginia Bankruptcy Court

By Peter D. DeChiara

pdechiara@cwsny.com

Posted February 2015

The WARN Act generally requires an employer to give employees 60 days’ notice before a plant closing or mass layoff.  Can a claim that a bankrupt employer violated the statute constitute an administrative expense claim if the plant closing or mass layoff came before the employer filed for bankruptcy?  Yes, at least in part, concluded a November 2014 decision of the bankruptcy court for the Eastern District of Virginia.  See In re Truland Group, Inc., Case No. 14-12766, 520 B.R. 197 (Bankr. E.D Va. Nov. 26, 2014).

According to the class action WARN suit filed in that case, the employer, an electrical contractor with approximately a thousand employees, terminated them all three days before it filed for Chapter 7 bankruptcy.  The Chapter 7 trustee argued that because the employer terminated the employees pre-petition, the WARN Act claim could not be an administrative expense claim.

In reviewing Section 503 of the Bankruptcy Code, which defines administrative claims, bankruptcy judge Brian Kenney noted that Section 503(b) originally limited employee administrative claims to wages, salaries and commissions “rendered after the commencement of the case.”  However, in 2005, Congress amended Section 503(b) to also include “wages and benefits awarded pursuant to a judicial proceeding … as back pay attributable to any period of time occurring after commencement of the case … without regard to the time of the occurrence of unlawful conduct on which such award is based.”

Judge Kenney noted that in Powermate Holding Corp., 394 B.R. 765, 775 (Bankr. D. Del. 2008), the court interpreted this amendment, now codified as Section 503(b)(1)(A)(ii), to provide administrative expense status to WARN claims only when the violation occurs post-petition, reasoning that only in such cases is back pay “attributable” to a post-petition period.

Judge Kenney correctly rejected such reasoning, reading the phrase “without regard to the time of the occurrence of unlawful conduct” to mean that even if an employer violates the WARN Act before it files for bankruptcy, the resulting WARN claim enjoys administrative expense status to the extent any back pay awarded as a result of the violation applies to the period following the bankruptcy filing.

The Chapter 7 trustee in Truland also argued that the WARN Act claim cannot fall within Section 503(b)(1)(A)(ii) because no back pay had been previously awarded “pursuant to a judicial proceeding.”  The court rejected that argument too, finding that nothing in the language of the section requires that there be an award in a judicial proceeding before the bankruptcy is filed, and that the bankruptcy court’s allowance of the WARN claim itself constitutes a “judicial proceeding” under the statute.

The court’s reading of Section 503 in Truland, and its analysis of WARN Act claims, is the sensible approach, squarely grounded on the statute’s plain language.  Indeed, it is consistent with the approach recently recommended by the ABI’s commission on review of Chapter 11 (see January 2015 post below).