AE Liquidation, Inc. v.

Citations: 866 F.3d 515; 42 I.E.R. Cas. (BNA) 235; 2017 WL 3319963; 2017 U.S. App. LEXIS 14359; 64 Bankr. Ct. Dec. (CRR) 134Docket: 16-2203

Court: Court of Appeals for the Third Circuit; August 4, 2017; Federal Appellate Court

Original Court Document: View Document

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In the case of In re: AE Liquidation, Inc., the Third Circuit addressed the obligations of Eclipse Aviation Corporation under the Worker Adjustment and Retraining Notification (WARN) Act regarding employee notification prior to mass layoffs. The court determined that a business must notify employees only when layoffs are deemed probable—meaning more likely than not—rather than at the mere possibility of layoffs. The facts revealed that Eclipse Aviation's closure in February 2009 was unexpected; prior to that, the company had declared bankruptcy in November 2008 but entered into a tentative sale agreement with its largest shareholder, ETIRC, contingent upon funding from VEB, a Russian state-owned bank. Despite ongoing assurances about securing funding, the necessary financial support did not materialize, leading to the company's abrupt closure. Consequently, the court affirmed the lower court's ruling that Eclipse was not liable for failing to notify employees of layoffs, as the closure was not considered probable until it occurred.

Eclipse is represented in this litigation by Trustee Jeoffrey L. Burtch, referred to simply as “Eclipse.” ETIRC, which formed a subsidiary, EclipseJet Aviation International, Inc., became involved with Eclipse in 2004 as a customer and distributor of its aircraft. In late 2007, ETIRC invested in Eclipse by providing a significant loan in exchange for preferred stock and entered into a Memorandum of Understanding to purchase aircraft kits for assembly in Russia, primarily financed by VEB. In early 2008, ETIRC further invested in Eclipse and secured two board seats as part of a restructuring agreement.

However, financial difficulties arose when the Russian factory deal faced delays, leading to a breach of Eclipse’s minimum cash covenant. To address this, ETIRC provided a $25 million unsecured loan, and ETIRC’s Chairman, Roel Pieper, became acting CEO of Eclipse. Despite continued support, Eclipse’s financial situation worsened, leading to a freeze of company accounts by an ad hoc committee of noteholders in November 2008. The board considered three bankruptcy options: asset auctions with or without a stalking horse bidder or liquidating under Chapter 7.

ETIRC showed interest in continuing Eclipse’s operations and committed an additional $1.6 million for operational funding while negotiating an acquisition agreement. On November 25, 2008, Eclipse filed for Chapter 11 bankruptcy, proposing to sell its assets to ETIRC with VEB providing a $205 million loan. The asset purchase agreement required Eclipse to continue operations and retain employees through the transition. The Bankruptcy Court approved the auction procedures, and after no competing bids were received, a second amended asset purchase agreement was approved on January 23, 2009, finalizing the sale to ETIRC.

ETIRC's sale agreement with Eclipse included a commitment from VEB to provide a $205 million loan, although the agreement did not require ETIRC to retain Eclipse's employees. While there was no specific closing date, it allowed either party to terminate the agreement if closing did not occur by February 28, 2009. Following Bankruptcy Court approval, the initial closing was set for January 29 but was delayed due to VEB's unexpected insolvency. ETIRC executives reported assurances from Russian officials regarding the sale's funding, but Eclipse's disinterested directors demanded documentation confirming VEB's recapitalization and funding approval to avoid recommending a liquidation under Chapter 7.

On February 5, the Russian parliament approved VEB's recapitalization and ETIRC's funding, prompting Pieper to travel to Moscow to finalize the agreement. However, on February 10, Pieper reported that VEB had not yet been recapitalized, but a meeting was imminent. Eclipse's CFO indicated the company was administratively insolvent as of February 6 and would run out of money by the week of February 20. The board resolved to recommend liquidation or furloughing employees if funding was not confirmed by February 16. On that date, a Russian Governor assured the board of VEB's recapitalization and prioritized funding for the Eclipse project, leading the directors to temporarily forgo liquidation plans but agree to furlough employees if funding did not occur the next day.

Disinterested directors sought clarification from Pieper on whether ETIRC could temporarily fund an agreement without a loan from VEB. On February 17, Pieper and Bolotin informed the board that VEB had budgeted for the sale, with potential funding imminent. However, they warned that ETIRC lacked the capital to support Eclipse independently if delays occurred. During a meeting that day, Eclipse's CFO alerted the board that the company would deplete its funds by February 27 without additional financing. Consequently, the directors decided to furlough employees to extend cash reserves while awaiting the sale's completion. On February 18, employees were notified of the sale's delays and the indefinite furlough aimed at preserving resources. The next day, Pieper confirmed VEB had approved necessary documentation, pending final approval from Prime Minister Putin. However, on February 20, noteholders indicated that, due to ETIRC's financial issues, they would have to pursue Chapter 7 liquidation. Pieper informed the noteholders of upcoming meetings in Russia for updates. At a board meeting on February 21, Bolotin relayed that Prime Minister Putin had not yet made a funding decision, as he needed more time to consider. A medical emergency prevented the Russian Governor from attending this critical meeting. Pieper's absence from a scheduled meeting on February 22 raised concerns, and by February 23, noteholders were prepared to initiate liquidation proceedings. Pieper requested one additional day for financing, and Bolotin assured the board that ETIRC's attorney would advocate for funding directly with Putin. The board resolved to wait until February 24 for a formal commitment from the Russian government to secure funding by February 26, or they would file for Chapter 7 liquidation.

On February 24, Eclipse filed a motion to convert its bankruptcy from a Chapter 11 reorganization to a Chapter 7 liquidation, citing a lack of time and funds amid "dire circumstances" in the global marketplace. Employees were informed via email that their furlough had been converted to layoffs effective February 19, and they would receive information about their benefits. Subsequently, the employees filed a class action complaint claiming Eclipse violated the WARN Act by failing to provide a sixty-day notice before the layoffs. After discovery, the employees sought partial summary judgment, arguing Eclipse could not invoke the "faltering company" or "unforeseeable business circumstances" exceptions to the notice requirement. Eclipse countered with a cross-motion for summary judgment, asserting the "unforeseeable business circumstances" exception applied. The Bankruptcy Court ruled in favor of Eclipse, granting summary judgment, a decision later affirmed by the District Court. 

Jurisdiction for the appeals was established under 28 U.S.C. sections 157(b), 158(a), and 158(d). The appellate court reviews the Bankruptcy Court's decision de novo, affirming only if no genuine dispute of material fact exists and the movant is entitled to judgment as a matter of law. The WARN Act mandates a sixty-day notice for mass layoffs to provide workers with transition time, but Eclipse contends its failure to comply is excused by the "unforeseeable business circumstances" exception.

Employers may invoke an exception to the WARN Act's notice requirement when a layoff is due to unforeseeable business circumstances. To qualify, the employer must prove that the circumstances were not reasonably foreseeable and were the cause of the layoff, as established in Calloway v. Caraco Pharm. Labs. Ltd. Even if unforeseeable events hindered timely notice, employers must still provide as much notice as practicable, potentially including post-layoff notification. Appellants argue that Eclipse fails to meet the exception for three reasons: (1) it did not provide adequate notice of termination to its employees, which is a prerequisite for the exception; (2) it cannot demonstrate that its failure to close a sale to ETIRC was the cause of the layoff; and (3) the failure to close was foreseeable within the sixty-day window prior to the layoff. The first contention emphasizes that the notice Eclipse eventually gave was insufficient under WARN Act standards, which require specific information, including the employment site details, whether the layoff is permanent or temporary, separation dates, affected job titles, and a rationale for any reduced notification period.

Notice requirements mandate that communication must be based on the best information available to the employer and delivered in a manner that ensures receipt. Eclipse met these requirements following its bankruptcy proceedings conversion to Chapter 7 on February 24, 2009. Management informed employees via work email about the stalled asset sale, the dire financial situation, and the impending layoffs effective February 19, 2009. Employees were advised of their rights in the bankruptcy process and promised termination packages outlining benefits. 

The notice clearly stated that the layoffs applied company-wide, were permanent, retroactive to the furlough date, and provided detailed reasons for the decisions, including failed funding efforts and financial market conditions. Despite objections from Appellants regarding email access during furlough, evidence indicated they retained access and were instructed to monitor their accounts for updates.

The communication method was deemed adequate, and no material fact disputes regarding the notice's contents or delivery violated the WARN Act were identified. The document then addresses whether Eclipse can invoke the unforeseeable business circumstances defense for failing to provide earlier notice, concluding that the inability to secure financing directly caused the layoffs and was not reasonably foreseeable before February 24, 2009, thus supporting the defense's applicability.

Under the WARN Act, the responsibility for notifying employees about mass layoffs during the sale of a business shifts from the seller to the buyer on the effective date of the sale. In this case, Eclipse asserts that since ETIRC agreed to buy Eclipse as a going concern, it is presumed that ETIRC would retain the employees, unless indicated otherwise. Eclipse cites Section 6.7 of the asset purchase agreement, which mandates that Eclipse maintain its operations and employee relationships prior to closing, suggesting that ETIRC intended to continue Eclipse's operations without layoffs.

Circumstantial evidence supports this view, including board meeting minutes indicating a desire to avoid operational cuts, ETIRC's preference for maintaining Eclipse's employment levels, and statements from both Eclipse's and ETIRC's counsel emphasizing the preservation of jobs during the sale process. Furthermore, ETIRC allocated a significant budget for the entity after the sale, with executives believing that layoffs were not intended.

Opponents argue that two specific provisions in the asset purchase agreement negate the presumption of employee retention, particularly Section 7.2, which states that ETIRC would not assume any employee-related liabilities, including WARN Act claims. They contend this implies that no employees would be guaranteed retention post-sale.

Section 7.3 titled “Employment” states that ETIRC may choose to offer employment to individuals working for Eclipse at the time of the Closing Date, but is not obligated to do so. Any employment by ETIRC would be at-will and under terms determined by ETIRC. ETIRC is not required to retain any employees post-February 24, the date when the motion to convert Eclipse’s bankruptcy to Chapter 7 liquidation was filed, which effectively indicated the sale's failure. The retroactive nature of Eclipse's February 24 layoff to February 19 does not impact the causation analysis regarding the layoff. Appellants argue that the layoff could not have been caused by the sale's failure due to this retroactivity, a claim that is dismissed. The term “Hired Employees” refers to those who accept ETIRC's employment offer after the Closing Date. Although Appellants assert that ETIRC indicated no intent to hire Eclipse’s employees en masse, the courts conclude that the language serves typical litigation concerns and does not negate the expectation of continued employment in a going-concern sale, especially given evidence of ETIRC's intent to continue Eclipse's operations had the sale gone through. The District Court concluded that the failure to secure financing for the sale was the cause of the layoffs. Additionally, the foreseeability of the sale's failure before the February 24 layoff notice is examined, with regulations indicating that an "unforeseeable business circumstance" is one not anticipated at the time a notice would have been required. Appellants reference testimony indicating no promises of employment were made, but this does not alter the analysis.

Pieper's testimony does not contradict the presumption of continued employment following the going concern sale, as it merely allowed ETIRC to decide on specific employees later. Courts are advised to conduct a fact-specific inquiry to determine if an employer exercised commercially reasonable business judgment in anticipating the circumstances leading to a closure. Relevant case law indicates that the context of the business and industry history must be considered. The District and Bankruptcy Courts have referenced the standard from Halkias v. General Dynamics Corp., which states that for an event to be deemed "reasonably foreseeable," it must be probable. Eclipse argues that this standard is correct, supported by multiple appellate courts. Conversely, Appellants argue that the WARN Act does not necessitate such a high threshold for notice, suggesting that even reasonably possible outcomes should trigger the notice requirement. They contend that when two outcomes are equally likely, both should be considered "reasonably foreseeable." The text intends to first clarify the standard for "reasonable foreseeability" and then apply it to the case at hand. In Halkias, the Fifth Circuit determined that the mere possibility of layoffs due to contract cancellation did not meet the threshold for WARN Act notification, as such outcomes are not frequent enough to warrant unnecessary notifications. Since Halkias, this probability standard has been adopted by all Circuits addressing the issue.

The court addressed the application of the unforeseeable business circumstances exception under the WARN Act, emphasizing that an employer's awareness of economic downturns does not automatically negate this defense. The ruling clarified that the focus must be on the probability of layoffs occurring rather than the mere possibility. Supporting precedents indicate that a higher standard, akin to probability, should be applied. In a notable case, a casino's closure was deemed unforeseeable, with the court suggesting that a standard based on probability is appropriate to prevent undue burdens on economically viable employers. The court concluded that the WARN Act is triggered when a mass layoff becomes probable, ensuring employee protections are upheld without imposing impractical constraints on businesses. This probability standard is objective, meaning that employers cannot evade liability by simply hoping for a positive outcome against likely adverse conditions.

Failure to adhere to the WARN Act’s notice requirement cannot be justified by subjective beliefs unless those beliefs are “commercially reasonable” based on the facts known to the company during the sixty days preceding a layoff. The standard of "reasonable foreseeability" may vary across contexts and has been interpreted as less than a probability in legal precedents. Companies experiencing financial distress often face tough decisions involving potential layoffs, and if "reasonable foreseeability" were interpreted as anything less than probable, it would compel nearly all companies in bankruptcy to issue WARN notices due to the risk of liquidation. Such a requirement could accelerate a company's decline by raising undue alarm among employees, potentially leading to unnecessary layoffs. The WARN Act is designed not to deter companies from seeking to remain operational, and courts have generally concluded that a layoff is reasonably foreseeable only when it is more likely than not to occur. 

In applying this reasonable foreseeability test to the current case, it is determined that Eclipse has demonstrated that ETIRC’s inability to secure necessary financing was not probable before Eclipse decided to lay off employees on February 24, 2009. The relevant date for determining WARN Act compliance is December 26, 2008, by which time Eclipse was preparing for a sale through court-approved auction procedures with ETIRC as a stalking horse bidder.

The Bankruptcy Court approved Eclipse's sale to ETIRC on January 23, 2009, after multiple days of testimony and with no additional bidders emerging. Eclipse cannot be held liable for failing to provide WARN Act notice to employees before this date, as the likelihood of the sale's failure was not apparent at that time. The court referenced precedent indicating that unforeseeable circumstances can exempt employers from liability. Although Eclipse's CFO expressed concerns about ETIRC's funding prior to the sale's approval, the company's disinterested directors were reassured by ongoing commitments from VEB and chose not to convert to Chapter 7 liquidation despite these concerns. The board deemed the assurances from VEB's representatives compelling enough to proceed with the sale, and the Bankruptcy Court agreed with their assessment. The court noted that Eclipse's decisions were based on available information and the historical relationship between Eclipse and ETIRC leading up to the bankruptcy, which included ETIRC's increasing involvement in Eclipse's operations. Overall, the concerns regarding ETIRC's financing did not constitute a factual dispute regarding the probability of the sale's success at the time of approval.

Pieper and Bolotin, representatives of ETIRC and members of Eclipse's board, including Pieper as CEO, were involved in the sale process. ETIRC had consistently expressed a commitment to keeping Eclipse operational, evidenced by their financial support and filling board positions. The asset purchase agreement allowed for a month-long closing period, extending to February 28, 2009, before either party could terminate the contract. Despite previous delays with a Russian factory deal, Eclipse had received credible assurances from ETIRC regarding forthcoming funding, particularly before Prime Minister Putin's February 21 decision. This positive feedback led Eclipse to believe that the sale was likely to close, negating the need for a WARN Act notice at that stage. However, after February 21, optimism around the sale diminished, but it was determined that no reasonable jury could conclude the sale's failure was probable during the subsequent days leading up to February 24. The history of dealings with VEB was noted as relevant but did not alone create a material dispute regarding the sale's likelihood of success.

Eclipse was reasonably led to believe that a sale was imminent based on ongoing communications and a preliminary report from Bolotin, which indicated the Prime Minister was still considering the matter after a colleague missed a crucial meeting. Prior to February 17th, ETIRC disclosed its inability to fund Eclipse without a VEB loan, yet this did not condition the sale's closure, leaving potential for the deal to proceed despite funding delays. Despite Pieper's indication of financing problems on February 22nd, both Pieper and Bolotin remained optimistic about resolving issues quickly, with Bolotin promising clarity by February 24th. Once that deadline passed without resolution, Eclipse filed a motion to convert and informed employees of the situation. The perceived probability of the sale failing increased but remained uncertain. Given the historical relationship between the parties, Eclipse deemed it commercially reasonable to believe the sale would close before February 24th, thus not necessitating a WARN Act notice. The regulation allows for conditional notice but does not mandate it, and Eclipse was within its rights to refrain from issuing such notice. Ultimately, Eclipse demonstrated that the shutdown and layoffs were not deemed probable before February 24, 2009, qualifying for the WARN Act's unforeseeable business circumstances exception, leading to the affirmation of the District Court's order and judgment.