Varela v. Eclipse Aviation Corp. (In re AE Liquidation, Inc.)

Citations: 522 B.R. 62; 2014 Bankr. LEXIS 4768Docket: Case No. 08-13031 (MFW); Jointly Administered Adv. No. 09-50265 (MFW)

Court: United States Bankruptcy Court, D. Delaware; November 18, 2014; Us Bankruptcy; United States Bankruptcy Court

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Cross-motions for summary judgment have been filed regarding claims under the federal Worker Adjustment and Retraining Notification Act (WARN Act) concerning Eclipse Aviation Corporation. The key issue is whether Eclipse can utilize the 'faltering company' or 'unforeseeable business circumstances' exceptions to the WARN Act. The Court ruled that the unforeseeable business circumstances exception applies, granting the Trustee’s motion and denying the Plaintiffs’ motion.

The facts are undisputed: Eclipse, engaged in jet aircraft engineering and manufacturing, faced severe financial difficulties, defaulting on secured notes by November 1, 2008, and freezing its cash accounts. The Chief Financial Officer proposed bankruptcy, and the Board opted for a sale through 'stalking horse' bidding rather than liquidation, leading to a Chapter 11 filing on November 25, 2008, with $20 million in debtor-in-possession financing from its largest shareholder, ETIRC.

Despite an approved sale order on January 23, 2009, financing from ETIRC was delayed. On February 18, 2009, Eclipse announced a furlough of nearly all employees, indicating ongoing efforts to finalize the sale. However, on February 24, management informed employees that the sale had stalled due to inadequate funding, resulting in a layoff effective February 19, 2009. Employees were notified that they would not receive their upcoming paycheck or vacation pay, with potential rights to seek payment in the bankruptcy proceedings.

The case was converted to Chapter 7 on March 5, 2009, and a trustee was appointed. The Plaintiffs initiated a class action alleging violations of the WARN Act on March 3, 2009, and subsequently filed a Motion for Partial Summary Judgment on February 14, 2014, contesting the applicability of the defenses. The Trustee filed a cross-motion supporting the unforeseeable business circumstances defense.

Jurisdiction over the adversary proceeding is established under 28 U.S.C. §§ 1334(b) and 157(a), as it pertains to the bankruptcy claims administrative process and qualifies as a core proceeding under 28 U.S.C. § 157(b)(2)(A, B, O), referencing In re Jamesway Corp., 235 B.R. 329 (1999). 

Summary judgment is permitted when no genuine dispute exists regarding material facts, and the moving party is entitled to judgment as a matter of law, as outlined in Fed. R. Civ. P. 56(a) and Fed. R. Bankr. P. 7056. The burden lies with the movant to demonstrate this absence of dispute, with material facts defined as those that could affect the lawsuit's outcome (Anderson v. Liberty Lobby, Inc.). After establishing a prima facie case, the opposing party must present specific evidence to show a genuine dispute exists. The court assesses each motion for summary judgment separately, as noted in relevant case law.

Under the federal WARN Act (29 U.S.C. § 2102(a)(1)), employers must provide 60 days' written notice before a plant closing or mass layoff, enabling employees to transition to new employment. In this case, Eclipse failed to give the required notice prior to employee terminations, notifying them only after the fact. However, the Trustee contends that exceptions to the WARN Act may apply, specifically the faltering company and unforeseeable business circumstances exceptions. To invoke these exceptions, employers must provide as much notice as practicable and a brief explanation for the shorter notice period. The employer bears the burden of proof for these exceptions, as demonstrated in In re Advanced Accessory Systems, LLC.

The faltering company defense allows an employer to bypass the 60-day notice if they were actively seeking capital or business that could prevent the shutdown and reasonably believed that providing notice would hinder their efforts to obtain the necessary resources (29 U.S.C. § 2102(b)(1)).

Four requirements must be met for an employer to invoke the faltering company defense under Department of Labor regulations: 1) the employer was actively seeking capital when a 60-day notice was required; 2) there was a realistic opportunity to obtain that financing; 3) the financing would have been sufficient to avoid or postpone a shutdown; and 4) the employer reasonably believed that sending the notice would hinder obtaining financing. In the case discussed, Eclipse failed to meet these criteria as it was not actively seeking capital on December 26, 2008, when the notice was due. Instead, Eclipse was engaged in negotiating a sale, which is not considered “actively seeking capital.” Furthermore, case law establishes that business sales do not fulfill this definition, and the faltering company exception is inapplicable if layoffs result from a failed sale.

Additionally, the Trustee contends that the unforeseeable business circumstances defense of the WARN Act applies. This defense allows an employer to avoid a WARN Act violation if the closing was caused by unforeseen circumstances that could not have been anticipated 60 days prior. To successfully invoke this defense, the employer must demonstrate that the circumstances were unforeseeable and directly caused the layoffs. Unlike the faltering company defense, this defense is not narrowly construed. The determination of foreseeability is fact-intensive, with an objective test to evaluate whether a similarly situated employer would have foreseen the layoffs. An example of an unforeseeable circumstance includes a sudden and unexpected event outside the employer’s control. In a relevant case, it was found that a casino could not have predicted the revocation of its license, as the timing of such an action was uncertain.

In Jevic Holding, the Court determined that a lender's refusal to forbear was reasonably unforeseeable given the employer's financial struggles and prior considerations of a section 363 sale or liquidation. Despite previous extensions of forbearance, the employer believed it could meet its lending agreement requirements to avoid default. The Trustee demonstrated that ETIRC's failure to close the sale of Eclipse was not reasonably foreseeable by December 28, 2008. Testimonies from Mr. Pieper indicated that ETIRC had secured necessary financing and expected approval from the Russian government, which was confirmed on February 16. ETIRC had also committed $20 million in DIP financing for the sale. The Plaintiffs argued that ETIRC's past inability to secure funding and the non-binding nature of commitment letters made reliance on ETIRC's assurances unreasonable. However, the Court maintained that it was the probability of occurrence, not mere possibility, that defined foreseeability, concluding that the sale's failure was not probable based on ETIRC's repeated assurances. The Court also noted that rushing layoff notices could lead to employees overestimating closure risks, thus jeopardizing the sale. While the Plaintiffs claimed that ETIRC could have terminated employees regardless of the sale's success, the Court rejected this, emphasizing that Eclipse's skilled workforce was integral to its operations and that the sale was expected to retain these employees.

ETIRC intended to allocate an annual budget of $125 to $150 million for the post-sale entity, indicating its commitment to ongoing operations. The Amended Asset Purchase Agreement (APA) indicated that ETIRC had no hiring obligations, which is typical in going-concern sales, allowing the buyer discretion over employee retention. The Court determined that ETIRC's failure to complete the sale led to Eclipse terminating its workforce.

Regarding the notice sufficiency, Eclipse was required to provide as much notice of layoffs as practicable due to unforeseen business circumstances. On February 24, following the secured lenders' motion to convert to chapter 7 liquidation, Eclipse management notified employees of the layoffs. The WARN Act mandates specific content and delivery requirements for layoff notices, including clarity on the layoff's permanence, expected dates, bumping rights, and contact information for inquiries. Notices must be based on the best information available and delivered to ensure receipt.

The Court assessed Eclipse's communications to determine compliance with the WARN Act. A February 18 email indicated a furlough due to sale delays, while the February 24 email confirmed the sale would not close, transitioning the furlough to a permanent layoff. A termination package was sent to employees’ home addresses on February 25. The Court concluded that the notices provided the necessary information, and while bumping rights were not relevant, the overall communication satisfied WARN Act requirements. The Court did not need to decide if workplace email alone met delivery standards, as the combination of methods used was adequate.

Ultimately, the Court granted the Trustee’s motion for summary judgment and denied the Plaintiffs’ motion for summary judgment, affirming that the Plaintiffs' claims under the New York WARN Act were invalid since Eclipse did not qualify as an "employer" under those regulations. An appropriate order was issued on November 18, 2014, with the opinion serving as findings of fact and conclusions of law according to Bankruptcy Procedure Rule 7052.