In re World Marketing Chicago, LLC

Citations: 564 B.R. 587; 2017 Bankr. LEXIS 532Docket: Case No. 15bk32968

Court: United States Bankruptcy Court, N.D. Illinois; February 24, 2017; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The memorandum decision addresses the application of the Worker Adjustment and Retraining Notification Act (WARN Act) in a bankruptcy context. The WARN Class Representatives seek an administrative claim for damages due to the termination of employees by World Marketing entities after the petition date of September 28, 2016, alleging violations of the WARN Act due to lack of required notice. They argue these damages should receive administrative priority under 11 U.S.C. 503(b)(1)(A)(ii). The Trustee opposes this application, asserting that notice was unnecessary because the Debtors were liquidating and claims are prepetition, thus not qualifying for administrative treatment. After reviewing the arguments and evidence, the court finds the Trustee's exceptions inapplicable and grants the Application. 

The memorandum also outlines jurisdictional considerations, noting that federal district courts have exclusive jurisdiction over bankruptcy cases, with the authority to refer these matters to bankruptcy judges. The Bankruptcy Court has the power to enter final judgments on core proceedings under the Bankruptcy Code, including claims for administrative expenses. All parties have consented to the court’s authority to adjudicate the Application, confirming the court's jurisdiction to issue a final order.

On October 21, 2015, the Representatives initiated an adversary proceeding, Carroll v. World Marketing Chicago, LLC, against the Debtors, claiming damages for alleged violations of the WARN Act and seeking class action certification. Following the intervention of the Official Committee of Unsecured Creditors, all parties agreed to dismiss the case on January 27, 2016, allowing the WARN Class to pursue claims through the bankruptcy claims resolution process and certifying the class with appointed counsel. In March 2016, the WARN Class submitted identical claims in the Debtors’ three bankruptcy cases, asserting an estimated $4 million administrative claim (the "Class Claim"). On August 17, 2016, the WARN Class filed an application for allowance of this claim. The Trustee objected to the Class Claim on October 4, 2016, and the WARN Class filed a reply on October 14, 2016. Additional relevant motions included various requests for authority to use cash collateral and to pay pre-petition payroll across multiple cases, as well as a motion to sell assets outside the ordinary course of business. The court has taken judicial notice of the docket contents. After full briefing, the matter was argued on November 30, 2016, with the court issuing its ruling orally on February 15, 2017, which is restated in this Memorandum Decision.

On the Petition Date, the Debtors terminated a significant number of employees without prior notice. While the facts of the termination are undisputed, the parties contest whether this action incurs liability under the WARN Act and if such liability should be treated as an administrative claim. The WARN Act mandates that employers with 100 or more full-time employees provide written notice at least sixty days before any "plant closings" or "mass layoffs." Exceptions to this requirement exist if the layoffs do not result in the loss of at least 50 employees at a single site or if they do not affect at least 33% of the workforce. The numerical thresholds set by the WARN Act are strict, and any failure to comply with these thresholds results in the employer being liable for back pay and benefits for each affected employee for the duration of the violation. The central issue for the court is whether the WARN Act claim arising from the immediate termination of employees after the onset of a Chapter 11 bankruptcy case qualifies for administrative priority.

The issue of whether the WARN Class is entitled to an administrative claim for termination without proper notice under the WARN Act hinges on whether the requirements of section 503 of the Bankruptcy Code are met. Section 503(b) allows for administrative expenses, including necessary costs like wages and benefits for services rendered after the bankruptcy case commenced. The WARN Class must prove its entitlement to such claims by a preponderance of the evidence. The court will interpret the statute based on its plain language, which indicates that the subsections of 503(b)(1)(A) are independent. Claimants do not need to satisfy both subsections to qualify for an administrative claim, as illustrated by various case law, including In re Truland Grp., In re Philadelphia Newspapers, and In re Powermate Holding Corp. The argument that all subsections must be satisfied for administrative expense treatment is deemed nonsensical. Therefore, under section 503(b)(1)(A), an applicant only needs to meet one of the subsections to establish entitlement.

The WARN Class seeks to advance its claim under section 503(b)(1)(A)(ii) while also adhering to relevant case law in the Seventh Circuit, which mandates that "actual and necessary" administrative expenses must benefit the entire estate, not just the creditor claimant. According to Fruehauf Corp. v. Jartran, Inc., prepetition claims are ineligible. The WARN Class must establish that its claim meets six criteria: (1) it pertains to wages and benefits; (2) it arises from a judicial proceeding; (3) it constitutes back pay; (4) it relates to a period after the bankruptcy case commenced; (5) it results from the debtor's violation of federal or state law; and (6) it does not significantly increase the likelihood of layoffs for current employees. The claim satisfies the first three elements as WARN liability is defined in terms of wages and benefits, is awarded through judicial proceedings, and is classified as back pay under the WARN Act. The fourth element requires that the claim is linked to post-petition incidents. Previous rulings, such as In re Calumet Photographic, indicate that claims linked to terminations occurring before the bankruptcy filing do not qualify for administrative expense status, though the court has not yet ruled on whether post-petition terminations do create WARN Act liability.

WARN Act claims are classified as severance pay awarded in lieu of notice, fully vesting upon termination of employment. Relevant case law supports that such claims arise at the time of termination, establishing them as postpetition claims that satisfy the fourth element of eligibility under the Bankruptcy Code. The claims directly result from violations of the WARN Act's notice provisions, fulfilling the fifth element. Given the context of liquidating cases, allowing the claims will not likely increase layoffs, thereby satisfying the sixth element. The determination of whether the Class Claim benefits the estate as a whole hinges on the nature of the WARN Act as a statutory form of severance, which is earned upon termination rather than continuously accrued. Courts have consistently ruled that postpetition claims for severance in lieu of notice qualify for administrative expense priority. This priority is granted because the claims arise from the bargain made at the time of termination, thus benefiting the estate overall. The WARN Class has successfully demonstrated that its claims meet the necessary statutory requirements under section 503 of the Bankruptcy Code.

The court addresses the Trustee's Objection regarding liability under the WARN Act, which mandates that employers provide written notice of impending plant closings or mass layoffs at least sixty days in advance. The Seventh Circuit case, Ellis, clarifies that failure to meet the WARN Act's strict criteria results in no liability. Although the parties agree that the termination in question would typically incur WARN Act liability, the court does not need to conduct the usual liability analysis. Instead, the focus is on whether an exception to the WARN Act exists that would negate this liability. If such an exception is found, the Class Claim cannot be permitted, irrespective of the previous section 503(b) analysis.

Three traditional exceptions under section 2102(b) of the WARN Act allow employers to bypass the 60-day notice requirement for plant closings or mass layoffs. 

1. **Faltering Company Exception**: Employers can shut down a single site of employment early if they are actively seeking capital or business that could prevent the shutdown and reasonably believe that providing notice would hinder their efforts (29 U.S.C. 2102(b)(1)).
   
2. **Unforeseeable Business Circumstances Exception**: Employers may provide less than 60 days' notice if the closing or layoff is due to unforeseen business circumstances that were not anticipated at the time notice would have been required (29 U.S.C. 2102(b)(2)(A)).

3. **Natural Disaster Exception**: No notice is required if the closure is the result of a natural disaster, such as floods or earthquakes (29 U.S.C. 2102(b)(2)(B)).

The Trustee in this case does not claim any of these exceptions but refers to a different exception articulated by the Department of Labor. This commentary indicates that a fiduciary whose sole role is liquidating a failed business for creditors does not inherit the notice obligations of the previous employer, as they are not operating a business in the conventional sense. Conversely, if a fiduciary continues to operate the business, they would assume the WARN obligations. This "liquidating fiduciary" exception is not explicitly present in the WARN Act itself. 

The court faces two novel questions: whether a liquidating fiduciary exception exists under the WARN Act and how it is applicable in bankruptcy contexts. These questions have not been previously addressed in the Seventh Circuit.

A liquidating fiduciary exception to the WARN Act is not explicitly stated in the statute, prompting the court to evaluate its significance. The Seventh Circuit has previously deemed the Department of Labor’s commentary on the WARN Act to hold "significant weight," a view echoed by other circuits. Bankruptcy courts addressing this issue have uniformly recognized the existence of a liquidating fiduciary exception, with cases like Walsh v. Diamond affirming that bankruptcy courts can rely on Department of Labor commentary to determine employer qualifications under the WARN Act. The court, referencing the Department of Labor's guidance and relevant case law, concludes that a liquidating fiduciary principle is applicable, confirming the existence of this exception within the bankruptcy context as articulated in the Department of Labor's commentary. The precise application of this exception remains a complex matter.

The liquidating fiduciary exception in bankruptcy requires both the presence of a fiduciary and that the fiduciary’s sole role is to liquidate. In Chapter 7 bankruptcy, the trustee acts as a fiduciary with a primary duty to collect and liquidate the estate's assets for the benefit of unsecured creditors, aligning with the Department of Labor's commentary on the exception. In contrast, Chapter 11 involves a debtor in possession or a trustee who also acts as a fiduciary but whose responsibilities extend beyond mere liquidation. They have a duty to operate the debtor's business for creditors' benefit, as permitted by 11 U.S.C. § 1108, unless restricted by court order. Consequently, since the fiduciary in Chapter 11 is not solely focused on liquidation, the liquidating fiduciary exception does not apply to either the debtor in possession or the Chapter 11 trustee. The commentary explicitly states that the fiduciary's function must be limited to liquidation, reinforcing that Chapter 11's broader focus on reorganization excludes it from this exception. Thus, the clear language of the commentary should guide the interpretation, preventing any judicial overreach into legislative functions.

Courts interpret administrative commentary similarly to how they interpret statutes, primarily focusing on the plain language. Various cases, such as Imperial Crane Services, United States v. Evans, and others, illustrate this approach. The plain language of Department of Labor commentary suggests that the powers of a fiduciary should be assessed, not their actions, indicating that if a fiduciary’s powers exceed those outlined in the commentary, they cannot claim the exception, which could negatively impact liquidating chapter 11 cases. The leading case on this matter is the Third Circuit's decision in United Healthcare, where the court applied the liquidating fiduciary exception after the debtor terminated employees. The court emphasized the debtor’s intent to liquidate rather than strictly adhering to the commentary’s language regarding fiduciary powers. The Third Circuit's interpretation was based on the WARN Act's definition of "employer" and a broader understanding of business enterprises. Subsequent cases have followed United Healthcare's precedent, often assessing whether a debtor was reorganizing or liquidating, rather than limiting themselves to the plain language of the commentary. This trend suggests a judicial expansion of the liquidating fiduciary exception beyond the strict wording of the Department of Labor's guidance, which the author of the excerpt views as unsupported.

The Department of Labor's specific intent regarding the liquidating fiduciary exception should take precedence over broader judicial interpretations. The court indicates that it is not bound by precedents such as United Healthcare and suggests it would reject the broader application of the liquidating fiduciary exception if required to do so. In this case, applying either the Department of Labor's plain language or the United Healthcare analysis yields the same conclusion: no liquidating fiduciary exception applies. The Trustee claims the Debtors were in liquidation, supported by an email from September 28, 2015, which stated they were "shutting down operations." However, the WARN Class does not contest this email or the fact that the Debtors liquidated by February 2016. Notably, it remains ambiguous whether liquidation was their primary intent. Immediately after filing for Chapter 11, the Debtors sought court approval to use cash collateral, asserting that they aimed to reorganize rather than liquidate. They claimed the cash was necessary for ongoing business operations and to facilitate a reorganization plan. The Debtors also indicated that failure to use cash collateral would jeopardize their operational viability and chances for successful reorganization. Additionally, they filed motions to pay prepetition payroll, affirming their status as operating businesses within the reorganization context.

Debtors asserted that failure to timely pay payroll could jeopardize their reorganization efforts, stating in sworn affidavits that without court authorization, they would be forced to cease operations and face liquidation. Despite these claims, the Debtors filed a Sale Motion emphasizing a "going concern" sale nearly a month after initiating bankruptcy proceedings and terminating employees in the WARN Class, indicating actions inconsistent with liquidation. The court highlighted that the liquidating fiduciary exception should be applied sparingly, noting the WARN Act's exceptions must be construed narrowly to protect employees' rights. Allowing the Debtors to present a public intent to reorganize while acting otherwise privately would undermine transparency in bankruptcy proceedings. Consequently, the court concluded that even if the liquidating fiduciary exception were applicable, the Debtors were not entitled to it, resulting in the determination that liability under the WARN Act exists, granting the Class Claim administrative status under section 503(b)(1)(A)(ii).

The WARN Class has successfully demonstrated its entitlement to administrative priority for its Class Claim due to the Debtors' violation of the WARN Act. The Trustee's argument regarding the applicability of the liquidating fiduciary exception is rejected. Consequently, the court will grant the Application, allowing the Class Claim with the specific amount to be determined in a future hearing. The document references the jointly administered chapter 11 cases, specifically identifying the Chicago, Dallas, and Atlanta Cases. The Trustee's objection focused solely on the liquidating fiduciary exception, while asserting the right to raise additional defenses regarding liability and its priority. However, the court emphasizes that a party cannot selectively defend parts of a matter and later introduce new arguments. The Trustee was expected to present all relevant defenses upfront, as encouraged by the Seventh Circuit. Any reservation of rights made by the Trustee is deemed ineffective without court approval, leading to the court's decision to disregard such reservations. The court confirms that the entirety of the Application has been considered, and since the Trustee did not raise additional defenses, it forfeits those rights. All objections not specifically addressed, except those related to the amount of the Class Claim, are overruled.