Does the WARN Act Apply in Receivership Proceedings?

The U.S. economy is in the midst of a record economic expansion but signs, from slowing manufacturing numbers to weakness in formerly high-flying housing markets, suggest we may be in the tail-end of growth. In times of distress, troubled companies and their secured lenders start to evaluate options. Chapter 11 bankruptcy reorganization, or Chapter 7 bankruptcy liquidation, are common processes that are used to address distressed business situations. An often overlooked solution is utilizing a state or federal court receivership.

State and federal court receiverships involve the court appointment of a receiver to oversee and, in most cases, operate a business. A receiver is a neutral and independent third party appointed to act on behalf, and for the benefit, of all interested parties. Receiverships are often sought by secured lenders as a bankruptcy alternative because it’s typically a faster and less costly process.

A receiver’s duties and responsibilities, such as monetizing assets and distributing funds, are outlined in an order entered by the court overseeing the receivership. Because receiverships typically involve a sale or a liquidation of the business, one of the issues that a receiver and its legal counsel must address is the reduction of the business’ workforce. And whenever a significant layoff of employees takes place, a key legal issue that must be considered is the potential implication of the Worker Adjustment and Retraining Notification (“WARN”) Act, 29 U.S.C. § 2101-2109.

A Brief Explanation of the WARN Act

The WARN Act, subject to certain exceptions, requires employers with 100 or more employees to provide employees, bargaining representatives of the employees (unions), and specific government agencies at least 60-days’ notice of any plant closing and mass layoff.

The notice procedures prescribed by the WARN Act are meant to give workers transition time to prepare for the loss of employment, to seek new work, and, if necessary, to seek training in a new skill or retraining in an existing skill that will allow them to obtain replacement work.

Failing to abide by the WARN Act can have serious consequences. The statute provides that an employer who orders a plant closing or mass layoff without providing WARN Act notice is liable to each unnotified employee for back pay and benefits for up to 60 days during which the employer is in violation of the WARN Act. In addition, if an employer fails to provide notice to the relevant local government, it can be liable for a civil penalty of up to $500 for each day the employer is in violation of notification requirements.

Does the WARN Act Apply in a Receivership?

One of the primary goals of most receivership proceedings is to move fast. After all, the longer a legal process such as a receivership proceeding takes, the more expensive it will be. A dragged out process may also negatively impact the value of receivership assets, leading to reduced creditor recoveries, and hamper the receiver’s ability to sell the business as a going concern. Accordingly, speed is paramount.

The WARN Act, however, is meant to slow employers down, at least when it comes to layoffs associated with the wind-down of a business. So, does a receiver have to abide by the WARN Act?

There is little case law on this issue. While it’s always hard to provide a definitive answer on an issue of statutory interpretation without clear court guidance, the short answer is: probably not.

At least that’s been our experience. For example, in a receivership case pending in the United States District Court for the Northern District of Georgia involving the assets of Heritage Sportswear, Inc., we recently filed a motion on behalf of the receiver requesting that the court authorize the receiver to reduce the company’s workforce without sending notice in accordance with the WARN Act. No objections were lodged and the court granted the motion.

While there’s not much in the way of case law that’s directly on-point, there is guidance that can be drawn from analogous court decisions—involving contexts slightly different than a traditional receivership— that suggest that receivers aren’t obligated to provide WARN Act notice. The key distinction that these courts identify is that in the case of a receivership-like proceeding, an entity other than an “employer,” such as a receiver, court, or the federal government, is ordering the layoffs and directing the wind-down. Therefore, because an “employer” is not in control, the WARN Act doesn’t apply.

For example, in a situation involving a failed bank and a government takeover of the bank’s assets, a court explained, “[W]hen the federal authorities take over the bank and shut it down, there is no employer to give notice. The former bank owners do not own the bank; nor did they close the bank. Moreover, the federal government is precisely not an employer if it is shutting the bank down.” Office & Professional Employees Int’l Union Local 2 v. FDIC, 138 F.R.D. 325 (D.D.C. 1991).

Conclusion

A receivership can be an excellent tool for a secured lender to maximize the value of its secured collateral while holding down costs relative to a Chapter 11 bankruptcy proceeding. One of a receivership’s primary advantages is that, unlike in many Chapter 11 cases involving a debtor-in-possession, the WARN Act doesn’t apply when layoffs are required. Labor costs are significant in most receivership cases, and avoiding 60-days’ notice in advance of a workforce reduction can have a meaningful impact on the funds ultimately available for distribution.

The Dragich Law Firm serves as legal counsel to receivers in cases throughout Michigan and across the country. To learn more about our receivership legal counsel services, please contact David Dragich at [email protected].