By: John Gionis
This post serves to put readers on notice of a certain unresolved exception that is, for relatively unclear reasons, widely unknown in the legal community. This exception, known as the “liquidating fiduciary” exception, sometimes entirely relieves employers from WARN Act liability. Generally, deciding whether the exception applies in any given case depends on (1) when the employer in question filed for bankruptcy; and (2) when the Act required them to provide lay-off notice in the first place. This rule, however, has been only rarely applied and, as such, is wholly undeveloped. Below is a brief overview of the WARN Act, followed by the focus of this post – an illustration of the relatively obscure standard that courts apply when deciding liquidating fiduciary issues.
The Worker Adjustment and Retraining Notification Act (“WARN Act” or “Act”) was enacted in 1988 following some highly publicized nationwide plant closings. The WARN Act’s purpose, according to the Department of Labor (“DOL”), is to provide “workers and their families some of the transition time to adjust to the prospective loss of unemployment, to seek and obtain alternative jobs and if necessary to enter skill training that will allow these workers to successfully compete in the job market.” The Act aims to achieve this goal by requiring employers to give written notice to its employees at least 60 days prior to either a plant closing or mass layoff. While this requirement is generally applicable in most situations, the Act explicitly provides several exceptions.
The first exception to WARN Act liability is the Faltering Company Exception. This exception generally relieves an employer from giving WARN Act notice during plant shutdowns (but not mass layoffs) when the company is “actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown and the employer reasonably and in good faith believed that giving the notice required would have precluded the employer from obtaining the needed capital or business.”
The second exception is known as the Not Reasonably Foreseeable Business Circumstances Exception. This exception basically provides that an employer is relieved from giving WARN Act notice during both plant closing and mass layoffs when they are caused by “business circumstances that were not reasonably foreseeable as of the time that notice would have been required.”
There is, however, a third exception to WARN Act notice that is far less widely known, probably because it is not specifically laid out in the WARN Act itself. Rather, this exception is court-made, and finds its basis in the Commentaries that the DOL released in 1989, just one year after the WARN Act was enacted. The exception, while still relatively unclear due to the fact that it has come up less than ten times since it was first created, states as follows: “[A] Fiduciary whose sole function in the bankruptcy process is to liquidate a failed business for the benefit of creditors does not succeed to the notice obligations of the former employer because the fiduciary is not operating a ‘business enterprise’ in the normal commercial sense.”
The seminal case for this Liquidating Fiduciary Exception, In re United Healthcare System, Inc (“United Healthcare”), hails from the third circuit circa 1999. Since then, however, the exception, while judicially recognized, has not been broadly applied. In United Healthcare, the courtupheld the Liquidating Fiduciary Exception where a fully functioning hospital with 1,300 employees had to close its doors when its main creditor suspended all of its funding. After the hospital filed a petition for Chapter 11 bankruptcy, it did, in fact, provide sufficient WARN Act notice to all of its employees, and actually required each of them to spend the rest of their time at the hospital cleaning and taking inventory rather than engaging in normal business activities. Problems arose, however, when the hospital decided to terminate all of the employees just 16 days after notice was given rather than waiting the statutorily prescribed 60-day period. At that point, several employees sued for a violation of the WARN Act in an attempt to collect back-pay for each of the remaining 44 days that the employees felt entitled to employment. The court denied the employees’ claim, however, and held that because the hospital conducted itself as a business liquidating its affairs instead of as a business operating as a going concern, it was not subject to WARN liability. This was a particularly big win for the hospital, as it was able to dodge a judgment that would have required it to pay 44 days worth of wages to its laid off employees. To put this into perspective, the back-pay liability would have totaled approximately $ 5.1 million at a time when the hospital did not even have enough money to conduct normal business operations on a day-to-day basis.
While almost completely absent from case law in the last few years, this exception seems to create a potentially double-edged sword. While it can be argued that United Healthcare upheld good policy, there is an equally persuasive position that the exception created an opportunity for unwarranted relief. For example under this exception, could a healthy company that has already blown its WARN act notice requirements avoid liability by claiming that it was planning to file for bankruptcy all along, and was acting as a liquidating fiduciary in the process? True, this would require a healthy company to actually file for bankruptcy, but in some circumstances – where the cost of going bankrupt amounts to less than paying back wages for the remainder of a 60-day period – the exception might unintentionally provide relief to dishonest companies looking to skirt their WARN Act duties.
 29 U.S.C. §§ 2101-09 (1988).
 Ethan Lipsig & Keith R. Fentonmiller, A Warn Act Road Map, 11 Lab. Law. 273 (1996).
 20 C.F.R. § 639.1(a).
 29 U.S.C § 2102 (b)(1).
 29 U.S.C § 2102 (b)(2)(A).
 54 FR 16042
 In re United Healthcare System, Inc., 200 F.3d 170.
 Id. at 172.
 Id. at 173.
 Id. at 175.
 Id. at 173.
 Id. at 178.
 Id. at 174.