Delaware Bankruptcy Court Holds that Employee’s WARN Act Claim Does Not Have Administrative Priority

As layoffs continue to occur, the WARN Act will become increasingly meaningful to employers, particularly those who are considering bankruptcy protection.

The WARN Act requires employers to give advance notice to employees who will be affected by a plant closing. Generally, 60 days’ written notice is required before closing a plant or implementing a mass layoff. Failure to comply with the Act can result in serious liability, including back pay and benefits for each affected employee for every day that the notice was not provided, for up to 60 days. This number can quickly add up to millions of dollars, which, for a company considering bankruptcy protection, can become an important factor in managing a bankruptcy estate.

On October 10, 2008, Delaware’s Bankruptcy Court issued a memorandum opinion which held, in a question of first impression for the Third Circuit, that an employee’s WARN Act claim is a general unsecured claim, rather than an administrative expense claim–a favorable opinion for debtor-employers.[1]

Powermate Holding Corp. and certain of its affiliates filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on March 17, 2008. Prior to the filing, Powermate operated in three states. On March 10, 2008, it sold all of its assets in Springfield, Minnesota and terminated the employment of all workers at that location. Next, on March 17, 2008, prior to their bankruptcy filings, Powermate discharged all of its remaining employees in all of its locations without prior notice. Approximately 260 employees lost their jobs.

Gregg Henderson, a former employee, sued Powermate on behalf of himself and other discharged employees, alleging that Powermate violated their rights under the WARN Act. Henderson further alleged that he and other similarly situated employees were entitled to recover their wages, ERISA, and other benefits for sixty days pursuant to the WARN Act, and that their claims were entitled to administrative priority. If Henderson were correct, the administrative liability would have been significant for Powermate’s bankruptcy estates.

The Bankruptcy Code structures claims against debtors in a particular order to achieve the goal of equitably distributing the estate among all creditors. For example, the Bankruptcy Code prioritizes secured claims (i.e., claims for which there is some associated collateral) above unsecured claims. Generally high priority claims are paid in full, whereas holders of lower priority claims (e.g., general unsecured claims) are infrequently paid in full. Administrative expenses, which are typically costs associated with preserving the bankruptcy estate or facilitating with the estate’s wind-down, are highly ranked and are usually paid in full. The import here is that, if an employee’s WARN Act claim were given administrative priority, it should be paid and full, which is a burden many employer-debtors could not bear.

Although the Bankruptcy Court has not yet determined whether Powermate has any liability under the WARN Act, it nonetheless considered Henderson’s claim ripe for adjudication because the issue was purely legal and required the interpretation of one of the 2005 amendments to the Bankruptcy Code. The Court also emphasized, “Without a determination of the priority status of the Plaintiff’s claims, [Powermate] will be frustrated in their efforts to proceed any further in their bankruptcy, to formulate a plan as well as to negotiate with creditors. Depending on the outcome of this issue, the claims of Plaintiff could be of sufficient magnitude and priority that there may be nothing left for distribution to other, lower priority creditors.”[2] Thus, the parties sought the Court’s determination that if there were WARN Act violations, would any damages be considered an administrative expense? The Court answered in the negative; in this case any damages would be considered unsecured claims (under Bankruptcy Code Section 507(a)(4)-(5)).

This finding is important for debtor-employers because, as the Court noted, without a determination of the priority status, Powermate’s bankruptcy proceedings would be stalled until any WARN Act liability was reduced to a liquidated amount, which would not occur until after a trial.

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[1] Henderson v. Powermate Holding Corp. (In re Powermate Holding Corp.), Adv Pro. No. 08-50559 (KG) (Del. Bankr. Oct. 10, 2008).

[2] Slip. Op. at 6.

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