Director & Officer Liability for WARN Act Claims in Light of Stanziale
By Brett Amron
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Introduction
Prior to September 2015, directors and officers generally have not been held individually liable for a company’s failure to provide timely notice under the federal and Wisconsin WARN Acts. However, a recent decision issued by a Delaware bankruptcy court has clouded the issue of whether individual corporate officials fall within the ambit of the WARN Act. In Stanziale v. MILK072011, LLC, the court refused to dismiss the chapter 7 trustee’s claims against the sole manager and president of an insolvent corporation for breach of fiduciary duty based on these individuals’ failure to provide the requisite 60-day notice under the WARN Act.
Stanziale v. MILK072011, LLC
Stanziale arose out of a claim filed in the bankruptcy case of Golden Guernsey Dairy, LLC. Before bankruptcy, the company had operated a dairy and milk processing facility in Wisconsin, and was wholly owned by MILK072011, LLC, which was a portfolio company of a private equity firm owned by Andrew Nikou. On January 5, 2013, Golden Guernsey abruptly ceased operations, and three days later filed a petition under Chapter 7 of the Bankruptcy Code.
On January 3, 2014, the Wisconsin Department of Workforce Development filed an amended proof of claim on behalf of some of Golden Guernsey’s former employees claiming damages in an amount not less than $1.56 million based on the company’s alleged violation of the Wisconsin WARN Act. On November 4, 2014, the bankruptcy trustee instituted an adversary proceeding against MILK072011, as well as Nikou and Golden Guernsey’s former president for damages cause by their alleged failure to issue a WARN notice. In his complaint, the trustee alleged that the individuals breached their fiduciary duties to the debtor by maintaining the debtor’s business operations until the last moment and by ignoring their responsibility to issue appropriate notices to its employees, thereby exposing the company to liability under the Wisconsin WARN Act.
The managers filed a motion to dismiss the breach of fiduciary duty claims asserted in the complaint on the ground that the alleged facts, even if true, did not give rise a valid legal claim. The managers argued that the company was already insolvent at the time when they might have given the WARN notice, and that the additional liability caused by closing without having given the notice merely deepened the insolvency. Since Delaware has rejected the “deepening insolvency” theory of director and officer liability, the managers argued that the complaint did not state a valid cause of action against them. The court ultimately concluded that the trustee’s complaint alleged facts which, if established at trial, would support a finding that the Defendants had breached their fiduciary duties to Golden Guernsey.
Importantly, although the WARN Act only provides for recourse directly against the “employer,” the chapter 7 trustee sought to hold the officers personally liable for the violation on based on the alleged breach of fiduciary duty claims.
The WARN Act
Legislative History
The Worker Adjustment and Retraining Notification (WARN) Act prohibits certain employers from ordering any long-term plant closing, mass layoff, or worker dislocation without first giving 60 days advance notice. The advance notice period is intended to afford employees time to find other jobs, obtain retraining or otherwise adjust to their soon-to-be-changed employment situation.
Despite its history, there have been surprisingly few lawsuits filed under the WARN Act. Various reasons for the lack of WARN Act litigation have been suggested. Whatever the reason for the low volume of WARN cases, the sole enforcement mechanism appears to lie within the federal courts, and judicial interpretation of the statute and its exceptions is therefore extremely important.
Summary of the WARN Act and Its Exceptions
The WARN Act, which is codified in nine sections, requires that certain employers provide 60 days’ notice in advance of a plant closing or other mass layoff. An employer covered under the WARN Act is one who either employs 100 or more employees (excluding part-time employees) or 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime). The WARN Act defines a “plant closing” as the “the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees.” The statute defines “mass layoff” as “a reduction in force which (A) is not the result of a plant closing; and (B) results in an employment loss at [a] single site of employment during any 30-day period for (i) at least 33 percent of the employees (excluding part-time employees) and (II) at least 50 employees (excluding part-time employees); or (ii) at least 500 employees (excluding part-time employees).”
The statute specifies that written notice of such an order must be given to: (1) each affected employee’s representative, or, if there is no such representative, to each affected employee; (2) the state or entity designated by the state to carry out rapid response activities; and (3) the chief elected official of the unit of local government within which such closing or layoff is to occur.
If an employer is found to have violated the WARN Act, the employer will be liable to each employee for an amount equal to back pay and for the period of the violation, up to 60 days. A violating employer may also be subject to a civil penalty of up to $500 per day for each day of such violation, payable to the unit of local government entitled to receive advance notice under this Act.
Exceptions to or Exemptions from the Notice Requirement
The WARN Act contains several exceptions to or exemptions from its requirement that employers provide 60 days’ notice of an impending plant closing or mass layoff. Such exceptions and exemptions primarily concern business circumstances which were not reasonably foreseeable at the time an employer would have been required to issue notice under the act. In practical terms, the exceptions may not be as expansive as the literal language of the statute suggests.
The statute provides for a shortened notice period under three distinct circumstances. First, reduction of the notice period is permitted in situations involving a “faltering company” where notice would have precluded efforts to gain new capital or customers. To be sure, even if an employer is able to show that it was actively seeking capital or new business which would have otherwise enabled him to avoid or postpone the shutdown, the employer must still give as much notice as is reasonably practicable under such circumstances. Despite being responsible for a considerable amount of WARN Act litigation, this defense has only proved successful in a limited number of cases.
Second, in the event that a closing is the result of a natural disaster, the requirement is to give as much advance notice as possible under the circumstances. Third, employers can provide reduced notice if they could not reasonably foresee the business circumstances that provoked the plant closings or mass layoffs. The statute does not specify which events constitute business circumstances that are not reasonably foreseeable as of the notice, but the regulations provide some specific examples, such as a major client termination, sudden termination of a large contract with the employer, a strike at a supplier of key parts to the employer or the swift onset of a deep economic downturn or a non-natural disaster.
In terms of exceptions to WARN Act’s notice requirement, an employer does not need to give notice of a plant closing or mass layoff if the employer is temporarily closing a facility or the closing or layoff is the result of completing a temporary project, in which case the employees are presumed to know at the time of hiring that their employment was limited to the time necessary to complete such project. WARN Act liability may be reduced at the discretion of the court if the employer can show that its act or omission that constituted the violation was in good faith and that it had reasonable grounds for believing that the act or omission was not a violation.
The WARN Act and Personal Liability
The WARN Act does not expressly provide for personal liability of corporate officers—only the employer. Moreover, the use of the term “business enterprise” in the definition of “employer” has led some courts to the conclusion that individuals cannot be liable for damages under the WARN Act.
Moreover, Hollowell v. Orleans Reg’l Hosp., 1998 WL 283298 (E.D. La. May 29, 1998), involved a case brought under the WARN Act (29 U.S.C. §§2101-2109) in connection with employment terminations that occurred in advance of the ultimate closing of Orleans Regional Hospital, a psychiatric and substance abuse treatment facility in New Orleans. Orleans Regional Hospital was a Louisiana limited liability company, as were co-defendants, Brentwood Behavioral Healthcare, L.L.C. and Magnolia Health Systems. The plaintiffs’ claims included claims against individual members of the LLCs which were premised upon several different arguments, including that individuals could be liable under the WARN Act. The court ordered summary judgement in the WARN Act claims in favor of the individual defendants, holding “[t]he statutory language of the WARN Act, its legislative history, and the caselaw interpreting both, all indicate that an individual may not be held directly liable for WARN Act violations.” Hollowell at *9.
In Cruz v. Robert Abbey, Inc., 778 F. Supp. 605, 609 (E.D.N.Y. 1991), the court held that the term “employer” as it is defined in the WARN Act does not include individual persons, and therefore, did not include the individual defendants. The court looked to the regulations and legislative history of the statute and determined that when Congress defined “employer” it meant that term to be synonymous with “business enterprise,” and that a “business enterprise” means a corporate entity, in other words, a corporation, limited partnership, or partnership, not an individual. While recognizing that WARN is a remedial statute and must be construed broadly, the court nonetheless stated that such a view does not permit it to disregard entirely the plain meaning of the words used by Congress.
A Deeper Look at the Decision in Stanziale v. MILK072011, LLC
In Stanziale, the trustee was able to secure the debtor’s electronically stored information prior to filing the complaint, thereby enabling the trustee to allege, among other things, that the debtor and its management accurately projected in the debtor’s 16-week cash flow forecast that the debtor would run out of cash in late December and that the debtor and the defendants knew of the requirements of the federal and Wisconsin WARN Acts. Additionally, the electronically stored information showed that despite such knowledge the debtor and the individual defendants failed to give the requisite notices.
Without citing any precedent, the court concluded that the trustee’s complaint alleged facts which, if established at trial, would support a finding that the individual defendants had breached their fiduciary duties to Golden Guernsey. In so holding, the court explained that the defendants maintained the Golden Guernsey’s operations until the last moment, thereby exposing the company to the WARN Act claims. They never gave the requisite notice, which may constitute a breach of their fiduciary duties.
The court began its discussion by stating that Delaware law has long recognized that directors owe a fiduciary duty to the company they serve. A breach of the duty of loyalty may be found when the fiduciary has failed to act in good faith. Thus, the court concluded that the complaint alleged facts that could support a finding that the defendants breached their fiduciary duties to Golden Guernsey, and denied the motion to dismiss. In so holding, the court explained: “Where directors fail to act in the face of a known duty to act, demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.” In re Bridgeport Holdings, Inc., 388 B.R. 548, 564 (Bankr. D. Del 2008).
The court also rejected the defendants’ argument that the breach of fiduciary duty cause of action was a disguised “deepening insolvency” claim and that such a claim is not recognized under Delaware law. Likewise, the court rejected the defendants’ argument that debtor suffered no damages as a result of the Wisconsin WARN Act claim. The defendants argued that the fact that the insolvent debtor’s liabilities grew from the violation was unfortunate but did not give rise to a cause of action. The court held that the increase in liabilities could be found to have damaged the debtor.
Future Implications of Stanziale v. MILK072011, LLC
Prior to Stanziale, directors and officers generally have not been held individually liable for a company’s failure to provide timely notice under the WARN Act, as the WARN Act does not expressly provide for personal liability of “individuals”—only the employer. It remains to be seen whether Stanziale will signal a shift away from the court’s refusing to dismiss claims against the individual defendants in Stanziale. In light of Stanziale, there is at least a colorable argument for trustees and plaintiffs to assert a claim for breach of fiduciary duty against corporate officials as a result of this opinion. This possibility of exposure to WARN Act liability will hopefully impact pre-bankruptcy planning by making it more likely that a company will give, or carefully consider the implications of not giving, the requisite 60-day notice. Moreover, insurers should take notice as an increase in the litigation of breach of fiduciary cases for failure to give the requisite notice is likely to result in claims for coverage under directors’ and officers’ insurance policies. And finally, for attorneys who advise boards of directors and corporate managers, it is important to take note of this opinion in the event that a client may find itself in a position in which it must be counseled to provide the requisite notice when operating a business that is forecasted to have insufficient resources to continue operating in the meantime.