{"id":2861,"date":"2018-11-06T13:47:50","date_gmt":"2018-11-06T18:47:50","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/jol\/?p=2861"},"modified":"2021-12-03T18:28:06","modified_gmt":"2021-12-03T23:28:06","slug":"warning-the-liquidating-fiduciary-exception-should-not-exist","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/jol\/2018\/11\/06\/warning-the-liquidating-fiduciary-exception-should-not-exist\/","title":{"rendered":"WARNing: The \u201cLiquidating Fiduciary\u201d Exception Should Not Exist"},"content":{"rendered":"

WARNing: The \u201cLiquidating Fiduciary\u201d Exception Should Not Exist<\/strong><\/p>\n

Jonathan C. Gordon*<\/a><\/p>\n

 <\/p>\n

Abstract<\/strong><\/p>\n

The Worker Adjustment and Retraining Notification Act requires employers of a sufficient size to provide sixty days\u2019 notice to employees affected by plant closings or mass layoffs. The Department of Labor, meanwhile, said that fiduciaries that are liquidating a business do not have to comply with that notice requirement. Courts have uniformly held that such a \u201cliquidating fiduciary\u201d exception exists. I disagree; there is no such exception.<\/p>\n

Using traditional tools of statutory interpretation, I submit that Congress did not mean for such an exception to apply. Thus, Congress should clarify the WARN Act and make clear that there is no exception for \u201cliquidating fiduciaries.\u201d Until then, however, courts should stop applying the exception.<\/p>\n

<\/p>\n

Introduction<\/strong><\/p>\n

Congress passed the Worker Adjustment and Retraining Notification Act (the \u201cWARN Act\u201d or \u201cWARN\u201d or the \u201cAct\u201d) in 1988.[1]<\/a> The Act requires certain employers to provide sixty days\u2019 notice to employees affected by plant closings or mass layoffs.[2]<\/a> The Act defines \u201cemployer\u201d as \u201cany<\/em> business enterprise<\/em> that employs\u2014(A) 100 or more employees, excluding part-time employees; or (B) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime).\u201d[3]<\/a><\/p>\n

If an employer fails to give proper notice, the \u201cemployer . . . shall be liable to each aggrieved employee who suffers an employment loss as a result of such closing or layoff for\u201d backpay and benefits.[4]<\/a> That backpay is \u201ca statutory form of severance pay.\u201d[5]<\/a> More specifically, because severance pay comes in two forms\u2014(i) pay in lieu of termination notice and (ii) pay based on the employee\u2019s length of service\u2014WARN backpay is \u201cseverance pay in lieu of notice, imposed by statute.\u201d[6]<\/a> As one bankruptcy court explained:<\/p>\n

WARN gives the employer a choice\u2014it may provide 60 days\u2019 notice of closing or layoff to its employees, keeping the business open and incurring operating expenses during that period; or it may shut down its operations with little or no notice to its employees, saving operating expenses, but providing back pay to its employees, in compensation for the lack of notice, in accordance with a statutory formula.[7]<\/a><\/p><\/blockquote>\n

The Act further requires that the Department of Labor (the \u201cDepartment\u201d) \u201cprescribe such regulations as may be necessary to carry out\u201d the Act.[8]<\/a> In the Department\u2019s Analysis of the Final Rule, the Department commented that a \u201cliquidating fiduciary\u201d does not satisfy the Act\u2019s definition of \u201cemployer.\u201d[9]<\/a> Specifically, the Department wrote:<\/p>\n

[A]\u00a0fiduciary\u00a0whose\u00a0sole function\u00a0in the bankruptcy process is to\u00a0liquidate\u00a0a 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 \u201cbusiness enterprise\u201d in the normal commercial sense. In other situations, where the fiduciary may continue to operate the business for the benefit of creditors, the fiduciary would succeed to the WARN obligations of the employer precisely because the fiduciary continues the business in operation.[10]<\/a><\/p><\/blockquote>\n

A proper understanding of the \u201cliquidating fiduciary\u201d exception first requires a proper understanding of a liquidating fiduciary. When a business is financially distressed, it may choose to file for bankruptcy protection under the United States Bankruptcy Code. Typically, the business has two options: chapter 7 or chapter 11.[11]<\/a><\/p>\n

If a business files under chapter 7, then a trustee is automatically appointed[12]<\/a> to replace the debtor\u2019s management and to liquidate the business.[13]<\/a> Thus, the \u201cliquidating fiduciary\u201d exception is most applicable in chapter 7 bankruptcies\u2014where a trustee (a fiduciary) is appointed to liquidate the business.[14]<\/a><\/p>\n

If a business files under chapter 11, however, then a trustee is not automatically appointed.[15]<\/a> Rather, the debtor\u2019s management stays in possession of the business,[16]<\/a> provided that the management does not engage in fraud or gross mismanagement.[17]<\/a> As such, the debtor is called a \u201cdebtor in possession.\u201d[18]<\/a> The debtor in possession, however, has all the duties and responsibilities of a trustee.[19]<\/a> Thus, just like trustees, debtors in possession are also fiduciaries.[20]<\/a><\/p>\n

But in chapter 11, the debtor is not required to liquidate, though it may choose to do so.[21]<\/a> Rather, chapter 11 permits the debtor to continue operating the business as a going concern while it restructures its debts.[22]<\/a> Thus, it is not clear whether the \u201cliquidating fiduciary\u201d exception applies to chapter 11 debtors because the \u201csole function\u201d[23]<\/a> of a debtor in possession is not to liquidate.[24]<\/a> Regardless, though courts dispute the proper contours of the exception, they do not dispute the exception\u2019s existence. All the courts that have considered whether a \u201cliquidating fiduciary\u201d exception exists for fiduciaries in bankruptcy have uniformly answered in the affirmative.[25]<\/a> Humbly, I submit that those courts have uniformly erred.<\/p>\n

This Article proceeds in three parts. Part One examines some of the precedent on the \u201cliquidating fiduciary\u201d exception. Part Two presents my thesis\u2014traditional tools of statutory interpretation prove that the WARN Act includes businesses being liquidated by fiduciaries, contrary to what courts uniformly have held. And Part Three explains that judicial deference to the Department\u2019s interpretation is not warranted.<\/p>\n

 <\/p>\n

Part One: Examining the Precedent<\/strong><\/p>\n

Unfortunately, due to limited space, I cannot discuss all the cases that address the \u201cliquidating fiduciary\u201d exception.[26]<\/a> That said, nothing in them would materially alter this discussion. Instead, I want to focus on two particular cases, In re Hanlin Group, Inc.<\/em>[27]<\/a> and In re United Healthcare Systems, Inc.<\/em>[28]<\/a>\u2014each of which is noteworthy for a unique reason. Hanlin<\/em> was the first court to determine whether a fiduciary in bankruptcy is subject to the WARN Act requirements. And United Healthcare<\/em>, a decision from the Third Circuit, is the leading authority on the issue.<\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 I.\u00a0Hanlin<\/em> (<\/strong>Bankr. D.N.J. 1995)<\/strong><\/p>\n

Hanlin Group filed for bankruptcy protection under chapter 11 and, as a result, became a debtor in possession.[29]<\/a> After filing its bankruptcy petition, Hanlin Group terminated employees without providing sixty days\u2019 notice, as required by the WARN Act.[30]<\/a> The employees\u2019 union sought $1.2 million in damages for the layoffs.[31]<\/a><\/p>\n

The court first looked at whether the debtor in possession was an employer under the WARN Act.[32]<\/a> The court\u2019s entire (and limited) analysis on the issue relied on the Department\u2019s commentary.[33]<\/a> The court did not refer to the statutory definition of \u201cemployer,\u201d nor did the court consider what constitutes a \u201cbusiness enterprise.\u201d[34]<\/a> Rather, the court quoted the Department\u2019s \u201cliquidating fiduciary\u201d exception before holding that Hanlin Group qualified as an employer because it \u201ccontinued to operate the business as a whole for the benefit of all parties in interest.\u201d[35]<\/a> The court, thus, clearly adopted the exception to determine what qualifies as a WARN Act employer, even if the court found the exception inapplicable due to the specific facts.<\/p>\n

In short, the first court to use the \u201cliquidating fiduciary\u201d exception to determine the status of an employer in bankruptcy, for purposes of the WARN Act, did so without an iota of statutory interpretation.<\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 II. United Healthcare<\/em><\/strong> (3d Cir. 1999)<\/strong><\/p>\n

Courts widely consider the Third Circuit\u2019s decision in United Healthcare<\/em> to be the leading authority on the issue.[36]<\/a> United Healthcare<\/em> featured a non-profit corporation (United Healthcare System, Inc.) in financial distress.[37]<\/a> Because of its financial troubles, United Healthcare did the following:<\/p>\n