WARNing To “Faltering Companies”: Be Proactive!

If your company is in the unfortunate position of having to effect a mass layoff or plant closing, you must take into consideration the Worker Adjustment and Retraining Notification Act’s (WARN) 60-day notice requirement.  The WARN notification period may be shorter under these three exceptions: 1) faltering company, 2) unforeseeable business circumstance, and 3) natural disaster. 

 

The faltering company exception is narrowly construed.  In order to assert this exception, a company must prove:

 • it was actively seeking capital or business through a commercially reasonable method at the time the 60-day notice would have been required,

 • it had a realistic opportunity to obtain the financing sought,

 • the capital would have been sufficient, if obtained, to enable the employer to avoid or postpone the shutdown, and

 • the employer reasonably and in good faith believed that sending the 60-day notice would have precluded it from securing the financing. 

 The phrase "actively seeking" must be construed literally.  The 3rd Circuit Court of Appeals has held that employers must be proactive in securing financing in order to succeed under the faltering company defense.

FALTERING COMPANY EXCEPTION DOES NOT EXCUSE INACTION

 A trucking company entered into a $40 million loan agreement with a financial backer that required the company to provide 60 days' notice for requests to extend the loan.  The agreement was set to expire February 28, 2002.

On October 24, 2001, it met with its financial backer and discussed in general terms its need for additional financing.  Problem: It did not make a formal request for financing.

On January 2, 2002, it sent a letter to the backer requesting additional financing, to be secured by mortgages on two properties owned by related companies.  Problems: None of the necessary steps to obtain the mortgages were taken.  Also, the letter did not specifically seek an extension or renewal of the loan agreement, nor did it mention the impending termination date.

On January 24, it sent another letter reiterating the offer from the first letter.  The backer did not respond with a credit memorandum or credit approval.

On February 13, the backer formally notified the trucking company that the loan agreement would expire February 28, and it would not agree to extend the agreement to provide additional financing.

Unable to function without financing, the trucking company notified its employees via a letter received by the local union on February 14 that it would permanently shut down February 20.  In court, it asserted that it had provided shortened notice because it had been "actively seeking financial assistance to alleviate its severe economic problems."

The appeals court ruled that the company was not "actively seeking" additional financing.  Between the October 24 meeting and the January 2 letter, the company took no steps to secure additional financing nor did it take any specific steps to seek an extension of the loan agreement that it knew was set to expire on February 28.  Despite knowing that the terms of the loan agreement required that a request for such an extension be made in writing, no such request was made. 

 

Said the court: "At best," the company’s actions can be characterized as "waiting" for the backer to offer additional financing.  (In re: APA Transport Corp. Consolidated Litigation, 3rd Cir., Nos. 07-1050, 07-1051, 07-1052, 2008)

Be foreWARNed: Consider, as the 3rd Circuit did, how Webster's Third New International Dictionary 22 (1993) and the Department of Labor define "actively seeking."  The word "actively" is generally understood to mean "characterized by action rather than by contemplation or speculation."  Department of Labor regulations provide that "actively seeking"means "seeking financing or refinancing through the arrangement of loans, the issuance of stocks, bonds, or other methods of internally generated financing; or the employer must have been seeking additional money, credit, or business through any other commercially reasonable method."

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