Court Tightens Exceptions to Plant Shutdown Warning Requirements

Wth the economy in a historic tailspin, the next round of layoffs and factory closings cannot be far behind.
Most employers know that under the Worker Adjustments and Retraining Notification Act (WARN), co mpanies that employ at least 100 full-time workers must give 60 days written notice before a shutdown.

The law, which became effective in early 1989, says written notice of a closing or mass layoff must be provided if 50 or more workers will lose their jobs when a particular site or operating unit is closed or if a layoff will affect 50 employees representing a third or more of the workforce.

Employers can invoke three possible exemptions to the WARN requirements including business circumstances, such as the loss of a major contract, and a natural disaster, such as an earthquake or flood. But with a recent 3rd Circuit ruling, it will be more difficult to invoke the third exemption, known as the "faltering company defense," to sidestep the 60-day notice requirement. That defense requires a company to demonstrate that it was actively seeking capital at the time the notice was to be given, that it had a realistic chance to obtain the financing, that the capital would have been enough to avoid a closing and that publishing the 60-day notice would have forestalled the financing.

In APA Transport Corp. Consolidated Litigation, the court ruled Aug. 29 that APA, based in North Bergen, N.J., failed to prove that it was actively seeking capital at the time the 60-day WARN Act notice was required. The court reversed the district court's summary judgment in favor of the trucking company, which closed on Feb. 20, 2002.

The lack of a paper trail was APA's downfall, says Maria Greco Danaher, a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart. "The lesson is that if you are taking action, make sure you document," she says. "Otherwise the courts will make the decision on the best interest of employees."

Matter of Timing

APA had drawn funds from a revolving credit facility with Transamerica Business Capital Corp. since 1996, but the trucker defaulted on its loan covenants several times. Each time, the lender either waived the breaches or amended the covenants. After the Sept. 11 attacks, APA's business plunged 30 percent and the company sustained heavy losses.

The company met with its lender Oct. 24, 2001, and it was evident that the key to getting a new agreement would lie in fixing its defaults, says Keith McMurdy, a Fox Rothschild partner who represented APA Transport. "The lender told us no more money until you cure the defaults. Fixing the defaults was the search for capital."

In February the lender conveyed the bad news that it wouldn't renew the credit agreement that expired later that month. APA gave employees only a week's notice prior to its closing.

Teamsters Union locals representing the workers filed suit, alleging violation of the WARN Act. They asserted that although APA discussed the need for additional financing with its lender in October 2001, it didn't attempt to formally nail down funding until early January 2002 when the owners offered as collateral two freight terminals owned by sister companies. That was after Dec. 20, 2001, when the company should have issued the 60-day WARN Act notice. The federal district court in December 2006 granted summary judgment to APA based on the faltering company defense.

Waiting Isn't 'Seeking'

But the 3rd Circuit was unimpressed with APA's arguments that it was seeking financing to stay open at the time that a WARN notice would have been required. The panel noted that there was no written request for financing made at any time prior to the 60-day period. "APA Transport's actions can, at best, be characterized as waiting for Transamerica to offer additional financing," the three-judge panel wrote. "This cannot be squared with the requirement that APA Transport be 'actively seeking' additional financing."

McMurdy says the decision ignores the practicality of what goes on in a search for financing. "We talked to [Transamerica] daily--at least once a week," he says. "Were [the owners] looking for more money? They were always looking for more money." Filling out an application was a formality that Transamerica didn't require, he added.

In October, the company's request for an en banc hearing was denied. Now the case will be remanded to the district court for the question of damages.

There is likely to be a dispute over whether the company owes back wages for 60 working days or for two calendar months, which translates to about 45 working days. The 3rd Circuit in the past has used the 60-day measure, but there is a split among circuits on this question, so there is a chance the question would be of interest to the Supreme Court, McMurdy says.

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