Third Circuit Clarifies the “Faltering Company” Exception to Notice Requirements of the WARN Act

The purpose of the Worker Adjustment and Retraining Notification (WARN) Act is to protect workers by requiring advance notice of plant closings.  Such notice allows workers some time to adjust to the prospective loss of employment, and to seek other jobs or retraining.  The WARN Act requires generally 60 days’ written notice before a closing or mass layoff by covered employers (typically, those with at least 100 full-time employees at a site).   Companies that violate the Act are liable for back pay and benefits for each day that the required notice is not provided, up to the 60 day maximum. 

The WARN Act includes three specific affirmative defenses to the 60-day notice requirement:  the “business circumstances” exception, the “natural disaster” exception, and the “faltering company” exception.  Recently the 3d U.S. Circuit Court of Appeals reversed summary judgment on behalf of an employer that had relied on the “faltering company” exception as an explanation for failure to provide more than a week’s notice before a total shut-down of the company.  In Re: APA Transport Corp. Consolidated Litigation, 3d Cir., No. 07-1050, 07-1051, 07-1052, August 29, 2008. 

In that case, APA Trucking Corporation (APA) entered a Loan Agreement with Transamerica Business Capital Corporation in 1996, which allowed APA the use of a revolving line of credit in the amount of $40 million secured by real property, equipment, and accounts receivable.  After entering into the Agreement, APA suffered continuous losses and, in October 2001, began a series of meetings, requested by Transamerica, to discuss APA’s financial future.  The Loan Agreement was set to expire on February 28, 2002, at which time the entire loan amount would become due.  That Loan Agreement required a 60 day notice from APA to Transamerica for requests to extend the loan.  As of the end of 2001, APA had not made a timely request to extend or renew the Loan Agreement.

However, during the month of January 2002, APA sent two separate letters to Transamerica, each requesting additional financing.  Neither letter was followed by any action on the part of APA to support the requests, and Transamerica did not provide a credit memorandum or credit approval in response to either letter.  Transamerica then formally notified APA that the Loan Agreement would terminate on February 28, 2002, pursuant to its terms.  Unable to function without financing, APA notified its employees, in a letter received by the president of the local union on February 14, that the company would permanently close its Philadelphia terminal effective on February 20.  APA asserted that it had provided the “shortened” notice because it had been “actively seeking financial assistance to alleviate its severe economic problems.”

A number of lawsuits were filed against APA, including one by the company’s employees, who alleged a WARN Act violation.  APA asserted a “faltering company” defense to that claim.  In order to succeed under that theory, a company must show that it was actively seeking capital or business at the time that the 60-day WARN Act notice would have been required, that it had a realistic opportunity to obtain that financing, that the capital would have been sufficient to avoid the shutdown, and that sending the required 60-day notice would have precluded it from obtaining the financing.

The district court granted summary judgment to the company, based on the faltering company defense.  On appeal, however, the Third Circuit reversed, and found in favor of the employees on that issue.  First, the court held that the faltering company exception is to be construed narrowly, and that it requires proof that the company was “actively seeking” financing at the time that the 60-day notice was required to have been given to employees.  APA was unable to provide that proof.  On the date 60 days prior to the February 20 terminal closing, the company had made no formal request for financing from Transamerica or any other financial backer.  In addition, the court held that the words “actively seeking” should be construed literally, and found that meetings called by Transamerica to discuss loan status, and correspondence without follow-up were insufficient to demonstrate that level of engagement.  In spite of the fact that APA knew that the Loan Agreement was to expire on February 28, 2002, it made no formal request for extension, nor did it take other steps to secure financing.  The court characterized APA’s efforts as “waiting for Transamerica to offer additional financing,” and found that action to be insufficient to meet the interpretation of the term “actively seeking” financing.

In these difficult financial times, companies contemplating plant shut-downs or large lay-offs should have a clear recognition of the pre-conditions and requirements set forth in the WARN Act.  Companies seeking to assert an available exception or defense to the requirements of the Act should work closely with legal counsel, human resource personnel, and funding sources in order to avoid the financial penalties associated with violation of that Act.