Upcoming Committee Formation Meeting:  Tuesday, September 26, 2017 10:00 AM

Case Name: 17-11962 (KJC)

Location: U.S. Trustee Office, 844 King Street, Suite 3209, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition and First Day Declaration for further details.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Short Summary

In In re AE Liquidation, Inc., 866 F.3d 515 (3d Cir. 2017), the Third Circuit answered two important legal questions under the Worker Adjustment and Retraining Notification Act of 1988 (the WARN Act).  First, the Third Circuit held that when a corporation is sold as a going concern, there is a presumption that the sale involves the hiring of the seller’s employees, “regardless of whether the seller has expressly contracted for the retention of its employees.”  Id. at 526.  Second, the Third Circuit held that, under the WARN Act, in determining whether a mass layoff was caused by “unforeseeable business circumstances,” a mass layoff is “reasonably foreseeable” only if it is “probable.”  Id. at 528.  The Court’s holding is more thoroughly examined below.

The WARN Act

The WARN Act “was enacted by Congress in 1988 to provide limited protections to workers whose jobs are suddenly and permanently terminated [and] generally precludes an ‘employer’ from ordering a ‘plant closing or mass layoff’ until the expiration of a sixty-day period after giving written notice.”  Laura B. Bartell, Why Warn?-the Worker Adjustment and Retraining Notification Act in Bankruptcy, 18 Bankr. Dev. J. 243, 243 (2002).

The WARN Act contains three exceptions to the this sixty-day notice period, but only one—the “unforeseeable business circumstances” exception—was presented to the Court in AE Liquidation.  29 U.S.C. § 2102(b)(2)(A) sets forth the “unforeseeable business circumstances” exception to the WARN Act’s notice requirements, and simply states that “[a]n employer may order a plant closing or mass layoff before the conclusion of the 60-day period if the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.”  As the Third Circuit explained, this “exception must be offered by the employer as an affirmative defense” and “the employer must demonstrate (1) that the business circumstances that caused the layoff were not reasonably foreseeable and (2) that those circumstances were the cause of the layoff.”  AE Liquidation, 866 F.3d at 523.

The Code of Federal Regulations, at 20 C.F.R. § 639.9(b), provides additional guidance on this exception, explaining that (1) “[a]n important indicator of a business circumstance that is not reasonably foreseeable is that the circumstance is caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control” and (2) “[t]he test for determining when business circumstances are not reasonably foreseeable focuses on an employer’s business judgment.”  Id. at § 639.9(b)(1)-(2).

Factual Background

The plaintiffs-appellants were former employees of the Debtor, Eclipse Aviation Corporation (Eclipse), who were laid off when the Eclipse’s § 363 sale to its largest shareholder fell through.  That sale, which would have allowed the Eclipse’s operations to continue as a going concern, was contingent upon funding from Vnesheconomban (VEB), a state-owned Russian Bank.  As the Third Circuit explained, “[f]or a month, Eclipse waited for the deal to go through with almost daily assurances that the funding was imminent and the company could be saved, but eventually, as those assurances failed to bear fruit, the time came when it was forced to cease operations altogether.”  AE Liquidation, 866 F.3d at 518.  As a result, on February 24, 2009—nearly two weeks after Eclipse had become administratively insolvent—Eclipse’s board of directors instructed Eclipse’s attorneys to file a motion to convert the case to a Chapter 7 liquidation.  Id. at 522.  As soon as the motion was filed, Eclipse emailed all of its employees and informed them that Eclipse was being liquidating and all employees were being laid off.  Id.

The Third Circuit’s Holding

The Third Circuit addressed two important legal questions left unresolved by the Code of Federal Regulations.  The first was the question of causation—what proof is needed to show that the “allegedly unforeseeable event was, in fact, the cause of the layoff”?  Id. at 525.  The second was the question of foreseeability—“what makes a business circumstance ‘not reasonably foreseeable’”?  Id. at 528.

The Court’s first ruling was simple—when a business is being sold as a going concern, the Court presumes that “that the sale ‘involves the hiring of the seller’s employees unless something indicates otherwise,’ regardless of whether the seller has expressly contracted for the retention of its employees.”  Id. at 526.  More importantly, the Court held that although the terms of the purchase agreement “freed ETIRC from any binding obligation to retain Eclipse’s employees and prevented it from incurring liabilities were it not to retain them,” this fact did not rebut the presumption.  Id. at 527.  As the Third Circuit explained, “[w]hile such boilerplate language perhaps signifies that the sustained employment of Eclipse’s workforce was not a foregone conclusion, it does not rebut the presumption in favor of continued employment in a going concern sale.”  Id.   By applying this presumption, the Third Circuit aligned itself with the Eighth and Ninth Circuit, which made similar holdings in Wilson v. Airtherm Prod., Inc., 436 F.3d 906 (8th Cir. 2006) and Int’l All. of Theatrical & Stage Employees & Moving Picture Mach. Operators, AFL-CIO v. Compact Video Servs., Inc., 50 F.3d 1464, 1468 (9th Cir. 1995).

The Court’s ruling on foreseeability similarly brought the Third Circuit in line with other Circuits.  Citing to the Fifth Circuit’s holding in Halkias v. Gen. Dynamics Corp., 137 F.3d 333, 336 (5th Cir. 1998), the Third Circuit explained that “anything less than a probability would be ‘impracticable.’”  AE Liquidation, 866 F.3d at 529.  The Third Circuit examined this proposition, and agreed with the Fifth Circuit, explaining that “there are significant costs and consequences to requiring these struggling companies to send notice to their employees informing them of every possible ‘what if’ scenario and raising the specter that one such scenario is a doomsday… premature warning has the potential to accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided.”  Id.  By so holding, the Third Circuit joined the Fifth, Sixth, Seventh, Eighth and Tenth Circuit in determining that “more probable than not” is the appropriate standard for foreseeability under the WARN Act.  See Halkias, 137 F.3d 333; Watson v. Michigan Indus. Holdings, Inc., 311 F.3d 760, 765 (6th Cir. 2002); Roquet v. Arthur Andersen LLP, 398 F.3d 589 (7th Cir. 2005); United Steel Workers of Am. Local 2660 v. U.S. Steel Corp., 683 F.3d 882 (8th Cir. 2012); Gross v. Hale-Halsell Co., 554 F.3d 870 (10th Cir. 2009).

Applying these holdings to the facts of the case, the Court found that Eclipse had met its burden of demonstrating the “unforeseeable business circumstances” exception to WARN Act liability.  As the Court explained, “[u]nder the circumstances, and taking account of the historical relationship between the [Eclipse and its majority shareholder], it was commercially reasonable for Eclipse to believe that the sale was still at least as likely to close as to fall through before February 24th, so that no WARN Act notice was required prior to that time.”  In re AE Liquidation, Inc., 866 F.3d 515, 533 (3d Cir. 2017).

Conclusion

WARN Act issues arise often during bankruptcy proceedings.  Although the facts of AE Liquidation present a rare scenario—where WARN Act liability arose as a result of a failed sale process—the Third Circuit’s holding in AE Liquidation addresses two fundamental issues in the “unforeseen business circumstances” exception to WARN Act liability—causation and foreseeability.  The Third Circuit’s holding brings needed certainty to these issues and therefore greater certainty to the bankruptcy process.

Aerogroup International, Inc., along with five of its affiliates and subsidiaries, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-11962).  Based in Edison, NJ, the Debtors comprise a women’s footwear brand which whose products are retailed through various channels, including 78 Debtor-owned stores and the Debtors’ e-commerce platform.   The Petition reports $50 million to $100 million in assets and $100 million to $500 million in liabilities.  According to the First Day Declaration, the Debtors intend to liquidate their retail stores and pursue a reorganization or § 363 sale built around their e-commerce and wholesale businesses.  The Debtors have engaged Hilco Merchant Resources, LLC as their exclusive liquidating agent for the store closing sales.  Prime Clerk, LLC is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Upcoming Committee Formation Meeting:  Tuesday, September 19, 2017 10:00 AM

Case Name: 17-11933 (KJC)

Location: Sheraton Suites, 422 Delaware Avenue, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition and First Day Declaration for further details.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Vitamin World, Inc., along with eight of its affiliates and subsidiaries, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-11933).  In the Petition, Vitamin World reports $50 million to $100 million in assets and $10 million to $50 million in liabilities.  According to the First Day Declaration, the Debtors’ filings were precipitated by difficulties in transitioning their supply chain and distribution system, and the Debtors have filed with the intent to pursue a balance sheet restructuring and to shed burdensome leases and underperforming retail locations.  The Debtors enter Chapter 11 with a proposed DIP Facility provided by their Prepetition Lenders.  JND Corporate Restructuring is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Model Reorg Acquisition, LLC, along with eighteen of its subsidiaries and affiliates, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-11794).  The Debtors, based in Belleport, NY, collectively comprise the largest specialty retailer and distributor of fragrances and related beauty products in the United States and primarily operate under the brand “Perfumania.”  According to a press release issued by Perfumania Holdings, Inc. (NASDAQ: PERF), the Debtors plan to undergo a recapitalization through the Chapter 11 process and emerge as a privately-held company.  The First Day Declaration explains that the Debtors enter Chapter 11 with a prepackaged plan of reorganization and debtor in possession financing.  Epiq Bankruptcy Solutions is the proposed claims and noticing agent.  The case has been assigned to the Honorable Christopher S. Sontchi.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

USAE, LLC, f/k/a U.S. Aerospace LLC, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-11778).  Based in Wilmington, DE, USAE produces aircraft assemblies, structural components and highly engineered, precision machined details for the U.S. Government, U.S. Airforce and companies such as Lockheed Martin and Boeing.  In the First Day Declaration, USAE cites limited liquidity and ongoing disputes with several of its secured lenders as the cause of its filing.  USAE reports $25.25 million in assets and $19.56 million in liabilities; of the reported assets, $5 million is attributed to an insurance policy and $20 million to causes of action.  No claims or noticing agent has been proposed.  The case has been assigned to the Honorable Kevin J. Carey.

 

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Upcoming Committee Formation Meeting:  Monday, August 21, 2017 10:00 AM

Case Name:  17-11722 (BLS)

Location: Delaware State Bar Association, 405 N. King Street, 2nd Floor, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition and First Day Declaration for further details.

 

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Creditors have filed an involuntary petition for relief under Chapter 11 against Speed Vegas, a Las Vegas, Nev.-based recreational racetrack that serves as the home studio and track for the “Top Gear America” television series (Case No. 17-11752).  The petitioning creditors are Phil Fiore, Velocita, LLC, Aaron Fessler, EME Driving, LLC, Thomas Garcia, Sloan-Speed, LLC and T-VV, LLC, each of who claims at least $5,529 due on Notes for which Stein Harris serves as the Collateral Agent.  In the involuntary petition, the petitioning creditors allege that Speed Vegas is not paying its undisputed debts as they become due.  No claims or noticing agent has been proposed.  The case has been assigned to the Honorable Kevin J. Carey.

 

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Peekay Acquisition, LLC, along with sixteen (16) of its affiliates and subsidiaries, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-11722).  Headquartered in Auburn, Washington, Peekay is a leading specialty retailer of a broad selection of lingerie, sexual health and wellness products and accessories.  The Debtors estimate their assets between $10 -$50 million and their liabilities between $50 – $100 million.  According to the First Day Declaration, the Peekay enters Chapter 11 seeking a competitive sale process.  Peekay’s Term Lenders have submitted a bid to serve as stalking horse during this sale process.  Rust Consulting/Omni Bankruptcy is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.