On May 5, 2015, Outten & Golden LLP and Loizides, P.A. filed a class action adversary proceeding complaint for violation of the WARN Act in the Corinthian Colleges bankruptcy. The Corinthian Colleges bankruptcy is case number 15-10952 and this adversary proceeding is number 15-50309.
The Delaware Bankruptcy Court has previously published opinions concerning the WARN Act, as can be seen in our prior posts:
Decision in Powermate Holding Corp. Declines to Grant Administrative Claim Status to Employee WARN Act Claims
Decision in Tweeter Opco, LLC., Holds Non-Debtor Controlling Company Liable for Debtor’s Violation of the WARN Act
The WARN Act provides qualified employees up to sixty (60) days of back pay and benefits due to an employer’s failure to provide proper notice of a potential termination. Congress passed the WARN Act in 1988 following two decades which many workers were terminated without notice as a result of mergers, acquisition and closings. Exceptions to the WARN Act include terminations due to shut downs that were not reasonably foreseeable, natural disasters or situations where notice to employees might interfere with an employer’s efforts to secure outside investments.
As the Delaware Bankruptcy Court held in Powermate, WARN Act awards are unsecured claims against the bankruptcy estate. Administrative expense claims are those which either preserve the estate in a reorganization or facilitate the winding-down in a liquidation. Congress amended § 503(b)(1)(A) in 2005, extending administrative claim status to “(ii.) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title.” Looking at the plain meaning of the statute, § 503 grants administrative status to wages that vest post-petition, [so that] the back pay is attributable to the time occurring after the commencement of the case and therefore it is an administrative expense claim.
Citing In re First Magnus Fin. Corp., 390 B.R. 667, 673 (Bankr. D. Ariz. 2008) the Powermate Court held that rights of employees discharged in violation of the WARN Act accrued upon their termination. In reaching this conclusion, the Court relied upon other opinions that consistently hold that WARN damages are specifically like payment at termination in lieu of notice. The Powermate employees were terminated prior to the filing of the bankruptcy petition. Because the employees’ claims vested pre-petition, they were not entitled to administrative expense status. Instead, the employees’ damage claims were governed under § 507(a)(4)-(5) granting unsecured claim status to wages.
While any employees of Corinthian Colleges should certainly pursue a recovery based on the WARN Act, they should do so with their eyes open to their likely recovery. The recovery will be in post-bankruptcy dollars, so the total recovery depends on the percentage recovery of unsecured creditors. The recovery will also be reduced by the attorneys’ fees earned in pursuing this recovery. Based on my experience, litigants should try to temper their expectations. Even if they hit a litigation home run, litigants should keep in mind that the Debtors were required to give them 60-days of notice, and after fees, expenses, and the award of an unsecured claim, they are likely to receive significantly less than 60 days of their salary.
John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP. John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at firstname.lastname@example.org.