Delaware Bankruptcy Lawyer & Attorney : Fox Rothschild Law Firm : Financial Restructuring & Bankruptcy Litigation

Introduction

In a recent decision in the Distributed Energy Systems bankruptcy ("DES" or "Debtors"),  the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware provided a concise discussion of what is required for a debtor to assume and assign an executory contract.  DES filed a motion seeking to assume and assign contracts with ePower and Vestas Wind Systems to CB Wind Acquisition Corp ("CB Wind").  CB Wind previously purchased all of Debtors' assets. Due to what Debtors' termed a "scrivener's error,"  the ePower and Vestas contracts were not included in the schedules to the original asset purchase agreement.

ePower objected to the assumption of its contract on several grounds.  First, ePower argued that DES failed to prove CB Wind could provide adequate assurance of future performance.  Next,  ePower claimed that its contract was not an executory contract and therefore not subject to assumption and assignment under section 365 of the Bankruptcy Code.  Finally,  ePower argued that Debtors' failure to include its contract in the sale motion evidenced its original intent to reject the agreement. 

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Introduction

In a decision that the Court deemed “one of first impression for this Circuit,” the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware, declined to grant administrative claim status to employee WARN Act claims, instead finding that the employees’ claims vested prior to the commencement of the bankruptcy proceeding. See Henderson v. Powermate Holding Corp. (In re Powermate Holding Corp.), Case No. 08-10498(KG)(Bankr. D. Del. Oct. 10, 2008)(read opinion here). The opinion provides a useful analysis of the application of the WARN Act following the 2005 amendments to § 503 of the Bankruptcy Code governing administrative claims.

Background

Powermate Holding Corp (“Powermate”), and its related entities, filed for chapter 11 bankruptcy protection on March 17, 2008. Powermate also terminated all of its remaining employees on March 17, however, it did so prior to the filing its bankruptcy petition. Powermate’s employees brought claims against the Debtors alleging the Debtors violated their rights under the Worker Adjustment and Retraining Notification Act (the “WARN Act”). The employees further alleged that they were entitled to sixty days of wages and benefits under the WARN Act, and that these expenses were entitled to administrative claim status pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). In response to the employees’ adversary complaint for damages, Powermate argued that the employees’ WARN Act claims, to the extent proven, were entitled to fourth or fifth priority status under §§ 507(a)(4) and (5), not administrative status.

Analysis

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. As the Court observed, 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.” Id. at *7. 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.

After looking at the intent behind the WARN Act, the Court next looked at administrative expense claims in the context of wages. Administrative expense claims are those which either “preserve the estate in a reorganization or facilitate the winding-down in a liquidation.” Id. at *9. 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, the court found that the amended § 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.” Id. at *16. The question remaining for the Court, then, was to determine when the employees’ rights under the WARN Act vest.

The Court found 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.” Id. at *18. Citing In re First Magnus Fin. Corp., 390 B.R. 667, 673 (Bankr. D. Ariz. 2008). 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.

Conclusion

The Powermate decision is helpful, in part, for the clarity it provides to a portion of the 2005 Bankruptcy Code amendments. Like with many other decisions before it, the Court in Powermate applied a “plain meaning” analysis to the 2005 amendments. The Powermate employees who commenced the WARN Act claim might not agree that this decision is “helpful.” On October 20, 2008, the employees filed a Notice of Appeal of the Court’s Order dismissing their adversary action.
 

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