A recent decision by the Third Circuit Court of Appeals (the “Third Circuit” or the “Court”) may have a lasting impact on financially distressed companies selling themselves in bankruptcy and the rights of their employees. In the In re AE Liquidation, Inc.decision, the Court ruled that the Debtor did not violate the Worker Adjustment and Retraining Notification (“WARN”) Act—which generally requires employers to provide 60-days’ notice of a mass layoff—when it waited until the day on which its proposed going concern sale fell through to notify employees that the company would shut down immediately. In so ruling, the Court established that the test to determine whether notice is required under the WARN Act is if the mass layoff is probable, or, “more likely than not” to occur, rather than merely possible.

Given that the Third Circuit’s decisions are binding on the country’s most active district for large chapter 11 filings (the District of Delaware), this decision is important for all companies. However, as the standard is both vague and flexible, it raises questions as to how exactly it will affect distressed companies in the future. Does the AE Liquidation decision blur the line as to when an insolvent company needs to provide notice, such that any company whose bankruptcy sale falls through need not give notice to its employees of a potential closure? Or, is the AE Liquidation decision merely the result of an exceptionally unique set of facts such that, as a practical matter, it will have little impact on many cases going forward?

Click here to view the full article