No. 14-1331
IN THE
SUPREME COURT OF THE UNITED STATES
__________________
SPRING TERM 2015
__________________
IN RE FAZAL OIL,
Debtor
VERONICA MURRAY, INDIVIDUALLY AND
ON BEHALF OF ALL OTHER SIMILARLY
SITUATED FORMER EMPLOYEES,
Petitioners,
v.
FAZAL OIL, INC.
Respondent.
__________________
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT
__________________
BRIEF FOR RESPONDENT
Counsel for Respondent
Team No. 4
QUESTIONS PRESENTED
I.
Was Fazal Oil acting as a “liquidating fiduciary” rather than an “employer” under § 2101
of the Worker Adjustment and Retraining Notification Act when it lost all financing, filed
for Chapter 11 bankruptcy, and terminated its employees on May 6, 2013?
II.
Was Fazal Oil entitled to the shortened notice of termination it provided on May 6, 2013
under the “unforeseeable business circumstances” and “faltering company” exemptions
of the Worker Adjustment and Retraining Notification Act after the sudden overthrow of
the San Marcos government and Fazal Oil’s complete loss of financing?
i
Team No. 4
TABLE OF CONTENTS
Page(s)
QUESTIONS PRESENTED .....................................................................................
i
TABLE OF AUTHORITIES ....................................................................................
iv
OPINIONS BELOW .................................................................................................
1
STANDARD OF REVIEW ......................................................................................
1
STATEMENT OF THE CASE .................................................................................
2
Statement of the Facts ...................................................................................
2
Procedural History ........................................................................................
4
SUMMARY OF THE ARGUMENT .......................................................................
6
ARGUMENT ............................................................................................................
7
I.
FAZAL WAS ACTING AS A LIQUIDATING FIDUCIARY RATHER
THAN AN EMPLOYER WHEN IT TERMINATED ITS EMPLOYEES
AND THUS IS NOT SUBJECT TO THE WARN ACT. ............................
A.
Congress Did Not Intend for the WARN Act to Apply to
Liquidating Fiduciaries. ....................................................................
1.
7
The Department of Labor’s regulations establish a
liquidating fiduciary exception to the WARN Act. ..............
8
Federal courts recognize a liquidating fiduciary exception
to the WARN Act..................................................................
9
When Fazal Filed For Bankruptcy, Its Commercial
Activities Resembled Those of a Liquidating Fiduciary. .................
11
EVEN IF FAZAL IS AN EMPLOYER UNDER THE WARN
ACT, IT IS EXEMPT FROM THE SIXTY-DAY NOTICE
REQUIREMENT UNDER THE UNFORESEEABLE BUSINESS
CIRCUMSTANCES AND FALTERING COMPANY EXEMPTIONS. ....
14
2.
B.
II.
7
A.
Fazal’s May 6, 2014 Letter Provided Adequate Notice Because It
Contained a Brief and Specific Statement Explaining the Reasons
for Shortened Notice. ........................................................................
ii
Team No. 4
15
TABLE OF CONTENTS (CONT.)
Page(s)
B.
Fazal Could Not Have Reasonably Predicted the San Marcos Coup
d’Etat and Nationalization of the Oil Industry, and Thus, the
Unforeseeable Business Circumstances Exemption Relieves Fazal
of Liability. .......................................................................................
1.
The coup d’etat and its effects were sudden, dramatic,
unexpected, and out of Fazal’s control. ................................
17
Fazal exercised commercially reasonable business
judgment as would another similarly situated employer. .....
21
Fazal Is Entitled to the Faltering Company Exemption Because
Fazal Only Closed the Plant When It Failed to Secure Capital. .......
23
2.
C.
17
1.
Fazal could not have foreseen the need to actively seek
capital before the sudden coup d’etat and subsequent
events. ...................................................................................
24
Fazal had a realistic opportunity to obtain financing that
would have postponed a plant closure. .................................
27
Earlier notice would have precluded Fazal from obtaining
needed capital........................................................................
28
CONCLUSION .........................................................................................................
30
2.
3.
iii
Team No. 4
TABLE OF AUTHORITIES
CASES
Page(s)
United States Supreme Court
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837 (1984) ......................................................................................
7-8
Chrysler Corp. v. Brown,
441 U.S. 281 (1979) ......................................................................................
8
Commodity Futures Trading Comm'n v. Weintraub,
471 U.S. 343 (1985) ......................................................................................
4
I.N.S. v. Cardoza-Fonseca,
480 U.S. 421 (1987) ......................................................................................
7
N.L.R.B. v. United Food & Commercial Workers Union, Local 23,
484 U.S. 112 (1987) ......................................................................................
7
Pierce v. Underwood,
487 U.S. 552 (1988) ......................................................................................
1
United States Courts of Appeals
Adams v. Erwin Weller Co.,
87 F.3d 269 (8th Cir. 1996) ..........................................................................
7,10-11
Alarcon v. Keller Industry, Inc.,
27 F.3d 386 (9th Cir. 1994) ..........................................................................
15, 26-27
Carpenters Dist. Council of New Orleans v. Dillard Dep't Stores, Inc.,
15 F.3d 1275 (5th Cir. 1994) ........................................................................
24, 28
Chauffeurs, Sales Drivers, Warehousemen & Helpers Union Local 572
v. Weslock Corp.,
66 F.3d 241 (9th Cir. 1995) ............................................................................
10
Coppola v. Bear Stearns & Co.,
499 F.3d 144 (2d Cir. 2007)..........................................................................
10-11
iv
Team No. 4
TABLE OF AUTHORITIES (CONT.)
Page(s)
Gross v. Hale-Halsell Co.,
554 F.3d 870 (10th Cir. 2009) ......................................................................
18, 21
Halkias v. Gen. Dynamics Corp.,
137 F.3d 333 (5th Cir. 2006) ........................................................................
18
Hotel Emps. and Rest. Emps. Int’l Union Local 54 v.
Elsinore Shore Assocs.,
173 F.3d 175 (3d Cir. 1999)..........................................................................
8, 18, 21
In re APA Transp. Corp. Consol. Litig.,
541 F.3d 233 (3d Cir. 2008)..........................................................................
25
In re Fazal Oil,
675 F.3d 671 (13th Cir. 2014) ......................................................................
1
In re Flexible Flyer Liquidating Trust,
511 Fed.Appx. 369 (5th Cir. 2013) ...............................................................
22
In re United Healthcare, Inc.,
200 F.3d 170 (3d Cir. 1999)..........................................................................
passim
Jurcev v. Cent. Cmty Hosp.,
7 F.3d 618 (7th Cir. 1993) ............................................................................
18
Loehrer v. McDonnell Douglas Corp.,
98 F.3d 1056 (8th Cir. 1996) ........................................................................
passim
Pearson v. Component Tech. Corp.,
247 F.3d 471 (3d Cir. 2001)..........................................................................
10-11
Roquet v. Arthur Andersen LLP,
398 F.3d 585 (7th Cir. 2005) ........................................................................
18-19, 22
USW Local 2660 v. U.S. Steel Corp.,
683 F.3d 882 (8th Cir. 2012) ........................................................................ 16, 19, 21-22
v
Team No. 4
TABLE OF AUTHORITIES (CONT.)
Page(s)
Watson v. Mich. Indus. Holdings, Inc.,
311 F.3d 760 (6th Cir. 2002) ........................................................................
19
United States District Courts
Chestnut v. Stone Forest Indus., Inc.,
817 F. Supp. 932 (N.D. Fla. 1993)................................................................
21
Grimmer v. Lord Day & Lord,
937 F. Supp. 255 (S.D.N.Y. 1996)................................................................
16
In Re Fazal Oil,
674 F.3d 171 (S.D. Wag. 2014) ....................................................................
1
United Paperworkers Int'l Union v. Alden Corrugated Container Corp.,
901 F. Supp. 426 (D. Mass. 1995) ................................................................
27
United States Bankruptcy Courts
Angles v. Flexible Flyer Liquidating Trust,
438 B.R. 886 (Bankr. N.D. Miss. 2010) .......................................................
29
In re Jamesway Corp.,
235 B.R. 329 (Bankr. S.D.N.Y. 1999) ..........................................................
8, 12-13
In re Old Electralloy Corp.,
162 B.R. 121 (Bankr. W.D. Pa. 1993) ..........................................................
24-25
In re Tweeter OPCO, LLC,
453 B.R. 534 (Bankr. D. Del. 2011) .............................................................
16
Federal Statutes
11 U.S.C. § 1107(a) (2014) .......................................................................................
4
29 U.S.C. § 2101 (2014) ...........................................................................................
7, 23
29 U.S.C. § 2102 (2014) ...........................................................................................
passim
vi
Team No. 4
TABLE OF AUTHORITIES (CONT.)
Page(s)
29 U.S.C. § 2104 (2014) ...........................................................................................
7
29 U.S.C. § 2107 (2014) ...........................................................................................
8
Federal Regulations
20 C.F.R. § 639.1 (2015) ..........................................................................................
7
20 C.F.R. § 639.3 (2015) ..........................................................................................
8
20 C.F.R. § 639.7 (2015) ..........................................................................................
15-16, 29
20 C.F.R. § 639.9 (2015) ..........................................................................................
passim
Other Authorities
134 Cong. Rec. S8686-01 (June 28, 1988) ...............................................................
27
134 Cong. Rec. S8854-02 (July 6, 1988) (statement of Sen. Tom Harkin) ..............
17
134 Cong. Rec. H2278-01 (Apr. 21, 1988)...............................................................
28
54 Fed. Reg. 16,042-01 (Apr. 20, 1989) ...................................................................
9, 17, 24
Falter Definition, Merriam-Webster.com,
http://www.merriam-webster.com/dictionary/falter
(last visited Feb. 10, 2015) ............................................................................
26
John Ethan-Gionis, Note, The Liquidating Fiduciary: A Hidden Exception to
WARN Act Liability, 31 Hofstra Lab. & Emp. L.J. 273 (2013) ....................
7, 13-14
vii
Team No. 4
No. 14-1331
IN THE
SUPREME COURT OF THE UNITED STATES
SPRING TERM 2015
IN RE FAZAL OIL,
Debtor
VERONICA MURRAY, INDIVIDUALLY AND
ON BEHALF OF ALL OTHER SIMILARLY
SITUATED FORMER EMPLOYEES,
Petitioners,
v.
FAZAL OIL, INC.
Respondent.
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT
BRIEF FOR RESPONDENT
OPINIONS BELOW
The opinion of the United States District Court for the Southern District of Wagner
appears on page one of the record, and it is reported at In re Fazal Oil, 674 F.3d 171 (S.D. Wag.
2014). The opinion of the United States Court of Appeals for the Thirteenth Circuit appears on
page eighteen of the record and it is reported at In re Fazal Oil, 675 F.3d 671 (13th Cir. 2014).
STANDARD OF REVIEW
This Court reviews questions of law de novo. Pierce v. Underwood, 487 U.S. 552, 558
(1988).
1
Team No. 4
STATEMENT OF THE CASE
Statement of the Facts
The Respondent Fazal Oil, Inc. (“Fazal”) is a multinational oil company founded in 1994.
R. at 1. Fazal originally secured and developed oil reserves in the Southwestern United States,
and in 2007, Fazal secured oil production rights abroad. R. at 1. In that same year, Fazal
discovered that the Republic of San Marcos, rumored to have vast high quality oil reserves, had
liberalized its foreign investment laws governing its energy sector. R. at 2.
San Marcos is located in the South Pacific with a population of 200,000 citizens. R. at 2.
The Mellish family has ruled San Marcos for the last 100 years. R. at 2. In 1980, Fielding
Mellish (“Mellish”) came to power in San Marcos. R. at 2. In 2009, the San Marcos
government opened up foreign investment in the state operated energy company, Jimenez Oil.
R. at 2.
Fazal is a publicly traded company on the Wagner Stock Exchange (“WSE”). R. at 3.
Fazal’s stock averaged $6.00 per share from 2007 to 2011. R. at 3. In 2011, after significant
negotiation, the government of San Marcos and Fazal signed an exclusive deal granting Fazal a
51% majority stake in Jimenez Oil. R. at 2, 39. From 2008 to 2011, oil prices averaged $56.28
per barrel. R. at 3. In late 2011, when oil prices were at a record high of $111.67 per barrel,
Fazal struck a massive oil reserve in the “A-24” field. R. at 3. Subsequently, Fazal’s stock price
increased to $15.00 per share. R. at 3. By 2012, Fazal had 10,000 total employees and 2,000
employees in San Marcos. R. at 3. Of the 2,000 San Marcos employees, 1,500 were American
citizens and 500 were San Marcos citizens. R. at 3.
In 2012, Fazal obtained a $5 billion loan secured by Fazal’s global drilling equipment
with a ten-year repayment period from the WSB Bank (“WSB”) to increase production capacity.
R. at 3. The terms of the loan stated that Fazal would automatically default if there were any
2
Team No. 4
significant changes to the company’s revenue or outlook. R. at 3. In an effort to bolster its
presence in San Marcos, Fazal transferred 4,000 of its employees to San Marcos and began
construction on an international headquarters. R. at 3.
In early 2013, 65% of Fazal’s total revenue came from production in San Marcos, up
from 40% in 2012. R. at 4. While San Marcos was experiencing economic growth and pursuing
new construction projects, it still suffered from inflation and income inequality. R. at 4. In late
2012, a university issued a report simply warning of an “increasingly unstable situation” in San
Marcos. R. at 4. Additionally, the Wagner Daily News cited a report by a private risk
assessment agency claiming, political instability could “endanger the oil sector.” R. at 4, 42.
On April 1, 2013, San Marcos’ Defense Minister unexpectedly usurped Mellish in a coup
d’etat, announcing the nationalization of the San Marcos oil industry. R. at 4-5. The next day,
Fazal issued a press release stating the company did not expect the coup to affect operations in
San Marcos. R. at 5. Fazal maintained close contact with top-level State Department officials
who were in contact with San Marcos representatives to ensure economic stability. R. at 5. The
State Department assured Fazal that ongoing communications with San Marcos could allow
Fazal to continue business operations there. R. at 5. However, the details of these sensitive
communications could not be released to the public. R. at 5.
On April 4, 2013, as a result of after hours trading, Fazal stock dropped 20%. R. at 5.
Thus, WSE halted trading of Fazal stock. R. at 5. Subsequently, Fazal sent a letter pursuant to
the Worker Adjustment and Retraining Notification Act (“WARN Act”) notifying the 5,500
American employees in San Marcos they would be terminated in sixty days. R. at 5, 11. The
letter specifically stated that termination stemmed from the unexpected political upheaval in San
Marcos and Fazal’s financial crash. R. at 5.
3
Team No. 4
Over the next thirty days, Fazal unsuccessfully sought additional capital, including a line
of credit, from various financial institutions. R. at 5, 13. On May 5, 2013, WSB issued a notice
of default, demanding immediate repayment of its loan. R. at 5-6. On May 6, 2013, Fazal filed
for Chapter 11 bankruptcy. R. at 6. As a result, Fazal assumed the role of debtor-in-possession.1
R. at 6. Fazal then sent a letter of immediate termination to 3,000 of the American employees
stationed in San Marcos, while retaining 2,500 employees for essential tasks. R. at 6, 47. The
letter explained that nationalization of the San Marcos oil industry and Fazal’s inability to obtain
financing caused the shortened notice of termination pursuant to the “unforeseeable business
circumstances” and “faltering company” exemptions of the WARN Act. R. at 6, 47. The letter
further contained Fazal’s contact information, a list of the affected employees and positions, and
a statement that closure of San Marcos’ plants was expected to be permanent. R. at 6, 47.
Finally, on May 7, 2013, WSB sent another letter to Fazal expressing an interest in purchasing
Fazal’s assets in an auction in exchange for Fazal’s debt. R. at 6.
Procedural History
On June 28, 2013, Veronica Murray, on behalf of herself and similarly situated former
employees (“Petitioners”), filed a proof of claim demanding back pay on the grounds that the
May 6, 2013 notice of termination was inadequate under the WARN Act. R. at 6-7. In response,
Fazal asserted that it was not an “employer” subject to the WARN Act but rather a “liquidating
fiduciary.” R. at 7. In the alternative, Fazal contended that it was entitled to shortened notice
under the unforeseeable business circumstances and faltering company exemptions to the
WARN Act. R. at 7. The United States Bankruptcy Court for the Southern District of Wagner
found that Fazal was liable for back pay under the WARN Act. R. at 18.
1
If a trustee is not appointed, the debtor remains in possession and its directors “bear essentially the same fiduciary
obligation to creditors and shareholders as would the trustee for a debtor out of possession.” Commodity Futures
Trading Comm'n v. Weintraub, 471 U.S. 343, 355 (1985). Debtors-in-possession have nearly the same rights,
4
Team No. 4
The United States District Court for the Southern District of Wagner adopted the opinion
of the Bankruptcy Court in its entirety. R at 1. The court concluded Fazal was not
unequivocally pursuing liquidation after filing for bankruptcy. R. at 15. The court also
determined that the May 6, 2013 notice was perfunctory and lacked any justification for the
shortened notice period. R. at 9. In denying the unforeseeable business circumstances
exemption, the court reasoned that Fazal should have known about the events leading to its
bankruptcy. R. at 10. The faltering company exemption similarly did not apply because the
ultimate cause of the mass layoff was the nationalization of oil in San Marcos rather than Fazal’s
failure to obtain financing. R. at 13.
On appeal to the United States Court of Appeal for the Thirteenth Circuit, the court
reversed the decision of the District Court. R. at 18. The court held that Fazal was acting as a
liquidating fiduciary rather than an employer. R. at 22. The court placed particular weight on
the fact that Fazal filed for Chapter 11 bankruptcy and WSB expressed interest in an auction
purchase of Fazal’s assets. R. at 21-22. Further, the court determined that by terminating over
half of its employees worldwide and risking 65% of its total revenue, Fazal demonstrated intent
to liquidate. R. at 21-22. Additionally, the court read Fazal’s two letters together and concluded
that they complied with the WARN Act. R. at 25. In granting the unforeseeable business
circumstances exemption, the court reasoned that Fazal could not have predicted the coup d’etat
or the resulting decline in Fazal’s stock price. R. at 27-28. It determined that Fazal exercised
reasonable business judgment in seeking additional capital after its stock price dropped. R. at
28. As to the faltering company exemption, the court reasoned that although the suspension of
Fazal’s stock was public knowledge, the potential plant closures were not, and notice to all
5
Team No. 4
affected employees could have detracted from the company’s continued survival and hindered
Fazal’s ability to obtain additional financing. R. at 29.
The Petitioners filed a writ of certiorari with this Court, which this Court granted on
January 13, 2015. R. at 31.
SUMMARY OF ARGUMENT
This Court should affirm the decision of the Thirteenth Circuit and hold that Fazal was
not acting as an “employer” subject to liability under the WARN Act when it terminated its
employees on May 6, 2013. First, the WARN Act was not meant to apply to liquidating
fiduciaries. Since the WARN Act does not clearly define an “employer,” this Court should defer
to the Department of Labor, which possesses explicit rulemaking authority. The Department of
Labor’s regulations and comments suggest that bankrupt entities operating as liquidating
fiduciaries rather than operating in the normal commercial sense are not employers under the
WARN Act. Second, Fazal’s commercial activities strongly demonstrate an intent to liquidate
rather than continue to operate the company as a going concern.
If Fazal does not meet the liquidating fiduciary exception, it is exempt from WARN Act
liability under the unforeseeable business circumstances and faltering company
exemptions. Fazal could not reasonably have foreseen the coup d’etat and subsequent
events. The company acted reasonably and as a similarly situated employer would.
Furthermore, Fazal meets the faltering company exemption because it gave notice to terminate
employees only after efforts to secure financing proved fruitless. This Court should consider the
policy behind the exemption and evaluate whether Fazal was a faltering company in light of the
sudden, dramatic, and unexpected events in San Marcos.
6
Team No. 4
ARGUMENT
I.
FAZAL WAS ACTING AS A LIQUIDATING FIDUCIARY RATHER THAN AN
EMPLOYER WHEN IT TERMINATED ITS EMPLOYEES AND THUS IS NOT
SUBJECT TO THE WARN ACT.
The WARN Act provides that “[a]n employer shall not order a plant closing or mass
layoff until the end of a 60-day period after the employer serves written notice of such an order.”
29 U.S.C. § 2102(a) (2014). This ensures workers adequate time to prepare for loss of
employment, search for alternate employment, and if necessary, pursue retraining and skill
development to compete in the job market. 20 C.F.R. § 639.1 (2015). The Act creates a private
right of action for employees terminated without proper notice. 29 U.S.C. § 2104(a) (2014).
A.
Congress Did Not Intend for the WARN Act to Apply to Liquidating Fiduciaries.
The WARN Act only applies to “employers.” It defines an “employer” as any “business
enterprise” that employs 100 or more employees, excluding part-time employees; or 100 or more
employees who in the aggregate work at least 4,000 hours per week. 29 U.S.C. § 2101(a)(1)
(2014). The plain language of the WARN Act does not clearly define “business enterprise.” See
In re United Healthcare, Inc., 200 F.3d 170, 176 (3d Cir. 1999); Adams v. Erwin Weller Co., 87
F.3d 269, 271 (8th Cir. 1996) (citing § 2101(a)(1)). Furthermore, the statute does not explicitly
provide guidance on whether it applies to bankrupt entities. See John-Ethan Gionis, Note, The
Liquidating Fiduciary: A Hidden Exception to WARN Act Liability, 31 Hofstra Lab. & Emp. L.J.
273, 285 (2013). On a question of statutory interpretation, the first step is for courts to determine
congressional intent using traditional canons of construction. N.L.R.B. v. United Food &
Commercial Workers Union, Local 23, 484 U.S. 112, 123 (1987) (citing I.N.S. v. CardozaFonseca, 480 U.S. 421, 446 (1987)). If a statute administered by an agency is silent or
ambiguous to the precise question at issue, the court defers to the administrative agency’s
permissible interpretation of the statute. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
7
Team No. 4
467 U.S. 837, 842 (1984). The regulations, comments, and case law surrounding the WARN Act
all demonstrate that Congress did not intend for the Act to apply to liquidating fiduciaries. See
Hotel Emps. and Rest. Emps. Int’l Union Local 54 v. Elsinore Shore Assocs., 173 F.3d 175, 18183 (3d Cir. 1999) (using federal regulations, comments, legislative history, and case law to
determine the scope of § 2102).
1.
The Department of Labor’s regulations establish a liquidating fiduciary
exception to the WARN Act.
The WARN Act specifically provides that the Secretary of Labor “shall prescribe such
regulations as may be necessary to carry out this chapter.” 29 U.S.C. § 2107(a) (2014). Any
regulations that the Department of Labor (“DOL”) prescribes to that end have the force and
effect of law. In re Jamesway Corp., 235 B.R. 329, 337 (Bankr. S.D.N.Y. 1999); see Chrysler
Corp. v. Brown, 441 U.S. 281, 295 (1979) (“It has been established in a variety of contexts that .
. . agency regulations have the ‘force and effect of law’”) (citations omitted). The DOL’s
regulations and comments demonstrate that whether an entity is a business enterprise under the
WARN Act depends on the entity’s activities. United Healthcare, 200 F.3d at 177.
In its regulations, the DOL defines “employer” to include “public and quasi-public
entities which engage in business (i.e., take part in a commercial or industrial enterprise, supply
a service or good on a mercantile basis, or provide independent management of public assets,
raising revenue and making desired investments) . . . .” 20 C.F.R. § 639.3(a)(1)(ii) (2015)
(emphasis added). In the comments to the regulations, the DOL elaborated:
[A] fiduciary whose sole function in the bankruptcy process is to liquidate a failed
business for the benefit of creditors does not succeed to the notice obligations of
the former employer because the fiduciary is not operating a “business enterprise”
in the normal commercial sense. In other situations, where the fiduciary may
continue to operate the business for the benefit of creditors, the fiduciary would
succeed to the WARN obligations of the employer precisely because the fiduciary
continues the business in operation.
8
Team No. 4
54 Fed. Reg. 16,042-01, 16,045 (Apr. 20, 1989). Thus, the key inquiry is whether the entity is
acting as a liquidating fiduciary or operating the business enterprise in the normal commercial
sense. See Id.
Although the final regulation does not expressly put forth this liquidating fiduciary
exception, the ordinary meaning of the phrase “engaged in business” would exclude liquidation,
which essentially marks the end of an entity’s life. Furthermore, the DOL’s comment to the final
regulation suggests that an entity engaged in business is one in which “continues the business in
operation.” 54 Fed. Reg. 16,042-01, 16,045 (Apr. 20, 1989). These activities are all antithetical
to liquidation and the winding up of an entity’s affairs. Thus, the regulations and the comments
demonstrate that the DOL did not envision the WARN Act applying to liquidating fiduciaries.
2.
Federal courts recognize a liquidating fiduciary exception to the WARN
Act.
United Healthcare remains the most persuasive authority regarding the liquidating
fiduciary exception to the WARN Act. There, the Third Circuit adopted a sliding-scale test for
the liquidating fiduciary exception. 200 F.3d at 178. It held that an entity is more likely an
employer when its activities resemble those of a business “operating as a going concern.” Id. In
contrast, an entity is more likely a liquidating fiduciary when its activities “resemble those of a
business winding up its affairs.” Id. In establishing this test, the court ultimately relied upon the
DOL regulations and comments. Id. at 177. First, the court recognized that the WARN Act’s
definition of “employer” as a “business enterprise” was unclear. Id. at 176. Second, based on
the regulations, the court had to consider whether the entity was engaged in business prior to the
plant closing or mass layoff. Id. at 177. Third, using the regulatory comments, the court
concluded that the key inquiry was whether the entity was “operating as an ongoing business
enterprise or was merely engaged in the liquidation of assets.” Id. Additionally, the court
9
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recognized a good faith element of the liquidating fiduciary exception. Id. at 178-79 (“[T]here is
no evidence United Healthcare knew . . . it would be forced to close but concealed that
knowledge from its employees. . . . United Healthcare made . . . good-faith efforts to remain
financially viable and to ensure its employees would keep their jobs.”)
The Second, Third, Eighth, and Ninth Circuits have also recognized a liquidating
fiduciary exception applicable to secured creditors. See Coppola v. Bear Stearns & Co., 499
F.3d 144, 150 (2d Cir. 2007); Pearson v. Component Tech. Corp., 247 F.3d 471, 491 (3d Cir.
2001); Adams v. Erwin Weller Co., 87 F.3d 269, 272 (8th Cir. 1996); Chauffeurs, Sales Drivers,
Warehousemen & Helpers Union Local 572 v. Weslock Corp., 66 F.3d 241, 244 (9th Cir. 1995).
Implicit in these decisions is the fact that federal courts can and have read a liquidating fiduciary
exception into the WARN Act and the DOL regulations. See id. These decisions also
demonstrate an inherent practicality and flexibility in applying the liquidating fiduciary
exception. See id.
In Weslock, the Ninth Circuit held that the WARN Act applies to a secured creditor
where the creditor operates the debtor’s asset as a “business enterprise” in the “normal
commercial sense.” Weslock, 66 F.3d at 244. There, the court relied upon the WARN Act’s
definition of an employer as a “business enterprise” as well as the comments to the DOL’s
regulations. Id. Finally, the Ninth Circuit recognized that the WARN Act and the regulatory
comments were sufficient to find an exception, despite the lack of express language. Id.
The Eighth Circuit in Adams held that a creditor assumes the role of an employer when it
becomes so entangled with its debtor that it is responsible for managing the debtor’s business.
87 F.3d at 272. The court there expressly adopted the Ninth Circuit’s central holding in Weslock.
Id.; See also Pearson, 247 F.3d at 491 (adopting the Eighth and Ninth Circuits’ liquidating
10
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fiduciary exception for creditors); Coppola, 499 F.3d at 150 (“the appropriate test is the one used
by Weslock and Adams”). This Court should join the circuit courts and recognize that Congress
did not intend for the WARN Act to apply to liquidating fiduciaries.
B.
When Fazal Filed For Bankruptcy, Its Commercial Activities Resembled Those of
a Liquidating Fiduciary.
The steps that Fazal took both before and after terminating its employees on May 6, 2013
reflect a dramatic shift toward liquidation, satisfying the liquidating fiduciary exception. First,
Fazal filed for Chapter 11 bankruptcy before it terminated any of its employees. R. at 6.
Second, Fazal then terminated half of its employees worldwide and nearly all of its employees in
San Marcos, even though it had just transferred thousands of employees there. R. at 3, 6. Third,
Fazal stood to lose 65% of its worldwide revenue. R. at 4. Lastly, Fazal’s primary creditor,
WSB, considered purchasing Fazal’s assets. R. at 6.
Fazal, similar to the debtor-in-possession in United Healthcare, is a liquidating fiduciary.
United Healthcare System, Inc. was a New Jersey non-profit corporation that provided hospital
and medical services. 200 F.3d at 172. On February 16, 1997, United Healthcare received a
notice of default from its secured creditor and lost all funding. Id. United Healthcare
subsequently accepted a company’s offer to purchase United Healthcare’s assets and decided to
close the hospital. Id. On February 19, 1997, United Healthcare surrendered its certificates of
need, filed for Chapter 11 bankruptcy, and gave sixty-days’ notice of termination to 1,300
employees pursuant to the WARN Act. Id. at 173. Within forty-eight hours after the notice,
United Healthcare discharged or transferred all remaining patients, preventing the employees
from performing their regular duties. Id. Instead, the employees cleaned, took inventory, and
prepared the company’s assets for sale. Id. About two weeks later, on March 6, 1997, United
Healthcare gave notice that it was immediately terminating 1,200 employees, while retaining 100
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employees to secure the plant facility and maintain necessary equipment. Id. The court placed
particular weight on the fact that United Healthcare surrendered its certificates of need, agreed to
sell its assets and good will, transferred or discharged all of its patients, and tasked its remaining
employees with work solely designed to prepare United Healthcare for liquidation. Id.
In applying the liquidating fiduciary exception, the court dispelled any suspicion that
United Healthcare was operating as a going concern after filing for bankruptcy. Id at 178. First,
even though employees continued to work at United Healthcare, that fact did not weigh against
the liquidating fiduciary exception because the employees assumed roles dedicated to
liquidation. Id. Second, filing for Chapter 11 rather than Chapter 7 bankruptcy was immaterial
because United Healthcare made a bona fide effort toward liquidation as opposed to
reorganization. Id. Third, United Healthcare “made repeated and intensive good-faith efforts” to
remain financially stable and transparent for the sake of itself and its employees. Id. at 178-79.
Thus, from the time United Healthcare filed for bankruptcy, it was clearly acting as a liquidating
fiduciary. Id at 178.
By contrast, Jamesway provides a clear example of when the liquidating fiduciary
exception does not apply. There, on October 12, 1995, Jamesway’s directors authorized
liquidation under Chapter 11 and began firing, without proper WARN Act notice, 260 of its 550
employees. Jamesway, 235 B.R. at 335, 337, 343. Six days later, Jamesway filed for Chapter 11
bankruptcy and became a debtor-in-possession. Id. at 335, 337. Before Jamesway fired the
plaintiffs on October 12, it had already selected the plaintiffs for termination, and made a
schedule for firing them. Id. at 343. The bankruptcy court determined Jamesway became liable
under the WARN Act when it failed to give notice to the employees fired on October 12. Id.
Thus, the subsequent filing for Chapter 11 bankruptcy “did not divest [Jamesway] of its
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obligations under WARN to those employees.” Id. at 343-44. Additionally, Jamesway
contended that it made good faith efforts, in reliance on advice of counsel, to comply with its
WARN notice obligations. Id. at 345. However, the good faith defense was unreasonable
because Jamesway was in fact aware of its WARN Act obligations prior to the layoffs, had the
ability to provide notice, and failed to do so. Id. at 347. Therefore, Jamesway was liable under
the WARN Act. Id. at 343.
While United Healthcare and Fazal are distinct entities and approached liquidation
differently, they both appropriately acted as liquidating fiduciaries. Fazal is a publicly traded,
multinational oil corporation. R. at 1, 3. Consequently, winding up its affairs could not occur as
rapidly or as smoothly as the New Jersey-based United Healthcare. In contrast to the relatively
rapid merger agreement in United Healthcare, coordinating an auction purchase of Fazal’s assets
in exchange for billions of dollars worth of debt will inherently take more time. Thus, this Court
should find the factual differences between United Healthcare and the current case do not
indicate Fazal was any less engaged in liquidation.
Unlike Jamesway, Fazal acted in good faith when it terminated its employees after filing
for Chapter 11 bankruptcy. Although Jamesway’s management authorized both firing its
employees and liquidating the company, Jamesway waited an additional six days to file for
bankruptcy. Jamesway, 235 B.R. at 337, 342-43. By contrast, Fazal defaulted on its loan from
WSB bank, filed for Chapter 11 bankruptcy, and then terminated its employees. R. at 5-6.
Coupled with the fact that Fazal attempted to give proper WARN notice in April, whereas
Jamesway made no effort to give prior WARN notice, Fazal’s post-petition termination more
closely resembles a good faith effort than Jamesway’s pre-petition termination. See John-Ethan
Gionis, Note, The Liquidating Fiduciary: A Hidden Exception To WARN Act Liability, 31
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Hofstra Lab. & Emp. L.J. 273, 298 (2013) (describing Jamesway’s bankruptcy petition as “filed
in bad faith in order to circumvent WARN Act obligations.”) Here, Fazal was not trying to
divest itself of its WARN Act obligations after the fact by filing for bankruptcy. Only when
WSB pushed Fazal into a corner by demanding repayment of the $5 billion loan, did Fazal have
no choice but to file for bankruptcy and immediately fire its employees. R. at 6.
Furthermore, similarly to United Healthcare, there is no evidence that Fazal foresaw a
future shutdown but concealed that knowledge from its employees. Rather, Fazal made
“repeated and intensive good-faith efforts to remain financially viable and to ensure its
employees would keep their jobs” and was transparent with its employees regarding its financial
difficulties. See United Healthcare, 200 F.3d at 178-79. Specifically, Fazal sought additional
capital thirty days before having to filing for bankruptcy. R. at 5.
Fazal made good faith efforts to comply with the WARN Act, maintained transparency,
and took swift action to address its financial difficulties when Fazal reached its boiling point.
Fazal satisfies the liquidating fiduciary exception and this Court should relieve Fazal from any
WARN Act liability.
II.
EVEN IF FAZAL IS AN EMPLOYER UNDER THE WARN ACT, IT IS EXEMPT
FROM THE SIXTY-DAY NOTICE REQUIREMENT UNDER THE
UNFORESEEABLE BUSINESS CIRCUMSTANCES AND FALTERING COMPANY
EXEMPTIONS.
Employers are entitled to give shortened notice rather than full sixty-days’ notice under
the unforeseeable business circumstances and faltering company2 exemptions. § 2102(b). An
employer may order a plant closing or mass layoff before the sixty-day period if it was caused by
unforeseeable business circumstances. § 2102(b)(2). Furthermore, an employer may close a
plant before the sixty-day period if the employer sought financing that would have enabled it to
2
Although § 2102 does not explicitly include the term “faltering company,” the regulations refer to this exemption
as the “faltering company” exemption. 20 C.F.R. § 639.9(a) (2015).
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postpone the shutdown, and believed earlier notice would have precluded obtaining the
necessary capital. § 2102(b)(1). Here, Fazal provided adequate notice to its employees and met
the unforeseeable business circumstances and faltering company exemptions, relieving itself of
any liability for back pay.
A.
Fazal’s May 6, 2014 Letter Provided Adequate Notice Because It Contained a
Brief and Specific Statement Explaining the Reasons for Shortened Notice.
The WARN act provides that the employer “shall give as much notice as is practicable,”
giving a “brief statement of the basis for reducing the notification period.” § 2102(b)(3). For
general notice, the federal regulations require that the notice be based on the best information
available to the employer, state specifically in writing the names of the affected workers and
positions, and whether the action is expected to be permanent. 20 C.F.R. § 639.7 (2015).
In Alarcon v. Keller Industry, Inc., the Ninth Circuit determined that the termination
notice was sufficient after weighing legislative history, plain language reading, and federal
regulations. 27 F.3d 386, 389-90 (9th Cir. 1994). The notice must only contain a “brief
statement . . . to provide employees with information that would assist them in determining
whether the notice period was properly shortened.” Id. at 389. In Alarcon, the company
provided notice to terminate employees after its sole source of financing stopped providing
capital to the company. Id. at 388. The termination letter included, inter alia, a short statement
that it lacked working capital, could not remain viable, and was unable to secure a qualified
buyer. Id. at 390-91. Citing the faltering company exemption, the letter stated that it served as
official notice of plant closure. Id. The Ninth Circuit held that this brief statement satisfied the
requirements of notice because it provided the specific basis for the shortened notice and cited
the relevant statutory provisions thereof. Id.
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In contrast, a notice containing mere conclusory language does not provide adequate
WARN notice. Grimmer v. Lord Day & Lord, 937 F. Supp. 255, 257 (S.D.N.Y. 1996). In
Grimmer, the termination letter only included a statement that more advance notice was not
available due to “unforeseen business circumstances.” Id. Following the Ninth Circuit’s
reasoning in Alarcon, the district court held that simply “parroting a statutory exception
provision” is not sufficient to satisfy the notice requirements of the WARN Act. Id.; compare In
re Tweeter OPCO, LLC, 453 B.R. 534, 547 (Bankr. D. Del. 2011) (notice stating, “today we are
conducting a significant layoff and your position is directly affected by this reduction” did not
provide sufficient explanation), with USW Local 2660 v. U.S. Steel Corp., 683 F.3d 882, 884 (8th
Cir. 2012) (notice stating, “the purpose of this letter is to notify you regarding the layoff . . . due
to recent major and unanticipated downturn in the United States and global economy . . .”
provided sufficient explanation). The district court reasoned that “if an employer must set forth
specific facts in its notice in order to rely on a statutory exception, it is more difficult for one
who does not truly qualify for the exception to invoke it.” Id.
Fazal’s May 6, 2013 termination letter cited to the unforeseeable business circumstances
and faltering company exemptions. Specifically, Fazal provided the nationalization of San
Marcos’ oil industry, the stock suspension, and Fazal’s failure to obtain additional financing as
the unexpected circumstances behind the shortened notice. R. at 47. Pursuant to the general
notice requirement, the termination letter included contact information and a list of those
affected. See 20 C.F.R. § 639.7. Thus, the May 6, 2013 termination letter complied with the
statutory mandates of the WARN Act and provided employees sufficient explanations for the
shortened notice of termination.
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B.
Fazal Could Not Have Reasonably Predicted the San Marcos Coup d’Etat and
Nationalization of the Oil Industry, and Thus, the Unforeseeable Business
Circumstances Exemption Relieves Fazal of Liability.
The WARN Act provides an exemption to the sixty-day notification requirement if the
employer was faced with “unforeseeable business circumstances.” § 2102(b)(2)(A); 20 C.F.R.
639.9(b). “What is important is that the circumstance be ‘sudden, dramatic and unexpected.’”
54 Fed. Reg. 16,042-01, 16,063 (Apr. 20, 1989); 20 C.F.R. 639.9(b)(1).
The DOL has suggested that when determining what constitutes an unforeseeable
business circumstance, courts should not narrowly construe the exception and “any particular
scenario involves a highly factual inquiry to be assessed on a case-by-case basis.” Loehrer v.
McDonnell Douglas Corp., 98 F.3d 1056, 1060 (8th Cir. 1996) (citing 54 Fed. Reg. 16,042-01,
16,063 (Apr. 20, 1989)). In evaluating foreseeability, courts should determine whether an
employer exercised “such commercially reasonable business judgment as would a similarly
situated employer in predicting the demands of its particular market.” 20 C.F.R. § 639.9(b)(2).
Here, despite the exercise of reasonable business judgment, Fazal could not have foreseen the
sudden upheaval in San Marcos.
1.
The coup d’etat and its effects were sudden, dramatic, unexpected, and out
of Fazal’s control.
The WARN Act was not meant to impose strict liability on employers that fail to give the
full sixty-day notice. Rather “[t]he circumstances of each case will dictate whether the
exemption applies.” 134 Cong. Rec. S8854-02 (July 6, 1988) (statement by Senator Harkin).
The DOL “was reluctant to list examples of events that would, without deviation, qualify as
‘unforeseeable business circumstances.’” Loehrer, 98 F.3d at 1060 (citing 54 Fed. Reg. 16,04201, 16,062 (Apr. 20 1989)). Further, an “employer is not required to accurately predict general
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economic conditions that also may affect demand for its products or services.” 20 C.F.R. §
639.9(b)(2).
Just because an event may be possible, does not mean it is reasonably foreseeable. See
Gross v. Hale-Halsell Co., 554 F.3d 870, 876-77 (10th Cir. 2009) (employer did not reasonably
foresee its largest customer’s failure to renew contract despite a deteriorating relationship);
Halkias v. Gen. Dynamics Corp., 137 F.3d 333, 337 (5th Cir. 2006) (although the board was
aware of the possible loss of a major contract and resulting mass layoff, it could not reasonably
foresee those events); Roquet v. Arthur Andersen LLP, 398 F.3d 585, 589-90 (7th Cir. 2005)
(accounting firm was aware of an investigation by the Department of Justice, but could not
reasonably foresee an indictment forcing the sudden termination of its employees); Hotel Emps.,
173 F.3d at 186 (despite casino owner’s knowledge, possible revocation of license by gaming
commission was not reasonably foreseeable). Thus, an employer can still meet the exemption
even if the employer had knowledge of a possible event that would lead to a mass layoff.
The Seventh Circuit in Jurcev v. Central Community Hospital granted the unforeseeable
business circumstances exemption when it determined a hospital’s loss of funding was sudden,
dramatic, unexpected, and beyond its control. 7 F.3d 618, 625-27 (7th Cir. 1993). There, the
hospital depended on a foundation’s grants in order to remain open. Id. at 621. Despite
overlapping board membership between the hospital and the foundation, the hospital had no
authority over the foundation’s decision to continue funding. Id. at 624. The court ultimately
determined that while becoming financially dependent on the foundation was unwise, it was not
so unreasonable to render the loss of funding foreseeable. Id. at 626.
In Loehrer, the Eighth Circuit found that although there were several months of
dissatisfaction and complaints from the United States government, the government’s cancelation
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of McDonnell Douglas’ contract was sudden, dramatic, and unexpected. 98 F.3d at 1062. The
court noted that the government rarely cancels contracts for which it has stated a need. Id.
Therefore, while McDonnell Douglas was aware of the government’s frustration, knowledge is
not sufficient to bar the unforeseeable business circumstances exemption. Id.
Similarly, in Roquet, the Seventh Circuit further clarified the boundaries of the
exemption:
WARN was not intended to force financially fragile, yet economically viable,
employers to provide WARN notice and close its doors when there is a possibility
that the business may fail at some undetermined time in the future. Such a reading
of the Act would force many employers to lay off their employees prematurely,
harming precisely those individuals WARN attempts to protect. A company . . .
struggling to survive . . . may . . . continue on for years and it was not Congress's
intent to force [it] to close its doors to comply with WARN's notice requirement.
398 F.3d at 589-90 (quoting Watson v. Mich. Indus. Holdings, Inc., 311 F.3d 760, 765 (6th Cir.
2002). Thus, Congress intended for a liberal application of the exemption that considers the
reality of business operations.
In USW, the Eighth Circuit found that the 2008 financial crisis was an unforeseeable
business circumstance. 683 F.3d at 888-89. Prior to the drop in orders and the slowdown of the
United States economy, U.S. Steel Corp. was having one of its strongest years on record. Id.
However, U.S. Steel was aware that the economic downturn would reduce demand for its
products. Id. at 887. The court concluded that although the economic downturn may have been
apparent, the resulting dramatic drop in the demand for steel was not. Id. at 888. Additionally,
the court noted, “[a] company, faced with an unprecedented and cataclysmic event, reasonably
may need a little time to assess how things would shake out.” Id. (quotations omitted).
Consequently, the court recognized that U.S. Steel reasonably expected to weather the downturn,
and thus was not liable under the WARN Act. Id.
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Prior to the coup, Fazal experienced a surge in revenue from production in San Marcos
and could not reasonably foresee the overthrow of the Mellish, who had governed for thirty
years. R. at 3. Past political turmoil did not indicate that a civil insurrection was on the horizon.
Fazal reasonably relied on negotiations with the San Marcos government to secure long-term
production rights and envisioned a lasting, mutually fruitful relationship. Fazal had invested
heavily in San Marcos by employing local workers and building a new international
headquarters. R. at 3. These investments and goodwill indicated Fazal’s intention to remain in
the country far into the future.
Further, a privately-funded study and a university study cited in the Wagner Daily News
were not reasonably sufficient to place a multinational oil company on notice that its flagship
location could implode at any moment. R. at 4. While reports of political instability circulate
around the world frequently, it is rare for any of these potential disturbances to actually come to
fruition. Even if the two reports gave Fazal knowledge of a possible regime shift, that
knowledge alone does not foreclose Fazal’s use of the unforeseeable business circumstances
exemption.
The usurpation and nationalization of the oil industry were out of the blue and led to
Fazal’s eventual default and financial collapse. R. at 4. Fazal’s good faith efforts extended even
beyond the unexpected coup as they continued to communicate with the new regime through the
State Department to maintain their operating agreement with San Marcos. R. at 5. The State
Department assured Fazal that ongoing talks with the new San Marcos government could ensure
continued business operations. R. at 5. Further, Fazal issued a press release indicating that it did
not expect the events in San Marcos to alter its operations in the country. R. at 5. Lastly, Fazal
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sought additional financing from various financial institutions. R. at 5. Overall, the extent of
their remedial efforts demonstrates that Fazal was reeling from truly unexpected events.
Fazal could not have reasonably foreseen that it would fail to secure additional capital
from any financial institution and its loan from WSB would default. R. at 5-6. Fazal could no
longer maintain production, finance operations, and had to immediately repay a $5 billion loan.
As a result of these sudden and unexpected events, Fazal filed for Chapter 11 protection. R. at 6.
Fazal could not have reasonably foreseen the domino effect of the coup on Fazal’s global
operations. First, Fazal only had vague hints of the possibility of a coup in San Marcos. As in
Loehrer, that knowledge is not sufficient to render the coup a reasonably foreseeable event.
Second, Fazal had no control over the Mellish regime’s fate or whether WSB continued funding.
Like in Jurcev, this lack of control undercut Fazal’s ability to foresee the coup and subsequent
default. Lastly, similar to USW, Fazal could not have reasonably foreseen the domino effects of
a cataclysmic event that would lead to its need for shortened notice. Accordingly, this Court
should find the events leading up to Fazal’s default were sudden, dramatic, and unexpected.
2.
Fazal exercised commercially reasonable business judgment as would
another similarly situated employer.
WARN Act liability does not attach to a company when it exercises reasonable business
judgment in the face of potentially devastating occurrences. Loehrer, 98 F.3d at 1061. The court
assesses a company’s business judgment “based on what a similarly situated employer would do
in predicting the demands of its particular market.” Chestnut v. Stone Forest Indus., Inc., 817 F.
Supp. 932, 936 (N.D. Fla. 1993); see also USW, 683 F.3d at 886; Gross, 554 F.3d 870, 876-77
(10th Cir. 2009) (quoting Hotel Emps., 173 F.3d at 186). The Eighth Circuit in Loehrer
emphasized that hindsight should not dictate the scope of the unforeseeable business
circumstances exemption. 98 F.3d at 1061. Further, the WARN Act “allows good faith, well-
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grounded hope, and reasonable expectations” in order to respect the employer’s reasonable
business judgment. In re Flexible Flyer Liquidating Trust, 511 Fed.Appx. 369, 374 (5th Cir.
2013). In Flexible Flyer, the Fifth Circuit refrained from holding Flexible Flyer liable as that
“would serve only to encourage employers to abandon companies even when there is some
probability of some success.” Id.
In Loehrer, the Eighth Circuit looked to the “reasonable defense contractor” in finding
that McDonnell Douglas’ reactions to the government’s mixed messages were sensible. 98 F.3d
at 1062. In USW, the Eighth Circuit concluded that U.S. Steel used reasonable business
judgment in “initially attempting to weather the storm before ultimately concluding” that closing
its plant was necessary. 683 F.3d at 888. Finally, the court distinguished the case from the
“prototypical WARN Act violation” where an employer secretly plots to move its plants to
Mexico and close up shop without notice. Id. (quoting Roquet, 398 F.3d at 591).
There is no evidence in the record to suggest that a similarly situated employer would not
have taken the same steps if faced with these extreme circumstances. Fazal took a calculated
risk to invest in San Marcos’ untapped market, which paid off massively. R. at 3-4. In
hindsight, the two risk assessment reports claiming political instability and possible collapse
correctly predicted the coup. However, had Fazal relied on just two reports to terminate 5,000
employees in a time of record high oil prices and production, it not only would have sacrificed
massive profit, but also the livelihood of its employees.
After the sudden coup d’etat, a prudent businessperson would attempt to weather the
storm before abandoning its business entirely, like U.S. Steel in USW. Fazal used commercially
reasonable business judgment by acting in good faith to prevent their sudden bankruptcy and
termination of operations. If Fazal is found liable for acting reasonably and swiftly, future
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foreign investment and business operations would be chilled for fear of courts using hindsight to
second guess informed business decisions. Thus, this Court should find the sudden, dramatic,
and unexpected events that occurred in San Marcos and subsequent financial calamities were
unforeseeable business circumstances falling within the WARN Act exemption.
C.
Fazal Is Entitled to the Faltering Company Exemption Because Fazal Only Closed
the Plant When It Failed to Secure Capital.
In addition to the unforeseeable business circumstance exemption, Fazal is entitled to
the faltering company exemption. The WARN Act allows shortened notice if, at the time proper
notice was required, the company actively sought capital or business that would have enabled the
employer to avoid or postpone the shutdown of a single site of employment.3 § 2102(b)(1). The
employer further must have reasonably and in good faith believed that giving notice would have
precluded it from obtaining the needed capital. Id.
The federal regulations further elaborate on the statutory provision by presenting a fourfactor test for whether a company qualifies for the exemption: (1) an employer must have been
actively seeking capital at the time the sixty-day notice would have been required; (2) there must
have been a realistic opportunity to obtain the financing or business sought; (3) the financing
sought must have been sufficient to avoid or postpone the shutdown; and (4) the employer
reasonably and in good faith must have believed that giving notice would have precluded the
employer from obtaining the needed capital or business. 20 C.F.R. § 639.9(a).
3
The faltering company exemption applies solely to plant closings, known as a single site of employment. §
2102(b)(1). A permanent or temporary shutdown of a single site of employment is a plant closure if the shutdown
results in an employment loss during any thirty-day period for fifty or more employees. § 2101. Thus, the May 6,
2013 termination letter constituted a plant closing under the plain language of the WARN Act.
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However, in confronting the reality of struggling companies pursuant to the WARN Act
provisions, courts have not rigidly implemented the WARN Act regulations. See Carpenters
Dist. Council of New Orleans v. Dillard Dep't Stores, Inc., 15 F.3d 1275, 1281 (5th Cir. 1994)
(inserting a “causation” factor in the faltering company analysis); In re Old Electralloy Corp.,
162 B.R. 121, 126 (Bankr. W.D. Pa. 1993) (minimizing the sixty-day notice element because it
was incongruent with the practical reality of the company’s financial issues.) Here, Fazal is
entitled to the faltering company exemption because it took steps to secure funding and
terminated employees only when financing was no longer viable. See 54 Fed. Reg. 16,042-01,
16,061 (Apr. 20, 1989). This Court should view Fazal’s status as a faltering company in light of
the unforeseeable business circumstances exemption because the sudden political instability,
markets, and funding are inextricably tied together.
1.
Fazal could not have foreseen the need to actively seek capital before the
sudden coup d’etat and subsequent events.
In pertinent part, the federal regulations define “actively seeking financing” as “seeking
additional money, credit or business through any other commercially reasonable method.” 20
C.F.R. § 639.9(a)(1). Further, the company must have been actively seeking financing at the
time WARN Act notice was required. Here, because the May 6, 2013 termination amounted to a
plant closure under the WARN Act, Fazal must have been seeking financing on March 6, 2013.
The record is silent regarding whether Fazal suffered from financial instability requiring
additional capital on March 6, 2013. What the record does reflect is that in early 2012, Fazal
secured a $5 billion loan from WSB that paid $1 billion annually for five years absent significant
change to Fazal’s revenue or outlook. R. at 3. By early 2013, Fazal’s San Marcos production
accounted for a significant majority of Fazal’s revenue. R. at 4. Thus, this Court should not
penalize Fazal for failing to seek capital when it simply was not necessary.
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The faltering company exemption should not require a company to foretell a sudden
event and any crippling effects thereafter. In Old Electralloy, the company sought financing in
early 1990, and by June 1990, its most favorable prospective lender indicated an unwillingness to
go forward. 162 B.R. at 125. In October 1990, more negotiations had fallen through, and by
November, the company continued seeking prospective lenders. Id. On January 21, 1991, the
company was forced to close and terminate its employees because it could not secure funding.
Id. The court concluded that “there [was] no way the [company] could have or should have
foreseen the precise date of a fatal cash flow deficiency sixty days in advance.” Id.
Furthermore, the Third Circuit’s decision in In re APA Transportation Corp.
Consolidated Litigation, 541 F.3d 233, 248-49 (3d Cir. 2008), is not persuasive here because it
disregards the issue of foreseeability in the context of the faltering company exemption. There,
APA closed its plant on February 20, 2002 because APA defaulted on its loan and failed to
obtain financing. Id. at 235. For purposes of the exemption, the Third Circuit focused on
whether APA had sought financing on December 20, 2001. Id. at 249. Although APA had been
discussing the terms of the loan with its lender as early as October 2001 and again in January
2002, because APA was not actively seeking capital on December 20, 2001, the Third Circuit
denied the faltering company exemption. Id. at 250. The court rejected APA and the district
court’s reasoning that such a precise standard effectively required that companies read the minds
of their creditors. Id. In rejecting this argument, the court reasoned that Congress considered the
issue of foreseeability in crafting the unforeseeable business circumstances exemption and that
APA failed to show such circumstances existed in its case. Id. Since the Third Circuit did not
have both exemptions before it, the court did not confront the practicality of strictly applying the
faltering company exemption in light of sudden, dramatic, and unexpected events. Thus, even
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the Third Circuit’s rigid application of the faltering company exemption leaves open the
possibility that unforeseen events could justify deviation from the sixty-day requirement.
Strictly applying the sixty-day requirement of the faltering company exemption would
impose an oppressive standard on otherwise desperate companies, including Fazal. There was
no way Fazal could have or should have predicted its loss of funding from WSB and subsequent
bankruptcy petition on May 6, 2013. Importantly, Fazal’s default arose from a significant
change in its outlook – an assessment entirely in the hands of WSB. Under a strict reading of the
exemption, Fazal must have predicted all of the events that led to a significant change to Fazal’s
outlook or revenue. In effect, Fazal must have predicted the coup a month before it occurred, the
nationalization of oil, and the stock suspension. Then, Fazal must have predicted that all of these
future events would amount to a significant change in Fazal’s outlook. To complicate the
assessment even further, Fazal would also need to balance these events with its future remedial
efforts, including its press release, assurances to investors, search for additional capital, and the
ongoing talks between the State Department and San Marcos. This Court should not recognize
such an impossible standard for companies that are not looking for capital on a single date but
are otherwise “faltering” in the common sense of word.4 Instead, this Court should focus on the
period between the coup on April 4, 2013 and the plant closure on May 6, 2013. During this
period, the district court found as fact Fazal actively sought additional capital, including a line of
credit, from various financial institutions after the suspension of Fazal’s stock. R. at 5, 13.
By May 5, 2013, Fazal’s $5 billion loan defaulted and WSB sought immediate
repayment. R. at 5-6. As a result, shortened notice was necessary because Fazal could not repay
the loan or continue normal operations. See Alarcon v. Keller Indus., Inc., 27 F.3d 386, 388 (9th
4
Merriam-Webster’s Dictionary defines “falter” in relevant part as “to stop being strong or successful: to begin to
fail or weaken.” Falter Definition, Merriam-Webster.com, http://www.merriam-webster.com/dictionary/falter (last
visited Feb. 10, 2015).
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Cir. 1994) (granting the faltering company exemption when the company’s sole lender withdrew
funding, necessitating the immediate plant closure and same-day notice). Thus, this court should
conclude Fazal is exempt from WARN Act liability pursuant to the faltering company exemption
because Fazal pursued additional capital to maintain operations in response to the sudden and
dramatic events caused by the coup.
2.
Fazal had a realistic opportunity to obtain financing that would have
postponed a plant closure.
The congressional record behind the WARN Act demonstrates that the realistic
opportunity factor is not a key component. See United Paperworkers Int'l Union, v. Alden
Corrugated Container Corp., 901 F. Supp. 426, 428 (D. Mass. 1995) (citing 134 Cong. Rec.
S8686-01 (June 28, 1988)) (excluding the realistic opportunity factor from the list of “key
phrases” of the exemption). Nevertheless, Fazal would not have sought financing unless it
wanted to stay in San Marcos, a country in which it heavily invested. Furthermore, Fazal was a
multinational, publicly traded company, with thousands of employees worldwide, which had
been in operation for nearly twenty-years. R. at 1, 3-4. Fazal had obtained financing in the past,
achieved success in the stock market, and could realistically obtain financing in the future.
While the new San Marcos government announced its intention to nationalize the oil
industry, Fazal sought additional capital after reassurances from the State Department that
continuing operations were possible. R. at 5. This is unlike In re Organogenesis Inc. in which
another company, Novartis, acquired Organogenesis’ entire distribution and marketing rights to
its signature drug. 316 B.R. 574, 581 (Bankr. D. Mass. 2004). The district court found
Organogenesis failed to show it had a realistic opportunity to obtain new capital because
Organogenesis would have had to reacquire its rights in order to obtain additional capital. Id.
Thus, although Organogenesis had been seeking financing, the opportunity to realistically obtain
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it relied on a near impossible contingency. Id. In contrast, while it was difficult for Fazal to
secure additional capital, it was still realistic because of the mitigating steps it took.
Moreover, the federal regulations do not require that a faltering company show the funds
sought would completely halt a plant closure. Rather, postponing a plant closure is sufficient.
See 20 C.F.R. § 639.9(a)(3). In Dillard, the Fifth Circuit refused to grant the faltering company
exemption because the actual cause of the mass layoffs was a merger rather than a loss of
funding. 15 F.3d at 1278. There, the company ultimately terminated its employees because
positions simply became redundant as a result of the department store merger. Id. The Fifth
Circuit reasoned the exemption did not apply “[b]ecause there was no causal relationship
between [the company’s] search for additional capital and the reduction in its work force.” Id. at
1281. In Dillard, regardless of whether the company acquired additional capital, the mass
layoffs would have occurred. Id. By contrast, the fact that Fazal withheld notice and did not
close its plants until WSB withdrew financing demonstrates that Fazal was seeking capital in
order to postpone or avert a plant shutdown. Thus, this Court should find Fazal realistically
sought additional capital to avert closing its San Marcos plants.
3.
Earlier notice would have precluded Fazal from obtaining needed capital.
The faltering company exemption is premised on the notion that providing earlier notice
would sabotage the company’s attempts at securing new capital. See 134 Cong. Rec. H2278-01
(Apr. 21, 1988) (“faltering companies often have excellent reasons not to provide notice: If they
announce their intentions too early, they could be stampeded by their creditors.”). In effect, the
policy behind this exemption is that staying in business and sustaining jobs is more important
than providing WARN Act notice.
The district court below concluded that because Fazal’s stock suspension was a matter of
public knowledge, notice of a plant closure and mass termination would not have precluded
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additional capital from creditors. R. at 13. However, this logic is inapposite to the policy behind
the faltering company defense. Although it was public knowledge Fazal was in a financially
precarious situation, Fazal needed financing all the more because of it.
While the stock suspension and political unrest were matters of public knowledge, efforts
to shut down operations in San Marcos were not. R. at 29. Fazal clearly indicated it had hoped
to contain the situation and continue operations by providing the press release. R. at 5. In
Angles v. Flexible Flyer Liquidating Trust, Flexible Flyer’s go-cart line deteriorated which lead
to product liability suits nationwide. 438 B.R. 886, 893 (Bankr. N.D. Miss. 2010). While
lawsuits are generally a matter of public knowledge, the bankruptcy court did not consider this in
its analysis of the faltering company exemption. Id. Rather, the court granted the exemption
because Flexible Flyers’ principal financiers terminated their agreement and refused to infuse
any more capital. Id. Further, the court reasoned that providing earlier notice “would have had a
negative effect on Flexible Flyer’s viability with its employees as well as its lender.” Id. at 894.
Here, Fazal provided the termination letters in order to comply with the WARN Act, as its
actions sought to at least postpone plant closures and terminations. See 20 C.F.R. § 639.7
(WARN permits conditional notice when the consequences of an occurrence or non occurrence
will lead to a plant closing). Further, the district court below erred in equating public knowledge
of Fazal’s stock suspension with how potential creditors would react to mass layoffs in a
company they may finance. Therefore this Court should find Fazal meets the faltering company
exemption because it actively sought realistic financing that would have postponed the plant
closure after the sudden and unexpected coup.
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CONCLUSION
The WARN Act’s purpose was to protect employees from being blindsided by large
companies suddenly moving plants overseas in order to save money. These are not the facts
before this court. Fazal did everything it could in the wake of devastating and unexpected
events. This court should find Fazal is not liable under the WARN Act because as, a liquidating
fiduciary, it does not fit the Act’s definition of an “employer.” Alternatively, even if the Act
applies, Fazal exercised reasonable business judgment in reaction to the unexpected events in
San Marcos. Further, Fazal, as a faltering company, actively sought capital when it was
appropriate to do so in order to postpone closing its San Marcos plants. Holding Fazal liable
would deter future American investment in otherwise lucrative parts of the world, threatening not
only the expansion of American enterprise but also the creation of jobs.
Accordingly, Respondent respectfully requests that this Court AFFIRM the decision of
the United States Court of Appeals for the Thirteenth Circuit.
Dated: February 17, 2015
Respectfully Submitted,
Team No. 4
Counsel for Respondent
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