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Amid Unforeseeable Failed Sale, Debtor Gave Employees Enough WARNing For Layoffs

Varela v. Eclipse Aviation Corp. (In re AE Liquidation, Inc.), Adv. No. 09-50265 (MFW), 2014 WL 6460805 (Bankr. D. Del. Nov. 18, 2014)

Eclipse Aviation Corporation (“Eclipse”) engineered, manufactured, and sold jet aircrafts.  In 2008, Eclipse defaulted on its secured notes.  Its board of directors contemplated liquidation, but eventually decided on a sale as a going-concern through Bankruptcy Code section 363 to Eclipse’s largest shareholder, European Technology and Investment Research Center (“ETIRC”).  ETIRC funded the Eclipse bankruptcy with $20 million in debtor-in-possession financing.  ETIRC later emerged as the stalking horse bidder, financed through a Russian state-owned bank.  On January 23, 2009, the Court entered an order approving the sale to ETIRC.  However, despite repeated assurances from ETIRC, the Russian financing never came through and the sale did not close.  On February 24, 2009, upon the filing of a motion by the senior secured creditors, the Court entered an order converting the case to chapter 7.  Eclipse contacted its employees that same day and gave them the bad news.  Thereafter, former employees (the “Plaintiffs”) filed a class action lawsuit alleging a violation of the federal Worker Adjustment and Retraining Notification Act (the “WARN Act”).  For general background on the WARN Act as analyzed in another case, click here.

Under the “unforeseeable business circumstances” defense, an employer can avoid a WARN Act violation where a closing was caused by business circumstances that were not reasonably foreseeable sixty days in advance of the employee termination date.  In finding that Eclipse, by and through the chapter 7 trustee, met this defense, the Court held that ETIRC’s failure to close the sale of Eclipse was not reasonably foreseeable as of December 28, 2008 (60 days before employees received notice of their termination).  The Court noted that there were no contingencies to the sale, ETIRC repeatedly reassured Eclipse that the funding would come through, and ETIRC itself had already committed $20 million in financing in anticipation of the sale closing.  Plaintiffs alleged that ETIRC had been unable to obtain funding from the Russian government previously so their reliance on funding was unreasonable.  The Court, however, disagreed and explained that in determining foreseeability, “it is the probability of occurrence that makes a business circumstance reasonably foreseeable, rather than the mere possibility of such a circumstance.”  Roquet v. Arthur Andersen LLP, 398 F.3d 585, 589 (7th Cir. 2005).  The Court held that it was not probable that the sale would fail and Eclipse’s reliance on the sale was reasonable.  Thus, the Court granted Eclipse’ motion for summary judgment, and denied Plaintiffs’ summary judgment motion.