Restructuring

Contributed by Adam Lavine
The Bankruptcy Court for the Southern District of New York recently issued two decisions focusing on the interplay between section 362(b)(4) of the Bankruptcy Code and the New York State Worker Adjustment and Retraining Notification Act (“NY WARN Act”).  In Gazez v. New York State Department of Labor, (In re Fortunoff Holdings, LLC), No. 10-3339 (RDD) (Bankr. S.D.N.Y. Jan. 24, 2011), the court held that an administrative proceeding brought pursuant to the NY WARN Act is excepted from the automatic stay under section 362(b)(4).  In In re Saint Vincent’s Catholic Medical Centers of New York, No. 10-11963 (CGM) (Bankr. S.D.N.Y. Mar. 14, 2011) the court ruled that notwithstanding Fortunoff, the bankruptcy court still retains jurisdiction over a NY WARN Act claim, (at least when an administrative proceeding has yet to be commenced). These decisions represent the first instances in which a court has considered the NY WARN Act in the bankruptcy context.     
Under the NY WARN Act, which was enacted in 2008, employers with fifty or more employees “may not order a mass layoff, relocation, or employment loss, unless at least ninety days before the order takes effect, the employer gives written notice of the order” to its employees.  If, after an administrative hearing, the Commissioner of the New York Department of Labor (“DOL”) determines that an employer failed to comply with these notice requirements, the employer will be liable for back pay and benefits for the period of the employer’s violation.  The NY WARN Act not only provides a private right of action to employees but it also gives the Commissioner of the DOL the right to enforce the Act on behalf of the State. 
In Fortunoff, the debtor delivered termination notices to its employees on February 5, 2009, the same day it filed its petition, and mass layoffs began roughly two weeks later.  As a result of the layoffs, the DOL filed claims with the bankruptcy court for back pay and benefits, citing the NY WARN Act.  The DOL also commenced an administrative proceeding seeking an assessment of damages under the NY WARN Act.  In response, the chapter 7 trustee requested the bankruptcy court enjoin the DOL’s administrative proceeding arguing that the proceeding violated the automatic stay.  In a motion opposing the chapter 7 trustee’s request, the DOL argued that administrative proceedings brought pursuant to the NY WARN Act are excepted from the automatic stay under section 362(b)(4).
Under section 362(b)(4), the automatic stay does not apply to:

the commencement or continuation of an action or proceeding by a governmental unit … to enforce such governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power.  

To determine if a government action or proceeding falls within this exception, courts have applied two tests that tend to overlap.  As stated in Fortunoff, the first test asks “whether the governmental unit is pursuing a pecuniary interest rather than a matter of public safety or welfare.”  If the governmental unit is pursuing a matter of public safety or welfare, then the exception would apply.  The second test, according to the Fortunoff court, asks “whether the government action is designed to effectuate public policy, rather than to adjudicate private rights.”  If the government action is designed to effectuate public policy, the exception would apply.
In Fortunoff, the court held that the administrative proceeding brought pursuant to the NY WARN Act satisfied both tests.  In reaching its conclusion, the court pointed to the legislative history of the NY WARN Act, which clearly reflects the public policy goal of protecting employees from “precipitous termination by their employers.”  In addition, the court reasoned that although the DOL was technically vindicating private rights by attempting to collect back pay and benefits on behalf of the employees, the DOL was also serving public policy by acting as an effective deterrent of future conduct.
Much like the debtor in Fortunoff, the debtor in St. Vincent’s failed to provide its employees with notice of their termination within ninety days of their termination and as a result, the DOL filed a proof of claim on behalf of the former employees.  However, the DOL did not commence an administrative proceeding in St. Vincent’s like it did in Fortunoff. 
The DOL in St. Vincent’s argued that because an administrative proceeding pursuant to the NY WARN Act falls under the police powers exception to the automatic stay – at least according to Judge Drain in Fortunoff – the bankruptcy court should choose to abstain from liquidating the claim.  In other words, the DOL asserted that its bankruptcy claim is subject to and contingent upon the findings of the Commissioner of the DOL who has the right to commence an administrative proceeding during the pendency of the bankruptcy case under Fortunoff and section 362(b)(4).
The bankruptcy court found this argument unpersuasive.  Noting that bankruptcy judges may hear any core proceedings arising under the Bankruptcy Code, the court held that it had core jurisdiction over the DOL’s proof of claim.  According to the court, nothing could be more central to a bankruptcy administration than determining an objection to a proof of claim.  In addition, the court reasoned that because the NY WARN Act grants a right of action to both individuals and the department of labor “there is great potential for the duplication of litigation as well as for conflicting rulings on the claims.”  Indeed, there were seven state and federal WARN Act claims filed in the St. Vincent’s case, and some of the employees covered by the DOL’s claim would also be covered by a settlement agreement between the debtor and former employees.  In light of these complications, the court held that the bankruptcy forum would be “the most effective way to avoid duplicative and inconsistent litigation” and “afford complete relief for all parties.”  What remains unknown is whether the St Vincent’s court would have reached a different conclusion and ceded jurisdiction if the DOL had already begun an administrative proceeding.
As the first bankruptcy cases to address the NY WARN Act, Fortunoff and St. Vincent’s reveal a tension that is bound to surface in future bankruptcy cases.  On one hand, the DOL is entitled to enforce the NY WARN Act without violating the automatic stay – at least according to Fortunoff – because it promotes public policy.  Specifically, enforcement by the DOL softens the impact of mass layoffs and deters employers from ordering sudden terminations without proper consideration of the effect of the terminations on employees.  On the other hand, the bankruptcy court may be the more appropriate forum for liquidating NY WARN Act claims given that such claims can be brought by multiple parties, and in both the bankruptcy court and an administrative proceeding.  After all, one of the main purposes of the bankruptcy court is to act as a central arbiter of multiple and potentially conflicting claims.