Contributed by Paul Bagon and Yvanna Custodio
Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York recently dismissed a putative class action complaint filed on behalf of former employees of MF Global that alleged the chapter 11 trustee for MF Global Holdings Ltd. and certain of its subsidiaries and the SIPA trustee for MF Global Inc. failed to provide sufficient notice under the federal Worker Adjustment and Retraining Notification Act (the “WARN Act”) and the New York version of the WARN Act prior to terminating such employees.  In its memorandum opinion and order, the bankruptcy court considered whether the SIPA trustee and chapter 11 trustee were “employers” for purposes of the WARN Act and the NY WARN Act or “liquidating fiduciaries” who are excepted from the obligation to comply with advance notice requirements under the WARN statutes, in which case the actions of the trustees would be protected.
On October 31, 2011, pursuant to the Securities Investor Protection Act, the United States District Court for the Southern District of New York entered the order commencing the liquidation of MF Global Inc., the U.S. broker-dealer arm of the MF Global enterprise, and appointed James W. Giddens as the SIPA trustee.  (Under SIPA section 78eee, upon the grant by the district court of the “protective decree” and the appointment of the SIPA trustee, the liquidation proceeding is removed to the bankruptcy court.)  SIPA section 78fff(a), among other things, requires a SIPA trustee to liquidate the broker-dealer business.  That same day, the broker-dealer’s parent company, MF Global Holdings Ltd., and its affiliated financing company, MF Global Finance USA Inc., filed voluntary chapter 11 petitions.  Approximately two weeks later, on November 11, 2011, the putative class members were dismissed from their employment.  On November 21, 2011, the debtors and the statutory creditors’ committee filed a joint emergency motion seeking the appointment of a chapter 11 trustee, which the court granted a week later.
The only purpose of the SIPA proceeding for the MF broker-dealer (which employed the bulk of the terminated MF employees) could be liquidation.  The stated purpose of the chapter 11 filings, however, was less clear.  Although the first day affidavit and the statements at the first day hearing indicated that the MF Global chapter 11 cases were filed with the hope of reorganizing, these statements conflicted with those made in the emergency motion seeking the appointment of a chapter 11 trustee “to reorganize and/or liquidate the [d]ebtors’ assets for the benefit of the . . . estates,” which also stated that “[t]he primary objective for the duration of the chapter 11 cases is the orderly wind-down of the [d]ebtors’ various assets.”  The bankruptcy court observed, “With the appointment of the Chapter 11 Trustee on November 28, 2011, it became clear that the only possible outcome for the chapter 11 [d]ebtors was liquidation.  But between October 31, 2011 and November 22, 2011, there is nothing in the record to establish that the chapter 11 [d]ebtors intended to liquidate.”
Having established the differing original objectives of the SIPA proceeding and the chapter 11 cases, Judge Glenn then considered whether the trustees were “employers” for the purposes of the WARN statutes.  Both trustees relied upon the preamble to the explanatory WARN Act Regulations issued by the Secretary of the Department of Labor to exclude themselves from the definition of “employer.”  As a matter of law, the bankruptcy court concluded that the MF broker-dealer was liquidating when the layoffs occurred because the SIPA trustee was empowered by law only to liquidate the business, and as such, the SIPA trustee was a “liquidating fiduciary” and did not fall within the definition of “employer.”  Accordingly, the SIPA trustee was excepted from the obligation to comply with the advance notice requirements under the WARN statutes.
Although the bankruptcy court also granted the chapter 11 trustee’s motion to dismiss, it did so without prejudice and without basing its decision on the “liquidating fiduciary” principle.  Unlike the SIPA trustee’s motion to dismiss, disputed issues of fact existed with respect to the chapter 11 debtors.  Moreover, the class action complaint itself did not allege whether the debtors were seeking to reorganize or to liquidate.  Having concluded that the allegations in the complaint were deficient, the court granted the chapter 11 trustee’s motion to dismiss, but also granted the putative class representatives leave to amend their complaint within thirty days.  The bankruptcy court noted, however, that any subsequent amendment of the complaint would not preclude the court from dismissing the amended complaint based on the “liquidating fiduciary” principle.
Thielmann reminds (or perhaps warns) debtors and their professionals that the interplay between the Bankruptcy Code and various federal and state statutes can be complicated and often ill-defined.  Moreover, what may appear to be innocuous, generic statements made in first day pleadings may have implications later.   Unless a debtor-entity is excepted from the definition of “employer” pursuant to the WARN statutes, a debtor (or its trustee) is warned to WARN.
Disclosure:  Although Weil is not involved in the WARN litigation, we represent the Administrators in certain of the proceedings relating to MF Global’s UK subsidiaries, including its UK broker-dealer.